COMMERCIAL LAW

Including COMPANY.LAW
AND
INDUSTRIAL LAW
[BPSINESS LAW]
•
 COMMERCIAL
. . ,LAW
Inc/udin, COMPANY LAW
AND
INDUSTRIAL LAW
[BUSINESS LAW]

29 o.er 2008
By . .
ARUN KUMAR SEN. IIt.A: (Cal). IIt.Sc, ([coa. Load.)

and
JITE~RJ\IlllUl\IkRr}MITRA, M.~ .• LL.B.

Edited and ReVised

by , ,
Prof. SAKTI MUKHERJEE .
M.A. (£COIl), M.A. (Pol. $c.); Ph. D. (£Con.),
LLM. of Caiculla Uniwrsity
Profosso~ ~parl..enl of Com",erce. Caiclllla Univ~;f)

26th Edition

..
, e"· ~ The Worl~Press
~ K,ol"a~ .
. '
Private ;f..lmlted
~.~~. . 2006. ~ .
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c toP>rlsll"'.. ·..56. ~.s.: 'dO~ ;61; "61r '64; :~. '6J. :70, '72. '73,
r '74. "I" ·,1: '7'...·.t; "3; '.'., '91: '92: '94: 20C»
The' AUlhors -S ThI World Press PriYlle Limited,
37A Collcp S.IrCCt, K,?lkat.70001l

, .
ISBN : 11-17567-31-7

Fi;1t UtifltJ 19'6

.~cOlfd Ed,.".",. 19'8
Tllird £4;/ion 1960
Fou,.,h £dillon 1961
Fifth EdiliOll 1963 "
Sixth Edil;on , ., 19.~
Snofllh Edili"" 1966
Eighlh Edili"" 1968
Niath £dIllon 1970
TenIA Edill"" ,' 1971 '
EJ~ltlh Edi' ion 1973
T_/fth EditiOll 1974
Thin••n,h EdiHow ' , ' ': ' 1.76
Founn",h £4ilion 1977
Fijlt,,,,1t Edition 1978
SiJrf".,h Edili",,' 1981
SnMtu",1t EditiOlf . 1983
£i~h~!.nlh ~dili"" , ,198;
N ilf~ttt"l~ Edilio" 1991
rw.,.ti.,h Edition . . 1991
Twtlttj
, '
... Firll
,
Edilioll 1994
Twtlfry-S,coltd Edition .. 1999
Twenty. Third
Reviud Edi/ion NOllelff/nr; 2001
R.,wiIllN 1001
26th Revised Edition : 2006'

,. rill red ill India

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1'rivlte
Limi~iI>"ll1 A College Street, !<olkata-'700Q13; friiyed
by.1"ag
EIl'\eriirisc's: 154 Keshab Chandra Sen Street: k.oibta.~ ..
LOJ'I{r Type Sl!IIillg b.y S. M. Printers.
 PREFACE TO THE TWENTY-THIRD EDITION
. It gives me great pleasure in placing before the readers The Twenty-
Tflird Edition of this book. When I was requested by The World Press
Private Limited authority to take up. the charge of revising the present
book (after the death of the reputed authors of this book, Prots. Sen and
Mitra} I was rather hesitant in accepting this hard task. For, il involved
a thorough revision of the book to make it at par with the currentlmlds,
especially alier so many amendments of the Law in this' sphere. But
considering the intereslS of the students in general and academics in
panicular, I had no other option but to concede to the request of a high
heaned person like Sripati Bhallacharjee, the former Managing Director
of The World Press Privaie Limited.
The new edition has been thoroughly re~ed both in maner oftext
and upclating case materials . .1t takes full accounts of The Workmen's
Compensali<>n (Amendment) ACI. 1984, The Faclories (Amendment} Act,
1987, The Industrial Disputes (Amendment} Act, 1984. The Payment of
Gratuity (Amendment) Act, 1987, The Payment of Bonus (Amendment)
'Act, 1984, The Employees' Statdnsurance (Amendment) Act, 1984, The
Companies' (Amendment) Act, 1985, The Apprentices (Amendment) Act,
1986, The Companies (Amendment) Ac.!, 1988, The Factories
(Amendment) Act, 1988, The MRTP Act. The Industries (development
and regulation) Act. 195 I and The Consumet Protection Act. Indeed the
Company Law has been completely re"Tinen in order to make it more
comprehensive ·and exhauslivt. .
A special care has been taken in this Edition 10 see that the readers
at Ihe primary stage of this srudy docs not find . himself lost in the
tcchnicalities and niceties of various legal concepts and interpretations.
I hope this Edition will continue to help the students in their studies and
preparations for higher examinations.
October, 200 I Sakti Mukherjee

:
. (vi) ,. .. ':"'~ACE

PREPACE TO tHE FIRST EDITION

The objec:t of this book is to state and explain the leading

principles af the branch of law known as Commercial Law.........
We have attempted to present the subjec:t as briefly and eoncisely
as possible. Sec:tion numbers of the ~Ievant statutes have been
mentioned, so that students may find it convenient to refer to them.
We hope the .book will make the students acquainted with the
. subjec:. and. wilt.eneourage .further study.
Our thanks are due to the publishers Sri Prakash Chfitdra
Bhattacharjee and Sri Sripati Bhattacharjee ot The World Press and
. the printers, the Modem India Press for the care and attention with
which the work of publication and printing were done.

August, 1956 A.K.S.

J.K.M.

PUBLISHER'S NOTE

Since 1958 the book Commercial Law (including ColTIpany

Law) and Industrial Law by A. K. Sen and J. K. Mitra is WJ:II known
to the educational field in India. In absence of the author; the book
is thoroughly revised by Prof. Sakli Mukherjee M.A. (IftIn.), M.A.
(Pol. Sc.), Ph.D. (Econ.), LL.M. of Calcutta Uni."nsitJi. an
experienced and expert professor of Commercial and I~emational
Law. Revision has been done according to all currerii~add!l...and
amendments in Commercial and Industrial Law by the qaovemment
of India.' Hence we believe, the present edition of the book will
be more helpful to the students of the subject Cominercial and
Indusrrial Law, at the same time, also to the professional examinees
and practitioners of the Law. ',.., .
Our thanks are due to Dr. Mukherjee, for his kind and laborious
. attention and active stand to make the book up-dated. After all. we
hope. the present revised edition. will serve the purpose more
perfec:t1y.
-Publisher
 TABLE: OF CONT~NTS

PACI!

Table or Cases (xl) - (xxIII)

Introduction 1-8

Book I. uw or Contract 9-198

.... Contell\S 9 - II
Chopter I: The ESSenlial Elements of Contract 12 - 16
Chaptet 2: Offer and Acceptance 17 - 32
Chapter 3: Intention to Create Le,al Relations 33 - 34
Chlpter 4: Consideration 35 - 45
Chaptet 5: Void and Voidable Agreements 46 - 48
Chapter 6: Capacity of Parties 49 - 58
Chapter 7: Free Consent 59 - 76
Chapter a: Leaa1ity of Object and Consideration 77 - 94
Chapter 9: Contingent ContraclS . 95 - 98
Chapter 10 : Perfonnance of Contracts 99 - 114
Chopter II : Termination or Discharge of
Contracts 115-142
Chapter 12 ,'Quasi-Controcts 143 - 146
Chapter 13 : Indemnity and Guarantee 147 -160
Chapter 14 : Bailment and Pledge 161 - 173
Chapter U : Law of Agency 174 -197

Book II. The uw Relatl_lto Sale or Goods 199-246

Contents 199
chapter I: Definitions 200 - 220
Chapter 2: Transfer of Ownenhip 221 - 231
Chapter 3: Perfonnance of the Contract of Sale 232 - 246

Book III. Tbe uw or Partnership 247-286

Contents 247
. Chapter I : Nllure of Plrtneiship 248 - 261
Chapter 2 : Rights and Liabilities of Partners 262-2n
Chapter 3 : Dissolution of Finns 271-286

(vii)
 (vIIi) TABLE OF CONTENTS

Book . IV. T,he ",.w Relating to !ltegoliable

..Ins~ruD1enb . 187..,36l
•
Contents 287 - 288
Chapter I:
Definitions 289 - JII
Chapter 2:
Acceptance and Negotiation 312 - 321
Chapter 3:
Rights and liabilities of Parties 322 - 343
Chapter 4:
Dishonour of A Negoti(ble
Instramen: 344 - 351
Chapter 5: Hu<¥lis 352 - 354
Chapter 6: Bankers II d Customers 355- 362

( ' Book V. The Law Relating to Carriage 363-397

Conlents· 363
Chapter I: Carriage by L..,d 364 -378
. Chapter 2: Carriage by Sea 379 - 390
Chapter 3: Carriage by Air 391 -397

Book VI. The Law of Insurance 399-450

Contents 399
Chapter I: Principles of Insurance 400-415
Chapt~r 2: life Insuranc;c 416-428
Chapter 3; Marine Insurance 429 - 4~5
hapter 4: Fire and Other Insurance 446-450

Book VII. The Law of Insolvency 451 -484

Contents 451
Chapter I: Procecciings Preliminary to
Adjudica~ion 452 -461
Chapter 2: Proceedings Aller Order of
Adjudication 462 -479
Chapter 3: Discharge of the Insolvent 480 -484

Book VIII. Arbitration 485-504

ContenlS 485
Chapter I: General Pro...·isions 486 - ~91
Chapter 2: Arbitraiion Without the
Intervention of the Court 492 - 504 .

Book IX. Securities 505 - 514

Contents 505
Chapter I: Securities 506- 514

Book X. Consumer P"!teclion Act, 1986 515 - 531

Contents 5 IS
Chapter I: ConsulMr Protection Act. 1986 516 - 531
 rAllLE OF C01'-:ltN1S

Book XI. Company Law 533 - 790

Contents 533 - 536
Chaptl'r InlroJu~lillll 537-,64
~'hapler 2 rhl' !\'·1cmorandul11 and Articks uf
Association jf>65 - 586
Charl~r 3 rhl' Fonn<uion of A ('omp,m~ 587-612
,.t11aPI~'l ~ CapiInl Shares ,11"14 Sh.u:choldcrs __ 6lJ - 651
ChJpll'r :' '\k~ljngs and RL'solUliotls 652 - 665
Chapl.::r 6 Dircclllrs 666 -701
Chapler i Compan~ Managt.'!l1l'lH 702 - 715
Chaph:r X :\l"\;ount~ and Audit 716-731
Chapter l} Borrcming. Ptmcrs, Ikhcntllr~s 732 - 774
Charier I (J ('rmlml (h er Comp:lIlil's 7:15 - i60
Chaptl'r II Winding Up 761-790

!lnok XII. Monopolistic and Rcstl'icthc Trade

Pra('tic..·l"~ Act 791 - 803-
l'tmll'l1ts 7'11
~·tRI PAct 792 .. S03

XIII. l"tlus\I-i,,1 L:m

,Book
"
' \ ,,- ContUllS
805 - 1078
805 -- S07
Inlroduciion 8US-RIO
ChapteT Thl' hlctorks Ad 811 - 876
Chaptl!r 2 Employees' State Insuralll'c Acl 877-917
Chil[1l\.'r -, Indi;1Il ratal Accidents !\Cl 918-919
Chapter 4 Emrloyers I.iilhilil~ :\1..\ 9~O - 921
Chapter 5 \\'(lr~ml"n's <,,'ompl"llSalion Al·t 92~ - 947
Charla 6 Trade Ullions ...\\.'\ 9-lS - 962
Chapt . . r 7 Pa~ IlK'IlI of \\·a;;.cs :\ct 96.1 - 977
Chapler R \tinimul1l \\"a~I..'~ Aet 978 - 991
Chapter <J Illdu"'lri~1 Di;o;[1l1lcS A(I 992-1067
Ch.lpll'r 10 'rile Industril':, (De,~loplllcnt
alld Regulation) :\ct. 1951 1068 - I07R

Inde, 1079 - 110"'


ICOMMERCIAL LAW)
Abdul Aziz ~ Masum Ali, 40
Addis Y. Gramophone and Co., /31
Aggarwal & CO. Y. Commissioners
of Income Tax, 254
Agra Bank v. Hamlin, 245
Aldridge ~ Johnson, 203
Alexander ~ Automatic Telephone
co., 648
Alexander Y. Rayson, 78
AI/card ~ Skinner, 63
AI/en v. Gold Reefs of West Attica
Ltd, 580, 648
Amir Begam Y. Badruddin, 503
Amiraju v. Seshanuna, 61
Anderson v. James Sutherland
(Peterhead) Ltd., 677
Anderson Wright Ltd. Y. MO~6an &
Co., 488
Andhra Sugars Ltd. v. State of A. P.,
61
Andrews v. Beltield, 96
Apthorpe v. Peter Schenhofcn
Brewing Co. Ltd., 759
Arantee Manufacturing Corpn. v.
Bright Bolts PVI. Ltd., 69 I
Ashbury Rly. Carriage & Iron Co.
v. Riche, 565, 581
Ashley v. Ashley, 4 I9
Ashoka Marketing Ltd. I'. [;"ion of
india, 75 I
Attorney General of Australia l'.
Adelaid S. S. Co .. 86
AnDme), General v. Great Eastern
Rly.. 581
Avery \: Bowden, 1~9
Ayres 1: Moore, 334
Babasaheb v. Rajaram. 9 I
TABLE OF CASES
Bahia & San Francisco Rly. Co., In
re,645
Bai Lakshmi Y. Jaswantal T. Das,
420
Baird's case, 637
Bajaj Auto Ltd. Y. N. K. Firodia,
645
Bakshi Das ~ Nadu Das, 82
BaldI)' ~ Marshall, 218
Balfour ~ Balfour, 33
Barnfield Y. Goole & Sheffield
Transpon Co., 368
Bank of Baroda v. Punjab National
Bank,297
Bank of Travancore v. Dhin Ram,
20
Banw.ri Lal v. SUkhdarshan Dayal,
28
Barium Chemicals v. Company Law
Board,751
Barnet Hoars & Co., v. South
London Tramways Co., 703
Banon v. L. & N. W Rly. Co., 623,
644. 645
Baroness Wenlock v. River Dee.
732
Baxendale \: Bennen. 300
B. ehalapathi v. Official Assignee.
368
Beauie v. Beanie Ltd., 583
Bcchuanaland Exploration Co. Ltd.
\: London Trading Bank, 624
Balfast Ropework Co. 1'. Bushel/.
365
Be/lerb} v. Rowland and Marwood
S. S. Co, 650
Belsize Motor Supply Co. \: Cox.
230
(xii) COMMfRCIAL ''lAW
Bengal Coal Co. v. Wadia, 28·
Bentley v. Craven, 264
Beresford v. Royal Insurance Co.,
424
Bevan " The National Bank Ltd.,
271
Bhagwat Dayal Singh \. Debi Dayal.
Sahu. 80
Bhar-at Mining Corporation Ltd., in
re, 574
Bhimji r. Bombay Trust Corpora-
tion. 208
Bhutoria Bros. (P.) Ltd. in re,574
Bircswar v. The Emperor. 99
Blackburn Bobbin Co. \'. Allen &
Sons. 122, 126
Bloomenthal v. Ford. 623
Bonlex Knitting \\forks Ltd. v. St.
John-s Garage. 1M, 367. 370
Borland's Trustee r, Steel Bros. and
. Cla)10n's Case, 112
Co., 583, 614
Borrowman Phillips & Co. \-: Free
and 1I01lis, 234
Boultun \', Jones. 22
Bowman \.: Secular Society Ltd.,
589
Bradford Banking CO. I'. Briggs,
583
Brahmaputra Tea Co. \'. Scarth, 87
British Movictonew$ lid. " London
& District Cinemas Ltd., 125
Bristol Tramways Co. 1: Fial Motors
Ltd., 214
Brogden I'. Metropolitan Rly. Co.,
25
Broome v. Cassel and Co .. 131
Bro\\n Jenkinson and Co. Ltd. v.
Percy Dalton Ltd., 382
Burdett v. Standard Exploration Co.,
623
Burland ,'. Earle, 583, 712
Burne v. Morri~, 333
Busk v. Davis, 221
Candler r. Crane Christmas and Co ..
731
Carlill I'. Carbolic Smoke Ball
Company, 24
Carmichael v. Evans, 274, 280
Carter" Boehn, 408
Castellain \: Preston, 403, 411
Cawley & Co., re, 648
Champasen Bhara and Co. \'. JiHaj
Balloe Co. Ltd., 503
Chaplin \: Hicks, 135
Chavalier etc. v The Dharmodayam
Co., 688
Chhognal Ratwatmal \' Sankal Chad
Shah & Ors., 502
Chinnaya \: Ramaya. 39
Churton \'. Douglas, 257
City Equitable Fire Insurance Cu.
re,_694_ n9
Clarke \: Army Navy Co-operative
Society Ltd., 219
Cleaver v. Mutual Reserve Fund
Life Association, 421
Coal Marketing Company of India
(1'.) Ltd., in reo 655
Coalport China Co .. reo 644
Cuhen \'. Mitchell, 467
Cohen V. Wilkie, 87
Coles v. Odham's Press, 90
Collins v. Godefroy, 37
Commissioner oflncome Tax, \V. B.
I'. Kalu Babu, 254
Commissioner of Income Tax ",
Standard Vaccuum Oil Co., 614
Commissioner of Income Tax,
Madras \'. Sri Meenakshi Mills.
'759
Company Law Board v. The Upper
Doab Sugar Mills Ltd. etc .. 686
Consolidated Coffee Ltd. \'. Coffee
Board, Bangalore, 245
Co-operative HinduSlhan BanI-. \'.
Surendra. 513
Cort \: Ambergate Rly. Co., 130
Cotman v Brougham. 582
 TABLE OF CASES
Coutrier v. Hastie. 205
Cox v. Hickman. 250
Craven-Ellis v Canons Ltd .. 138
Cundy v. Lindsay. 74, 228
Currie v. Misa. 35
Counice v. London City & Midland
Bank, 358
Cuner v. Powell, 139
Cyclists Touring Club Ltd.. Re.,
574
Daimler & Co. Ltd. \'. Continent
Tyre and Rubber Co., 759
Dashwood v. Jermyn. 36
Davis Contractors Ltd. v. Fareham
U.D.C .. 123, 125
Dawson v. African Consolidated
Co .. 648
Dawson's Ltd. v. Bonnin. 402
D.C. & G.M. Co. Ltd. \'. Union of
India. 596
Deputy Secretary v S. N. Dasgupta.
730
Derry v. Peck. 600
Dhakeswari Cotton Mills Ltd. v.
Nilkamal. 583
Divisional Forest Officer v.
Biswanath Tea Co. Ltd .. 541
Dixon V" Kennaway. 623
Donoghue v. Stevenson. 219
Dorabji v Lance. 90
Doyle v. White City Stadium, 51
Dunlop Pneumatic Tyre Co. Ltd., v.
New Garage and Motor Co. Ltd.,
136
Dunlop Pneumatic Tyre Co. v.
Selfridge & Co .. 43
Durga Prasad v. Baldeo. 36
Eastern Tdegraph Co. Ltd., re, 763
E. B. M. & Co. Ltd. v Dominion
Bank, 539
Ed. v. K. N. Shaw, 339
Egyptian Salt etc. v Pon Salid Salt
etc'.. 565
(xiii)
Elphick v. Barnes. 205
Empress Engineering Co. reo 591
English and Colonial Produce Co.
Ltd .. reo 592
English Hop Growers v Derring, 86
Entores Ltd. v. Miles Far Eastern
Corp., 28
Erlanger v. New Sombrero
Phosphate Co .. 591
Eshaque v. Abdul Bari, 100
Eshosito v. Bowden. 122
Esso Petroleum Co. v Harper's
Garage (Stoupon) Ltd .. 84
Evans v Brunner, Mond & Co. Ltd.,
582
Everett v. Automatic Machine. 648
Farquaharson Bros. \-: King & Co.,
230
Fazalbhoy v The Credit Bank of
India, 54. 637
Featherstonehaugh v. Fenwick. 264
Fenilizer Corp. of India v. !rhe
Workmen. 559
Felthollse v. Bindley. 25
Fenton v. Thorley. 449
Fibrosa etc. v Fairbairn etc., 126
Firm MadanlaI Rosh.nIal Mahajan
v. Hukumchand Mills' Ltd ..
Indore. 499
Fisher v. Bell. 20
Fitch v. Dewcs. 86
Fitch v Snedaker. 20
Foley v. Classique Coaches Ltd., 89
Ford Motor Co. v. Armstrong. 136
Forest of [Jean Coal Mining Co. re,
689
Foss. v Harbottle. 752
Foster v. Mackinnon. 75
Fraser v. Bombay Ice Co .. 83. 86
Frost v. Aylesbury Dairy Co. Ltd ..
215
Frost \-' Knight. 129
G. M. Refining Co. v. Commr. of
I. Tax. 251
(xiv) COMMERCIAL LAW
G. N. Rly. v. Swaffield, 180
G. W. Ry. CO. v. London and County
Banking Co., 297
G. W. Rly. Co. l'. Sunon, 367
Gajanan v. Moreshar, 148
Galloway v. Galloway, 75
Gamathinayagam Pillai y.
Palaniswami Nadar, III
Ganjanan " Moreshar, 148
Gamer l'. Murray, 284
General Auction Estate ·Co. v Smith,
732
Genn v. Winkel, 225
George Newman & Co. in re, 685
German Date Coffee Company, re,
763
Gherulal Prakash v. Mahadeodas
Maiya & Ors., 79, 91
Giddu Narayanish v Annie Besant,
82
Glossop v. Glossop, 673
Gluckstein v. Barnes, 591
Govind Prasad Ch.turvedi v Hari
Dun Shastri and another, 112
Goldsoll v. Goldman, 85
Gosta Behari Roy v. P. C. Ghosh
Co., 57
Gough v Leneham, 92
Gourochandro D. Sumanto 1'.
Krushnacharana Padhi, 338
Graff v. Evans, 204
Gray (Miss) Ltd. v. Cathcart, 180
Great India Trading Co. (P) Ltd. v.
Angus Co. Ltd., and Another,
382
Great Western Ry. Co. v. London
and Country Banking Co., 297
Gujrat Singh v. laswant Singh, 347
Guthing v. Lynn, 89
Habib Bux v. Samuel Fitz & Co.,
249,252
Hadley v. Baxendale, 132,370
Hallen's Estate. in re, 114
Hamilton v. Sponiswoode, 293
Hammond v Anderson, 233
Handerson v. Bank of Australia,
582
Hanuman Prasad v. Hiralal, 583,
7\3
Har Charan Singh v. Shiv Rani and
others, 27
Hardoon v Belilios, 644
Hari Laxman v. Secretary of State
for India, 123
Harinagar Sugar Mills Ltd. v. Shyam
Sundar lhunjhunwala, 645
Harishchandra and another v.
Kailashchandra and another, 113
Harris v. Poland, 447
Harris v. Nickerson, 20
Hartley Baird Ltd. in re, 571
Harvey v. Facey, 20
Haven Gold Mining Co., in re, 763
Heavy Engineering Mazdoor Union
v. State of Bihar, 559
Hempson v. Price's Patent Co., 582'
Henkel v. Pope, 74
Herlock v. Beal, 121
Heme Boy Steamboat Co., v Hunon,
123
Higgins Ltd. v. Northampton
Corporation, 73
Hind Constn, Contractors v. State of
Maharashtra, III
Hind Overseas Private Ltd. v.
Raghunath Prasad etc., 763
Hindustan Lever Ltd. " Bombay
Soda Factory, 555
Hindusthan Co-operative Insurance
Society" Shyamsundar, 40 I
Hithcock v. Edwards, 300
Hochster v. De la Tour, 129
Holmes v. Keyes, 571
Hongkong & Shanghai Banking
Corporation Ie Lo Lee Shi, 338
Hom's Case, 423
Horwood v. Millar's Timber Co., 81
 TABLE OF CAS[S
Houghton & Co. v. Noth.rd, Lowe
and Wills, 585
Household fire Insurance Co. v.
Grant, 27
Howell v. Coupland, 120
Howrah Trading Co. Ltd., " I. T.
Commissioners, 636
H. R. Harmer Ltd., re, 754
Hurry" Mangles, 232
Hyde" Wrench, 23, 30
Inchc Noriah " Shaik Omar, 62
Inder Singh v. Parmeshwardhari
Singh, 56
Indian Airlines Corporation v.
Jothaji Maniram, 396
Indian Airlines Corporation v.
Madhuri Chowdhuri and others,
396
Indian Co-operative Navigation v.
Padamsey, 606
Indian Overseas Bank, Madras and
another v. Mis Narendraprasad
Gobindalal Patel, Ahmedabad,
357
Institute of Chartered Accountants
v. P. K. Mukheljee, 730
I. R. C. v. Crossman, 645
Introduction Ltd., re, 732
J. Aron & Co. v. Comptoir
Wegimont, 21 I
Jackson v. Rotax Motor etc., 216
Jackson v. Turquand, 606
Jackson v. Watson & Sons, 215
Jacob v. Credit Lyonnals, 123
Jaffer Ali v. Budge Budge Jute Mills,
108
Jagat v. Nabagopal, 99
Jamal v. Moola Dawood Sons &
Co., 134
James Drummond & Sons v. E. H.
Van Ingen & Co., 214
Jamuna v Ram, 40
Jan & Son v. Cameron, 165
(xv)
Janson v. Driellein etc., 79
Jaswantrai v The State of Bombay,
771
J. K. (P) Ltd. v. New Kaiser-I-Hind
Sp. & Wvg. Co., 511, 627, 787
Joel v. Law Union Insurance Co.,
402
J. Johnson v. Credit Lyonnals, 228
Jones v. Lipman, 759
Jordan v. Norton, 23
Jubilee Cotton Mills Ltd. " Lewis,
589
Jugal Kishore " Cheddu, 56
JuggaJ Kishore v. Union of India,
378
Jyoti v. Jhowmull, 245
K. A. Lana" Mis Dada Haj i Ibrahim
Hilari & Co. and others, 291
Kamala Wanti v. L. I. c., 402
Kanhaiylal v. Di~eshwar Chandra.
27
Kapur Chand Godha " Mir Nawab
Himayatali Khan, 117
Karberg's Case, 602
Kedemath " Gorie Mahomed, 40
Kelner v. Baxtier, 593
Keppel v. Wheeler, 191
Kesharichand " Shillong Banking
Corpn., 356
Khan Gul v. Lakha Singh, 53
Khirode Behari Dull v. Man Govioda
Pande,44
Khurshal Khengar etc. v
Khorshedbanu etc., 256
Khwaja Muhammad Khan v. Husaini
Begum, 43
Kingston Cotton Mills Co., re, 719
Kirkham v:Attenborough, 225
Kissenchand " Ramprotap, 213
K. Md. Farooq Ahmed v. fortam
Cirkit Electronics P. Ltd., 650
K. P. Poulose" State orKerala and
Another, S03
(xvi) COMMERCIAL LAW

Kreditbank Cassel v. Schenkers, 585 Mackenzie v. Royal Bank of Canada,

Krell v. Henry, 121. 125 63
K. R. KOlhandaraman l'. Commi- Maclaren Re. 203
ssioner of Income Tax, 689· Madhav v Rajcoomer. 84
Krishna Wanti Puri I'. L.tC, 402 Madhya Bharat Khadi Sangh v. Bal
Kundan Lal v. Secrelary of Slate. 23 Kishen Kapoor and others, 300
Madras Native Fund v Natcsa Saslri,
Lachhman Das and others \'. Hakim 650
Sita Ram & others, 245
Mahabir Prasad v. Durga Dutta, 112
Ladies Beauty v. Siale Bank of
Mahendra v. Kailash. 53
India. 359
Mannalal Khetan elc., v. Kedar Nath
Laf!unas Nitrate Co. l: Lagunas
Khetan and other. etc., 644
-Nilrate Syndicate. 591
Manchester Lint?s ", Rea Ltd., 215
Lake \: Simmons, 74
Marimuthu Gounder \'. Ramaswamy
Lakshminarayan Ram Gopal & Sons
Gounder & others, 206
\. Hyderabad Government, 175
McGruther v, Pitcher, 44
Lalman \J, Gauri Dutt, 20. 26
Mehru Belgam Vala & other v G,
Lamb l'. Sambas Rubber Co., 648
Bell & Co. & others. 258
Lands Allotment Co. Re, 687
Mercantile Bank of India v,
Latchford Premier Cinema v.
Mascarenhas. 333
Ermion, 673
Metropolitan Electric Supply Co. "
Laxmibai v. Raghunath. 290
Ginder, 140
Lee v. Baves, 230
M. G. Brothers Lorrf Service
Lee Behr~n & Co. Ltd., Re, 582
1'.
Prasad Textiles. 370
I.ee v. Butler. 229
Mighell " SuItan of Johore, 56
Lee v. Griffin. 209
Mitchell Reid CO. I'. Buldeo Doss,
Leeds Estate & Buildings Co, v
233
Shepherd, 730
Mithoolal Nayak \" LI.C, 411
Leicester & Co, v. 5, P. Mullick, 92
M Lachia Sell, and Sons Ltd, "
L' Estrange \'. Graucob Ltd., 21
' The CotTee' Board. Bangalore,
L.tC of India v. H. D. Mundra &
245
others, 754
Mohanl Singh v. Ba Yi, 156
Life Insurance Corporairon of India
Mohori Bibi v. Dharmodas Ghose,
", Raja V. K, Kamba & others,
50
25,401
MoIna Bros, v. Calcutta Landing &
Lily White v R, Munnuswami, 21
Shipping Co. Ltd., 755
Little v 5lacHord. 293
Mollow March & Co. \'. Coun of
Lloyd \', Grace Smith & Co., 185
Wards, 250 .
Loftus v. Roberts. 89
Montreal Gas Co, v. Vasey. 33, 89
London Assurance Co, v.' Mansel,
402 Mool Chand Gupta " Jagannath
Gupta and Co. (P) Ltd,. 751
Loonkaran Sethia elc. v Mr. Ivan E.
Moore & Co, and Landauer and
John & others etc., 128
Co., Re. 214
Macdougall \'. Gardiner, 752 Moosa v. Ebrahim. 589
 TABLE OF CASES
More, Et parle, 588
Morelli v. Fitch Gibbons, 216
Morgan Y. Manser, 121
Morris v Aylmer. 625
Morris r, 585
K<l115Sen.
Mosley v Simpson, 503
M. Rhodes \' Moules, 268
Mukul Dutta Gupta \' Indian Airlines
Corporation, 396
Muraka P. and V Works Ltd. \'
Mohan Lal, 690
Muralidhar Chatterjee \'. The
International Film Co., 140
Muthia \. Karuppan, 60
MyJappa \". Aga Mirza, 20
M. Siddalingappa \' T. NatJraj. 21
Nanchand Ganguram Shetji \'
Mallappa Mahalingappa Sadalgo
and other, 254
Napier 1', National Business A!lenc\'
Ltd .. 78 - •
Naresh etc. I'. Calcutta Stock
Exchange Assn, Ltd" 650
Nash \'. Inman. 51. 52
National Bank \' Silke. 296
National Textile \Vorkers' Union \:
p, R. Ramakrishnan, 542, 614.
765
Neale v. Merrett. 23
Needle Industries (India) Ltd .. and
others, I'. Needle Industries
Newey (India) Holdings Ltd"
and others, 576, 683. 686, 755
Neki \' Pirbhu, 134
• Neville \'. Dominion of Canada
News Co., 81
New Chinese Antimony Co, Ltd. I',
Ocean Steamship Co, Ltd" 382
Newborne v. Sensolid (Great
Britain) Ltd., 593
Niblett Ltd, \' Confectioner's
Materials Co .. 213
Nichol \' Godts, 215
Nihal Chand \' Dil"ar Khan. 57
C 8: I Law !Titk)- 2
(xvii)
N iranjan Shankar Goli"ari I'.
Century Spinning & Manufac-
turing Co. Ltd., 87
Nirmal Trading Co. \:, The
Conunissioner of Income-Tax
(Central) Calcutta, 90
Nordenfelt I'. Maxini Nor.denf<lt
Gun Co" 83
NOJ1hem India Assurance Co, 1'.
Kanhayalal, 424
Nowel \'. No\.\ell. 283
Ofticial Assignee of Bombay Y.
Registrar, Small Causes, 462
Offici<ll Liquidator l~ Pal1hasarathi
Sinha and others. 699
Orient Paper Mills Ltd. I', The State.
575
Orissa Mining Corpn. Ltd, \: MIS,
Prannath Vishwanath Rawleev,
498 .
Orton \' Cleveland etc. Co" 685
Osman Jamal & Sons \' Gopal, 149
Paradine v. Janc. 124
Parent Tyre Co. Re., 574
Parkinson \: College of Ambulance
Ltd .. 81
Patrakola Tca Co Ltd,. in re .. 751
PaYTe \: Cave, 19
Pearce \" Brooks, 79
Peek \'. Gurney. 602
Peel's Case, 589
Pender v. Lushingtion, 617
Percival Ltd. \" L. C. c.,28
Pcrccival \'. Wright, 688
Pickard \'. Sears. 227
Pickering \' Bush. 179
Pignataro \". Gilroy, 223
Pink \' Fleming, 409
Pinnock Bros. \' Lewis & Peat Ltd"
133, 214
Pillo Dhunjishaw \'. Municipal
Corporation of the City ofPoona.
145
(xviii) COMMERCIAL LAW
P. K. Nedungadi v. Malayalee Bank
Ltd .• 698
Planche v. Colburn. 138
Praga Tools Corporation v. C. II
Imanual. 559
Pramjla Devi v. People's Bank ofN.
India. 649
Pratachand Nopaji v. Kotrike etc .•
91
Pratt Ltd. v. Sassoon & Co. Ltd ..
585
Preist v. Last. 215
Prince of Wales State Quarry Co .•
781
Prithivi Cotton Mills v. Broach
Borough Municipality. 542
Rames v. Wichelhaus. 74
Raghavachariah v. Srinivas. 50
Raghunandan v. Hormasji. 251
Raghunath Prasad v. Sarju Prasad.
64
Rajahmundry Electric Supply Co. v.
A. Nageshwar Rao. 752. 763
Raja ~rayan Lal Bansilal v.
Maneck Phiroz. 751
Rajasthan Housing Board v. SOlI.
Shashi Sinwal. 523
Rajlukhy Debee v. Bhootnath. 42
Ramcoomer v. Chandrakanta. 80
Ramkissendas Dhanuka v. Satya
Charan Law. 752
Ramnath Agarwalla v. MiS. Goeoka
& Co .• 503
Rampal Sing v. Murray & Co .. 165
Ram Sarup v.. Bansi. 78
Ramsgate Victoria Hotel Co. \-:
Montefiore. 25. 29. 606
Ranganayakamma v. Alwarsetti. 60
Rangpur Tea Assn. v. M. Samaddar.
645
Ranjit Kumar Chatterjee v. Union
of India. 559
Rank Film Distributors v. The
Registrar of Companies. 575
Reed v. Norris. 158
Registrar v. P. M. Hedge. 729
Republic of Bolivia Syndicate. in
reo 729
Rex v. Kylsant. 599
Richardson v. Rowntree. 21
River Steam Navigation Co. Ltd .. in
reo 558
R. v. Grunwald. 600
R. K. Dalmia v. Delhi Adm .. 688
R. Les!:e Ltd. v. Shell. 53
Roberts v. Smith. 96
Robinson v. Davison. 121
Robinson v. Graves, 209
Rohtas Industries Ltd. v. S. D.
Agarwal. 751
Rose & Frank Co. v. Crompton
Bros. Ltd .• 33
Roshan v. Mohomad, 82
Rowland v. Divell, 213
Royal British Bank v. Turquand.
584
Ruben v. Great Fingall Consolidated,
584
Rugg v. Minnet, 222
S. Anusuya v. Mis Methodax
Systems (P) Ltd .• 519
Sadik Ali Khan v laikishore. 53.
637
Sales-tax Officer. Banaras v.
Kanhaiya Lal Mukund Lal Saraf.
145
Salomon v. Salomon & Co. Ltd ....
539. 540
Sanderson v. Collins, 163
Santa Sila Devi v. Dhirendra Nath
Sen, 499
Santi Vijay & Co. etc. v. Princess
"Fatima Fouzia & others, 127
Sarbali Devi & anr v. Usha Devi.
422
Satya brat a Ghosh v. Mugniram
Bangur & Co. and another. 126
Scarf v. Jardine. 116
 TABLE OF CASES
Scott v. Frank F. Scott Ltd., 580
Scottish Co-operative Wholesale
Society Ltd. l: Meyer, 755
Secretary of State etc. v. Bank of
India, 148
Secretary of State for India v.
Arathoon, 96
Sewell's case, 636
Seymour v. Pickett, 113
Shadwell v. Shadwell, 37
Shanti Prasad Jain v. Kalinga Tubes
Ltd., 754
Sheffield Corporation v. Ilarclay,
645
Shipton, Anderson & Co. re, 120
Shivanarayan v. State' of
Maharashtr., 688, 698
Shol'\vell v. Combined Incandescent
Mantles, 594
Shree Hanum.n Cotton Mills and
Anr. v Tata Aircraft Ltd" 206
Sidebottom v Kershaw Leese &
Co. Ltd., 580
Simmons v. Swift, 223
Sinclair v. Brougham. 582
S. K. Gupta and another v. K. P. Jain
and another, 627
Smith \', Butler, 23
Societe Generale de Paris v. Walker,
623
Sonia Ilhatia v. State of U. P. and
others, 38
South of England Natural Gas Co.
Ltd., Re, 594
Sparenbory v. Edinburgh Life
Insurance Co., 411
Sreeman Narasiah v. Ilansi Reddy
Venbtaramiah, 513
Sri Gooal Jalan & Co. v. Calcutta
Stock Exchange Assn. & ors.,
610
S. Said ,'. Ilutt. 45
Stanley". Western Insurance Co.,
446
(xix)
State of Bombay " Adamjee, 487
State of Ilombay v. Bandhan Ram
Bhandari, 720
State ofGujarat" MiS Variety Body
Builders, 209
State of M. P. v. Kaluram, 158
State of Punjab v. Ajit Singh and
others, 498
State of West Bengal v. L. M.
Das.503
State of West Bengal \'. B. K..
Mandai and Sons. 145
State Trading Corporation of India
v. C. T. 0., 541, 559
Statesman Ltd. & ors. v. Fact Finding
Committee & others. 542 -
Stroud v. Royal Aquarium, etc.
Society, 685
Subramania Cheuiar v. M. P.
Narayanaswami Gounder, 155
Sukherdoss v. Govindoss. 90
Sulekha Works Ltd., in re, 752
Sumpter v. Hedges. 138
Swabey v. Pan Darwin Gold Co.,
584
Sycd Abdul Khader v. Rami Reddy
and others, 177
Tarling v. Baxter, :!22
Tata E. & L. Co. Ltd. v. State of
Bihar, 541
Taylor" Caldwell, 119, 120. 125
Taylor v. Dunbar. 409
Thacker v. Hardy, 89
Thames & Mersey Marine Insurance
Co. v. Hamilton Fraser & Co.,
439
Thenappa v. Indian Overseas Bank,
645
Thomson v. L. M. & S. Rly .. cI
Thomen & F ehr ,'. Beer & Sons.
216
Tikyat ". Monohar. 82
Tolaram v. Birla Jute Manufacturing
. Co., 487
(xx) COM\1ERC1AL LAW
Trevor v. \Vhitworth, 650
Tsakiroglou & Co. Ltd. ,.. Noblee
Thorl G.m.b.II .. 122
Tukaram Bapuji Nikam ,.. The
Belgaum Bank Limited. 304
Tulsa Kunwar \', Jagcshar Prasad.
144
Turner Morri'son & Co. \'. Hunger-
ford Investment Trust Ltd., 5-t9
Tunon \~: Turton. 256
Tussaud & SOilS \: Tussaud, 568
Tweddle \'. Atkinson. 44
Union Carbide Ltd. \', Jayanti
Shipping Co., 382
Union of India ),: Bungo Steel
Furniture (P) Ltd., 503
Union of India \'. r-.,'1'S D. N. Revri
& Co. and others, 487
Union of India \: Mohd. Nazim.
365
Union of India l'. Shri Ramcsh
Colton Miib Ltd., 377
Union of India l' 1\1 'S Raghunath
Singh "nd Co. 494
Union of India l'. Ratilal Jaddavji,
388
Union of India v Sita Ram Jais\\'al,
144
Union of India v. The Central India
MachinelY Manufacturing Co.
Ltd. and others. 209. 210
Union of India " West Punjab
Factories Ltd .. 370
U. P. State Electricity Board and
another \.: M'S Gael Electric
Slores. Chandigarh, 24
Vaikuntam l'. Kallapiram. 144
Vanburgen" St. Edmunds Propenies
Ltd .. 37
Vancouver I3re\\ ing Co. v. I'
Breweries. 86
\'(:rco Private Ltd. Padi & others \'.
Nc\\ andram Naraindas &
another, 338
Vilas Udyog. Ltd. v. Prag. Vanaspati,
234
V. L. Narasu v. P. S. I: I)'er, 120
V. Rao, v. A. Rao. 24
V. R. Ramarain \'. lJOJ (1997) 89
Comp .. 782
Ward v. Hobbs. 68
\Varner Bros. v. Nelson. 140
Webb !laic & Co. " Alexandria
Water Co., 624
Webster \'. Cecil. 72
Whaley Bridge Printing Co. l',
Green, 590
Whitwell \'. Anhur. 179
w. 1\. Smith & Sons \'. Clinton, 78
\Vitliam & CO. II. Nor1h ofEngiand
etc. Ass., 409
\Vilson \: Lancashire and Yorkshire
Railway Co., 370
Wise \' Landsell, 6 I 6
Wrexham Rly. Co. in rc. 582
Yentdje Tobacco Co., rc., 763
Yokohama Specie \' Curienders &
Co., 462
Yonge l: Toynbce, IS'::;
Ycrkshire \\'001 combrcs' Associa-
tion re, 734
 TABLE OF CASES
IINDUSTRIAL LAW)
A. C. C. Ltd. v. l.abour Inspector.
980
Additional Dy. Commissioner,
Simbhum " Smt. Lakhmibaj
Naidu, 91~
Ahmedabad Vicioria Iron \Vorks
Ltd. \. \-Iag,nlal Kcshadal
Pancha!. 9~O
Alam Singh. in the matter of. 929
Alembic Glass Industries l.td ..
Baroda \'. The \Vorkmcn, 898
Anand Oil Industries \', Labour
COllI1. H~ dcnbad and others.
987.1010,1018
Ardeshir H.. Bhi\\ and;",ala ". Stote
of Bombay. 813
Asiatic Society l' State of \\lest
Bengal, 999
Associated Cement Companies ",
Khailari Cement Workers Union.
1029
Associated Cement Companies Ltd.
\'. Their Workmen, 100 I
Avon Servict's Production Agencies
(P) Ltd. \. Industrial Tribunal,
Haryana and others. 996, I02..l
A. V. D. Costa \. B. C. Patel, 972
Back \' Dock Kerr Co. Ltd .. 813
Bai Kok;labai I' Keshavlal
Man~aldas & Co., 942
Baidyanath Ayun'cda Shawan
Mazdoor Union. Patnn v.
Management ofShri 8aidyanath
etc .. 1010
Bangalore Water-supply \'. Rajappa,
993, 995, 997
Bansi Light Railwa) Co. Ltd. ,. K
N. Joglakar, 1051
Bareilly Holdings Ltd. ". Their
Workmen. 90S
Bharat Bank. Delhi r Employees of
Bharat Bank. I Cic9
(xxi)
Bhayabhai 1'. Central Rly., Bombay,
932
Oinoy Kumar Chatterjee v. Jugantar
Ltd. & ors., 1051
B. M. Lakshmanamurthy v. The
Employees' State Insurance
Corporation. Bangalore. 883
£3rijmohan Bagaria \'. N. C.
Chatterjee. 999, 1002
Buckingham and Camatic Co. Ltd.
'". \Vorkel's. I 03~
Burmuh Shell Workers Union ".
State of Kerala. 1027.
Burrell & Sons Ltd. ". Silvage, 930
Caroll \: Andre\\' Barclay and Sons
Ltd., 828
Chillu Kahar , . Bum & Co. Ltd ..
930
Chintall1an Rao and another v. State
of Madhya Pradesh, 815 ·1004
Chittra Tanti " Tata Iron &. Steel
Co .. 927
Commrs. for Port of Cal. 1'. A. K.
Ghosh. 925
Cricket Club of India v. Bombay
Labour Union & another, 1000
Crompton Greaves Ltd. v. The
Workmen. 1033, 1036
Davies \'. De Havill & Aircraft Co.
Ltd .. 835
Delhi Cloth & General Mills Co.
Ltd. 1'. Shambhu Nath Mukherji
& ors., 1051
Dennis v: Vt'hite. 932
Dhanrajgirij i Hospital" Workmen,
999
D. N. Banerjee 1'. P. K. Mukherjee,
995, 998, 1002
Electric \1echanical Industries ,~
Industrial Tribuna!. 1029
(xxii) INDUSTRIAL LAW
Employees' State Insurance
Corporation and another v. Tata
Engineering & Locomotive Co.
Ltd. and another, 881
Employees' State Insurance Corpn.
Hyderabad v. Andhra Pradesh
Paper Mills Ltd .. Rajahmundry,
882
Employees' State Insurance
Corporation v. Ramanuja Match
Industries, 880
E. S. l. C orpn., Bhopal v. The Central
Press & ano., 884
Excel Wear v. Union of India and
others, 1057
Express Newspapers (P) Ltd. v.
Labour Court, West Bengal,
1001
Federated State School Teachers'
Association of Australia v. State
of Victoria, 999
Fenton v. Thorley & Co., 930
Feroz Din v. State of West Bengal,
1031
Finch v. Telegraph Construction and
Maintenance Co. Ltd .. 836
Firestone Tyrc &: Rubber Co. India
Ltd. " Bhoja Shelly and another,
1032
Food Fats and Fertilisers Ltd. v.
E.S.I., 881
Gammon India Ltd. ". Niranjan
Dass, 1051
Ganesh Beedi's Case, 1006
Gemini Studio. re, 865
Gestetner Duplicators PVI. Ltd. v.
The Commissioner of Income
Tax, W.B., 866
Glaxo Laboratories (I) Ltd. v.
Presiding officer etc .. 1062
Godavari Sugar Mills, v. Sakuntala.
927
Gordon \. Jennings, 866
Grime v. Fletcher. 930 .
G. T. Lad and others v. Chemicals
and Fibres India Ltd., 1061
Gujarat Steel Tubes Ltd., etc. v.
Gujarat Steel Tubes Mazdoor
Sabha and others, 1022
Hall & anderson Ltd. v. S. K. Neogy,
1064
Hari Mohan Rastogi v. Labour Court
& anr., 1051
Hill v. Begg, 929
Hindustan Lever Ltd. v. The
Wokmen, 1030
Holmes v. Great Nonhern Railway,
931
Hussainbhai v. The Alath Factory
etc., 1006
Hyderabad Asbestos Cement
Products. Ltd. v. Employees
Insurance Court and ano., 881
India Jute Company Ltd. v. E. S. I.
and another, 881
Indian News Chronicle Ltd. v. Mrs.
Luis Lazarus, 931
India Tobacco Co. v. Dy. Labour
Commr., 1027
Industrial Employees' Union,
Kanpur v. J. K. Conon Spinning
and Weaving Mills Company.
1048
Inland Steam Navigation Workers
Union, in re, 953
laslVant Singh v. Pepsu Roadways
Transport Corp. & anr., 1018
leewanlal Ltd. v. Their Workmen.
1029
Jhagrakhan Collieries (P) Ltd. v.
G. G. Agarwal etc., 1027
Kemp v Lewis, 930
Krishna Aiyar v. The Superintending
Engineer, P. W.D., Madras, 925
Lalappa Lingappa and others ".
Laxmi Vishnu Textile Mills Ltd ..
1013
 TABLE OF CASES
Lalit Hari Ayurvedic College
Phannacy •. Workers' Union,
998
Life Insurance Corporation of India
v. D. J. Bahadur and others,
1027
Local Govern'llent v. Nusarwanji,
815
L & Y Railway v. Highley, 932
Madras Gymkhana Club
Employees' . Union v.
Management, 1000
Maha Luxmi Cotton Mills Ltd. v.
Workers' Union, 1033, 1036
Malenu v. Narasama, 925
Manada Devi v. Bengal Bone Mill,
924
Management of K. S. R. T. Corpn.
Bangalore v M. Boraiah, 1051
Management of Safdar Jung
Hospital, New Delhi v. Kuldip
Singh Seth, 999
Md. Oasman Rahimtulla v. Labour
Appellate Tribunal, 1029
Mohmedalli v. Union of India, 866
MIS Cox and Kings (Agent) Ltd. v.
Their Workmen and ors., 1030
Nagpur Corporation v. Its
Employees, 998
Nanibala v. Auckland Jute Company,
918
Nara)'llll Jetha v Conunissioners and
Corporation of Bombay, 9 I9
National Tobacco Co. v. Sarathi,
1029
Newspaper Ltd., Allahabad v State
Industrial Tribunal, U.P., 1003
N.. U. C. Employees v. Industrial
Tribunal, 995
Osborne case, 950
Om Oil & Oilseeds Exchange Ltd.,
Delhi v. Their Workmen, 1051
(xxiii)
Ous Kutilingal Achudan Nair and
others v. Union of India and
others, 949
Paradip Port Trust v. Tlteir
Workmen, 1065
Patellshwerbhal etc. v. Taluka etc.,
979
Pallerso" v. Hunt, 813
Pegram v. Dixon, 92 I
Penn v. Spiers & Pond, 927
People's Union for Democratic
Rights & ors. v. Union of India
& ors., 808
Prag Narayan v. Crown, 815
Pratap Narain Singh Deo v. Srinivas
Sabata and anothers, 926
Province of Bombay v. Western
India Automobile Ass., 998
Pruce v. Da vey, 932
Rabindra Nath Sen v. The First
Industrial Tribunl, West Bengal
and others, 998, 1002
R;unkumar Misra v. State of Bihar
& ors., 979
Rangswami v. Registrar, 949
Ranibala Seth v. East indian
Railway, 93 I
Rohtas Industries Ltd. & another v.
Rohlas Industries StatfUnion &
others, 1027
Royal Calcutta Golf Club Mazdoor
Union v. State, 1015
Royal Talkies, Hyderabad and others
. v. E. S. 1.,881
R. Vaidyanathan v. Fifth Industrial
Tribunal. W. B. & Ors., 999
Sanjit Roy v. State of Rajasthan,
979
Santon FelJlandez Ie B. P. (India)
Ltd., 93 I
Sanlosh Gupta \' State Bank of
Patiala, 1051
...
(xxiv) INDlJSTRIAI. I.AW
Saurashtra Sail Mfg. Co. v. Bai Valu
Raja & others, 932
Secretary of State v. yopal Singh,
918
Sen Raleigh Ltd. v. E. S. I. and
others, 881
Sharp v. Johnson, 931
Sheikh Nawab Ali v. Sree Hal1uman
Jute Mills, 932
Shintng Tailors v. Industrial Tnlunal
II U. P. Lucknow & JrS., 1005
Shriram Hari Tambey v. Diwakar
etc., 919
Smith \' General Motor Cab Co.,
929
Sree Minakshi Mills v. State of
Madras, 1002
State of Bombay t'. Hospital
Mazdoor Sabha, 999
State of Punjab v The Labour Court
etc., 1013
State of Rajasthan and others v
Hari Ram Nathwani and other~.
983
Sudhir Chandra Sarkar v. T I.S. Co.
& Ors., 1013
Sukkai v. Hukum Chand Jute Mills
Ltd., 925
Supdl. and Remembrancer, W. 8. v.
P. Sen, 828
Superintending Engineer, Machkund
. v. Workmen of Machkund
Electric Project, 999
Suresh v. Collector of Bombay, 883
Surendra Kumar Verma etc. v. The
Central Government Industrial
Tribunal etc., 1043'
Tarr Vale Railway Company v.
Jenkins, 918
Union Carbide (India) Ltd. \' E. S. I.,
881
Union cf India & another \' B. D.
Rathi and others, 982
University of Delhi & others \', Rail!
Nath etc., 999
Unnila Dasi and another v. Tata
Iron and Stool Co. Ltd., 934
Ved Prakash Gupta v. Dellon Cable
India (P) I.td., 1005
Vishram v. Dadabhoy. 932
Vizagapatnam Dock Labour "',
S tevcdores Assoc iat ion
Vishakhaplltll"Ol and others, 999
V. N. & Ors. I: The Bihar Journals
Ltd., 949
Waterside \Vorkers Federation of
Australia v. J. \V. Alexander I.td.,
1029
v.,'eston v. London Countl)' Council,
814
Willets v Watt &. Co., 921
Withers v l.. 8. & S. C. Railways,
930
\Vorkmen v. Mangement of
Dimakuchi Tea Estate, 1001
Workmen of Indian Standards
Institution \'. rvlanagement of
Indian Standards Institution.
996, 998
\Vorkmcll of [he Indian Leaf
Tobacco Devciopment Co. Ltd.,
Guntur v. Management etc" i 057
\Vorkmen \., The Management of
Jorehaut Tea Co, Ltd .. 1051
Workmen etc. \'. I\l!s Straw Board
Manufacturing Co. Ltd., I05i
Yarmonth \'. france. 921
Yates \: South Kirkby Collieries,.
931
Yewcn \'. Noakes, 929
 INTRODUCTION
Definition of Law I-Society and. Law 2~Rule of Law 3-
Commercial Law and Mercantile Law &-Sources of Indian
Commercial Law 7

DEFINITION OF LAW
Law, as it is, is the command of the Sovereign. It means,
(I) law has its source in sovereign authority, (2) law is accom-
panied by sanctions, and (3) the command to be a law should
compel a course of conduct. Being a command the law must flow
from a determinate person or group of persons with the threat
of displeasure if it is not obeyed. Sovereignty is, however, only
a part of the state. SQ, in ultimate sense, law emanates from the
state. Thus the term Law is used to denote rules of conduct
. emanated from and enforced by the state. People living in anI,
organised society have to follow certain common rules, otherwise'
peaceful living is impossibie. It is the function of the State to
enforce these rules.
Holland
According to Holland I , Law is, "a rule of' external human
action enforced by the sovereign political authority". From this
definition it follows that there are three essential characteristics
of law.
I. taw is a rule relating to the actions of human beings.
2. Law attempts to regulate the external actions of human
beings. .
3. Law is enforc~d by the State.
Salmond
"Law is the body of principles recognised and applied by
the State in the administration of justice."2
Woodrow Wilson
Woodrow Wilson) defines Law as follows : "Law is that
portion of the established habit and thought of mankind which
has gained distinct and formal recognition in the shape of uniform

I Holland, Jl!risprudence. 3 Woodrow Wilson, Th~ State

2 SaJmond~ Jurisprudence.

Commercial Law - I t
2 INTRODUCTION .

rules backed by the authority and power of the government." This

definition is practically the same as that of Holland.
Anson
Rules regarding hUJ)1an conduct are necessary for peaceful
living as well as for progress and development. Anson l observes
as follows: "The object of Law is Order, and the result of Order
is that men are enabled to look ahead with some sort of security
as to the future. Although human action cannot be reduced to
the uniformities of nature, men have yet endeavoured to repro-
duce by Law something approaching to this uniformity".

SOCIETY AND LAW

The term 'society' is us.ed to mean a community or a group
of persons, living in any region, who are united together by some
commgn bond.
A 'common bond' is formed when some uniformity of factors
. like nearness, nature ohhe people, habit, custom, inhibition,
beliefs, culture, tradition etc. appears. The 'common bond' lead
to forming so"ial ·rules or rules of social behaviour. The rules
are made by members of the society. Disobedience of the rules
is followed by punishment in the. form of social disapproval.
There is no positive penalty associated with the violation of social
rules except excommunication or ostracism.
But 'law' unlike social rules, is enforced by the State. Law,
according to Holland is "a rule of external human action enforced
by the sovereign political authority": The objective of law is to
bring order in tho society with a view to enable its members
to progress and develop with some sort ·of security regarding the
future. (See below) .
From tIie above discussion it follows that although custom,·
usages and traditions indicate a particular social conduct, law
or definitive rules are made to ensure the peace and progress
of a society. .
The State makes laws. Disobedience of State laws involves,
a penalty which is enforced by the government through the
sovereign power of the State. Whatever is not enforceable is not
Law. Laws of the State are applicabre to all without exception
in identical circum~nces.

I Anson, LOll" of Contract.

 LAW 3

Law and Social Objectives

Many jurists and social scientists in 19th century interpret
the nature of Law with social perspectives. 'Ancient Law' by
Henry Maine, is the pioneering work in this respect. According
to him, with social advance, law must be framed and changed
on the basis social needs. Social scientists like Emile Durkheim,
L. T. Hobhouse, Max. Weber, etc., observed that moral values
rather than the settlement of disputes of interests should be the
objective of Law. According to Rosco Pound, Law is profoundly
related to the following three elements: (a) the legal structure
of tbe society (b) constitutional ideals and principles and (c) legal
procedure. The nature and the principle of Law of a democratic
society must be different from that of an autocratic system. It
has been accepted on all bands that Law is today one of the
imperative tools for performing social purposes.
Change of Law and Change of Social Rules
The legal system of a country rdlects the rules of society.
If there is a change of social rules usually there OCCU{S a change
of law. For example, in the Middle Ages in Europe, the landlord
and the feudal system prevailed. At that time the rights of the
peasant was very restricted. In modem times when the feudal
system was abolished the rights of the peasant and the citizens
were enlarged. Therefore change of social rules leads to change
of law.
The converse of the above also applies, i.e., change of law
leads to change of the rules of society. Legislation has enlarged
'the rights of Hindu women regarding inheritance, property rights
and marital rights. In these cases the change of law has been
accepted by the society We can conclude that there is a
dependence between law and social rules and vice versa.

RULE.OF LAW
The Concept
In earlier times (and in a few countries now) certain classes
and individuals possessed special privileges and were judged by
special law. The modern view is to apply the same law over
all persons in the State and to give all persons equal rights and
privileges for the protection of their human liberties. Democracy
can remain only in a society of equals.
4 INTRODUCTION

Three Rules
The concept of equality of all persons before ftw is the basis
of what is called the Rule of Law. The Rule was summarised
by Diceyl as follows :
I. The Rule of Law states that, "no man is punishable or
can be lawfully made to suffer in body or goods except for a
distinct breach of law established in the ordinary legal manner
before the ordinary courts." (Dicey). In other words, (a) there
must be supremacy of law, (b) no one shall be punished except
for definite breach of law and (c) the breach of law must be
proved in a duly constituted court of law. No citizen can be
arrested or imprisoned, unless he violates speciftcally any law
of the country in force and is accused of a charge by the court.
Thus the rule of law implies equal protection of law.
2. In the second place, Rule of law means that, "no man
is above law". Every man whatever his rank or condition, is
subject to the ordinary law of the State and amenable to the
jurisdiction of ordinary tribunals. "What is law-legal right and
Jegal obligation for me--must hold equally as such for all
citizens." (Dicey). In other words, Rule of Law means (~) equality
before the law, (b) every citizen is subject to the ordinary law
of the land and (c) the citizen has to face trial in the same law
courts, irrespective of his status or position in the society.
3. In the third place, the Rule of Law is the result of statutes
and judicial decisions determining the rights of private persons.
Thus the constitutional law of the country follows from the
ordinary law of the land.
Comments
The Rule of Law is therefore, no ·respecter of persons. It is
applicable to everybody (from Prime Minister to the convict, and
from the millionaire to a beggar). The judiciary must be indepen-
dent and impartial if the Rule of Law can mean anything real.
Unlike the Indian Constitution, the British Constitution has
developed through historical evolution on the basis of common
law. The rights of citizens of· England are not. written in a special
document (like Fundamental Rights or a Bill of Rights). They
are specified in common law. "If an ordinary citizen, or the
sovereign power interferes with the legal right of a citizen, the
•
I A. V. Dicey. Law of the Constitution.
 LAW 5

remedy ~s to be sought with the help of common law. Therefore,

Dicey' observes that the rights of the citizens have been protected
by the ordinary law of the country and the Rule of Law. In
India, however, there is a written constitution specifying the
Fundamental Rights of a citizen.
Criticism ,
The three principles, which Dicey described in relation to
the Rule of Law, have been criticised by many jurists, including
I. Jennings, H. Laski and W. A. Robson. The -main criticisms
are summarised below.:
1. The emergence of Administrative Law : With the increase
of constitutional complexities, the government departments have
made many rules framed under various acts. This is known as
Administrative Law. There are also special tribunals for the
settlement of professional disputes. At the time of Dicey (19th
century Great Britain) there existed separate military courts and
courts for churchmen. The executive department often uses the
arbitrary and prerogative powers in day-to-day's work and for
the purpose of performing the administrative work applies the
discretionary power in most cases. Therefore, it is apparent that
the Rule of Law is breached and "the power of the government
is far-reachi~g.
2. Economic Inequalities: In order to ensure legal equality
Prof. Laski emphasises the need of economic equality. Punish-
ment for the same offence varies because police enforcement is
frequently partial. Therefore, from the standpoint of law, the word
'equality' is meaningless, unless there is economic equality
followed by Social and constitutional equality.
3. The supremacy of the Legislature: The third principle
of the Rule of Law is the supremacy of common law. But, in
fact, the principal basis of the constitution of England is the
supremacy of Parliament. The sovereignty of Parliament in
Britain has not been established by the Court. Although the
Fundamental Rights of a citizen are established upon the basis
of conventiomll rules and the Court is the protector of those
rights, yet Parliament of Britain' is the sole authority to bring
any change over or' to nullify the existing rules. Therefore, it
is 'understood that Parliament is the fundamental basis of the
Constitution of England and judging from the standpoint of
modem age, the concept of the Rule of Law is only a theoretical
6 INTRODUCTION

idea. This, however, does not apply to India because the

constitution of India is written and there is a provision of .
fundamental rights in the constitution.
Conclusion
The principle of Rule. of Law has been criticised from three
viewpoints, viz.. (i) the extensive power of Administrative Law,
(ii) inequality of income/wealth and (iii) supremacy of the
legislature. In spite of these defects, a civilised state must secure
the Rule of Law. Otherwise, despotism, authoritarianism and
corruption will hold sway on the state. Democracy can be attained
only under the Rule of Law. Conversely Rule of Law can be
attained only in democracy. ..
The Rule of Law has many benefits. It protects the liberty
and rights of citizens. The Rule of Law creates an atmosphere
of peaceful living. This principle, with true education enhances
the calibre of citizens, legislators, and voters, thus enabling them
to maintain Rule of Law free from its defects and designs of
self-seeking persons.

COMMERCIAL LAW OR MERCANTILE LAW

Definition
The laws of a country relate to many subjects, e.g.,
inheritance and transfer of property, relationship between persons,
crimes and their punishment, as. well as 'matters relating to
industry, trade and commerce. The term Commer.cial Law or
Mercantile Law is used to include only the last of the aforesaid
subjects, viz., rules relating to industry, trade, and commerce.
Commercial Suit
. A suit between merchants, bankers, and trailers, relating to
mercantile transactions is a commercial suit. It' follows that all
laws which must be referred to in order to decide such suits come
withln the scope .of commercial law, Commercial law or mer-
cantile law may therefore be' defined as that part of law which
.regulates the transactions 'of the mercantile commwrity.
Scope
The scope of commercial law is large. It _Iudes the laws
relating to' contract, partnership, negotiable instruments, sale of.
goods, companies etc.
 · .It must be noted that there is no fixed line of division
between commercial law and other branches of law, nor is then::
any conflict or contradiction between them. The law of contract,
which is a very important pari Qf commercial law, is BVplicable
not only to merchants and bankers but also to .other persons.
When a merchant files a suit in a court of law the procedure
is not materially different from that of other suits. When a trader
commits an. offence he is puriishable 'under the, criminal law
exactly in the same way as any otlier persQn. The subjects studied
under tlie lieading of commercial law do not form a comprehen-
sive code dealing witli. all. aspects of mercantile activity. Com-
mercial law deals with only those parts of law which are of
special importance to tlie mercantile community. The same laws
are applicable to 'other citizens under appropriate circumstances.

SOURCES OF INDIAN COMMERCIAL LAW

The commercial Jaw of India is based upon statutes of the
Indian legislature, Epglish mercantile law and Indian mercantile
usages. modified and adapled by judicial' decisions.
We are stating below the sources from which the rules of
Commercial Law of India have been derived.
1. Statutes of tbe Indian Legislatures
The legislature is the main source of law in modem times.
In India, the Central and the State legislatures possess law making
powers and liave exercised their powers extensively. The greater
part of Indian commercial law is statutory.
2. Engllsb Mercantile Law
Many rules of English 'Mercantire Law have been incorpo-
rated into Indian Law, througli statutes and judicial decisions.
English MercaDtile Law is a mixture of diverse elements. It
contains rules originating from the following sources :'
(i> Maritime usages which developed during the 14th and the
I Sth centuries among merchants' trading in the European
ports. Tbese usages are known as Lex Mercantoria.
(ii) Rules which developed by custom in England and' which
constitute what is called the English Common Law.
(iiI) Rules of Ro~an Law. i
8 INTRODUCTION

(iv) Rules of Equity, i.e .• rules which· were applied by English

Courts of Equity in cases where the common law rules
were considered harsh and oppressive.
(v) Statutes of the British Parliament.

3. Judicial Dec:isions or Precedents

Judges interpret and explain statutes. Rules of equity and
good conscience are incorporated into law through judicial
decisions. Whenever the law is silent on a point, the judge has
to decide the case according to his idea of what is equitable.
Prior to 1947, the Judicial Committee of the Privy Council of
Great Britain was the final court of lIppeal for Indian cases and
its decisions were binding on Indian courts. After, independence,
the Supreme Court of India is the final court of appeal. But
decisions of the superior English courts like the Courts of Appeal,
Privy Council, and the House of Lords, are frequently referred
to as precedents which might be followed in interpreting Indian
statutes and as rules of equity and good conscience.
4. Custom and Usage
A customary rule is binding where it is ancient, reasonable,
and not opposed to any statutory' rule. A custom becomes legally
recognised when it is accepted by a court and is incorporated
in a judicial decision.
I
EXERCISES
I. Define 'Law' and discuss the theory of 'Rule of Law'.
(Pages I. 3-5)
2. "Change of Law depends upon the change of society". Discuss .
.' . (Pages 2-4)
3. What do you understand by Rule of Law? What are the benefits
of Rule of Law? (Pages 3-5)
4. "All are equal in the eyes of law". Discuss. (Pages 3-5)
5. Discuss tlie relationship between Law and Society. (Pages 1-3)
6. What are the 'sources of Commercial Law in India? (Page 6)
7. Objective questions. Give shon answers.
(i) -Summarise the Rule of Law in seven lines. (Pages 3-5)
(ii) What good law does to the society? (Page I)

•
 BOOK I
LAW OF CONTRACT

. CHAPTER I The Essential Elements of Contract 12 -16

Object and Scope 12 ; Application 12; Definition of Contract
13; The Essential Elements of a Contract I3; Some
Definitions of Contract ·15.
CHAPTER 2 Orrer and Acceptance 17 - 32
Definitions 17; Effect of Orrer and Acceptance 18; Orrer
1·8; Rules regarding Orrer 18; Acceptance 22; Rules
regarding Acceptance 23; Communication of Offer and
Acceptance 26 ; Offer and Acceptance by post 27 ; Orrer and
Acceptance through Telephone 27; Options 28; Standing
Contracts 28 ; Open Proposals 28 ; Revocation 29.
CHAPTER 3 Intention to Create'Legal Relations 33-34
CHAPTER 4 Consideration 3S - 4S
Definition of Consideration 35 ; TYPes of Consideration 35 ;
Rules regarding Consideration. 36; bifferences between
English and Indian Law 39 ; Promise to 'Charities 40; ''No
Consideration No Contract", Exceptions to the Rule 41 ;
Can a Person who is not a Party to a Contract Sue Upon
it? 43 ; Rights and liabilities of a stranger 44.
CHAPTER 5 Void and Voidable Agreements 46 - 48
Void Agreement 46 ; Voidable Agreement 47 ; Unenforceable
Agreement 47; Illegal Agreement 47; Distinction
between Void Agreement and an Illegal Agr~ement 47; Valid
Contract 48.

CHAPTER 6 C.paclty of Parties 49-58

Defmition of "Capacity" 49; Minority 49; Persons of
Unsound Mind 54; Disqualified persons 56; Aliens 56;
Foreign Sovereigns 56; Corporation 57; Professional
Persons 57; Married Women 57.
CHAPTER 7 Free Consent 59-76
Definition of "Free Consent" 59; Coercion 59; Undue
Influence 61 ; Misrepresentation 65; Fraud 66; bistinction

9
10 LAW OF CONTRACT

between Fraud and' Mi"'~presentation 69; Contracts

Uberrimae Fidei 70; Mistake 71 ; Opinion 12; Unilateral
Mistake 72; Mistake and Consent 7j:

CHAPTER 8 Legality ofObjeCt ancl'tonsidera"tlon' 77 .:. 94

Unlawful Consideration and Object 77 ; Agr~ements Against
Public Policy 79; Void Agreements 83; Objects or
Consideration Unlawful in Part 92.

CHAPTER 9 Contingent Contracts 95 - 98

Definition 95; Meaning of Collateral Event 95;
Characteristics of Contingent Contra"ts 96; Contingency
dependent on act of party 96; Rules regarding Contingent
Contracts 97 ; Difference between Contingent Contract and
Wagering agreement 98,

CHAPTER 10 Performance of Contracts 99 -114

Definition 99; Offer to Perform or Tender 99; By whom
is a Contract to be Perfonned 10 I ; Devolution of Joint
Rights and Liabilities 102; Reciprocal Promises 104;
Contracts which need not be Performed 107 ; Assignment of
Contracts '107; The Time and Place of Performance 109;
Performance within Stipulated Time 1\0; Rules Regarding
Appropriation of Payments, 112.

CHAPTER II Termination or Discharge of Coniraets 115 - 141

Methods of Termination 115; Termination by Performance
115 ; Termination by Mutual Agreement 115 ; Novation 116;
Alteration 116; Remission 116; Accord and Satisfaction
117 ; Rescission 118; Waiver 118 ; Merger 119; Subsequent
or Supervening Impossibility i 19 ; The Effects of Supervening
Impossibility 123; The Doctrine of Frustration 124;
Termination by Operation of Law 127; Lapse of time 127;
Termination by material Alteration 127; Termination by
Breach of Contract 128; Damages 131; Rules Regarding the
AlROunt of Damages \31 ; Liquidated Damages and Penalty
135; Quantum Meruit 137; SpecifIC perfOflll8llCC 139;
InjUnction \39; RestitUtion of Benefit 149.

CHAPTER 12 Quasi-Contracts 143-146

CHAPTER 13 indemnity and Guarantee 147 - 160

Contracts of Indemnity 147; Contracts of Guarantee 149';
Contracts of Guarantee which are Invalid 150; Differences
between Indemnity and Guarantee 151; Continuing
 mE ESSENTIAL ELEMENTS OF CONTRACT 11

Guarantee I S2; The Extent of the Liability of the Surety

I S2 ; When is a Surety Discharged from Liability? I S4 ; The
Rights of the Surety I S7 ; Contribution between Co-s.;reties
IS8.
CH.>.Pmt 14 Bailment and Pledge 161 - 173
Definition of Bailment 16 I; Characteristic features of
Bailment 161 ; Different kinds of Bailment 162; Duties of
the Bailee 162; Duties of the Bailor 165; Bailee's Rights
166; Bailor's Rights 167; Termination of Bailment 168;
Rights and Duties of Finder of Goods 168 ; Suits by Bailees
or Bailors against wrong-doers 169; Bailments by way of
Pledge or Pawn 170; Rights of Pledgee or Pawnee 171 ;
Rights of Pledgor 172.
Ciw>'rER IS Law of Agency 174-197
Definition and Nature of Agency 174; Power of Attorney
174; Enforcement and Consequences of Agents Contracts
174 ; Test of Agency 175 ; Different classes of Agents 177 ;
Methods of Creating Agency 178; Agent's Authority 182;
Representation as to Liability 184;, Pretended Agents 184;'
Misrepresentation and Fraud by Agents 185 ; Sub-Agent and
Co-Agent 186; Termination of Agency 187; Agent's Duties
to Principals 189; Principal's Duties to Agent 192;
Principal's Rights 194; Agent's Rights 194; Personal respon-
sibility of Agent 195; Contr,"cts with an Undisclosed Prin-
cipal 196.
 THE ESSENTIAL ELEMENTS
CD OF CONTRACT

Object and Scope

The Law of Contract deals with agreements which can be
enforced through courts of law.
\ The Law of Contract is the most important part of commer-
cial law because every commercial transaction starts from an
agreement between two or more persons~
According to Salmond I a contract is "an agreement creating
and defining obligations between the parties." According to Sir
William Anson 2 , "A contract is an agreement enforceable at law
made between two or more persons, by which rights are acquired
by one or more to acts or forbearances on the part of the other
or others."
The object of the Law of Contract is to introduce definiteness
in commercial and other transactions. How this is done can be
illustrated by an example. X enters into a contract to deliver 10
tons of coal of Y on a certain date. Since such a' contract is
enforceable by the courts, Y can pllin his activities on the basis
of getting the coal on the fixed date. If the contract is broken,
Y will get damages from the court and will not suffer any loss.
Sir William Anson observes as follows: "As the law relating
to property had its origin in the attempt to ensure that what a
man has lawfully acquired he'Shall retain, so the law of contract
is intended to ensure that what a man has been led to expect
shall come to pass; and that what has been promised to him
shall be performed."
Application
The Indian Contract Act of 1872 (Act IX of 1872) lays down
certain general rules regarding contracts. The Act is not exhaus-
tive. There are other Acts relating to particular types of contracts.
e.g.. the Negotiable Instruments Act,the Transfer of Property
Act, etc.

I Salmond. Jurisprudence. 2 Anson, La.. of Con/raet.

12
.,
 THE ESSENTIAL ELEMENTS OF CONTRACT 13

The Contract Act does not affect any usage or custom of

trade, or any incident of any contract not inconsistent with the
provisions of the Act.-Sec. I.
Definition of Contrad
Section 2(h) of the Indian Contract Act provides that, "Ail
Agreement enforceable by law is a cC'ntract". Therefore in a
contract there must be (I) an agreement and (2) the agreement
must be enforceable by law.
An agreement comes into existence whenever one or more
persons promise to one or others, to do or not to do something,
"Every promise and every set of promises, forming the consid-
eration for each other, is an agreement-Sec. 2(e). Some agree-
ments cannot be -enforced through the courts of law, e.g., an
agreement to play cards or go to a cinema. An agreement, which
can be enforced through the courts of law, is called a contract.
The Essential Elements of a Contract
An agreement becomes enforceable by law when it fulfils
certain conditions. These conditions, which may be called the
Essential Elements of a Contract, are explained below.
I. Offer and Acceptance: There must be a lawful offer
by one party' and a lawful acceptance of the offer by the other
party or parties. The adjective "lawful" implies that the offer and
accep\ance must conform to the rules laid down in the Indian
Contract Act regardi\lg offer and acceptance. (See ch. 2)
2. Intention to create Legal Relationship: 'There must be
an intention (among the parties) that the agreement shall result
in or create legal relaiions. An agreement to dine at a friend's
house is not an agreement intended to create legal relations and
is not a contract. But an agreement to buy and sell goods or
an agreement to marry, are agreements intended to create some
legal relationship and are therefore contracts, provided the other
essential elements are present. (See ch. 3)
3. Lawful Consideration: Subject to certain exceptions, an
agreement is legally enforceable only when each of the parties
to it gives something and gets something. An agreement to do
something for nothing is usually not enforceable by law. The
something given or obtained is called consideration. (See ch. 4)
14 LAW OF CONTRACT

The consideration may be an act (doing something) or forbear-

ance (not doing sOl1)ethiIW) or a promise .'0 ,do or not to do
something. Consideration may be past (something already done
or not done). It may also be present or future. But only those
considerations are valid which are "lawful". (What is meant by
"lawful consideration" is discussed in ch. 8)
4. Capacity of Parties: The parties to an agreement must
be legally capable of entering into an agreement, otherwise it
cannot be enforced by a court of law. Want of capacity arises
from minority, lunac;y, idiocy, drunkenness, and similar other
factors. If any of the parties to the agreement suffers from any
such disability, the agreement is noi enforceable by law, except
in some special cases. (See ch. 6)
5. Free Consent: In order to be, enforceable, an agreement
must be based on the free consent of all the parties. There is
absence of genuine consent if the agreement is induced by
coercion, undue influence, mistake, misrepresenfation, and fraud.
A person guilty of coercion, undue influeoce etc. cannot enforce
the agreement. The other party (the aggrieved party) can enforce
it, subject to rules laid down in the Act. (See ch. 7)
6. Legality of the Object: The object for which the
agreement has been. entered into. must not be illegal, or immoral
or opposed to public policy. (See ch. 8)
7. Certainty: The agreement must not be vague. It must
be possible to ascertain the meaning of the agreement, for
otherwise it cannot be enforced. (See ch. 8)
8. Possibility of Performance: The agreement must be
capable of being performed. A promise to do an impossible thing
cannot be enforced. (See ch. 8).
9. Void Agreements: An agreement so made must not have
been expressly declared to be void.. Under' Indian Contract Act
there are five categories of agreements which are expressly
declared to be void. They are :
I. Agreement in restraint to marriage. (Sec. 26)
2. Agreement in restraint of trade. (Sec. 27)
3. Agreement in restraint of proceedings. (Sec. 28)
4. Agreements having uncertain meaning. (Sec. 29)-
S, Wagering agreement. (Sec. 30)
-'
"
 THE ESSENTIAL ELEMENTS OF CONTRACT IS

10. Writing. Registration and Legal Formalities: An oral.

contract is a perfectly good contract, except. in those cases where
writing and/or registration is required by some statute. In India
writing is required in cases of lease, gift, sale and mortgage of
immovable property: negotiable instruments; memorandum anlI
articles of association of a company e'~. Registration is com-
pulsory in cases of documents com in/,o within the purview of
Section 17 of the Registration Act, e.g.. mortgage-deeds covering
immovable property. The terms of an oral contract are sometimes
difficult to prove. Therefore important agreements are usually
entered into HI writing even in· cases where writing is not
compUlsory.
Conc:lusion
The elements .mentioned above must all be present. If any
one of them is absent, the agreement does not become a contract.
An agreement which fulfils all the essential elements is enforce-
able by law and is called a contract. From thi!; it follows that,
every contract is an agreemellt hut all agreements are not
contracts.
Every contract gives rise to certain legal obligations or duties
on the part of the contracting parties. The legal obligations are
enforced by the courts. .
The Indian Contract Act contains rules regarding each of the
elements mentioned above. These rules are discussed in the
subsequent chapters. .

SOME DEFINITIONS
In the Law of Contract certain terms are used indicating their
meaning. The terms also show that contracts can be classified
into four broad divisions, namely, (I) the method of formation
of a contract, (2) the time of its performance, (3) its parties,
and (4) its legality or validity.
I. Method of Formalion
(I) Express Contract
Express Contract is one which is expressed in words spoken
or written. When such 8 contract is formed, there is no difficulty
in understanding the rights and obligations of the parties.
(See pp. 18-19)
16 LAW OF CONTRACT

(2) ImpJil!d CODtract

The conditions of an implied contract is to be understood
•
from the acts, the conduct of the parties and/or the course of
dealing between them. (See pp. 18-19)
(3) Quasi Contract
There are certain dealings which are not contracts strictly,
though the parties act as if there is a contract. The Contract Act
specifies the various si:~; 'ions which come within what is called
Quasi Contract. (Sections 68-72; see Chapter 12 Book I)
IL The Time of Performance
(1) Executed Contract
There are contracts where the parties perform their obliga-
tions immediately, i.e., as soon as the contract is formed. (See
pages 35-36) .. -
(2) Executory Contract
In thjs contract the obligations of the parties are to be
performed at a later time. (See p. 36)
III. The Parties Of the Contract
(I) Bilateral Contracts
There must be at least two parties to the contract. Therefore
all contracts are bilatenll or multilateral. (See p. 15)
(2) Unilateral Contract
In certain !contracts one party has to fulfil his obligations
whereas the. other party has. already performed his obligations.
Such a contract is called unilateral contract.
IV. Legality or Validity of the Contract
Contracts can be classified into the following ; (I) valid,
(2) void, (3) voidable, (4) illegal and (5) unenforceable. These
terms are exp lained in Chapter 5, Book I.
EXERCISES
I. Explain the essential elements of a contract. (Pages 13-14)
2. Define contract. State the essential elements of contract.
(Pages 12-13)
3. "All agreements are not contracts, but all contracts are agreements".
Discuss· the statement explaining essential elements of a valid
contract. (Pages .13-14)
 OFFER AND ACCEPTANCE

DEFINITIONS
,
Formation of Contract
All contracts are made by the process· of a lawful offer by
one party and the lawful. acceptance of the offer by the other
party. X says to Y. "Will you buy my house for Rs 50.000?"
This is an offer. If Y says, "Yes", the offer is accepted and a
contract is formed.
Proposal ,
An "offer" involves the making of a "proposal". The term
proposal is defined in the Contract Act as follows: "When one
person signifies to another his willingness to do or to abstain
from doing anything, with a view to obtaining the assent of that
other to such act or abstinence, he is said to make a proposal"
-Sec. 2(a).
Offer
A proposal is also called an offer. The promisor or the person
making the offer is called the offeror. The person to whom the
offer is made is called the offeree.
Promise and Acceptance
"When the person to whom the proposal is made signifies
his assent thereto. the proposal is said to be accepted. A proposal
when accepted becomes a promise."-Sec. 2(b). .
"The person making the proposal is called the 'promisor'
and the person accepting the proposal is called the 'promisee'."
-Sec. 2(c).
£r.amp/es of offer and acceptance :
(i) Specific Offer : X offers to sell his motor car to r at the price
of Rs. 5000. This is a proposal. X is the promisor or the offeror.
r is the offeree. If Y agrees to buy the car at the price stated;
r becomes the promisee or tlie acceptor. There is a contract.
(ii) Specific Offer : P puts up a notice offering to pay a reward of
Rs. 5 to any student who' finds out and returns a book lost in
the college. Q a student, reads the notice and then finds and brings
the book to P p's notice is an offer and Q is the acceptor. There
is a contract. .

Commercial Law - 2 17
18 LAW OF CONTRACT

(iii) General Offer: ~ transport company runs tramway cars along the
streets. This is an otTer by the company to carry passengers al
the scheduled fares. The otTer is accepled when a passenger gets
up on a tram with the intention of becoming a passenger.

EFFECT OF OFFER AND ACCEPTANCE

Offer alone and acceptance alone are "inactive", "inert" or
"powerless". When separate they cannot lead to the formation
of a contract. But an offer logelher wilh acceptance leads to a
contract which is enforceable by the Court, provided the other
essential elements of contract exist.
The formation of a contract can be illustrated by the famous
'gunpowder and lighted match' simile of Anson. The materials
in a gunpowder (like sulphur, iron fillings, etc.) by themselves
are not enough to cause an explosion. But when a lighted match
is appl ied to the inflammable mixture, an explosion occurs.
Similarly, offer and acceptance together can explode leading to
the formation of a valid contract. But if there is any disquali-
fication on the part of either offer or acceptance, no contract
will be formed just as if a gunpowder lacks sulphur or a lighted
match is damp no explosion will occur. The idea being clear.
we can recall the original saying. "Acceptance is to offer what
a lighted match is to a tl'llin of gunpowder. It produces something
which cannot be recalled or undone. But the powder may have
lain till it has become damp or the man who laid the train may
remove it before the match is applied. So an offer may lapse
for want of acceptance or be revoked before acceptance. Accep-
tance converts the offer into a promise and then it is too late
to remove it." (Anson)
OFFER
Rules regarding offer
The .contract Act contains various rules regarding offer 'or
proposal. They can be summed up as follows :
I. An offer may be expre,'s or may be implied from Ihe
ci11'UmSlances : An offer may be made in two ways : (i) by
words, spoken or written and (ii) by conduct. When an offer is
made by stating so in words or in writing, it is called an Express
offer. When an offer is implied from the conduct of a person,
it is called an Implied offer. Examples (i) and (ii) in the last
 -,
OFFER AND ACCEPTANCE 19

page, are cases of express offer. Example (jji) is a case of an

implied offer. (See p. 18)
"In so far as the proposal or acceptance of any promise is
made in words, the promise is said to be express. In so far as
such proposal or acceptance is made otherwise than in words,
the promise is said to be implied"-Sec. 9.
2. An offer may be made to a definite person; to some definite
class of persons; or to the world at large : An offer made to
a definite person or a definite class of person is called a Specific
offer. An offer sent to all persons (or the world at large) is called
a General offer. Example (i) is an offer to a defin ite person;
example (ii) is an offer to a definite class of persons; and
example (iii) is an offer to the world at large. (See pp. 17-18)
3. Legal relationship is required: The offer must be one
which is capable of creating a legal relationship. A social party
Or an invitation to play cards is not a legal relationship.
Therefore, an offer to such an affair does not lead to a binding
contract. (See chapter 3, Part I, p. 33)
4. The terms of the offer must be certain, definite, unam-
biguous alld not vague: X says to Y, "I will give some money
if you marry Z ". This is not an offer which can be accepted
because the amount of money to be paid is not certain.
5. A mere statement of inten/ion is not an offer : A
distinction is usually made, between an "offer" and "a statement
of intention". Price-lists and catalogues, and enquiries for cus-
tomers are merely statements of intention. They ate not regarded
as offers but as invitation to others to made offers. An advertise-
ment in a newspaper or elsewhere may be so worded that it
amounts to an offer. But ordinarii} and advertisement is consi-
dered to be an inv)tation to make offers. Similarly. in an auction
sale. articles are displayed with an intention that the bidders
present may bid for them i.e. may make an offer. Thus in an
auction sale a bid is an offer while the fall of the hammer
signifies the acceptance of the auctioner. (Payre v. Cave)
Examples :
(i) Intention to sell: A table on an article in a shopkeeper~s showcase
stating 'price Rs. 5' is considered to be the expression of an
intention to sell the article at Rs 5. It is not an offer to the world
at large which can be accepted by anybody. The intending purchaser
\\ hI) wishe" to buy the article is the proposer. The shopkeeper may
20 LAW OF CONTRACT

or may not accept the proposal. The same rule applies to price-
list and catalogues. Fisher v. Belli
(ii) Quolation oj prices: A quotation of prices is not an offer, but an
invita~ion for offers. Mylappa Chell;ar v. Ago Mirza Alohamed
Shira=ee. 2 This is true of many common forms of advertisement.
(hi) Advertisements : A newspaper advertisement inviting applications
for a job or inviting tenders for some work is not an offer. It is
only an invitation to make offers. The applicants who, reply to the
advertisement are the proposers or offerors. The adverti,:;er is free
to accept anyone of the applications.
(i\') Catalogue: A banker's catalogue of charges is not an offer. Rank
of Travancore v. Dhirl Ram,]
(v) Time-Iable : A railway time-table is not an offer. Therefore if a
train does not work according to the table, the ticket-holder cannot
tile a case for breach of contract.
(ri) Question and Reply: H telegraphed to F asking the laner to inform
him whether he would sell Bumper Hall Pen and if so at what price.
F informed H that the lowest price was £900 but did not say that
he was willing to sell at that price. H telegraphed that he would
buy at that price. F gave no reply to the telegram. Held, there was
no contract because neither the question of H nor the reply of F
constituted an offer. Harvey v, facey.'
(rN) Aliclibn : When particular goods are advertised for sale by auction
the auctioneer does not contract anyone who attends the sale
intending to purchase those goods that they shall be actually put
up for sale. Harris v. Nickerson. 5

6. An uffer must be communicated to the offeree: A person

cannot accept an offer unless he knows of the existence of the
offer. P offers a reward to anyone who returns his lost dog. Q
finding the dog brings it to P without having heard of the offer.
Held, he was not entitled to the reward. Fitch v. Snedaker 6 In
this case it was argued that a man cannot accept an offer without
intending to do so, and he cannot intend to accept an offer of
which he was ignorant. In La/man v. Gauri Dutt,7 G sent his
servant L in search of his missing nephew .. Subsequently G
announced a reward for infonnation concerning the boy. L
brought back the missing boy, without having known of the
reward. Held, there was 110 contract between Land G and the
reward cannot be claimed.
[Communication of Offer and Acceptance.-See p. 26]
t (1961) 1 Q B. 394 '(1919) 37 Mad. L.J. 712
't,IR (1942) Privy Council 6 4 (1893) A. C. 552
'(1873) L. R. 8 Q. B. 286 630 N. Y. 248
7" A. L. 1. 489
 OFFER AND ACCEPTANCE 21

7. An offer may be conditional: An offer may be made

subject to conditions. In such cases, the conditions must be
clearly communicated to the offeree. If a person accepts an offer
without knowledge of the conditions, the offeror cannot claim
fulfilment of the conditions. But if the conditions ar{ clearly
written or expressed and should have been known to the offeree,
he cannot plead ignorance of the conditions.
Examples:
(i) Slricl enforcement : X agreed to buy goods from Y and signed
an order form given by Y containing a number of clauses in small
print, without reading them. Held. clauses were binding on X.
L '£Slrange v. Graucob Ltd. I
(ii) Strict enforcement: T. who could not read, took an excursion ticket
on the railway. On the front of the ticket was printed "for conditions
see back", One of the conditions was that the railway company
would not be liable for personal injuries to passengers. T was injured
by a railway accident. Held, T was bound by the conditions and
could not recover any damages. Thomson v. L. M. & s. Rly 2
(iii) No reasonable notice: R booked her passage on a ship and received
a ticket"folded in such a way that no writing was visible. On the
ticket were printed certain conditions in small type, one of which
was that the shipowner's liability was limited to £ 100. R knew that
there was printing on the ticket but did not know that the printing
related to conditions of the contract. Held, R was not bound by
the conditions as she did not know of their existence, and having
regard to the smallness of the type in which they were printed, the
absence of calling of attention to them, the shipowner had not given
reasonable notice of them. Richardson v. Rawntree. 3
(iv) Against public interest: At delivered one new sari to a laundry for
washing. On the back of the printed receipt it was stated that the
customer would be entitled to recover only 15% of the market-price
of the article in case of loss. The sari was lost owing to the
negligence of the laundry. In a suit by M it was held that the term
was unreasonable. Such a term would give a premium on dishonesty
and is against the public interest. Lily White v. R. Afunnuswami. 4 .
(,,) Unreasonable : In a Kamataka case, a laundry would pay on Iy 8%
of the price in case of loss. The court held that the term was
unreasonable. M. Siddalingappa v. T Nalaraj. S
Comments: A contract formed on a conditional offer is
valid. The terms of the contract can be constructed strictly or

1(1934) 2 K. B. 394 , (1930) I. K. B. 41

'(1894) A. C. 217 • AIR (1966) Mad 13
, AIR (1970) Mys f54
22 LAW OF CONTItACT

leniently. Fonnerly, all contracts were constructed and enforced

strictly. See examples (i) and (ii). above. In recent times, however,
the courts have adopted various protective measures for the
aggrieved persons. Conditional offers are invalid under the
following circumstances :
(I) Lack of reasonable notice. Example (iii)
(2) Unreasonable terms. Example (iv) and (v)
(3) Breach of fundamental ·rights.
(4) Tortious action by offeror.
8. Printed Contracts: Printed Contracts (or Standard Fonns
of Contracts) often contain a large number of terms and
conditions which exclude liability under the contract. For
examples. the Life Insurance Corporation of India, the Railway
Administration, Statutoty Corporation and big companies issue
printed forms of contract. The individual is bound to sign them
,vhether he likes the terms or not. Previously, the offerees of
such printed forms were helpless against the massive organisations
like those above. These organisations have aveiled of the
opportunity to exploit the weak individual by imposing onerous
terms upon them. Therefore. nowadays in order to protect the
oppressed individual the courts have evolved various modes of
protection. (See last para)

ACCEPTANCE
Who can accept?
An offer can be accepted only by the person or persons for
whom the offer is intended. An offer made to a particular person
can only be accepted by him because he is the pnly person
intended to accept. An offer made to a class of persons can be
accepted by any member of that class. An'offer made to the world
at large can be accepted by any person whatsoever. X sold his
business to Y without disclosing the fact to his customers. Z sent
an order for goods to X by name. Y received it and sent a letter
of acceptance. Held. there was no contract between Y and Z
because Z never made any offer to Y. Boulton v. Jones. I

1(1857) E. R. 232
 OFFEII AND ACCEPTANCE 23

Rules regarding'acceptance
The acceptance,of an offer tq, be legally effective must satisfy
the following re~lCel"Q.ents': >, • "-
I. It must be anaSsolute and unqualified acceptance of all
the terms of the offer.-Sec 7( I). If there is any variation, even
on an unimportant point, between the terms of the offer and the
terms of the acceptance, there is no contract.
Examples:
(i) AI offered land to N at £280. N replied accepting and enclosing,
£80, and promising to pay the balance by monthly instalments of
£50. Held, there was no contract, as there was no unqualified
acceptance. Neale v. Merrell.'
(ii) P offered to buy Q's mare on Q giving a guarantee that the mare
was quite in harness. Q guaranteed that .the mare was "quiet in
double harness ". Held, no acceptance. Jordan v. Norton. 2
2. Conditional Acceptance: In accordance with English law
as well as with the terms of the Contract Act, an acceptance
with a variation is no acceptance; it is simply a counter-proposal.
which must be accepted by the original promisor before a contract
is made. X offered to sell his house for Rs. 12,00q. Y said,
"accepted for Rs. 10,000." This is not an acceptance but a counter
offer or counter proposal. Kundan Lal v. Secretary of State 3 ;
Hyde v. Wrench. 4
But an acceptance is not called 'conditional' if an immaterial
term is added or if there occurs any misunderstanding between
the parties for the interpretation of collateral terms.
3. Contracts subject to condition : There are cases where
an "immediate binding contract is formed although some of the
parties' rights and obligations may be dependent upon the
happening of a particular event. For example, the agreement may
contain such a term as 'subject to the purchaser's solicitors
approving the title." Smith v. ButlerS. (Anson-Law of contract,
p.54)
4. Clarification : The seeking clarification of offer neither
amounts to the acceptance of the offer nor to the making of a
counter offer. Cheshire and Fifoots' Law of Contracts, 9 Edn.
1(1930) W. N. 189 2 (1838) 4 M. & W. 155
J (1939) 14 Luck, 710 • (1840) 3 8ev. 334
• '(1900) I Q. 8. 694
24 lAW OF CONTRACT

p. 34; U P. State Electricity Board and another v. Mis Gael

Electric Stores, Chandigarh. I
5. The acceptance· must be expressed in some usual or
reasonable manlier :-Sec 7(2). The offeree may express his
acceptance by word of mouth, telephone, telegram or by post.
These are the usual methods of communicating acceptance to the
offeror. [Comrriunication.-See p. 26]
An offer may also be accepted by conduct. If the offeree
does what the offeror wants him to do, there is acceptance of
the offer by conduct. Section 8 of the Act states that, "Perfor-
mance of the conditions of a proposal or the acceptance Gf any
consideration for reciprocal promise which may be offered with
a proposal, is an acceptance of the proposal."
Examples:
(i) Oral or by writing. P offers to buy Q's bicycle at Rs. 50.. Q may
accept this offer by stating so orally or through telephone or by
writing a letter or by sending a telegram to that effect.
(ii) Conduct. A company offered £10.0. to anyone who contracted
influenza after using their smoke ball 3 times daily for 2 weeks.
Mrs. Carli II used the smoke \iall but nevertheless got influenza. She
claimed the reward. The company objected, that she should have
notified them for her acceptance of the offer. Held, the use of the
smoke ball by Mr. Carlill constituted acceptance of the offer by
conduct, and no fonnal notice of acceptance was necessary. Carlill
v. Carbolic Smoke Ball Company. 2
(iii) Conduct. A widow invited her niece to stay with her in her residence
and promised to settle on her a particular immovable property. The
niece stayed with her in residence till her death. Held, <oby the Privy
Council) that the niece was entitled to the property because she had
accepted the aunt's offer by going to her tesidence and staying with
her as desired. V. Rao v. A Rao. 3
6. Mental acceptance or uncommunicated assent does not
result in a contract: No contract is formed if the offeree remains
silent and does nothing to show that he has accepted the offer.
Acceptance must be communicated to the offeror or shown by
conduct .
. Acceptance cannot be implied from silence of the offeree.
See example (iii).

I AIR (1977) All 494 2 (1893) I Q. B. 256

3 (1916).39 Mad 509 (Privy Council)
 OFFER AND ACCEPTANCE 25

Examples :
(i) F otTered to buy B s horse for £30, saying, "If I hear no more about
him I shall consider the horse as mine at £30." B did not reply.
Held, there was no contract because there was no communication
of acceptance. Mental acceptance or uncommunicated assent does
not result in a contract. Felthouse v. Bindley. I
(ii) A person received an offer by letter ; he wrote on the letter
"accepted", put the lener in his drawer and forgot all about it. Held
there was no contract because the other party was not informed.
Brogden v. Metropolitan Rly C02
(iii) Insurance proposal; Acceptance is complete only when it is
communicated to the offeror. Silence or receipt and retention of
premium cannot be construed as acceptance. Life Insurance Cor-
poralion of India v. Raja Vasireddy Koma/avall; Komba and others. 3
(See Law of Insurance, ch. I)
7. The mode of acceptance: Where the promisor prescribes
a particular mode of acceptance, the offeree must follow the
partiClrlar mode of acceptance. For example, 'if the offeror says,
"acceptance to be sent by telegram", the offeree must send a
telegram. If the offeree fails to follow the prescribed mode of
acceptance, the proposer may, within a reasonable time after the
acceptance is communicated to him, insist that the proposal be
accepted in the prescribed manner and not otherwise. But if the
proposer does not insist upon it, he accepts the acceptance as
actually communicated.-Sec 7(2). Thus, under the Indian law
the proposer has the option of waiving compliance with the
prescribed mode of acceptance.
Exampl. :
X offers to buy a certain quantity of coal from Yat a certain price
and asks }' to send a telegram if he accepts, }' writes a letter
accepting the otTer. X may insist on a telegram from Y; but if X
does not so insist, the acceptance is good.
8. TIme of Acceptance: (It the offeror prescribes a time, the
acceptance must be done within that time. If no time is prescribed
the acceptance must be done within reasonable time) What is
'reasonable' depends on the facts of the case. See the Case of
Ramsgate Vic/aria Hotel Co. v. Montefiore (Page 29).
9. When acceptance is complete : Section 4 of the Contract
Act lays down that the communication of an acceptance is

I (1862) I I C.B.N.S. 869 l (1877) A.C. 666

1 AIR (1984) Supreme Court 1014

, .
26 lAW OF CONTRACT

complete,-as against the proposer, when It IS put in a course

of transmissio~ to him,' so as to be out of the power of the
acceptor; and as against the acceptor, when it comes to the
knowledge of the proposer.
Examples:
(i) A proposes, by letter, to sell a house to B at a certain price. The
communication of the proposal is complete when B receives the
letter.
(ii) B accepts A's proposal by a letter sent by post. The communication
of the acceptance is complete-as against A, when the letter is
posted, as against B. when the letter is received by A.
10. Before Offer: Acceptance must be given before the offer.
This is the natural sequence. There cannot be acceptance before
the offer is given from any person. See the case of Lalman v.
Gaur; DUll. (Page 20)
II. The acceptance must be made while the offer is in force.
i. e.. before the offer has been revoked or the offer has lapsed.
How an offer is revoked is described below. (See page 29).

COMMUNICATION OF bFFER AND ACCEPTANCE

Section 3 of the Contract Act states as follows: The commu-
nication of proposllls, the acceptance of proposals, and the
revocation of proposals and acceptances, respectively, are deemed
to be made by any act or omission of the party proposing,
accepting or revoking by which he intends to communicate such
proposal, acceptance or revocation or which has the effect of
communicating it.
How is an Offer to be Communicated?
An offer may be communicated to the offeree or offerees
by word of mouth, by writillg or by conduct. A written offer
may be contained in a letter or a telegram. A circular or
advertisement or a notice may be written in such a language that
it amounts to an offer. A tramway car and a bus going along
a street and picking up passengers are examples of offers by
conduct.
Section 4 states : "The communication of a proposal is
complete when it comes to the knowledge of the person to whom
it is made,"
 OFFER AND ACCEPTANCE 27

How is an acceptance to be Communicated? (See p. 23)

Offer and Acceptance by Pos.t
An offer may be made by post. An offer may also be accepted
by post, if there is no other mode of acceptance specially
prescribed by the' proposer. When a proposal is made through
the post, the post office is by implication the agent 01 the
proposer. Therefore a letter of acceptance duly addressed and
posted is sufficient acceptance even though the lener does not
actually reach the proposer. (Notice to an agent is considered
to be notice to the principal). The letter must. however, be
correctly addressed. The lener must be actually posted. It is not
enough to give it to somebody to post. See example (ii)' in para
9. p. 25.
Etamples :
(i) G applied for shares in a company. A letter of allotment was posted
but the letter did not reach G. Held there was a binding contract
and G was a shareholder of the company. HOllst!hold Fire Insurance
Co .. v. Grant. I
(ii) A registered envelope was tendered by the postman to the addressee.
who refused to accept it. It is to be presumed that the addressee
has the knowledge of the content thereof. Har Chnrn Singh v. Shiv
Ran; and Olhers.2

Offer and Acceptance through Telephone

Offer and acceptance can be communicated through the
telephone. But there are certain rules regarding oral communi-
cation. It has been held that the offer and acceptance must be
audible. heard alld ullderstood. It these conditions are satisfied
and the other essential elements of contract exist, the parties are
bound through a telephone conversation. The High Court judg-
ment about this matter is quoted below. "Nuw, when the parties
negotiate a contract orally in the presence of each other or over
telephone and one of them makes an oral offer to the other, it
is plain that an oral acceptance is expected, and the acceptor
must ensure that his acceptance is audible, heard and understood
by the offer. The acceptance in such a case must be by such
words which have the effect of communicating it." Kanhaiylal
v. Dineshwar Chandra. 3

1(1877) 4 Ex. D. 216 'AIR (1981) Supreme Court 1284

'AIR (1959) M P 234
28 LAW OF CONTRACT

In an English court it was held that a communication, sent

through a telex or a t~leprinter machine in the office, is valid.
A contract made by "telex" was no exception to the general rule
that acceptance is not complete until communicated. En/Ores LId.
v. Miles Far Eastern Corporation. I
Microphone
There was an auction sale of plots of land. The terms,
including certain restrictive conditions, were announced by a
microphone. The Supreme Court held, "Microphones have not
yet acquired notoriety as carriers of binding representations.
Promises held out over loudspeakers are often c1aptraps of
politics." Banwari Lal v. Sukhdarshan Dayal. 2

OPTIONS
An option is a conditional contract to do something. Suppose
that P the owner of a house, agrees in consideration of Rs. 200,
to give Q an option to buy the house within six months at a
certain price. This is a contract binding upon P to allow Q to
purchase the house at the agreed price at any time within six
months. A promise to keep an offer open to acceptance for a
certain time is not binding on the proposer unless there is a
consideration separately given for that promise, as in the example
given above.

STANDING CONTRACT AND OPEN PROPOSALS

Contracts for the supply of goods over a period of time are
some times so worded that the buyer has an option as regards
the quantity to be purchased and the time of purchase. Such
contracts are called "Standing Contracts" or "Open Proposals".
Examples :
P signed a tender addressad to the London County Council, agreeing,
on acceptance, to supply. all the goods specified in the schedule,
to the extent ordered. iIle tender was accepted but the L. C. C.
did not order any goods. Held, the L. C. C. was not bound to order
any goods, but if it did so, P was bound to deliver the goods as
and when ordered. Percival Ltd. v, L.CC'
In such cases as above. a contract comes into existence when a
definite quantity is ordered. Bengal Coal Co. v. Wadia. 4

1 (1955) 2 Q. B. 327 2 (1973) ISCC 2941 (Supreme Court)

3 (1.918) 87 U,K.B. 677 • (1900) 24 Born 97
 OFFER AND ACCEPTANCE 29

REVOCATION
Revocation of an Offer. When does an Offer Lapse?
An offer comes to an end, and is no longer open to
acceptance under the following circumstances,-Sec 6.
1. By notice
If the offeror gives notice of revocation to the other party,
i,e., expressly withdraws the offer, and the offer comes to an
end, An offer may be revoked any time before acceptance. but
not afterwards. Once an otfer is accepted there is a binding
contra,ct, The acceptance of an offer becomes binding on the
offeror as soon as the acceptance is put in course of commu-
nication to the offeror so as to be out of the power of the acceptor,
But any time before this happens the offer may be revoked. A
proposal is sent by X to Y and is accepted by Y by letter. The
proposal might have been revoked any time before the letter of
acceptance was posted but it cannot be revoked after the letter
is posted.
The notice of revocation does not take effect until it comes
within the knowledge of the offeree,
2. By lapse of time
When the proposer prescribes a time within which the
proposal must be accepted, the proposal lapses as soon as the
time expires.
3. After expiry of reasonable time
If no time has been prescribed, the proposal lapses after the
expiry of a reasonable time, What is reasonable time will depend
on the circumstances of the case,
Example:
On 8th June, M offered to take shares in R company, He received
a letter of allotment on 23rd November, M refused to take the shares,
Held, M was entitled to refuse as the offer had lapsed by the delay
in acceptance. Ramsgale Vic/oria Hotel Co v. Jfonrefiore_'
,t. By failure of a condition precedent
An offer lapses by the failure of the acceptor to fulfil a
condition precedent to acceptance, where such a condition has
been prescribed.

'(1866) L R. I Ex, 109

30 LAW OF CONTRACT

Example
P says to Q. "I will sell my house at Delhi to you for Rs. 50,000
if you are married." The offer cannot be accepted until and unless
Q is married.
S. By death or insanity
An offer lapses by the death or insanity of the proposer, if
the fact of his death or insanity comes to the knowledge of the
acceptor before acceptance.
6. Counter Offer
When a counter offer is given, the original offer lapse. See
the Case of Hyde v. Wrench. (Page 23)
7. By refusal
A proposal once refused is dead and cannot be revived b:t
its subsequent acceptance.
Example:
A offers to sell his farm to B for Rs. 1,000. B replies offering to pay
Rs. 950. A refuses. Subsequently B writes accepting the original offer.
There is no contract because the original offer has lapsed.

Revocation of Acceptance
Section 5 of the Contract Act prov ides that an acceptance
can be revoked any time before the acceptance comes to the
knowledge of the proposer but not afterwards.
Example: .
P proposes, by a letter sent by post, to sell his house to Q Q accepts
the proposal by a letter sent by post. Q may revoke his acceptance
any .time before the letter communicating it reaches P but not
afterwards.
The English law on this point is different. Under English
law an acceptance is irrevocable once it is put in course of
communication to the offeror. Thus in the above example Q could
not have revoked the acceptance once he had posted the letter
of acceptance.
Communicatiori of Revocation
According to Section 3 of the Act. the revocation of a
proposal or an acceptance is deemed to be made by any act or
omission of the party by which he intends to communicate such
revocation, or which has the effect of communi'fting it.
 OFFER AND ACCEPTANCE 31

According to Section 4 of the Act, the communication of

revocation is complete-
as against the person who makes it, wten it is put into a.
course of transmission to the person to whom it is made, so as
to be out of the power of the person who makes it;
as against the person to whom it ., .nade, when it comes
to his knowledge.
Ewmples :
(i) P makes a proposal to Q. Q sends a letter of acceptance. Subsequently
Q revokes his acceptance by telegram. Q's revocation is complete, as
against Q when the telegram is despatched, and as against P when it
reaches him.
(ii) A revokes his proposal by telegram. The revocation is complete as
against A when the telegram is despatched. Jt is complete as against
B when B receives il. B revokes his acceptance by telegram. 8's
revocation is complete as against B when the telegram is despatched.
and as against A when il reaches him.

EXERCISES
I. When is an otTer completed? How and when mayan otTer be
revoked? (Pages 25-26, 29-31)
2. (a) How mayan otTer be terminated? (Pages 26-28)
(b) A otTers to sell B his horse for Rs. 1000 and tells B. 'This
offer will remain open one week'. The following day B reject the
offer. Within the week B changes his mind and notifies A that he
accepts the offer. Is there a contract? (Para 6, Page 30)
3. "Acceptance is to offer what a lighted match is to a train of
gunpowder". Discuss. (Page 18)
4. "An offer is made when, and not until, it is communicated to the
offeree". Explain with illustrations. (Para 6, page 20)
5. Deftne offer. and acceptance. When are offer and acceptance
deemed to be complete if made through post? (Pages 17, 27)
6. State how otTer is made, revoked and accepted. What are the rules
when offer is made throug.h post office and over the telephone.
(Pages 17, 22, 27-28)
7. ··A mere mental acceptance, not evidenced by words or conduct
is in the eye of law no acceptance." Explain.
(Para 6, pages 24-25)
8. Define the term' Acceptance' What are the essential of a valid
acceptance? (Pages 17, 22-26)
9. ·'Acceptance must be absolute, and must correspond with the tenns
of the otTer.' Discuss with suitable illustration.
(Para I, page 23)
 32 LAW OF CONTRACT

10. (a) Explain the meaning of the terms, Offer and Acceptance.
(Page 17)
(b) (i) A offers to sell his goods to B bY'a letter posted on 1st
March. B receives A 's letter on 3rd March. Can A revoke
his offer? (Page )0)
(ii) B posts his leiter of acceptance on 4th March. A receive
B's acceptance on 6th March. Can B revoke his acceptance?
(Page 30)
II. (a) Derme a proposal. [b) How is an offer communicated?
(Pages 17, 13·22)
12. Objective questions. Giv: short answers :
(i) What is meant by acceptance by conduct? Give one example.
(Page 24)
(il) "An advertisement to sell a thing by auction is (a) an offer
(b) an invitation (e) no offer at all." What is the best
alternative? (Page 19)
13. Problems :
(a) A proposes, by a leiter sent by post, to sell his house to B.
B accepts the proposal by a leiter sent by post. When A revokes
his proposal or B his acceptance? (Pages 30·31)
(b) X offers to sell a house in Calcutta to Y for Rs. 50,000. The
otTer is communicated to Y in Bombay by an express lener.
The letter is delayed in the censor's office. Before X's letter
rcachees Y, Y receives a telegram from X revoking his offer.
Advise Y. (Pages 30·31)
(e) A proposes by a leiter sent by post to sell his house to B.
B accepts the proposal by a letter sent by post. When can B
revoke this acceptance? (Pages 19·20)
(d) A offers a reward to whosoever shall do a certain thing. B docs
the thing, not knowing of the advertised reward. Is A bound
to pay the reward to B? (Pages 19·20)
(e) A duly posts a letter of acceptance to B. But the letter is lost in
transit by the negligence of the Post Office. What is the effect?
(Page 26)

l
 INTENTION TO CREATE
LEGAL RELATIONS

An agreement does not become a binding contract unless

there is an intention to enter into legal relations. The parties must
intend that the transaction should be attended by legal conse-
quences and create legal obligations. The intention of the parties
is to be gathered from the terms of the agreement and the
surrounding circumstances. In arriving at a conclusion as to what
is the interest of the parties the courts usually apply an objective
and not subjective test. Any way it is upto the courts to decide
whether the parties have intended to enter into legal obligatiorls.
A contract, however, is deflned as an agreement enforceable
by law. An agreement which does not create any legal obligation
will not be enforced by law. Hence such an agreement is not
a contract. X offers to play cards' with Y for pleasure and Y
accepts. In later on X refuses to do so, Y cannot go to the courts
for enforcing the promise. Hence, such an offer does not create
a contract. The courts of law are not concerned with enforcing
social obligations. They deal with legal obligations. Balfour v.
Balfour. 1
"Agreeing 10 agree "-See, Uncertain ; Agreements, ch. 8.
Examples:
(i) D, agrees to go to a cinema with B. This is not a contract enforceable
by law because going to a cinema is not a legal matter.
(ii) R Company made an agreement with G Company whereby they were
made agents of the latter. One clause in the agreement was as
follows : "This arrangement is not entered into as a fonnal or legal
agre<;ment and shall not be subject to legal jurisdiction in the law
courts". Held, there was no intention to create any legal relation;
hence there was no contract. Rose and Frank Co. v. Crompton Bros.
LtdI
(iii) A company agreed with V that or; expiration of V's existing contract,
they would "favourably consider" the renewal of his cOntract. Held,
no obligation was created to [enew the C"lntract. Montreal Gas Co.
v. Vasey. 3

1 (1919) 2 K.B. 571 2 (1925) A. C. 445

3 (1900) A. C. 595

Commercial Law - 3 33
 34 LAW OF CONTRACT

EXEltCJi;ES
\, DiscljSr-"Thc'<;lffcr must be 'one which in its natural meaning (lIay
be I3ken to contemplate and which is capable of creating legal
relations," (Page 33)
2, Explain : "In order that an offer may be made binding by
acceptance, it must be ma~ in contemplation of legal conse-
quences, (Page 33)

•
 CONSIDERATION

Definition of Consideration
Consideration is an essential element in a contract. Subject
to certain exceptIons; an agreement is not enfoFCeable unless each
party to the agreement gets somethmg. This "something" is called
consideration.' 'It is used in the sense of quid pro quo i.e.
something in return.
In the English case, Currie v. Misa, I consideration was
defined as, ':some right, interest, profit or benefit accruing to one
party, or some forbearance, detriment, loss or responsibilil)
gi,:,en, suffered or undertaken by the other."
Section 2( d) of the Contract Act defines consideration as
follows: "When, at the desire of the promisor, the> promisee or
any other person .has done or abstained (rom doing, or doe.'; or
abstains from d(\irig, or promIses to do or to abstain from, doing,
something. such act or abstinence or promise is called a
consideration for the promise."
Ecamples ,
(I) P~grees to sell a house to Q for Rs. 80.000. For P:s promise, the
consideration is Rs. 80~OOO, For Q's promise, th~"consideration is
the house.
Ui) if engages Q as a clerk in his omce for Rs 1000 a month. The
monthly wage is the c(lmirJeration received by Q; the services of
Q constitute thl.:. cOI1?,iderati.on receive~ by H. .~.
(iii)" X promises not to' file a suit" against Y if r pays. hi,ni Rs. 100 by
a fixed date. The' fori:'tearance vf X is the ~on:,iderati(ln for l '~
payment.
Types of Consideration
. Consideration may be classified into three IYlJj:s, as follows
I. Past consideration: When the consideration of one party
was givenbefote the date of the promise, it is said to be past.
Suppose that X does some work for Y in the month of January
(withoutexpectinj/; any payment). In rebr~arxY promi.~es to pay
"!m some money' The consideration of X ,is p~t' con'sider~tiol1'
I (i875) L.R. 10 Ex 162

35
36 LAW OF CONTRACT

Under English law past consideration is no consideration and a

contract based on past consideration is void. But under Indian
law a past consideration is good consideration because the
definition of consideration in' Section 2 (d) includes the words
"has done or abstained from doing".
2. Present consideration : Consideration which moves si-
multaneously with the promise is called Present Consideration
or Executed Consideration. B buys an article from a shop and
pays the price immediately. The consideration moving from B
is present or executed consideration.
3. Future consideration: When the consideration is to move
at a future date, it is called Future Consideration or Executory
Consideration. In a contract the consideration may be executory
on both sides. A promise may support a promise. Thus a promise
to pay money at a future date for goods to be delivered at a
future date is a val id contract.
Rules (or the Essential Factors) of Consideration
The following rules may be laid down regarding consi-
deration:
I. Desire (or request) of the promisor is essential: The act
done or loss suffered by the promisee must have been done or
suffered at the desire of the prom isor. An act done without any
request is a voluntary act and does not come within the definition
of consideration.
Examples "
(i) P sees Q's house on fire and helps in extinguishing it. Q did not
ask for his help. P cannot demand payment for his services.
(ii) The Collector of a district asked D to spend some money on the
improvement of a market and he did so. D cannot demand payment
from the shopkeepers using the market for having improved the
market. Durga Prasad v. Baldea, I
(iii) X promised to pay Y some money by a letter. Y showed the letter
to Z who thereupon consented to the marriage of her daughter with
Y. Z cannot force X to pay the money to Y because there is no
connection between the marriage and the promise to pay. Dashwood
v. Jermyn. 2
2. The consideration must be real: The consideration must
have some value in the eye of law. It must nOt be sham or illusory,

'(1880) 3 All. 221 2 12 Ch, D. 776

 CONSIDERATION 37

The impossible· acts and illusory or non-exlstmg goods

cannot support a contract. Therefore, real consideration comes
from good consideration. (See p. 39)
A contribution to charity is without consideration. Therefore,
it is not real consideration. (See p. 38)
Examples:
(i) Illusory consideration : G promises for no consideration, to give
H Rs 1,000. This is a void agreement. No consideration, no contract.
(ii) Impossible acl : X promises to supply Y one lola of gold brought
from the sun. The consideration is sham and illusory and there is
no contract.
(iii) So consideralion: Vowed £208 to E who told V that if the money
was not paid by 7th July he would file a bankruptcy petition against
V Thereupon V promised to pay the money before 12 o'clock on
8th July and E agreed not to file the petition before that time. Held,
there was no consideration for E's promise. Vanbllrgen v. St.
Edmunds Properties LId. I
Example (iii) above illustrates the rule that a promise to do
what one is already bound to do (whether under the law or under
an existing contract) confers nO additional benefit and is of no
value. The consideration is unreal. A promise to pay an existing
debt punctually if the creilitor gives a discount is without
consideration and the discount cannot be enforced.
3. Public duty : "Where the promise is already under an
existing public duty, an express promise to perform, or perfor-
mance of, that duty will not amount to consideration. There will
be no detriment to the promisee or benefit to the promisor over
and above their existing rights and liabilities"2 Example : A
contract to pay money to a witness who has recei~d a subpoena
to appear at a trial. Collins v. Godefroy. 3
4. Promise to a stranger: But a promise made /0 a stranger
to perform an existing contract, is enforceable because the
promisor undertakes a new obligation upon himself which can
be enforced by the stranger. X wrote to 'his nephew B, promising
to pay him an annuity of £150 in consideration of his marrying
C. B was already engaged to marry C. Held, the fulfilment of
B's contract with C was consideration to support X's promise
to pay the annuity. Shad,;,ell v. Shadwell. ~

1(1933) 1 K. B. 223 2 Anson. Law of Contract, p, 96

3(1831) IB & AD. 950 4 (1860) 9 C.B.N.S. 159
38 LAW OF CONTRACT

5. Consideration need not be adequate: Section 25 (expla-

nation '2) provides that, "An agreement to which the consent of
the party is freely given is not void merely because the
consideration is inadequate; but the inadequacy of the consid-
eration may be taken into account by the court in determining
the question "hether the consent of the promisor was freely
given."
The reason behind this rule is that it is impossible for the
court to decide what is adequate consideration. The parties to
the contract must d~cide the quantum of consideration and, if
consent was freely given, the court will enforce the agreement .
. If the consideration is inadequate, the Court may hold that
consellt of the promisor was not freely given and the agreement
ma);,tecome void.
'Consideration" means a reasonable equivalent or other
valuable benefit passed on by the promisor to the promisee or
by the transferor to the transferee. Similarly, when the word
'Consideration' is qualified by the word 'adequate', it makes
consideration stronger so as to make it sufficient and valuable
having regard to the facts, circumstances and necessities of the
case. Sonia Bhatia v. Slate of U. P and others. I !
Examples
(i) P agrees to sell a horse worth Rs 1000 for Rs. 10. P"s consent to Ihe
agreement was freely gi,,'en. The agreement is a contract notwithstandillg
the inadequacy of the consideration.
(II) D promises 10 B 10 sell land in Calcutta al Rs. 10 per cOllah. The
agreement is valid provided the consent of D was freely given.
(iii) 5 files a suit against B for Rs. 5,000. Subsequently he ag.rees (0 withdraw
(he suit on payment of Rs. 3.000. The agreement is a contract. Thl.!
\\ithdrawal of a suit is valuable consideration so as to support the
promise to pay money.
6. The consideration must not be illegal. immoral, or
opposed to public policy If either the consideration of the
object of the agreement is illegal, the agreement cannot be
enforced. The same principle applies if the consideration is
immoral or opposed to public policy. (See, Section 23 and ch.
8 for examples of such agreements.]
7. The consideration may be present, past, or future: This
follows from the definition of consideration given in the Act.

I AIR 11981, Supreme Court 1274

 CONSIDERATION '39

8. Consideration may move from the promisee or from any

other person: A person granted some properties to his wife
C directing her at the same time to pay an annual allowance
to his brother R. C also entered into an agreement with R
promising to pay the allowance to R. This agreemenl can be
enforced by R even though no part of the consideration received
by C moved from R. Chinnaya v. Ramaya. I A stranger to the
consideration can sue to enforce the contract, though a stranger
to the contract cannot. In England, a stranger to the consideration
cannot sue on the contract
9. What is good consideration ry: The rules or the necessary
factors for consideration can be summed up as follows: (I) There
must be desire of the promisor: (2) it must be real;
(3) reasona.ble; (4) not illegal, immoral or opposed to public
policy; (5) present, past or future; and (6) from the promisee
or any person .
. Subject to the above essential factors, a good consideration
can be any of the following: (I) physical goods; (2) services;
(3) forbearance (for example not to sue); (4) arbitration or the
compromise of disputed claims, and (5) settlement or composition
with creditors.
DIFFERENCES BETWEEN ENGLISH AND INDIAN
LAW REGARDING CONSIDERATION
In England, a distinction is made between Formal Contracts
and Simple Contracts. A Formal Contract is one which is (a)
in writing or printed, (b) signed, (c) sealed, and (d) delivered
to the other party. All other contracts are called Simple Contracts.
Under English law, Formal Contracts do not require any con-
sideration but Simple Contracts must be supported by so~e
consideration. Formal Contracts are also called Contracts Under
Seal and Specialty Contracts. Simple Contracts are also called
Parole Contracts.
The differences between the English and the Indian law
relating to consideration are enumerated below.
I. The Indian law of contract does not make any distinction
between Formal Contracts and Simple Contracts. In India.
excepting the few cases mentioned below, all contracts require
consideration.
'(1881) 4 M.d, 137
40 ·LAW OF CONTRACT

2. Under English law past consideration is no consideration.

Under Indian law past consideration is &ood consideration.
3. Under English law, consideration must move from the
promisee. Under Indian law, it may move from the promisee or
any other person.
4. The rules regarding ~Devolution of Joint Rights and
Liabilities" are different. See ch. 10 (Page 102).

PROMISE TO CHARITIES
A promise. to make a contribution to charity is not enforce-
able because it is without consideration.
Example:
A person agreed to pay to a charitable society a percentage of the
value of the goods imported by him. He then executed a halchilla
for the arrears of contribution to that charity. The Coun held this
was no more than a repetition of a voluntary promise and is not
enforceable. Ja".'una v. Ram. I
In Kedernath v. Gorie Mahomed 2 the defendant promised
to pay Rs 1,000 towards the construction of the Howrah Town
Hall and the trustees of the Town Hall, on the basis of this and
similar other promises, engaged contractors for building the hall.
The defendant subsequently refused to pay the money and a suit
was filed against him. The Calcutta High Court held that
ordinarily subscriptions to charitable objects were not recoverable
but if the promisors knew the purposes of the charity and also
knew that on the strength of their promises obligations would
be undertaken to third parties (the building contractors in this
. case) the promise is enforceable. This decision is contrary to
English decisions on similar facts. In subsequent cases on this
point in Indian courts, the Calcutta decision has not been
followed.
In .ftn Allahabad case, a person subscribed Rs. 5!>O to rebuild
a mosque. It was held that the promise was without consideration
and that the subscriber was not liable. Abdul Aziz v. Masum Ali. J

I 169 I.e. 396 (Privy Council) 2 (1886) 14 Cal 64

3 (1914) 36 All. 268
 CONSIDERATION 41

"NO CONSIDERATION NO CONTRACT"-

EXCEPTIONS TO THE RULE
Explanation
Consideration is essential for the validity of a contract. "A
promise without consideration· is a gift; one made for a
consideration is a bargain".-Salmond and Windfield, Law of
Contracts.
A promise without consideration is a gratuitous undertaking
and cannot create a legal obligation. Under Roman law an
agreement without consideration was called a nudum pactum and
was unenforceable. Under English law simple contracts must be
supported by consideration but specially contracts require no
consideration. Under Indian law the presence of consideration
is, as a. rule, essential to the validity of contracts.
Exceptions
There are exceptional cases where a contract is enforceable
even though there is no consideration. They are as follows :
1. Natural love and affection: An agreement made without
consideration is valid if, 'it is expressed in writing and registered
under the law for the time being in force for the registration
of documents, and is made on account of natural love and
affection between parties standing in a near relation to each
other."-Sec 25( I) .
. An agreement without consideration is valid under Section
25 (1) only if the following requirements are complied with :
(i) The agreement is made by a written document.
(ii) The document is registered according to the law relating
to registration in force at the tim~.
(iii) The agreement is made on account of natural love and
affection.
(i\') The parties· to the agreement stand in a near relation to
each other.
Examples:
(;) A for natural love and affection, promises to give his son B.
Rs. 1,000. A puts his promise to B in writing and registers it. This
is a contract. [Illustration (b) to Section 25)
{ii) An agreement entered into by a husband with his wife, during
qu-arrels and disagreement, whereby the husband promised to give
some property to the wife. The agreement is void because, under
42 I.AW OF CONTRACT

the circumstances, there is no natural love and affection between

the parties. Rajlukhy Dehee v. Bhoolnalh I

2. Voluntary Compensation: A promise made without any

consideration is valid if, "it is a promise to compensate wholly
or in part. a person who has already voluntarily done something
for the promisor, or something which the promisor was legally
compellable to do:'-Sec. 25(2).
Section 25(2) applies when there is a "Voluntary act by one
party and there is a subsequent promise (by the party benefited)
to pay compensation to the former. The term 'voluntarily'
signifies that the act was done, "otherwise than at the desire of
the promisor".
Examples:
(i) D finds 8's purse and gives it to him. B promises to give DRs. 50.
This is a contract.
(ij) D supports B's infant son. B promises to pay D's expenses in so
doing. This is a contract.
3. Time-barred debt: A promise to pay, wholly or in part,
a debt which is barred by the law of limitation can be enforced
if the promise is in writing and is signed by the debtor or his
authorised agent.-Sec. 25(3). A debt barred by limitation cannot
be recovered. Therefore a promise to repay such a debt is, strictly
speaking, with6Ut any consideration. But nevertheless such a
promise can be enforced if the debtor or his authorised agent-
makes written and signed promise to repay it.
The debt must be a liquidated or ascertained sum of money
and there must be a definite promise to pay. A mere acknowledge-
ment of the debt is not enough.
£mmple
D woes B Rs. 1000 but the debt is barred by the Limitation Act D
sign" a writlt:n promis.e to pa:. B Rs. 500 on account of the debt. This
is a contra!.:t
4. Agency : No cOlliiideration is required to create an
:;gency.-Sec. 185.
5. C'Jmpieted gift : The rule "no consideration, no contract"
does not apply to completed gifts. Explanation I, to Section 25
states that, "Nothing in this section shall affect the validity as
between the donor and the donee. of any gift actually made."

I (1900) C.W.N. 488

 CONSIDERATION 43

Thus, if a person gives certain properties to another according

to the provisions of the Transfer of Property Act (i.e .. by a written
and registered document) he cannot subsequently demand the
property back on the ground that there was no consideration.

STRANGER TO CONTRACT : CAN A PERSON WHO

IS NOT A pARTY TO A CONTRA<;T SUE UPON IT?
Differellce between Ihe rights of a stranger ta a cOlltract
alld of a stranger 10 the cOllsideratioll : A stranger to a contract,
ie., one who is not a part)' to it, cannot file a suit to enforce
it. A contract between P and Q cannot be enforced by R. Lord
Haldane said that, "It was a fundamental principle of English
law that only a person who is a party to a contract can sue on'
it and that the law knows noth ing of a right gained by a third
party arising out of a contract."Dunlop Pneumatic Tyre Co. v.
Selfridge & Co. 1
But a stranger to the consideration can sue to enforce it
provided he is a party to the contract. A contract between P.
Q and R whereby P pays money to Q for del ivering goods to
R can be enforced by R although he did not pay any part of
the consideration.
Exceptions
There are certain exceptions to the rule that a stranger to
the contract cannot sue upon it. They are as follows :
I. Beneficiaries in [he case of trust: An agreement to
create a trust can be enforced by the beneficiary. D agrees to
transfer certain properties to r to be held by T in trust for the
benefit of C. C can enforce the agreement though he was not
a party to the agreement.
2. Provision of Afarriage Settlement of Minor: [n Khwaja
Muhammad Khan v. Husaiui Begum 2 , the father of the bride-
groom had contracted with the father of the bride to make the
daughter an allowance called Kharchi-i-pandan if she married
the son. After the marriage the daughter sued her father-in-law
to recover arrears of the allowance. The Privy Council held that
though she was no party to the contract yet, "she was clear!)
entitled to proceed III equity to enforce her claim."
I (19t5\ A.r. 847 '(1910) 32 All. 410 (Privy Council)
44 LAW OF CONTRACT

3. Assignee of a contract: Under certain circumstances a

party to a contract can transfer his rights under the contract to
third parties. For example, the holder of a bill of exchange can
transfer it to' any person he wishes. In such cases the transferee
or the assignee can sue on the contract even though he was not
a party to it originally. Assignment may occur through operation
of law. For example, when a person becomes insolvent, all his
properties and rights vest in the Official Assignee who can sue
upon contracts entered into by him.
4. Family Selliement: When family disputes are settled by
mutual agreement and the terms of settlement are written down
in a document, it is called a Family Settlement. Such agreements
can be enforced by members of the family who were not
originally parties to the settlement.
5. Acknowledgement. or Estoppel: Where the promisor by
his conduct, acknowledges himself as an agent of the third party,
a binding obligation is thereby incurred towards him. Thus in
Khirode Behari Dull v. Man Govinda Pande case (1933, 61 Cal
841, AIR 1934 Cal 682) the landlord was allowed to recover
unpaid rent from the sub-tenant whereas under an agreement
between a tenant and his sub-tenant the sub-tenant was paying
the rent directly to the landlord.
Rights and Liabilities of a Stranger
With the exception of the above cases, a contract cannot
confer rights upon a person who is not a party to it. Also, a
contract cannot .mpose a liability upon a person who is not a
party to it.
Examples:
(i) X and Y entered into an agree"ent to pay a certain sum of money to
their children C and D upon their marriage. The marriage took place.
X died. C sued to recover the money from the executors of X Held,
he cannot sue. Tweddle v. Atkinson, I
(ii) P sold to Q some rubber with a condition that the goods were not
10 be resold below a certain price. Q sold the goods to R who was
aware of the condition. R resold the goods below the stated price. Held.
P cannot enforce the condition against R because there was no contract
between P and R. Me 'Gruther v. Piteher. 2
(iii) The managing director of a theatre gave instructions that no tickets were
to tx:' sold to S Knowing this, S asked a friend to buy a ticket for

'(1861) 1 B & S 393 2 (1904) 2 Ch. 306

 CONSIDERATION 45

hlm. With this ticket S went to the theatre but was refused admission.
He filed a suit for damages for breach of contract. Held, no cause of
action because there was no privity _of contract between the plaintiff
and the defendant. S Said v. BUll. I

EXERCISES
\. Define consideration. Critically discuss the essential elements of
consideration. (Pages 35, 36"39)
2. "Past consideration is no consideration". Comment.
(Para I, page 36)
3. Define consideration and point out the differences between English
law and Indian law in this respect. (Pages 35, 39-40)
4. "Insufficiency of consideration is immaterial; but an agreement
without consideration is void." Explain. (Para 5, page 38)
5. State the circumstances in which a contract without consideration
may be treated as valid. (Pages 41-43)
6. Discuss the rule that a stranger to a contract cannot sue on the
contract and the exceptions to that rule. (Pages 43-44)
7 .• A stranger to the consideration m·ay sue on a contract but not a
stranger to the contract.' Explain. (Pages 43-44)
8. "A stranger to a contract cannot sue to enforce the contract."
Discuss. (Pages 43-44)
9. (a) What do you mean by consideration? (Pages 35-36)
(b) Describe with examples the agreements which can be valid
without consideration. (Pages 41-43)
10. Under what circumstances can a person who is not a.party to
contract sue upon it? (Pages 43-44)
II. (a) Define 'consideration' and analyse the elements of consi-
deration. (Pasts 35-39)
(b) State the case in which an agreement without consideration is
valid. (Pages 41-43)
12. "An agreement without consideration is void unless it is in writing
and registered." Explain. (Para I, page 41)
13. (a) State the essential factors of consideration.
(b) A promises in writing to pay wholly an ascertained amount
which is barred by limitation. Is this agreement valid? Justify
your answer. {(a) Pages 36-39, (bY Para 3, page 30}
14. Objective questions. Give short answers. (2 marks)
(I) Give two examples of cases where a contract is enforceable
though there is no consideration. (Pages 41-43)
(ii) Give two examples of exceptions of the rule that a stranger. .>
to the contract cannot sue upon it. (Pages 43-44)

1 (1920) 3 K.B. 497

 VOID AND VOIDABLE
AGREEMENTS

An agreement which does not satisty the essential elements

of a contract may be eit~er void or voidable. The definitions
of these terms are given below.
1. Void Agreement
"An agreement not enforceable by law is said to be void."-
Sec. 2(g). A void agreement has no legal effect. It confers nc
rights on any person and creates no obligations.
Examples of Void Agreement : An agreement made by a
minor; agreements without consideration (except the cases
comingurider Sec. 25, p. 42) ; certain agreements against public
policy; etc. [Ails! of su'ch agreements is given in ch: 8]. These
agreelTlents arc; void .ab' ·'initio. i. e... void from' th~ b~ginnii1g.
Agreements which become void: An agreemen-t, Wllich was
legal and enforceable when it was' entered into, may subsequently
become·voiddue to impossibility of performance, change of law
Or other ·reasons. When it becomes· void the agreement ceases
to have legal' effect. [The'lrights and obligations of the parties
in such cases are discussed in ch. IIJ
-There are certain agreemerits which 'a'reexpressly declared
to' be'void, ev.en though they may otherWise 'satisfy Sec. 10 of
!he.Jndijl/l Contract Act. (i.e. would . have been qlherwise
enforcea!>le con_lracts), They ,are .as follows.:
L Section 26 of the Contract Act provides that every agree-
mentin.resuainr of Ihe.marrjage of any person, other than
a~ minor,.-Ils: void.
2. Section 27 of the Act stateslhat every agreement by which
oinyone is restrained from exercising a lawful profession,
trade or business of any'kind. is fo that extent void.
3. Aecording 10 .Sectl~n 28 of the Act Private individuals cannot
by agreement iJlter or vary their personal law or theStaMe law.
4. Section 29 implie's tnat, ,agreements. the meanm~nQf which
is nGt ce~in. orcapable..,of befng made certain.' are void.
5. Section; 30 of th~ ConkaGt·.!\cl clearly siates thatagreements
by way of wages are void. '

46

L
 VOID AND VIODABLE AGREEMENTS 47

6. Section 56( I) provides that agreements to do an act impos-

sible in itself are void.
7. Section 24, 57 and 58 maintain that agreements whose
objects or considerations are unlawful are void.
2. Voidable Agreement
. A voidable agr~ement is one which con be aVOIded, i.e., set
aside by some of the parties to it. U ,til it is avoided, it is a
good contract. "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."-Sec. 2(i) .
. _ Examples of voidable l;onlracls : . Contracts broughi about by
coefcion,' undue influence, misrepresentation etc.
X coerces Y into entering into a contract for the sale of Y's
house to X This contract can be avoided by Y X cannot enforce
the contract. But t if he so desires, can enforceii ag~inst X.
Unenforceable Agreement
The term Unenforceable Agreement is used in English law.
It means an agreement which cannot be enforced in a court of
law, one or both of the parti~ becau~e of some technical defect,
e.g.. want of registration or non-payment of the requisite stamp
~~~I . . .

Illegal Agreement·
An'IIlegal Agreement is one ·which is against a law In force
in IIidi!l. Example; an agreement to commit m\lrde'r, robbery or
cheatilig.
-Disthictionbetween a Vo\d Agreement and an megal Agreement
. An!llegal agr~ement is ~fso void. But ~ void agreement is
not necessarily illegal. An agreement may not be contrary to law
but may still be void. Anc agreement, the terms of which are
uncertain, is void but such II contract is not illegal.
.. : When an agreement is illegal, other agreements which are
'incidental Or collateral to it are void. Tnereason underlyhig this
rule is that the courts will not epforce any agreement entered
into with the object of assisting or promoting an illegal trans-
action.
I Anson. Law of Contract, p. 8.

•
48 LAW OF CONTRACT

If the main agreement is void, (but not illegal) agreements

which are incidental or collateral to it may be valid. (See
examples of Wagering Agreement in ch. 8)
Examples:
(i) P engages B to kill C and borrows Rs. 100 from D to pay B. Here
the agreement with B is illegal. The agreement with D is collateral.
to it, if D is aware of the· purpose of the loan. In thi! case the
loan transaction is void and D cannot recover the money. But if
D is not aware of titt ,urpose of the loan, it may be argued that
the loan transaction is • ot coUateral to the other illegal agreement
and is valid.
(ii) W enters Into a wagering agreement and borrows Rs. 100 for the
purpose. The main agreement is void but the loan transaction being
merely collateral to it is valid even though the creditor is aware
of the purpose of the loan.
Valid Contract
An agreement which satisfies all' the essential elements of
a contract, and which is enforceable through the courts is called
valid contract.

EXERCISES
I. Distinguish between void agreements and voidable contracts.
(Page 46)
2. Explain the difference between a void and illegaItransactionwilh
reference to collateral transactions. Give illustrations for each.
(Page 47)
3. Distinguish between : Void, voidable and unenforceable contract.
What is a 'valid contract' ? (Pages 46-47)
4. Problem : State whether the following agreement. i~ a valid
contract :' A Promises to pay· Rs 1,000 tii B who is ali intended
wilnes~ in a suit against A in' consideration of B's absconding
himself at the trial. (Page 47)
5. Give two examples of each of the following :
(a) Void agreement (b) Voidable agreement (c) Enforceable agree-
ment. .(Page 46)
6. State the void agreements under the Indian C~ntracts Act. (Page 46)
 CAPACITY OF PARTIES

Definition of "Capacity"
One of the essential conditions for the validity of an
agreement is that all the parties to it must have capacity to enter
into contracts. Section II of the Contract Act states that "E,ery
person is competent to contract who is of the age of majority
according to the law to which he is subject, and who is of sound
mind, and is not disqualified from contracting by any law to
wh ich he is subject."
From Section II it follows that a person is incapable of .
entering into contracts under the following circumstances :
(i) if he has not attained the age of majority according to
the law to which he is subject;
(ii) if he is not of sound mind (i.e., if he is a lunatic or
an. idiot or suffering from a similar disability) ; and.
(iii) if he is disqualified from contracting by any law to
which he is subject.
Cases of Incapacity are discussed below.

MINORITY
Who is a minor?
(According to the Indian Majority Act, 1875, a minor is one
who has not completed his or her 18th year of age) So a person
becomes a major after the completion of 18th year of life. To
this rule there are two cxceptions-{i) when a guardian of the
minor's person or property is appointed by a court of law and
(ii) when a minor's property is taken over by the Court of Wards!
for management. [n either cases minority continues up to the
completion. of the 21 st year.'

I Under the Coun of Wards Act. estates of il;1competent persons like.

minors or lunatics can be placed under the guardianship of the Coun
of Wards. The Board of Revenue may act as the Court of Wards.
~ In England. since the Enforcement of Famil)o Reforms Act of'1969.
the age of minority continues up to the completion of 18th year.

Commercial Law - 4 49
50 LAW OF CO'lTRACT

Why should minors be protected?

,Minors are very .often exploited, ill-treat~dand their prop-
erties stolen. Law provides that it is the duty of the Court to
guard against their lack of knowledge and experience. The actions
of the older persons aggravate ill-use of minors. In England the
Crown is considered to be the guardian of the minors. For the
reasons stated above the Court protects the minors in India.
The Law regarding Minor's Agreement
The law regarding agreements by minors may be summarised
as follows:
1. Minor's Agreement is Void
An agreement by a minor is (subject to the exceptions noted
under 2 and 3 below) absolutely void and inoperative. Molwri
Bibi v. Dharmodas Ghose. I In this case a minor executed a
mortgage for Rs,20.000 and received Rs. 8000 from the
mortgagee. He sued for setting aside the mortgage. The mortgagee
wanted refund of the sum which he had actually paid; viz.
Rs. 8,000. The Privy Council held that an agreement by a minor
was absolutely void and therefore the question of refunding the
money did not arise. Had the agreement been only voidable, the
benefit received would have been refundable under Sec. 64 or
Sec. 65 of the Act [See end of ch. II).
The decision of the Privy Council that an agreement by a
minor is void, is based upon a strict interpretation of Section
II of the Act. The reason underlying the rule is that a minor
is supported to be incapable of judging what is good for hini.
His mental faCilities are not mature and therefore the law protects
him. With certain exceptions, promises made by a minor will
not be enforced agai'lst him.
2. A minor <:an be a promisee
An agreement under which a minor has received a benefit
can be enforced as against the other party. A minor in whose
favo!Jr a mortgage has been executed can get a decree for the
enforcement of the mortgage. Raghm'achariah v. Sriniv(ls2
Similarly a promissory note executed in favour of the minor can
be enforced. Under English law, agreements for the infant's

'(1903) 30 I.A. 114 (Privy Council' 1 40 )"lad. 308 .

 CAPACITY OF PARTIES 51

education, service, or apprenticeship, and agreements which

enable him to earn his living arc binding unless they are
detrimental to h is interest.
Exampl. :
D. an infant professional boxer. held a licence from the British
Boxing Board under which his money was to be stopped if 'h e \\'as
disqualified. D sued to recover it. Held, the conlract was for hIS
benefil and was binding on him . Doyle v. While City Stadium. I

3, Minor's Liability for Necessaries

The minor's property is liable for the payment of a reasol1-
able price for necessaries supplied to the minor or to anyone
whom the minor is bound to support.
What is a necessary article is to be determined from the
status, and the social position of the minor. The price which the
trader will get is reasonable price, not the price "agreed to" h)
the minor. Only Ihe minor's property is liable. The minor is 1101
personally liable.
£X(Jmp/~s :
(il A trader supplies a minor with rice needed for hi s cons umpt ion .
He can recover the price from the minor' s property.
(ii) Inman, an infant undergraduate in Cambridge bought eleven fane)
waistcoats from Nash .. "'e was at the time adequ3.tel~ provided with
clothing. Held, the waistcoats were not necessary and the price co uld
not be recovered. !',;ilsh v. Inman. 2
(iii) When a minor is engaged in trade. contracts enten:d into by him
for trading purpos ~s are not for nec~saries and arc not binding on
him .
(i\') It has been held that reasonable expenses incurred for (he followin g
purposes are necessaries-marriage of the millor; marriage of his
sister; cost of d~f.:nding 8 minor in civil and criminal proceedi,ngs ;
funeral ceremonies of the wife, h'J5b::.na or children of the minor,
sradh ceremonies of the ancestors of the minor.
The case of necessaries supplied to a minor is covered by
Section 68 of the Contract Act which provides as folluws : "If
a person incapable of entering into a contracl, or anyone ",hom
he is legally bound 10 support, is supplied by another person
with necessaries suiled to his condiliun of life, the person who
has furnished such supplies is emilled 10 be reimbursed from the
'property of such incapable person," [See ch. 12]

'(1985) I K . B 110 1 (1 908) 2 K .B .

52 LAW OF CONTRACT
I
So far as necessaries are concerned, the minor's liability does
not arise out of contract. Fletcher Moulton J. in Nash v" Inman
observed as follows: "The basis of the action is hardly contract.
Its real foundation is an obligation which the law imposes on
the infant to make a fair payment in respect of needs satisfied."
See example (ii) above.
What are "necessaries'? What goods and services are
"necessaries' for minors are determined by their status and social
position. Necessarics include the following:
(I) Goods: Physical goods are necessary not only for bare
existence and also for reasonable comforts and luxuries to which
the minor concerned is habituated.
(2) Services rendered: A minor requires certain services for
example a nurse for an infant, a teacher for him, the marriage
expenses of a minor etc.
(3.) Loans: If requi{ed the minor can incur loans for his
necessaries.

4. Law regarding Compensation or Restitution

A minor cannot be compelled to compensate for or refund
any benefit which he has received under a void agreement
because Sections 64 and 65 of the Act do not apply to such
cases. [See ch. II]
But it has been held in a number of cases that the court
may, on cancelling an instrument at the instance of a minor,
require the minor to make compensation to the other party. The
court's power, to do so, is given by Section 41 of the Specific
Relief Act of 1877 which is as follows : "On adjudging the
cancellation of an instrument the court may require the party to
whom such relief is granted to make any compensation to the
other which justice may require." Section 38 of the Specific Act
provides in similar terms for cases where a contract is rescinded.
l-. rumple :
A minor sells a house for Rs. 10,000. Later he files a suit to set
aside the sale on the ground of minority. He may be directed to
refund the purchase-money received by him.

S. No Estoppel
A minor who falsely represents himself to he a major, and
thereby induces another pe.son to enter into an agreement with
 CAPACITY OF PARTIES 53

him, can nevertheless plead minority as a defence in an action

on the agreement. There can be no estoppel against a minor. Sadik
Ali Khan v. Jaikishore.! In the English case, R. Leslie Lid. v.
Shell2 the Court of Appeal held that where an infant obtains a
loan by falsely representing his age, he cannot be made to pay
the amount of the loan as damages for fraud, nor ca 1 he be
pompelled in equity to repay the money. But in India it has been
held that the court can direct the minor to pay compensation to
the other party in such cases. Khan Gul v. Lakha Singh. J
(The Principle of ESloppel : The Principle of estoppel is a
rule of evidence. When a man has. by words spoken or written,
or by conduct. induced another to believe that a certain state
of things exists. he will not be allowed to deny the existence
of that state of things. "Estoppel arises when you are precluded
from denying the truth of anything which you have represented
as a fact, although it is not a fact." (Lord Halsburyl]
6. No Ratification
A minor on attaining majority cannot ratify an agreement
entered into while he was a minor. The reason is that a void
agreement cannot be validated by any subsequent action and a
minor's agreement is void ab initio. Mahendra v. Kailash 4
7. No specific performance
An agreement by a minor being void. the court will never
direct specific performance of such an agreement by him.
S. No insolvency
A minor cannot be declared insolvent even though there are
dues payable from the properties of the minor.
9. Partnership by minor
A minor cannot enter into a contract of partnership. But he
can be admitted into the benefits of. partnership with the consent
of .1; the partners. (See under Partne~ship. Book Ill. ch. 2]
10. A minor can be an agent
A minor can draw, make, indorse, and deliver negotiable
instruments so as to bind all parties except himself A minor
cannOI be adjudicaled an insolvenl. When a minor and a major

1 AIR (1928) P. C. 152 (Privy Council) 2 (191.1.) 3. K.B. 607

1 (1928) 9 Lah. 701 455 Cal 8~1
54 LAW OF CONTRACT

jointly enter into an agreement with another person. the minor

has no liability but the contract can be enforced against the major
if his liability can be separately ascertained. If an adult stands
surety for a minor, the adult is liable on the agreement although
the minor is not.

11. Position of minor's guardian

An agreement entered into by the guardian of a minor on
his behalf stands on a different Jooting from an agreement entered
into by the minor himself. An agreement by a minor is void but
an agreement by his guardian on his behalf is valid provided
the obligations undertaken are within the powers of the guardian.
The powers of a guardian are determined by the personal law
of the minor and by the Guardian and Wards Act. An agreement
made by the guardian is binding on the minor if it is for the
benefit of the minor or is for legal necessity.

12. A company shares of a minor

A minor cannot apply for and be a member of a company.
If a minor has, by mistake, been recorded as a member, the
company can rescind the transaction and remove the name from
the register. The minor can also repudiate the transaction and
get his name removed, from the register. But where a minor was
made a member and, after attaining majority, he received and
accepted dividends, he will be estopped from denying that he
is a member. Fazalbhoy v. The Credit Bank of India. I

PERSONS OF UNSOUND MIND

Definition of "Sound mind"
For a valid agreement it is necessary that each party to it
should have a sound mind. What is a "sound mind" for the
purpose of contracting, is laid down in Section 12 of the Indian
Contract Act.
Section 12 : "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
judgment as to its effect upon his interesb.

'39 Bom. 331

 CAPACITY OF PARTIES S5

A person who is usually of unsound mind, but occasionally

of sound mind may make a contract when he is of sound mind.
A person who is usually of sound mind, but occasionally
of unsound mind may make a contract when he is of sound mind.
A person who is u'sually of sound mind, but occasionally
of unsound mind, may not make a contract when he is of unsound
mind."
"[/lustratiolls :
(alA patient in lunatic asylum, who is at intervals of sound
mind, may make a contract during these intervals.
(b) 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 judgment as to its elTect on his interests, cannot
contract whilst such delirium of drunkenness lasts."'
The test of soundness of mind is (i) capacity to understand
the business concerned and (ii) ability to form a rational judgment
as to its effect on a person's interest.
Unsoundness of mind may arise from-insanity or lunacy;
idiocy; drunkenness and similar factors. A person under the
influence of hypnotism is temporarily of unsound mind. Mental
decay brought about by old age or disease also comes within
the defintion.
In each case it is a question of fact to be decided by the
court whether the party to the contract was of sound mind or
not. There being a presumption in favour of sanity, the person
who relies on unsoundness. of mind must prove it sufficiently
to satisfy the court.

Idiocy
The term idiot is applied to a person whose mental powers
are completely absent. Idiocy is a congenital defect caused by
lack of development of the brain.

Lunacy or Insanity
This is a disease ofthe brain. A lunatic is one whose mental
powers are deranged so that he cannot form a rational judgment
on any subject. Lunacy can sometimes be cured. Idiocy is
incurable.
56 LAW OF CONTRACT

Drunkenness
Drunkenness produces temporary incapacity. The mental
faculties are clouded for a. time, so that no rational judgment
can be formed.
Effects of Agreements made by Persons of Unsound Mind
Agreements by persons of unsound mind are void. But an
agreement entered into by a lunatic or a person of unsound mind
for the supply of necessaries for himself or for persons whom
he is bound to support (e.g., his wife or children) is valid as
a quasi-contract under SeLl ion 68 of the Act. Only the estate
of such a person is liable. There is no personal liability. (See
ch. 12)
The guardian of a IU!1atic can bind the estate of the lunatic by
contracts entered into on his behalf. The mode of appointment of
such a guardian and hi~ powers ar~ laid doWn in the Lunacy Act.
Examples:
(i) A person 'agreed' to sell a property worth about Rs. 25,000 for
Rs. 7,000. His mother proved that he was a congenital idiot and
she pleaded for cancellation of the contract. The court held the
agreement to be null and void. Inder Singh v, Panneshwardhari
Singh. I
(ii) If an agreement entered into by a per's:on of unsound mind is for
his benefit, it can be enforced. JugV' Kishore v. Cheddu. 2

DISQUALIFIED PERSONS.
Aliens
An alien means a citizen of a foreign state. Contracts with
aliens are valid. An alieri living in India is free to enter into
contracts with citizens of India. But the state may impose
restrictions. Certain types of transactions with aliens may be
prohibited. A contract with an alien becomes unenforceable if
war br~aks out with the country of which the alien concerned
is a citizetl. (Outbreak of War-see ch. II)
Foreign sovereigns
Foreign sovereigns or governments cannot be used unless
they voluntarily submit' to the jurisdiction of the local court.
Mighell v. Sultan of Johore. 3 .

I
J
AIR (1957) Pat 491
(1894) 1 Q. B. 149
2
.
(1903) All. L. J. 43
 CAPACITY OF PARTIES 57

Foreign sovereigns and governments can enter into contracts

through agents residing in India. In such cases the agent becomes
personally responsible for the performance of the contracts. (See
under Agency, ch. 15)
Company and Corporation
See, "Contractual powers of Company and Corporation".
Ch. t, Book XI (Company Law).
ProCessional Persons
In England barristers are prohibited by the etiquette of their
profession from suing for their fees. So also are members of the
Royal College of Physicians. But they can sue and be sued for
all claims other than their professional fees. For example, if a
barrister or a member of the Royal College of Physicians engages
a contractor of building a house he can , .~ for the enforcement
. of the contract.
In India these personal disqual ifications do not exist. It has
been held in Nihal Chand v. Dilwar Khan, J that a barrister can
sue for his fees in India. A barrister, before he can practice in
India, must be enrolled as an advoc.ate under the Bar Council's
Act of 1927 'and the Advocates Act of 1961 and his legal status
comes from such enrolment. An Advocate can realize his fees
by a suit. Gas/a Behari Roy v. P. C. Gosh & Co2 In India there
is no restriction upon doctors as regards suing for their fees.
Women
In India there is no difference between men and women as
regards .x>ntractual capacity. A woman (married or single) can
enter into contracts and deal with her properties in any way she.
likes provided she is a major' and does not suffer from any
disability like lim~cy or idiocy.
A married woman can bind her husband's properties for
necessaries supplied to her. She is an agent of her husband for
this purpose. (See under Agency, ch. 15) •

EXERCISES
I. What do you understand by capacity to contract? What is the effect
of any agreement made by persons not qualified to contract?
(Pages 49-54)
JAil. 570 (Full Bench) l (1973) 77 C.W.N. 216
58 LAW OF CONTRACT

2. Who are competent to contmct under the Indian Law of Contract?

What is the legal effect if one of the parties to the contract is
a minor? (Pages 49-54)
3. What is the minor's position in the law of contract? What is the
leading case on the point? (Pages SO-54)
4. (0) What do you mean by capacity to enter into contract?
(Page 49)
(b) A. trader, supplies B, a minor, with rice needed for his
consumption. B, refuses to pay the price. Can A recover the
Price? (Pages 50-51)
5. What is the effect of agreements entered into by persons of unsound
mind? (Pages 54-55)
6. Write a note on the contractual capacity of Aliens; Foreign
Sovereigns; Women. (Pages 54-56)
7. Objective questions. Give short answers.
(i) Who is a minor? (Page 49)
(ii) What do you understand by 'necessaries' supplied to a minor?
(Para 3, pages SO-51)
(iii) Who is a Lunatic? (Page 55)
r?')
\.../ FREE CONSENT

Definition of "Free Consent"

An agreement is valid only when it is the result of t~.e "free
consent" of all the parties to it. Section 13 of the Act defines
the meaning of the term 'consent' and Section 14 specifies under
what circumstances consent is 'free'.
Section 13 : "Two or more persons are said to consent when
they agree upon the same thing in the same sense."
Consent involves a union of the wills and an accord in the
minds of the parties. When the parties agree upon the same thing
in the same sense, they have consensus ad item. For a valid
contract the parties must be ad idem.
Section 14 : This section lays down that consent is not free
if it is caused by (1) coercion. (2) undue influence, (3) fraud,
(4) misrepresentation, or (5) mistake.
The definition of coercion, etc., and their effects on the
formation of a contract are explained below.
COERCION
Definition
Coercion is defined by Section 15 of the Act as follows :
"Coercion is the committing or threatening to commit, any act
forbidden by the Indian Penal Code, or unlawful detaining, or
threatening to detain, any property, to the prejudice of any person
whatever with the intention of causing any person to enter into
an agreement.
Explanation-It is immaterial whether tre Indian Penal Code
is or is not in force in the place where the coercion is employed:'
Fea tures or Req uisites
The provisions of Section 15 can be analysed as follows
I. Coercion means (i) committing or threatening to commit
an act forbidden b)' the Indian Penal Code. or (ii) the unlawful
detaining or threatening to detain any property.
2. The act, constituting coercion, must be directed at any
person and not necessari Iy at the other party to the agreement.
59
60 LAW OF CONTRACT

3. The act, constituting coercion, must have been done or

threatened with the intention of causing any person to enter into
an agreement.
4. It does not matter whether the Indian Penal Code is or
is not in force in the place where the coercion is employed.
Examples:
(i) P threatens to shoot Q if he does not let out his house to P. and
Q agrees to do so. The agreement has been brought about by
coercion.
(ii) P threatens to shoot Q if R does not let out his house to P and
R agrees to do so. The agreement has been brought about by
coercion.
(iii) An agent appointed by a person refused to hand over the book of
account of the principal unless the principal released him from all
liabilities concerning past transactions. The principal gave a release
as demanded. Held, the release was obtained by coercion and was
not binding. Muthia v. Karuppan. I
(iv) A girl of 13 was made to agree to adopt a boy by her husband·s
relative who prevented the removal of the dead body of her husband
until she consented to the adoption. Held, the agreement to adopt
was not binding. Ranganayakamma v. AllI'arselti. 2
(\') A, on board an English ship on the high seas; causes B to enter
into an agreement by an act amounting to criminal intimidation
under the Indian Penal Code. A afterwards sues B for breach of
contract at Calcutta. A has employed coercion although his act is
not an offence by the law of England and although the Indian Penal
Code was not in force at the time when or the place where the
act was done.

Consequences of Coercion
A contract brought about by coercion is voidable at the
option of the party whose consent was so caused.-Sec. 19. The
aggrieved party can have the co"ntract set aside or he can refuse
to perform it and take the defente of coercion if the other party
sought to enforce it. The aggrieved party may, if he so desires,
abide by the contract and insist on its performance by the other
party.
Special Cases-
1. Prosecution
A threat to prosecute a man or to file a suit against him
does not constitute coercion because it,is not forbidden by the
I (1927) 50 Mad. 786 2(1889) 13 Mad. 214
 FREE CONSENT 61

Indian Penal Code. Compulsion of law is not coercion, undue

influence, fraud, misrepresentation or mistake. Andhra Sugars
Ltd. v. State of A. p'1
2. High prices and high interest rates
It is not coercion to charge high prices or high interest rates
because such acts are no! forbidden by the Indian Penal Code.
3. A threat to commit suicide
Consent to an agreement may be obtained by threatening to
commit suicide e.g.. by a fast to death. The Madras High Court
has held that this amounts to coercion. Amiraju v. Seshamma. 2
It was however, argued by Oldfield J, one of the judges of the
Bench which decided this case, that Section 15 must be cons-
tructed strictly and that an act which is not punishable under
the Indian Penal Code cannot be sai'd to be "forbidden" by it.
Suicide is not punishable by the Indian Penal Code; only the
attempt to commit suicide is punishable. Therefore, suicide is
not a crime and the threat to commit suicide is not coercion.
Duress
The term duress is used .in English law to denote threats
over the person or another with a view to obtain the consent
of a party to an agreement. The scope of the term coercion IS
wider because it includes thre]ts over property.

UNDUE INFLUENCE
Definition
A contract is said to be induced by undue influence where
(i) one of the parties is in a position to dominate the will of
the other and (ii) he uses the position to obtain an unfair
advantage over the other.-Sec. 16 (I).
Presum ptions
Section 16 (2) provides that undue influence may be pre-
sumed to exist in the following cases :
I. Where one party holds a real or apparent authority over
the other or where he stands in a fiduciary relationship to the

I AIR (1968) Supreme Court 599 '(1917) 41 Mad. 33

62 LAW OF CONTRACT

other. Fiduciary relationship means a relationship of mutual trust

and confidence. Such a relationship is supposed to exist in the
following cases-father and son; guardian and ward; solicitor
and client; doctor and patient; preceptor and disciple; trustee
and belleficiary etc.
2. Where a party makes a contract with a person whose
mental capacity is temporarily or permanently affected by reason
of age, illness or mental or bodi Iy distress.
£'(omples : ,
(i) F having advanced money to his son B during I>is minority, upon
8's coming of age obt.&ins by misuse of parental influence, a bond
from B for a greater amount than the S'lm advanced. F employs
undue influence.
(ii) P. a man enfeebled by disease or age, is induced by B's influence
over him as his medical attendant to agree to pay B 8n unreasonable
sum for his professional services. B employs undue influence.
(iii) A Malay woman of great age and wholly illiterate made a gift of
almost the whole of her property to her nephew who was managing
her estates. The gift was set aside on the ground of undue influence.
Illche Noriah v. Shaik Omar: I

Consequences of Undue Influence

An agreement induced by undue influence is voidable at the
option of the party whose consent was so caused. Such an
agreement may be set aside absolutely or, if the party who was
entitled to avoid it has received any benefit thereunder, the court
can set it aside upon such terms and conditions as may seem
just.-Sec. 19A. The aggrieved party may, if he desires, treat
the agreement as binding and enforce it against the other party.
According to the Madras High Court undue influence by a
person, who is not a party to the contract, may make the contract
voidable.
Burden of Proof
If a party is proved to be in a position to dominate the will
of another and if it appears that the transaction is an unconscio-
nable one, the burden of proving that the contract was not induced
by undue influence, lies on the party who was in a position to
dominate the will of the other.-Sec. 16 (3).

. 1(1929) A.C. 127

 FREE CONSENT 63

The existence of the power to dominate the will of another

may be presumed to exist under the circumstances mentioned in
Section 16 (2). [See para 2, above]
It has been held by judicial decisions that the existence of
a power to dominate the will of another cannot be presumed in
the case of landlord and tenant, and cree' ,tor and debtor. There
is no pr"3umption of undue influence bel\veel' husband and wife.
Mackellzie v. Royal Bank of Callada. I In these cases the party
alleging undue influence must prove that undue influence existed.
Lack of judgment, want of prudence, lack of knowledge of
facts, or absence of foresight are generally 'not, by themselves,
sufficient reasons for setting aside a contract. Undue influence
cannot be presumed merely from the existence of any of the
aforesaid defects in a party. Allcard v. Skinner. 2
Rebuttal
An allegation of undue influence may be answered or
rebutted if the following facts were proved: (a) the injured person
had independent advice; (b) all material facts were disclosed;
and (c) the consideration was adequate.
When suspected
Undue influence is suspected in the following cases
(i) Inadequacy of consideration.
(ii) Fiduciary relationship between the parties.
(iii} Inequality between the parties as regards age, intelligence,
social status, etc.
(iv) Absence of independent advisors for the weaker party.
(v) Unconscionable bargains. Unconscionable bargain is one
which is against the conscience of reasonable persons and
what shocks the public. If excessive profit is made it will
also be within this tenn.
High rlites of interest
It is usual for moneylenders to charge high rates of interest
from needy borrowers. Can the court presume the existence of
undue influence in such cases?
Illustration (d) of Section 16, Contract Act is as follows:
".4 applies to a banker for a loan at a time when there is
, (19341 A. C. 468 '(1887) 36 Ch. D. 145
64 LAW OF CONTRACT

stringency in the money market. The banker declines to make

the loan except at an unusually high rate of interest. A accepts
the loan on !hese terms. This is a transaction in the ordinary
course of business and the contract is not induced by undue
influence."
So a transaction will not be set aside merely because the
rate of interest is high. But if the rate is so high that the court
considers it unconscionable, the burden of proving that there was
no undue influence lip on the creditor. This is made clear by
illustration (c) of Sectio) 16 which is as follows: "A, being in
debt to B, the moneflender of his village, contracts a fresh loan
on terms which appear to be unconscionable. It lies on B to prove
that the contract was not induced by undue influence."
In India, in most of the States, there are Money Lenders Acts
which lay down the maximum rates of interest which can be
charged. Also, under the Usurious loans Act of 1918, the court
has discretionary power to reduce rates of interest whenever they
appear to be unconscionable.
Mental Distress
A poor Hindu widow was badly in need of money for her
maintenance. A money-lender availe.d of the opportunity of her
predicament and persuaded her to make an agreement to pay
100% interest. The court reduced the interest. Raghunath Prasad
v. Sarju Prasad I

High Prices
As regards high prices the general opinion is that if a trader
puts his prices up during scarcity and a buyer agrees to pay such
high prices, it is a transaction in the ordinary course of business
and is not a case of undue influence. In certain cases high pric,s
may amount to profiteering and blackmarketing. They are crimi-
nal offences.
Pardanishin Woman
Women, who observe thl! custom of Parda, i.e., seclusion
from contact with people outside her own family, are peculiarly
susceptible to undue influence. Therefore, Indian courts have held
that a contract made by or with a pardanishin lady may be set

I AIR (1924) Privy Council 60

 FREE CONSENT 65

aside by her unless the other party to the contract satisfies the
court that the terms of the contract were fully explained to her
and that she understood their implications.
Difference between Undue Influence and Coercioa
In both undue influence and coercion, one party is under
the influence of another. (1) In coercion the influence arises from
committing or threatening to commit an offence punishable under
the Indian Penal Code or detaining or threatening to detain
. property unlawfully. In undue influence, the influence arises from \
the domination of the will of one ~rson over another. (2) Casesl
of coercion are mostly cases of the use of physical force while
in undue influence there is mental pressure.

MISREPRESENTATION
Representation is a statement or assertion, made by one
party to the other, before or at t,he time of the contract, regarding
some fact relating to it. Misrepresentation arises· when the
representation made is inaccurate but the inaccuracy is not due
to any desire to defraud the other party. There is no intention
to deceive.
Section 18 of thll Contract Act classifies cases of misrep-
resentation into three groups as follows
1. Unwarranted Assertion
"The positive assertion; in a manner not warranted by the •
information of the person making it, of that wh ich is not true,
tbough he believes it to be true."
Example:
A says to B who intends to purchase A' s land : "My land produces
12 maunds of rice per bigha." A believes the statement to be true
although he did not have sufficient grounds for the belief. Later
on it transpires that the land does not produce 12 maunds of rice.
This is misrepresentation.

2. Breach of Duty
"Any breach of duty which, without an intent to deceive,
gains an advantage to the ~rsons committing it, or anyone
claiming under. him. by misleading another to his prejudice or
to the prejudice of anyone claiming under ·him." Under this

Commercial Law - 5
66 LAW OF CONTRACT

heading would fall cases where a party is under a duty to disclose

certain facts and does not do $0 and thereby misleads the other
party. In English law such cases are known as cases of
~4constructive fraud."

3. Innocent Mistake
"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." '
Consequences of Misrepresentation
In cases of misrepresentation the aggrieved party can :
(I) avoid the agreement, or
(ii) insist that the contract be performed and that he shall
be put in the position in which he would have been if
the representation made' had been' true.
But if the party whose consent was caused by misrepresen-
tation had the means of discovering the truth with ordinary
diligence, he has no remedy.-Sec. 19.
"Ordinary diligence" means such diligence as a reasonably
prudent man would consider necessary, having regard to the
l1ature of the transaction.
Example. :
A. by a misrepresentation leads B erroneously to believe that five
hundred maunds of indigo are made annually at A's factory. B
examines the accounts of the factory, which show that only four
hundred maunds of indigo have been made. After this B buys the
factory. The contract is not avoided by A's misrepresentation.

FRAUD
Definition
The term "fraud" inclUdes all acts committed by a person
. with a view to deceive another person. "To deceive" means to
"indu~e a man to believe that a thing is true which is false"
Section 17 of the Contract Act states that "Fraud" means
and includes any of the following acts:
1. False Statement
"The suggestion as to a fact. of that which is not true by
one who does not believe it to be true." A false statement
.intentiona lIy made is fraud.
 FREE CONSENT 67

2. Active Concealment
"The active concealment of a fact by one having knowledge
or belief of the fact." Mere non-disclosure is not fraud where
the party is not under any duty to disclose all facts. (See below).
But active concealment is fraud.
Examples:
(i) B. having discovered a vein of orc on the estate of A. adopls means
10 conceal, and does conceal. the existence of the ore from A.
Through A's ignorance B is enabled to buy the estate at an
undervalue. The contract is voidable at the option of A -(lilustration
(b) to Sec 19).
(ii) A sells by auction to B a hor;., which A knows to be unsound,
A says nothing to B about the horse's unsoundness. This is not fraud
because A is under no duty to disclose the fact to B. But if between
B and A there is" fiducial)' relationship (for example if B is A's
daughter) there arises the duty to disclose and non-disclosure
amounts to fraud.
3. Intentional non-performance
. "A promise made without any intention of performing it."
Examp/e-purchase of goods without any intention of paying for
them.
4. Deception
"Any other act fitted to deceive."
5. Frandulent act 01' omission
"Any such act or omission as the law. specially declares to
be fraudulent." This clause refers to provisions in certain Acts
which make it obiigatory to disclose relevant facts. Thus, under
Section 55 of t:1e Transfer of Property Act, the seller of
immovable propen} i. be.und to di<.10se to the buyer all material
defects. Failure to do so ~mounts to fraud.
Comment
To constitute fraud, the act complained of must be brought
with in any of the five above-mentioned categories.
It is to be noted that mere commendation or praising of one's
own goods is not fraud. Traders and manufacturers are inclined
to speak optimistically of their products, e.g., "X products are
the best in the market" or a soap powder which 'washes whiter
than white'. Such statements do not amount to fraud, unless a
c lear intention to deceive is proved.
68 LAW OF CON'TRACT

Can Silence be Fraudulent?

"Mere silence as to facts likely to affect the willingness of
a person to enter into a contract is not fraud, unless the
circumstances of the case are such that, regard being had to them,
it is the duty of the person keeping silence to ·speak, or unless
his silence is, in itself equivalent to speech."-Explanation to
Sec. 17.
From the above, the following rules can be deduced :
1. The general rule is that mere silence is not fraud.
Examples:
(i) A and B being traders enter upon a contract. A has private
information of a change in price which would affect B's willingness
to proceed with the contract. A is not bound to inform B.
(ii) H sold to W some pigs which were to his Irnowledge suffering from
swinefever. The pigs were sold "with all faults" and H did not
disclose the fever to W. Held, there was no fraud. Ward v. Hobbs. I
2. Silence is fraudulent, "if the circumstances of the case
are such that, regard being had to them, it is the -duty of the
person keeping silence to speak." The duty to speak, i.e.. disclose
all facts, exists where there is a fiduciary relationship between
the parties (father and son; guardian and ward, etc.). The duty
to disclose may also be an obligation imposed by statute.
(Example-Sec. 55 of the Transfer of Property Act). There is
also a duty of making full disclosure in contracts of insurance.
Whenever there is a duty to disclose, failure to do so amounts
to fraud.
3. Silence is fraudulent where the circumstances are such
that, "silence is in itself equivalent to speech".
Example:
B says to A, "If you do not deRY it,· I shall assume that the horse
is sound." A says nothing. Here A's silence is equivalent to speech.
If the horse is uusound A's silence is fraudulent.

Consequences of Fraud
A party who has been induced to. enter into an agreement
by fraud has the following remedies open to him-Sec 19.
I. He can avoid the performance of the contract.

I (1878) 4 A. C. 13
 FREE CONSENT 69

2. He can 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.
Example:
A fraudulenlly informs B thaI A's eslale is free from encumbrance.
B thereupon buys lhe estale. The estale is subject to a mortgage.
B may avoid the contract or may insist on its being carried oul
and the mortgage debt repaid by A.
3. The aggrieved party can sue for damages. Fraud is a civil
wrong or Tort; hence compensation is payable.
Conditions lit
Relief for fraud can be obtained only if the following
conditions are satisfied.
I. The act must have been committed by a party to a contract
or with his connivance or by his agent.
2. The act must have been done with the intention to deceive
and must actually deceive. A deceit which does not deceive gives
no ground of action.
3. The consent of the party was obtained by the act
complained of. A fraudulent act which did not cause the consent
to a contract of the party on whom such fraud was practised,
does not make the contract voidable.
4. In cases of fraudulent silence, the contract is not voidable
if the party whose consent was so caused had the means of
discovering the truth ordinary diligence.
S. The remedy of rescinding the agreement is not available
in cases of approbation (i.e.. acceptance of the agreement) and
laches or undue delay in taking action.

DISTINCTION BETWEEN FRAUD AND

MISREPRESENTATION
I. Different Intention : In misrepresentation there is no
intention to deceive. Fraud implies an intention to deceive.
2. Different Belief: The difference between misrepresenta-
tion and fraud depends on t!-le belief of the person making the
statement. If the statement is honest, even though it was wrong,
there is only misrepresentation. If the statement is dishonest it
is a case of fraud .
•
 70 LAW OF CONTRACT

3. Different Rights : In case of fraud the party aggrieved

can resCind the contract (i.e .. the contract is' voidable at his
option). He can also sue for damages. In case of misrepresentation
the only remedy is rescission. There can be no suit for damages.
4. Different Defence : In ca~e- of misrepresentation if the
circumstances were such that the aggrieved party might have
discovered the truth with ordinary diligence, the contract cannot
be avoided. The same is the case where there. is fraudulent
silence. But in other cases of fraud this is no defence. Even if
there were independent sources of discovering the truth which
were not availed of, the aggrieved party can rescind the contract
and/or file a suit for damages.

CONTRACTS UBERRIMAE FIDEI

Definition
Uberrimae fidei contracts are contracts where law imposes
upon the parties the duty of making a full disclosure of all
material facts. In such contracts, if one of the parties has any
information concerning the subject matter of the transaction
which is likely to affect the willingness of the other party to
enter into the transaction, he is bound to disclose the information.
Examples
The following contracts come within the class of uberrimae
fidei contracts.
I. Contracts of insurance: The assured must disclose to the
insurer all mate~ial facts concerning the risk to be undertaken.
Upon failure to do so, the contract may be avoided. London
Assurance Co. v. Mansel. 1
2. Fiduciary relationship: Contracts in which parties stand
in a fiduciary relation to each other, e.g., contracts between
solicitor and client, father and son, etc.
3. Contracts for the Sale of Immovable Property : Under
Section 55( I) (a) of the Transfer of Property Act, the seller is
bound "to disclose to the buyer any material defect in the
property or in the seller's title thereto of which the seller is,
and the buyer is not, aware, and which the buyer could not with
ordinary care discover."

1(1879) 11 Ch. D. 363

l
 FREE CONSENT 71

4. Allotment of share; of companies Persons who issue

the prospectus of a company have the duty of' disclosing all
infonnation regarding the company with strict accura'ly. (See
under Company Law, ch. 3).
5. Family Sell/ernen!s: When family disputes art settled
by mutual agreement, each party is bound to disclose any
infonnation possessed by him regarding the value of family
properties.
MISTAKE
Definition
Mistake may be defined as an erroneous belief concerning
something. Consent cannot be said to be' "free" when an
agreement is entered into under a mistake. An agreement is valid
as a contract only when the parties agree upon the same thing
in the same sense.
Classification
Mistakes may be (i) mistake of .law and (ii) mistake of fact.
Mistake of law may again be (a) mistake as to a law in force
in India and (b) mistake as to a law not in force in India.
Mistake may be Bilateral or Unilateral. Bilateral' mistakes
arise when both the parties of the contract make mistakes e.g..
regarding the existence of the things or the nature of the
transaction. Unilateral mistake arises from one of the parties of
the contract. As a rule unilat~al mistake does not make one avoid
an agreement. But there are cases where such agreement can be
avoided. For example in an agreement where there is no 'consent
(see below).
Rules ,.
The Indian Contract Act lays down the following rules
regard ing mistakes : ~

1. Mistake of Law
Mistake on a point of Indian law does not affect the contract.
Mistake on a point of law in force in a foreign country is to
be tre;rt~ as mistake of fact. A and B make a contract grounded
on. the erroneous, belief that a particular debt is barred by the-.
Indian law of limitation. This is a valid contract. The reason is
that every man is presumed to know the law of his own country
72 LAW OF CmmtACT

and if he does not he must suffer the consequences of such lack

Of knowledge. But if in the above case, the mistake is related
to the law of limitation of a foreign country, the agreement could
have been avoided.-Sec. 21.
2. Mistake of fact
An agreement induced by a mistake of fact is void provided
the following conditions are fulfilled.-Sec. 20.
(i) Both the parties to the agreement are mistaken.
(ii) The mistake is as to a fact essential to the agreement.
Examples:
(i) P agrees 10 sell to Q a specific cargo supposed to be on its w.'.;
from England to Bombay. It turns out that before the day of th<
bargain the ship conveying the cargo has been cast away and the
goods lost. Neither party was aware of the fact. The agreement is
void.
(ii) M agrees to buy from Na certain horse. It turns out that the horse
was dead at the time of the bargain though neither party was aware
of the fact. The agreement is void.
(iii) A, being entitled to an estate for the' life of B, agrees to sell it
to C. B was dead at the time of the agreement, but, both parties
were ignorant of the fact. The agreement is void. /
(il') Woffered to purchase certain plots of land belonging to Cat £2,000,
C rejected the offer. Later on C wrote a letter offering to sell the
plots to W for "£1,200". His real intention was to make an offer
for "£2,100". W accepted the offer as made. Held, W. was not
entitled to enforce the contract, as he knew that the "offer" was
made by C under mistake. Webster v. Cecil.l

3. Opinion
"An erroneous opinion as to the value of the thing which
forms the subject-matter of the agreement is not to be deemed
a mistake ar to a matter of fact."-Explanation to Sec. 20.
Example:
X buys an article thinking that it is worth Rs. J00 while it is actually
worth Rs. 50. The agreement cannot be avoided on the ground of
mistake: .

4. 'Unilateral Mistake
Section 22 provides that, "A contract is not voidable merely
because it was caused by one of the parties to it being under

1(1861) 30 Beur. 62
 FREE CONSENT 73

a mistake as to matter of fact." A mistake by one of the parties

(Unilateral Mistake) does not generally affect the validity of a
contract.
Example:
H contracted with the N Corporation to build a number of houses.
In calculating the cost of the houses H by" mistake deducted a
particular sum twice over and submitted his estimates accordingly.
The Corporation agreed to the figures which were naturally lower
than actual cost. Held, the agreement was binding as it stood when
the Corporation affixed its seal to it, even though it was based upon
erroneous estimates. Higgins Ltd. v, Northampton Corporation. I
But if the mistake is of such a nature as to prevent the
existence of free consent, the agreement is void, even though
the mistake is unilateral. (See below)
Mistake aDd CODseDt
Section 10 of the Act provides that an agreement is valid
if it is the result of the free consent of the parties. Section "3
of the Act lays down that two or more persons are said to consent
when they agree upon the same thing in the same sense. A
mistake may prevent the formation of a real agreement "upon
the same thing in the same sense". When one or more of the
parties to an agreement suffer from a fundaplental error. and the
consent (apparently given) is not really there, the agreement is
void. ,
A fundamental error, which precludes consent, is sometimes
!,he result of fraud. But fraud is not the necessary or decisive
-element. An error may arise without the fault of any of the parties
to the agreement. Whenever any fundame!'tal error exists, the
agreement is void.
Examples of Mistake
Somll typical cases of mistake invalidating an agreement are
given billow.
(a) Mista/ces as to identity oj the person contracted with,
where such identity is essential to the contract.
Examples:
(i) Blenkarn, by limitating the signature of reputable firm called
Blenkiron & Co., induced another firm Y to supply goods to him

1 (1927) I Ch. D. 128

l4 LAW OF CONTRACT

oQ .redit. The goods ,.,ere then sold to X Held, there w¥ no contract

between Blenkarn and Y. because.r DevOl intended to supply
Blenkarn. Therefore X obtained no title to the ·goods. Because. the
goods were given no credit the question of identity was essential
to the agreement. Cundy v. Lindsay. I
(ii) A jeweller was insured with a company against loss by theft, with
the exception of jewellery 'entrusted to a customer'. A woman,
posing as the wife of a wealthy customer, made a few purchases
from the jeweller to inspire confidence, and then was allowed to
take away two pearl necklelS of high value 'on approval' for her
supposed husband. She made away with the necklets. The House
of Lords held that the loss was covered hy the insurance. Lake v.
Simmom. 2
The question of identity must be an essential element of the
contract. Where the identity of the party contracted with is
immaterial, mistakes as to identity will not avoid a contract. Thus
if X goes to a shop. introduces himself as Y and 'purchases sdnle
goods for cash, the contract valid unless it can be shown that
the shopkeeper would not have sold the goods to X had he knew
that he was not Y..'
(b) Mutual mistakes as to the existence of a thing: All the
examples given in tlie Contract Act under Section 20 come within
this category. They have been reproduced above. (Page 71).
(c) Mutual mistake about the identity or quantity of a thing.
Examples:
(i) X agreed to buy from r 125 bales o( Suratcutton "to arrive ex
Peerless from Bombay." There were two ship's called "Peerless"
sailing from Bombay, one arriving in October and the other arriving
in November. X meant the earlier one and Y the latter_ Held there
was no contract. Rafjles v. Wichelhausl. In this case there was no
consensus ad idem : the parties· did not und8rstand the same _thing
in the same sense. .
(ii) X inspected 50 rifles in a shop. Latter he lelegraphed, "send three
rifles." The telegraph. clerk by mistake transcribed the message as,
"send'the rifles." The shopkeeper sent 50 rifles and'upon X's 'refusal
to accept. filed a suit for damages. Held, there wlts no contract.
Here the consensus ad idem did not arise. because of the mistake
of a third party. Henkel v. Pope'
(d) Mutual mistake as to the subject-matter of the contract,
or the nature of the transaction If th~ ,contract actually made

I (1878) L. R. 3 A. C. 459 2 (1927) A. C. 487

J (1864) 2 H'& C. 906 • (1870) L. R. 6 Ex.?'
 FREE CONSENT 7S

is substantially different from the contract the parties intended

to make, the contract can be avoided.
Examples:
(i) M an old man of feeble sight, endorsed a bill of exchange thinking
it was a guarantee. There was no negligence on his part. Held, there
was no contract.' Foster v. /wackinnon. 1
Oi) A and B believing themselves married made a separation agret.ment
under which the husband agreed to pay a weekly allowance to the
wife. Later: on it transpired that they were not married. In an action
by the "wife" for arrears of allowance, it was held that the agreement
was void because there was a mutual mistake on a point of fact
which was material to the existence of the agreement. Gal/oway
v. Galloway 2
(e) MIscellaneous: Mistakes may occur for the following
causes : the title of property; quality of the subject matter;
quantity of the goods; and, the price of the subject.

EXERCISES
I. (a) State when a consent is not said to be free. (Page 59)
(b) What is the effect 10 such consent on the formation of a
contract·? ('consequences'·-pages 60. 61, 64-65, 69-70, 71-72)
2. What is meant by undue influence? Give two examples. (Page 61)
3. Vt"hen is consent said to be free? Distinguish between coercion
and undue influence. (Pages 59, 65)
4. Define and distinguish 'misrepresentation' and 'fraud'. What rem-
edies are available to the aggrieved party? (Pages 65-71)
5. "Mere silence as to facts is not fraud." Explain with two illus-
trations. (Page 68)
6. "A contract caused by mistake is void." Explain. (Page 71)
7. Give answers with reasons whether the following cases are instances
of fraud: .
(a) A, sells, by auction, to B, a horse which A knows to be unsound.
A declares nothing to B about the horse's unsoundness.
(Page 66)
. (b) Suppose, B is A's daughter and has just come of age. Is A then
bound to tell B that the horse is unsound? (Pages 66-67)
(c) B says to A-"If you do not deny it. I shall take that the horse
is sound." A says nothing. (Page 68)

I (18G9) L.R. 4 c.P. 704 , ( 1914) T. L. R. 5.11

76 LAW OF CO!"TRACT

8. Problems :
(a) A and B make a contract on the mistaken belief that a particular
debt is barred by the Indian law of limitation. Is the contract
void? Is the contract voidable? (Pages 71-72)
(b) A fraudulently infonos B that A's house is free from encum-
brance. B thereupon buys the house. The house is subject to
a mortgage. What are the rights of B? (Pages 71-72)
(c) A agrees to sell B a specific cargo of goods per S. S. Malwa
supposed to be on its way from London to Bombay. It turn
out that before the day of the bargain 5.5. Malwa had been
cast away and the goods were lost. Discuss the respective rights
of A and B. (Example (I), page 72)
(<I) A agrees to buy from B a certain elephant. It turns out that
the elephant was dead at the time of the bargain, though neither
party was aware of the fact. Discuss the rights of A and B.
(Example (ii), page 72)
(e) A sells a horse to B knowing full well that the horse is vicious.
A does not 'disclose the nature of the horse to B. Is the sale
valid? (Page 66)
(j) A, a man enfeebled by disease is induced by B. his 'medical
attendant, to agree to pay B a sum of rupees one lakh for his
professional services. Is the agreement valid? Give reasons for
your answer. (Page 61-62)
(g) A buys a piece of ordinary cloth from B. A thinks erroneously
that the cloth is of high quality. B knows that A is under a
mistake but keeps quiet on this matter. When A rea.lises his
mistake, he wants to set aside the contract on the ground that'
B had knowingly committed fraud in not pointing out his
mistake. Discuss if the contract is voidable. (Page 73)
(h) A sells B his horse for Rs. 500. The horse is blind in one eye,
but B does not know this until after the sale is' completed. Is
A 'liable to B on the ground of fraud? (Page 67)
(I) X sola a mare to B which had a cracked hoof. X filled up the
hoof in ord.er to prevent detention even after diligent exami-
nation. What is the right of B? . (Para 2, page 67)
9. Objective questions. Give ~ort answers. (2 marlcs) :
(I) Give two examples whe~e undue influence has been exercised
in the contract. (Page 61)
(il) Suicide is no crime. True or false? (Page 61)
(iiI) Does silence as to fact amount to fraud? If so, give one
example. (Page 68)
 LEGALITY OF OBJECT AND
CONSIDERATION

UNLAWFUL CONSIDERATION AND OBJECT

Definition
An agreement will not be enforced by the court if its object
or the consideration is un lawful. By the expression, "object of
an agreement" is meant its 'purpose' or 'design'. The object and.
the consideration must both be lawful, otherwise the agreement
is void.
Unlawful Agreements
According to Section 23 of the Act th,e consideration and
the object of an agreement are unlawful in the following cases :
1. If it ~s forbidden by law: An act or' an undertaking is
forbidden by law when it is punishable by the criminal law of
the country or when it is prohibited by special legislation or
regulations made by a competent authority under powers derived
from the legislature. I If the object of an agreement or the
consideration is the doing of an act forbidden' by law, the
agreement is void.
2. If it is of such a nature that, if permitted, it would defeat
the provisions of any law: If the object or' the' consideration
of an agreement. is of such a nature' that it would indirectly lead
to a violation of the law, the agreement is void.
Examples:
(i) A's estate is sold for arrears of revenue under the provisions of an
act of the legislature by which the defaulte, is prohibited from
purchasing the estate. 8, upon an understanding with A, becomes
the purchiser and agrees to convey the estate to A upon receiving
from him the price which 8 has paid, The agreement is void as
it renders the transaction, in effect, a purchase by the defaulter, and
would so defeat the object of the law.
(ii) The plaintiff entered into a cont"';ct of service with the defendant
by which it was agreed that he should be paid the sum of £ 13 a
week as salary, and a further £6 per week for 'expenses', His

I Pollock and Mulla. Indian Contract Act. p. 138

77
78 LAW OF CONTRACT

expenses were vcry much lower, therefore thls ·provision was Illfrely
a device '" defraud the Income Tax Authority. The Court of Appeal
in England, held that the two provisions of the coittract cannot be
severed and the whole contract was void. Napier v. National
Business Agency Ltd. 1
(iii) P let a flat to R at a "'nt of £1 ,200 a ycar. To reduce the Municipal
tax he entered into two agreements with R. One, by which the renl
was staled to be £450 only and the other by which R agreed to
pay £750 for services in connection with the flat. In • suit filed
againsl R to rec'over £750, il was held that the agrccm~nt was p'ade
to defraud Ihe municipal authoritY and was void and A <;annol
recover the money. Alexander v. Raysolr. 1
3. If it is fraudulent An agreement whose object is to
defraud others is void.
Examples: (
(i) A, B and C enler into an agreemenl for tho division among them
of gains acquired or 10 be acquired by them by fraud. The agreemenl
is void.
(ii) A. being agenl fur a landed proprietor, agrees for money, without
the knowledge of his principal, to obtain for B a lease of land
belonging to his principal. The agreemenl between A and B is void,
as it implies a fraud by concealment hy A on hi. principal.
4. If iI involves or implies injury to the person or property
of another. If the object of an agreement' is to injure the person
or property of another, it is void.
Examples:
(i) An agreemenl by the proprietors of a newspaper 10 indemnify the
printers against claims arising from libels prinled in the newspaper
is void. W. H. Smith & Sons v. Clinton.'
(ii) An agreement by which a debtor promised to do manual labour for
Ihe creditor so long as Ihe debt was nol rq>aid in full has been
held to be void under this clause. Ram Sarup v. Bansi.·
5. If the COlJr! regards it as immo,.al. An agreement whose
object is immoral, or w/lere the consideration is immoral, is void.
Examples: .
(i) X who is B·s fyfukhlear promises to exercischis influence wilh B
in favour of C and C promises to pay Rs. 1,000 10 X The agreemenl
is void because it is immoral.
(Ii) D agrees 10 let her daughler !<> hire to B for concubinage. The
agreem""t is void.

1 (1951) 2 All E. R. 264 '(1936) I K. B. 169

3 (1908) 26 T. L. R. .34 4 (1915) 42 Cal 742
 LEGALITY Of OBJECT AND CONSIDERATION 79
(iii)' P let a cab on hire to·B a prostitute, knowing thaUt would be
used for Immoral purposes. The agreement is void and he cannot
recover the hire. Pearce v. Brooks. I
Ii") A man who knowingly lets out his house for prostitution cannot
recover the rent. '
6. If the court regards it as oppos.~· .0 public policy: Ail
agreement which is injurious to the .mblic or is against the
interests of the society is said to be opposed to public policy.
Public policy is not capable of exact definition and therefore
courts do not usually go beyond the decided cases on the subject.
It has been said in the House of Lords that, "public policy is
always an unsafe and treacherous ground for legal decision", per
Lord Davey. Janson v. DriejteinConsolidated Mines. 2 Courts are
generally disinclined to create a new item in the list of
agreements against public policy. Gherulal Porakh v. Mohadeodas
& others3
The following agreement's have been held to be against
public policy: trading with the enemy; traffic in public offices;
interference with the course of justice etc. These agreements are
discussed below.

AGREEMENTS AGAINST PUBLIC POLICY

I. Trading wit", tb~ enemy ~ ~,
. '- -
It is a well·settled principle of law that an agreement between
citizens of .two countries at war with each other is void and
inoperative. In India such agreements are allowed where specially
permitted by the government. ("Alien"-p. 56)
2.· Agreements interfering witb tbe course of justice
Agreements for still ing or hushing up prosecutions are bad
in law. When an offence has been committed, the guilty party
must be prosecuted and any agreement which seeks to prevent
the prosecution of such a person is opposed to public policy and
is void, Butimder the Indian criminal law there are certain cases
which can be compromised or compounded. These are mostly
minor offences like simple hurt. An agreement for the compro-
mise of such a case is valid. In civil cases compromises and
'(1866) L. R. I Ex. 213 2 (1902) A. C. 484
J (1959) (II) S.C.A. 342 (Supreme Court)
80 LAW OF CONTRACT

5e4lements are not only allowed but also an, encouraged. An

agreement to refer present or future disputes to arbitration is a
valid agreement. But an agreement varying the statutory period
of limitation is not valid.
Champerty and Maintenance
When a person agrees to help another by money or otherwise
in litigation in which he is not himself interested, it is called
Maintenance. When a person helps another in -litigation in
exchange of a promi::o hand over a portion of the fruits of
the litigation, if any, it s called Cbamperty.
Examples:
(i) P files a suit against Q for the recovery of a house. X promises
to advance Rs. 1,000 to P for the COsts of the litigation and P
promises to give to X a portions of the house if he is successful
in his suit. This is a champertous agreement.
(ii) An advocate entered into an agreement with his client by which
the latter promises to pay to the fanner filly per cent of whatever
is recovered from the decree of the court. The agreement is
champertous.
According to English law an agreement which amounts to
Champerty is void because it is against public policy to promote
litigation. But an agreement which amounts to Maintenlll1ce only,
is good if it can be shown that the motive underlying the help
given is purely charitable. It has been held by the Privy Council
in the case of Ramcoomar v. Chandrakanta, t that the English
doctrines of Champerty and Maintenance are not applicable to
Ind ia. In Ind ia, an agreement to finance litigation in return of
a portion of the results of the litigations is valid provided the
litigation was instituted with a bona fide motive. Bhagwat Dayal
Singh v. Debi Dayal Sahu. 2 If, however, the litigation was inspired
by a malicious motive or is of a gambling character, the
agreement is bad.
3. Traffic in public offices
Agreements tending to injure the public services are void
as being against public policy.
Examples:
.(i) An agreement the object of which is to procure public post is void.
(ii) An agreement to share the emoluments of a public office is void.

'(1876) 4 l.A 23 (Privy Council) 2 (1908)35 l. A.48 (J>rivyCouncil)

 LEGALITY Of OBJECT AND CONSIDERATION 81

(//i) An agreement 10 sell a religious offICe e.g., tIIIII of a shebait or

• mutawali is voicI.
(Iv) The secrel8ly of certain colle. promised Parltinsoa Ihal if he
donal.. £3 ,000 to !he college, he would use his intluaoce to secure
• knighthood for him, Parkinson made 1110 donaIioII but did not get
• knighlhood IItd sued for. the recovery of !he money. Held, the
action failed because the agl _ _ t was apinst public policy.
Park/mon v. College 0/ AmbllltllfCe Ltd 1
(v) P promises to obtain for Q an employment in the public service
IItd Q promise to pay Rs. 1,000 to P. The agreemenl is void.

agreement is void.
zcan
(vi) A paid 8, a public servant, a certain amoum inducing 10 him 10
retire from service, thus be iated in his place. The

4. Agreement creating an nlenst oppoMd to daty

It has been held in several cases that if a person enters into \
an agreement whereunder he will have to follow a course of
action which is against his public or professional duty, the
agreement is against public policy and is bad.
Exa"'pk :
An agreement by an agent whereby he would be enabled to make
secret profits; an agreement for the purc..ase of property by a public
officer' wI!ere such purchase is prohibited by law; lIII agreement
by a newspaper proprietor not to comment on !he conduct of
particular person. Nevill. v.Dominition 0/ CtINJda N.ws Co.'

5. AcreemeOts,. restrainiag
. personal
. Creedo."
Agreements unduly restraining personal liberty have been
l1eld to be. void as being against public policy.
Exfllr/piu: ' .
(I) An agreement by a debtor to do manual work fot !he creditor so
IoAg as the debt was nOI paid in fulL
(II) An agreement whereby the debtor promised to • moneylender tbaI
he will not change his residence or his employment or agree to a
reduction of his salary withllut the conseM of the money·lender was
held to be void. Horwood v. MII/ar's '17mber Co.' •

6. Agreements interfering with parental dnties

The authority of father over children and of a guardian over
his ward is to be exercised in the interest of the children and the

1 (1925) 2 K.B. I , (1'115) 3 K. B." 556

J (1917) I K. B. 305

Commercial Law - 6
82 LAW OF CONTRAFT

wards respectively. The authority of a father cannot be alienated

irrevocably and any agreement purporting to do so is void.
Example:
The father of two minor sons agreed to transfer their guardianship
to Mrs. Annie Besant, on an irrevocable basis. Subsequently he
wanted to rescind the agreement: Held, guardianship cannot be
permanently alienated. So he got back their custody. Giddu
Narayanish v. Mrs. Annie Besanl.'

7. Allnemeats iaterrering with .. arital duties

Agreements which interfere with the performance of marital
duties are void as being against public policy.
Examples :
(i) An agreement to lend money toa woman in consideration of her
getting a divorce and marrying the lender is void. Roshan v.
Mohomad 2
(;i) An agreement that the husband will always stay at the mother·in-
law's house and that the wife would never leave her parental house
is void. 7ikyal v. A!o/JohQ/: 3

8. Marrialle broke~ge agreements

According to English law an agreement to pay brokerage to
a person for negotiating a marriage, is void because it is against
public policy. The principle underlying this rule is that marriages
should take place according to the free choice of parties and suc~
choice should not be interfered with by third parties acting as
brokers. In India, however, marriages are in most cases negotiated
by the parents of the parties and the custom of appointing agents
or br9kers for finding out a suitable match is well-established.
Therefore there is some difference of opinion on the question
whether the English rule regarding marriage brokerage contracts
should be applied here,
In an old case, the Cakuita High Court held that an
agreement to remunerate a third person in consideration of
negotiatIng a marriage is contrary to public policy and cannot
be enforced. Baksh;: Das v: Nadu Das.1. •
An agreement to pay money to the parent of a minor to give
the minor in mllTriage is void and illegal.

'(1915) 38 Mad 80 , P. R. 46 of 1887

'28 Cal 751
 LEGALITY Of ODJECT AND- CONSIDERATION 83

VOID AGREEMENTS
An agreement can be void because of mistake. lack of
cons ideration, want of capacity etc. A Iist of void agreements
is given below :
(I) Lack of Capacity-Sec. II (See p. 49)
(2) Mutual Mistake of Fact-Sec. 20 (See p. 72)
(3) Unlawful Consideration or Object-Sec. 23 (See p. 77)
(4) Consideration or Object partly unlawful-·Sec. 24 (See
p. 92-93)
(5) Agreements without consideration-Sec. 25 (See p. 41-
42)
Void agreements declared by the Indian Contract Act in
sections 26, 27, 28, 29, 30 and 56. These agreements are
explained below :
(6) Agreements in restraint of trade.-Sec. 27 (See p. 83)
(7) Agreements in restraint of legal proceedings-Sec. 28
(See p. 87-88) . ,.
(8) Uncertain Ag,.eement.-Sec. 29 (See p. 88-89)
(9) Agreements by way of wager.-Sec. 30 (See p. 89)
(IO) Impossible Acts.-Sec. 56 (See' p. 92)
(II) Agreement Contingent on impossible event.-Sec: 36
(See p. 98)
(12) Reciprocal promises where there are void promises.-
Sec. 57 (See p. 104-107)
AgreemeDts in restraint of trade
"Every agreement by which anyone is restrained from
exercising a lawful profession, trade or business of any kind. is
to that extent void"--Scc. 27
"Public policy requires that every man shall be at liberty
to work for himself and shall not be at liberty to deprive himself
of the fruit of his labour, skill or talent, by any contract that
he enters into." Fraser v. Bombay Ice Company.2
According to English law as laid down in Norden/elt v.
Maxim Nordenfelt Gun Co. ) contracts which impose IIIJreasonable
restraints upon the exercise of a business.. ' trade or prof~sion
are void while those which impose reasonable re5Jraintsare valid.
l i e L. J. 261 , 29 Bom 107
3(\894) A. C 535
84 LAW OF CONTRACT

But in India restraints are not valid except In £e few cases

provided by law. (See below)
Examples:
(i) X and Y canied on business as braziers in • oerWn locality in
Calcutta. X promised to stop his business in !hat locality in
consideration of Y paying to him Ri. 900· which he had disbursed
as advances to his workmen. X stopped his business but Y failed
to pay him the promised money. X filed a suit to. recover Ri.900.
The' court held that the agreem,;;it was void under Sec. 27 and
nothing could be recovered on the basis of that -s-mem. Madlrtzv
v. Rajcoomer. 2
(ii) X garage agre~d to deal only with the products of Esso Petroleum
Co. and to work according to the company's rules for 4!years.
Garage Y with Esso had an agreement conlaining the same tenn,
but for 21 years. Y was also mortgaged to the Esso against 8. loan.
The House of Lords held that the agreement with Y was unreasOnable
and void. But the agreement with X was held reasonable and valid.
Essa Petroleum Co. v. Harper's Garage (Stouport) Ltd)
Cases in which restraint 01 trade is valid in India
An agreement .is restraint of trade is valid in the following
case.s:
I. Statutory ExceptioDS .
(i) Sale of Goodwill: "One who sells'the goodwill of a
business may agree with the buyer to refrain from cllrrying on
a similar business, within specified local limits, so long as the
buyer, or anyone deriving title t~the goodwiHfrom him, carries
on a like business therein; prOVIded that such limits' appear to
the court to be reasonable, regard being had to the nature of
the business"-Exc:eption I, Sec. 27, Contract Act.
The seller of the goodwill of a business can be restrained
from carryitig on a similar business within specified local limits,
provided the restraint is reasonable.
£tampies :
(a) X buys from Y the goodwill of the business of plying ferry boats
across certain ghats on a river and Y promises Dot to ply his boats
at. tl10se ghats:'The restraint is valid. .
(b) c after selling the goodwill of his business to D promises not to
. c..,. on similar buliness "anywhere in the world". The restraint
is void.

J (1874) 14 B L R. 76 2 (1968) A. C. 269

 LEGALITY OF OBJECT AND CONSIDERATION 85

(c) E a seller of imitation jewellery sells his business 10 D and promises

not to carty on business in "imitation jewellery and real jewellery".
HdcI, Ihe nosInIinl was valid as regards imitation jewellery, not as
. . . . raI jewellery. Goldsoll y. Goldman. I .

(ii) Parlllers competing business: A partner of a finn may

be restrained from carrying' on a similar business, so long as he
remains a partner.-5e<:. II (2) Partnership ACI.
(iii) Righn of outgoing partner: A partner may agree with
his partners that on ceasing to be a partner he will not carry
on a similar business within a specified period or within specified
local Iimits.-Sec. 36 (2), Partnership Act.
(iv) Partner's similar business on dissolution: Partners
may, in anticipation of the dissolution of the finn, agree thaI all
or some of them shall not carry on similar business within a
specified perioc! or within specified local Iimits.-Sec. 54,
Partnership Act,·
(v) Righn o/bll)lu and seller 0/ goodwill: The sellers of
the goodwill (i.e., the partners of the finn) or. anyone or more
of them may carry on a business competing with that of the buyer
and may advertise the business. A partJier or partners cannot
(a) use the fmn name, (b) represent himself as carrying on the
business of the firm, or (c) solicit the custom of persons who
.wuc dealing with the firm before its dissolution (unless there
is an agtee~ with the buyer of goodwill permitting any of
these).-Sec. 55 (2) Lo~' ~ •
(lIf; Agreements in restraint 0/ trade :'The buyer of the
goodwill may further protect himself from the competition of the
old partners by entering into an agreement with any partner
prohibiting such partner from carrying on any business similar
to that of the firm within a specified period or within specified
local limits. Such m agreement shall be valid if the restrictions
imposed are reasonable (not withstanding the fact that the
agreemeat may amount to restraint of trade).-Sec. 55(3)
IL LepI tlecisi_
(e) Trade _WutioB
It has been held in many English cases that an agreement
betwem a group of manufacturers or traders regarding the

I (1915) I CII. 0 292

86 LAW OF CONTItACT

conditions of an industry or the price, is binding although it is

in restraint of trade, provided the agreement is in the interest
of the parties themselves. Thus, pools and cartels whose objects
arc to promote the welfare of the parties themselves by regulating
competition are valid agreements.
u Q 1rIJi1es :
(i) Ccrlain icc: manufacturers CIIIcted into' a.gJCeid\:iil DOt 10 sell ice
below. c:crWn minimum price. The . . eeu....t .... held to be valid.
Fros.r & Co. v. BOIIfbay Ice Co.'
(jj) It was agreed among memben of. society of bop growers 1M! cacb
member would deliver all hops 'grown by him 10 the society which
would lIWket the hops end divide the profits ......... !he memben.
Held. the agreement was valid. Elfgli$1J Hop Gmwus v. f),rri"ll.'
But a trade combination is not valid if it is against the public
interest or if it tends to create monopoly. AnoTMY G_oJ of
Australia v. Adelaid S. S. Co.3 It was observed ill Vancouver
Brewing Co. v. V. Breweries' that, "Liberty of trade is not an
asset which the law will permit a person to barter away except
in special circumstances." .

(6) Negative stlp.latiOBS ia senice coalnets

A person while in. service with another may, by the terms
of his service, be prevented from accepting oilier enpgements.
For example, a doctor employed in a hospital IIUI)' be debarred
from private practice. Such negative stipulations in service
contracts· are not considered to' be in restraint of trade and are
therefore valid.
Sometimes, however, employers seek to restrict former
employees from engaging themselves in similar occapa&ioos for
some period afiCt the termiuatiou of their 5erYii:es. In EnsJish
law such stipulations have been held to be valid if they arc for
the protection of the emp1oyer's interest. Thus in Fitch v. Dewes s
the articled clerk of a solicitor stipulated that he would not
practice as a solicitor within seven miles of a certain place, after
he became qualified as a sol icitor and left his pmrioas employ-
ment. The agreement was held to be valid.
The Indian law regarding. restraint of trade is, however,
'29 80m 107 , (1928) 2 K. B. 174
J (1914) A. C. 461 • (1934) A. C. III
'(Inl) 2 A.C. 158
 LEGAlITY OF OBJECT AND CONSIDERATtON 87

stricter. It has been held in. Brahmaputra Tea Company v.

Scarth.1 that an agreement restraining an employee from taking
service or engaging in any similar business for a period of fIVe
years from the date of the termination of his service with his
previous employers is invaJid even though the restrictions only
extended to a distance of 40 miles from the previous piau of
work. In Cohen v. Wilkie. 2 an actor was brought out from England
under a contract containing a stipulation that he would not play
at another theatre in India during his tour. The stipulation was
held to be void as being in restraint of trade.
A decifion of the Supreme COllrl : A company was manu-
facturing a special yam with the collaboration of a foreign.
undertaking on the condition that the company would maintain
secrecy of all technical information and would have secrecy
agreements with its employees. One employee was appointed for
five years with the condition that during this period he would
not take service any where even if he left this service. Shelat. J.
of the Supreme Court held that the agreement is valid., Niranjan
Shanknr Golikari v. Century Spinning & Manufacturi"g Co. Ltd.)
3. Agreements i. restraint , of legal proceedings.~
Private persons cannot by agreement alter their personal law
or the statute law. Section 28 of the Act provides that, "Every
agreement. by which any party thereto is restricted absolutely
from enforcing his rights under or in respect of any contract.
by the usual legal proceedings in the ordinary tribunals. or which
limits the time within which he may thus enforce his rights. is
void to that extent. n
The effect of Section 28. can be summed up as follows : An
agreement which prohibits a person from taking judicial proceed-
ings. in reSpect of any right arising from a contract. is void.
Similarly any limitation of the time within which he may enforce
his right! is void. Section 28. is subject to two exceptions :
Exception. \-FIIhU'e disputes, An agreement by !be parties
to a contract to refer future disputes to arbitration is valid and
binding. An agreement to settle disputes by arbitration prevents
the parties from geningthe dispute adjudicated' by a court of
law but nevertheless. such an agreement is binding.
1 II Cal S4S 1 16 C. W. N. ~34
J AIR (1967) Supreme Court 10'18
88 lAW OF CONTRACT

ExceplUm 2~Pending disputes: An agreement in .... iting to

refer a pending dispute to arbitration is not rendered illepJ by
Section 28. The section does not affect !he law relating to
arbitrUion.
It is to be noted that Section 28 applies only to rights arising
'from a contract. It does not apply to cases of civil wrong or
torts.
Section 28 dealing with tbe above question renders void two
kinds following a"greement as per AJnendmeIIt Act 1996 :
(I) An agreement which wholly or partially prohibits any
party from enforcing his rights under or in respect of any contract
is void to diat extent.
(2) Agreements which curtail the period of Iimir.tion pre-
scribed by the law of limitation are void because their object
is to defeat the provision of law.
Similarly an. agreement purporting to east ~ jurisdiction" of
courts is contrary to public policy. But an agreement between
two or more parties to refer to arbitration any disputes which
have arisen or "I'hich may arise between them is perfectly valid.
4. UllCeftaill Acree_ent
"Agreements the meaning of which is not certain, or Gapable
of being made certain, are void,"-Sec. 29.
An agreement cannot be enforced lIIIIess the obligations
created by it are clearly understood. (See p. 33)
Ex."",lu :
(i) A a8.rJs 10 sell to B "one hundred 10DS of oil". Thae is nodIing
whatevel: 10 show what kind of oil was intended. The 8IPUIIIaIl
is void for uncertainty.
(ii) A. who is • cIcioIer in cocoanut oil only, -.us 10 sell 10 B"one
hundred _ of oil". The naI..... of A's trWIe aIIiJnIs _ iDdica1ioa
.' of the _ing of the WOlds and the .." • is _id.
(iii) 1 8&NCS 10 sell 10 B "all die gJ'8in in ." .,-y • R S -.
Thae is no uncertainty Ioae 10 lIIIke die . . 1 void.
(n·) A apees 10 .1110 B ".- Ihous.d ...... of rice • • price 10
be fixed by C". As the price is tlpable of beiq . . . oonaiD, there
is DO ~ here to mab the ""cca . . void.
(v) A IgNes 10' sell 10 B ""'Y white hone far RI. 500 or RI. 1,000".
There is ftOIbing 10 show wIIic:h of tbe _ prices _ II> be JiwD.
lbc ......_ is void for uncen.iIIIy.
(vi) L promises 10 pay five pounds more after die purcbMe or • hone
if the hone "proved lucky". The promise is 100 ...... 10 be enforced
 LEGALITY OF OBJECT AND CONSIDERATION 89

for it is DOt possible for the courts 10 decide when a bone is Iud<y
Glllhi. v. L)'IIII.'
"Agreeing to Agree" : An agreement to. enter irrlo QII agree-
melll i" the futwe is void for uncertainly unlc5S all the terms
of the proposed falure agreement are agreed expressly or by
implication. "Unless all material terms of the contrac:t are agreed,
there is no binding obligation. An agreement to agRe in future
is not a contraa nor is tha-e a contract if a malcrial tenD is
neither settled nor implied by law and the document contains
DO machinery for ascertaining it." Lord Maugbam in Foley v.
Classiqlle Coaches LId 2 (Anson. Law of Contract, ch; II).
~e.:
(i) An _ _ WIIS enPFd few • provincial lour. 11Ie .,ea,,",,, also
pm,,;..... liioi if the play WIIS broug/It to LondoII .... would be
engII(IOd • • salary "'to be IIIIII\IaIIy agee<j apoa". Held, there was
no contract. Loft". v. RobulJ' .
(ii) A compony agreed with V that on expiration of V's exisIin& contJact,
they would "favourably consider" the renewal of IUs contract. Held •
.... obIipliOll was auted to renew the contract. MMlnfll GtU Co.
v. V...."..

5. A.&rl - II)' way .,,.,.,.

fHlirUtiort : A water is H apeement by whicb money is
payable by one penon to another on the happaJilll or non-
'happening of a ftttwe. II1fCUIQi.I evertt. 'Th essence of gaming
and w.gering is that one party is to win and the other· to lose
upon a ~ event ; ~icb at the time of the cootract is of an
unccItain nature-durt is to say. if the event tunas out ODe way
A will lose but if it turns out the other way he will win." Th«lcer
v. Hardy.s
CIIarocteristics of lWI8et ing agreelfl/!flJS :
1. The consideration for the promise under a waping
IIF-ent is to pay or JI:l 1IIOItey.
2. The DJODeyis payable on the happenilll or the _ -
happening of au event.
3. The agreement depends on. a future Md ancertaia· event.

'(1131) 2 B It Ad. 232 2 (1934) 2 K. B. 1

'(1902) II T.L.R. 532 • (1900) A. C. 59S
'(1878) 4 Q.B.D 685
90 LAW OF CONTRACT

4. The essence of gaming and wagering is that one party

is to win and the. other lose.
5. In wagering agreement no party has control over the event.
_ 6. Commercial transactions are valid, but to pay price
differences in a wagering agreement is void. .
COIfflfle1Y:iai transactions: "In order to constitute a wager-
ing contraet neither party shoo Id intend to perform the contract
itself, but only to pay the differences." Sukherdoss v. GOllindoss. I
Commercial transactions are not speculative if there is a clear
intention to deliver the goods.
Ex_ph. of ".ri"1I agrrellHllfl3 :
• (i) P agrees with Q that if there is rain on a cenain day P will pay
Q Rs. SO. If there is no -noin Q will pay P Rs. SO.
(ii) A bet Oft a horse race is wagering transaction, aIthouP horse racing
is pcrmiued by some local law and a1lhough there may be official
agencies Ibrough which bets may be placed and the winnings
collected.
(iii) A share markel transaaion, in which there is no intenlion 10 give
or take delivery of the shares and where the parties iDlOIId 10 deal
only with the differences in prices, is a wagering transaclion.
(i.) Certain transactions were settled by handing over Delivery Orders
and cheques. 'There is no c..idence that actual delivery of goods
was ever effected. Held, the transactions are specUlative. Ni,ma!
Tradi"1I Co. v. TIre Co_sione, of Income-Tax (Con/,aJ) Caintto. 2
(v) Lotterie:r-A lonery is a s-ne of chance. 'Therefore an agreement
10 buy a ticket fur a loUcry is a wagering .,-enl. A IoUcry may
be aulhori>ed_j>y the governmenl. The <lnly effect of such
authorisalion i. 10, exempl Ibe persons conducting the lottery &om
criminal prosecutions but it remains a wagering transaction. Dorabji
v. Umc•. '
(vi) Cross-lifOIYi Pu:rl.s-In an English case il has been held !hal across-
word puzzle, in which prizes depend upon sameness of the
competitor's solution with a previously prepared solution kept with
editor of a newspaper, is • lottery and theref"", a wagering
_ _lion. Coles v. Odham ~ Press.'

£_,...,
It has been held that the following transactions are not
wagers :
(,) S1tmcs: Share madet transactions in which there is clear
iJltention to give and take delivery shares.

1(1928) 55 I.A. 32 (Privy Council) 2 AIR (1980) Sup<eme Court 234

3(1918) 42 80m 676 • (1936) '- K. B. 416
 LEGALITY OF OBJECT AND CONSIDERATION 91

(ii) Games of skill: Prizes and competitions which are games

of skill, e.g., picture puzzles; athletic competitions etc. An agree-
ment to enter into a wrestling contest, in which the winner was to
be rewarded by the whole of the sale-proceeds of tickets and the
party failing to appear on that day would have to forfeit Rs.500
was held not be a wagering agreement. Babasaheb v. Rajaram. I
(iii) A statutory exceplion : An agreement to contribute to
the payment of a prize of the value of Rs. 500 or upwards to
the winners of a horse race, is valid. This is statutory exception
laid down in section 30 of the Contract Act.
(iv) Contract of Insurance: A contract Qf insurance is not
a wagering agreement. (See 'Law of Insurance', ch. I)
(v) "Badia" : "Badia" transactions are exactly similar to the
transaction of 'conversion' or 'carrying over' in the terminology
of the Stock Exchanges with regard to dealings in securities. Mere
agreement to engage in speculation on the rise and fall in prices
of goods is not necessarily a wagering contract. But in a ca<e
this contract was held void under Section 23 of Contract Act
because it prohibited forward contracts by a statute on this
subject. Pratapchand Nopa}i v. Kotrike J'enkata Setty & Sons etc. 2
The effects of a wagering agreellleat
An agreement .by way of wager is void. It will not be
enforced by the courts of law. Section 30 provides as follows :
.. Agreements by way of wager are void; and no suit shall be
brought for recovering anything alleged to be won on any wager,
or entrusted to any person to abide by the result of any game
or other uncertain. event on which any wager is made."
In the State of Maharashtra and of Gujarat wagering
agreements are, by a local statute, not only void but also illegal.
In the case of void agreements, collateral agreements, i.e.,
agreements which are subsidiary or inciJental to the main
agreement, are valid. Therefore, though wagering agreements are
void, transactions collateral to such agreements are valid. GhenJal
Parakh v. Mahideodas Maiya d: ors.3
Examples:
(i) Money lent for the purpose of pub/inC or for payins • gambling
debt even if advanced with knowledge of the ~ for which
the money is required can lie recovered.

'(1931) 33 Born L.R. 260 1 AIR (1975) Supreme Coon 1223

) 1959 (11) S.C.A. 342 ISupreme Coon)
92 LAW OF CONTRACT

(iiI WheK one qf - . J holden of a· Derby Sweep ticket sold half

of his sUre 10 1IIOIher, !he OIlIer could enforce his clai~ in the
prizIe by' suiI. Gortglt v. lAMltaM. I
(Iii) 11 lost Rs. 1,500 to L on hone races. Subsequenlly M executed
a Hundi. for _ lIIIOunt in favour of L to prevent M being posted
as a defaulter in his club. L filed a suit 01\ the Hundi. M pleaded
dud it was • w g iu& bat =ction IIId that the consideration was
ualawful. Hekt, a wagcrirIg 4 1 - is void but does not affect
the col'--l uasaction. uwster & Co. v. S P. Mullick. 2

6. Impouible Acts
"An agreement to do an act impossible in itself is void.-
Sec. 56 (Para I).
Exa,.pks:
(i) A agrees with B to di....- treasure by magic. The agreement is
void.
(ii) A contncts to many B. bciq a11Udy manied to C. and forbidden
by the law to wbic:h he is subjec:l to pncrice polygamy. The contract
is void. BIll A lDust IIUIkc compcnsarioo to B for the loss caused
to her by tile non-perf..-ce of the promise.
1l1e examples cited ~bove are cases of Pre·contractual
Impossibility.
A contract may become impossible to perform by subsequent
events. These cases are discussed under "Termination of Con·
tracts" ih ch. II. TIley can be called Post-contractual Impossi·
bility. _

OBJECTS OR CONSIDERATION UNLAWFUL IN PART

. If the coasideration or• object is partially unlawful, the
following rules will apply. ~
I. If tbet'e are several objects but a single consideration the
agreement is void if any ODe oflhe objects is uulawful.-Sec. 24.
2. If tbere is • single object bill several considerations, the
ageement is void if anyone of the COIISida-Mions is unlawful.-
Sec. 24.
1l1e two above ndes willa the case where the agreement
~ i.e divided iI\to two pIf1S • part whicb is legal and a
part which is illegal.

'25 I.C. 35S ~ (1923) Cal. 445

 LEGALITY OF OBJECT AND CONSIDERATION 93

Example:
Apromises to superintend. on behalf of B, a legal manufacture of
indigo, and an illegal traffic in GIber articles. B promises to pay
A a salary of Rs 10,000 a year. The agltelhent is void. Here a
part of the object is Icp1 and a part is illegal but there is a single
consideration.
3. Where there is a reciprocal promise to do things legal
and also other things illegal, and the legal part can be separated
from the illegal part the legal part is a contract and the illegal
part is a void agreement.-Sec. '57.
Example:
A and B agree that A shall sell B a house for Rs. Hl,OOO but if
B uses it as a gambling hoose, he shall pay A Rs. SO,OOO for it.
The first part of the agreement is valid, the second pan invalid.
4. In the case of an alternative promise, one branch of which
is legal and the other illegal, the legal branch alone can be
enforeed.-Sec. 58.
Example:
A and B agree that, A shall pay Rs. 1,000 fot which B shall
afterwards deliver to A. either rice' or smuggled opium. This is a
valid contract to deliver rice ~d a void agreement as to opium.

EXERCISES
I. When is 81: agreement said. to be against public policy? Give five
examples' of agreements which are against public policy.
(Pages 79-83)
2. Examine the "alidity of .agreements with consideration and object
unlawful in part. . (Page 92)
3. State the. law in restraint of profession, trade, or business. Give
illustrations. (Pages 83-84, 88-89)
4. What are the exceptions to the role that contracts in restraint of
trade are void? (Pages 84-87)
5. What are the agreements which have been expressly declared to
be void as per the Indian Contract Act., 1872? (Pages 83-93)
6. What are agreements· by way of wager? What are the legal
consequences that flow' from an arrangement by way of wager ?
. (Pages 89-93)
7. Define 'Wagering Contract'. Is there any exception?
(Pages 89-93)
8. State with reasons, whether the following agreements are void or
valid : (a) A agrees to' sell to B "one thousand maunds of rice
at a price to be fixed by C". (Example (iv). page 88)
94 LAW OF CONTRACT

(b) A grants lease of certain premises in Calcutta to B knowing

that the premises will be used for the purpose of installing
machinery- for minting base coin. (Para I, page 77)
9. Pf'ObleIfU :
(a) A enters into a wagering agreement and borrows Rs. 100 for
the purpose. Void or valid? (Page 92)
(b) A agrees to sell to B "my white horse for Rs. 500 or 1000."
Is the agreement valid? (Page 88)
(e) X enters into a contract _with Y for the sale of goods to be
delivered. at It future date. Is it a wagering Contract? (It
is a valid Contract, not a Wagering Contract),
10. Objective questiqns. Give short answers.
(i) An agreement to share the emoluments of a public office is
void. True or false? (Para 3, page 80)
(ii) X agrees with Y to discover treasure by magic. Is the contract
valid? (Para 6, page 92)

!
 CONTINGENT CONTRACTS

Defioitioo
"A contingent contract is a contrac. ,0 do or not to do
something. if some event, collateral to suc I contract, does or does
not happen."-Sec. 3l.
Exa",pl. :
A contracts to pay B Rs 10,000 if B's house is burnt. This is a
conlingent conlract. [Illustration to Sec. 31)
A contingent contract contains a conditional promise. A
promise is "absolute" or "unconditional" when the promisor
undertakes to perform it in any event. A promise is "conditional"
when performance is due only if an event, collateral to the
contract, does or does not happen. "Collateral" means, "subor-
dinate but from same source, connected but aside from main
line".

Mea.lIIgor Collateral Event

According to Pollock and Mulla I a collateral event means
an event which is, "neither a performance directly promised as
part of the contract, not the whole of the consideration for a
promise." From this explanation it follows that the folldWing
contracts are not contingent contracts :
(a) X promises to pay Rs. 100 to any person who recove~s
~ome property lost by X
. (b) X promises to pay YRs. 1,000 if he marries Z.
In example (a) there is no contract until and unless somebody
finds the lost property. In example (b) there is an otTer by X
which becomes a binding promises when Y marries Z.
But a contract, whereby A promises to pay 8 Rs. 10,000
if 8's houseis burnt, is a contingent contract because the liability
of A arises" only when 8 's house in burnt, This is an event
collateral to the main contract because the burning of B 's house
is not the performance required from B under the contract nor
is it the consideration obtained from B. It is an iudependent event.
I Pollock and Mull., Indian Contract Act. p. 235

95 -
 96 LAW OF CONTRACT

Cul'llCteriltic: 01 eo.dltpllt Catncts

From the above discussion it follows that there are two
essential characteristics of contingeut contracts:
(a) The performance of such contracts depends on a con-
tingency, i.e., on the happening or non-happening of the future
event. .
(/I) In a Contingen~ Contract, the event must be collateral
I,e., incidental to the c' 'ntract.
(c) The continge'lcy is uncertain. If the contingency is bound
to happen, the contract is due to be performed in any case and
is not therefore a contingent contract.
Continlenq depellClent on act of party . -. ___
The performance of a contingent contract depends on the
happening or non-happening of a collateral event. The word
'event' includes an 'act'; and the 'act' may be of a party t9
the contract or of a third party. Thus a promise to buy certain
goods if the party's engineer approves of them, is valid. Here
the engineer's approval is the act on which the performance of
the promise 10 purchase is contingent. But if the pcrfOnJl8nce
of a promise is contingent upon the mere will and pleasure of
the promisor, there is no contract I
Em",pl,s :
(i) Life insurance, indemnity and guarantee lie examples of Contingent
Contract. ; .
(ii) A promise 10 pay. what a tbird party X shall determine, is valid.
(iii) The plaintiff entered inlO a contract for the su'pply of IimbCr 10 the .
Government. One of the terms of the contract was thar the timber
would bC rejected if not approved bY the Superintendent of the Gun
Carriage Factory for which the timber was rcquire,f The timber
supplied was rejected. Held, 00 a suit fof bmoch of Contract, that
it was not open to the plaintiff to question the Superintendem's
decision. S«re£ary 01 Slot. lor India v.' Arathoon. 2
(hr) In the case of goods 10 be manufactured 10 order, it may be • term
of the contract that the goods shall be to the customer's approval.
In such a case the customer'. judgment, acting bonafide and not
capriciously, is decisive. AlldreWs v. lhlfield. 3 ;
(v) A promise, to' pay for a service whaleYer tbC promisor himself
thinks right or reasonable, is no promise. Roberts v.' S",ith •

I Pollock and Mulla, op. cit., p. 236 ~ (1879) 5 Mad: 1'73

-
3 (1857) 2 C. B. N. S. 779. • (1859) 4 H. & N. 315
 cONTINGENT CONTRACTS 91

Rules regarding Contingent Contncts

Sections 32 to 36 of the Contract Act contain certain rules
regarding contingent contract. They are summarised below.
I. The' happening of a future uncerlain event: Contracts
contingent upon the happening of a future uncertain event, cannot
be enforced by law unless and until that event has happened.
If the event becomes impossible, such contracts become void.-
See. 32.
Examples;
(i) A makes a contract with B to buy B's ho~e if A survives C. This
contract cannot be enforced by law unless and until C dies in A's
lifetime.
(ii) 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 it. The
contract cannot be enforced by law unless and until C refuses to
buy the horse. •
(iii) A contracts to pay B a sum of money when B marries C. C dies
without being married to B. The contract becomes void.
2. The non-happening of an uncertain fo.ture event; Contracts
contingent upon the non-happening of an uncertain future event,
can be enforced when the happening of that event becomes
impossible, and not before-Sec. 33.
Example;
A agrees to pay B a sum of money if a certain ship does not a
return. The ship is sunk. The contract can be enforced when the
ship sinks.
3. When event to "be deemed impossible: If a contract is
contingent upon how a person win' 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 further
contingencies.-Sec. 34
Example:
.4 agrees to pay B a sum of money if B marries C. C marries D.
The marriage of B to C must now be considered impossible although
it is possible tliat D may die and that C may afterwards marry B.
4. The happening of an event with ill aflXed time: Contracts
contingent upon the happening of an event within a fixed time,
become void if, at the expiration of the fixed time, such event
has not happened, or if, before the tinie fixed, such event becomes
impossible.

Commercial Law - 7
98 lAW OF CONTRACT

The non-happening of an event within a fixed time

Contracts contingent upon the non-happening of an event 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 wi II not
happen.-Sec.;S.
Examples:
(i) A promises to pay B a sum of money if a certain ship return within
a year. The contract may be enforced if the ship return within the
year, and becomes void if the ship is burnt within the year.
(ii) A promise to pay B a sum of money if a cemin ship does not
return within a year. The contract may be enforced if the ship does
not return within the year, or is burnt within the year.
S. Impossible event: Contingent agreements to do or not
to do anything, if an impossible event happens are void, whether
the impos.sibility of the event is known or not to the parties to
the agreement at the time when it is made.-Sec. 36.
Examples:
(i) A agrees te! pay B Rs. 1,000 if two straight lines should enclose
a space. The agreement is void.
(ii) A agrees to pay B Rs. 1000 if B will marry A's daughter C C was
dead at Ihe time of Ihe agreement. The agreement is void.

Difference between Contingent Contrad and Wagering

agreements.
I. A contingent contract is valid, a wagering agreement is
void.
2. A contingent contract depends. on the happening or non-
happening of an event; but the contract is valid, a wagering
agreement is void.
3. Contingent contract may not contain reciprocal prom-
ises; a wagtring agreement consists of reciprocal promise.
4. In a Contingent contract either party or both may have
an interest in the subject matter of the contract; in a wagering
agreement the parties have no interest except getting or paying
money.
~. In a Contingent contract the future event is only collateral
and valid; a wagering agreement is void.

EXERCISE
I. Explain the meaning of contingent contracts and their rules.
(Pages 95·98)
.'
@ PERFORMANCE OF CONTRACTS
PERFORMANCE OR TENDER

Definition
A contract creates legal obligations. "Performance of a
contract" means the carrying out of these obligations. Each party
must perform or offer to perform the promise which he has made.
Section 37, para I, of the Contract Act lays down 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 this act. or of any other
law."

The Offer to Perform or Tender

The offer to perform the contract is called Tender. Offer to
perform or Tender may be called attempted performance. A
tender, to be legally valid, must fulfil the following conditions.-
Sec. 38 :
I. It must be uncondllion,,/. A tender coupled with a
condition is' no tender.
Example:
A passenger on a bus offers a rupee note for the fare \\'hich is lOp.
only. It is not a valid tender because it imposes condition on the
acceptance of the tcnder l';=. the return of the balance out of the
rupee. A tender of money must be of the exact sum duc. BireslI'ar
v. The Emperor. I
2. A tender to pay condllion,,"." upon the other party doing
somethings such a~ gi'ving a rek:l~e· ',1' ·,.~ccpti!lg the other amount
in full satisfaction of alJ demandi. is 111;( a v:rlid tender. But of
course, a receipt may be demanded alter .1 tender has been
accepted.
3. A tender money, must be in legal tender money, not by
any foreign money, or hy promissory note or cheque . .Iagal v.
Nabagopal. 2

'46 C:W.N. 550 , 34 Cal. 305

99
 100 LAW OF CONTRACT

4: The tender must be made at a propel' time and place.

What is proper time and place, depends upon the intention of
the parties and the provisions of ~~ions 46-$0 of .the Act. (See
pages 109-110).
A tender hefore the due date or at a time and place other
than that agreed upon, is not a valid tender. Eshaque v. Abdul
Bari.1 .
5. The person to whom a tender is made must be given 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.
6. The reason behind the above rule is that an offer to
perform a -part of the promise is not a valid tender.
7. If the offer is an offer to deliver anything to the promisee,
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.
Example:
P contracts to deliver to B al his warehouse on the Ist March 1973.
100 bales of colton of a particular quality. P must bring the cotton
to B's warehouse, on the appointed day. under such circumstances
that B may have a reasonable opportunity of satisfying himself that
the thing offered is cotton of Ihe quality contracted for, and that
there are 100 bales.
8. When there are several promisees, an offer to anyone
of them is a valid tender.
Effect of refusal to accept a properly made offer of
performance or Tender
Where the promisor has made an offer of performance to
the promisee, and the offer has not been accepted, the contract
is deemed to be broken by the promisee and he can be sued
for breach of contract.
_ Effect of refusal of party to perform promise wholly
When a party to a contract has refused to perform, or disabled
himself from performing, his promise in its entirely, the promisee
may put an end 10 the contract, unless he has signified by words
or conduct, his acquiescen«e in ils conlinuance.-Sec. 39.
I 31 Cal. 183
 PERFORMANCE OF CONTRACTS 101

Example:
P, a singer, enters into a contract with B. manager of a theatre to
sing at his theatre two nights in every week during the next two
months, and B engages to pay her at the rate of 100 rupees for
each night. On the sixth night P wilfully absents herself. With the
",sent of B, P sings on the seventh night. B has signified his
acquiescence in the continuance of the contract and cannot now put
an end to it but is emitted to compensation for the damage sustained
by him through P's failure to sing on the sixth night.

BY WHOM IS A CONTRACT TO BE PERFORMED?

1. Personal Performance
In cases involving personal skill, taste. or credit, the promisor
must himself perform the contract. The courts will enforce the
intention of the parties. as expressed in the contract, or as may
be inferred from the circumstances of the case.
2. Performance by representatives
In all other cases the promisor or his representatives may
employ a competent person to perform it.-Sec. 40.
I::.xamples :
(i) Q promis.s to paint a picrur. for B ; Q must perform this promise
personally. .
(ii) Q promises to pay B a sum of money. Q may perform this promise,
either by personally paying the money to 8 or" causing it to be paid
to B by another.

3. Effect of Performance from a third person

When a promise accepts performance of the promise from
a third person. he cannot afterwards enforce it against the
promisor.--Sec. 41.
4. Death of the Promisor
Contracts involving personal skill or volition, come to an
end when the promisor dies. His heirs or legal representatives
are not bound to perform such contracts. This rule is expressed
in a Latin phrase. actio personalis moritur cum persona-a
personal cause of action dies with the person concerned.
In cases not involving personal skill or volition, the legal
representatives of a deceased promisor arc bound to perform the
contract. Upon failure to do so. they will be liable for breach
,

102 LAW OF CONTRACT

of contract. But the liability of the legal representatives is limited

to the assets obtained from the deceased. They are not personally
liable.
The legal representatives can enforce performance of the
contract upon the other party or parties and their legal repre-
sentatives.
Examples'
(i) P promises to deliver goods to B 'on a certain day on payment of
Rs. 1,000. P dies before that day. P's representatives are bound to
deliver the goods to B, and B is bound to pay Rs. 1,000 to p's
representatives.
(ii) Q promises to paint picture for B by a certain day, at a certain price.
Q dies before the day. The contract cannot be enforced either by
Q:-; representatives or by B.

5. Performance of Joint Promises - See below.

Who can demand performance?

I. The promisee can demand performance of the promise.
A stranger to a contract, i.e., one who is not a party to it, cannot
file a suit to enforce it. A contract between P and Q cannot be
enforced by R.
2. Under certain cases a stranger to the contract can enforce
the contract. Examples, Trust, Assignee ... etc. (See p. 44).
3. The legal representatives can enforce performance of the
contract upon the other party or parties and their legal repre-
sentatives.

DEVOLUTION OF JOINT RIGHTS AND

LIABILITIES

Joint Performance
Two or more persons may enter into a joint agreement with
one or more persons. Example : A and B jointly promise to pay
Rs. 500 to C and D. In such cases, the question arises, who is
liable to perform the contract and who' can demand performance?
The rules on the subject are stated below-Sections 42-45 :
1. Devolution of Joint liabilities
When two or more persons have made a joint promise, then,
unless a contrary intention appears by the contract, all such
 PERFORMANCE OF CONTRACTS \03

persons must jointly fulfil the promise. Upon the death of one
of the joint promisors, his liability devolves upon his legal
representatives, and the legal representatives become liable to
perform the contract jointly with the surviving parties. if all the
parties die, the liability devolves upon their legal repres~ntatives
jointly.-Sec. 42. .
The English law on the point is different. In case of joint
promises, the liability to perform, devolves in England, upon the
surviving promisors. The legal representatives of deceased promi·
sors are not liable.
2. Anyone of joint promisor may be compelled to perform
"When two or more persons make a joint promise, the
promisee may. in the absence of express agreement to the contrary
compel anyone or more of such joint promisors to perform the
whole of the promise."
Each promisor may compel contribution
"Each of two or more joint promisors may compel· every
other joint promisor to contribute equally with himself to the
performance of the promise, unless a contrary intention appears
from the contract."
Sharing of loss by default in contribution
"If anyone of two or more joint promisors makes default
in such contribution, the remaining joint promisors must bear the
loss arising from such default in equal shares."-Sec.43.
[Sec. 43 does not apply to Sureties. See. ch. 13]
The English law is different. Under il "all joint contractors
must be sued jointly for a breach of contract." In Ind ia the
promisee can choose against whom to proceed.
Examples:
Ii) A. B & C jointly promise 10 pay DRs. 3,000. D may compel
either A 'or B or C to pay him Rs. 3,000.
(ii) A. B & Care und« a joint promise to pay DRs. 3,000. C is
unable to pay anything and A is compelled to pay the whole. A
is entitled to receive Rs. 1,500 from B.
(iii) A. B & C jointly promise to pay DRs. 3.000. 'C is compelled to
pay the whole. A is insolvent but his assets are sufficient to pay
one-half of his debts. C is entitled to received Rs. 500 from A's
estate and Rs. 1,250 from B.
 104 lAW OF CONTRACT

3. Effect of release of one joint promisor

"Where two or more persons have made a JOInt promise,
a release of one of such joint promisors by the promisee not
discharge the other joint promisors; neither does it free the joint
promisor so released from responsibility to the other joint
promisor or joint promisors."-Sec. 44.
The English law on this point is different. Release of one
joint promisor under English law releases all the promisors but
not in India.
4. Devolution of joint rights
When a person has made a promise to several persons jointly.
then (unless a contrary intention appears from the contract) the
right to claim performance rests on all the promisees jointly so
long as all of them are 'alive. When one of the promisees dies'
the right to claim performance rests with his legal representative
jointly with the surviving promisees. Whcn all the promisees are
dead. the right to claim performance rests with their legal
represcntatives jointly.-Sec. 45.
Example:
Q in consideration of Rs. 500 lent to him by B & c. promises B
& C jointly to repay them t~e sum with interest on a day specified.
B dies. The right to claim performance rests with B's representative
jointly with C during C's life and after the death of C with the
representatives of B & C jointly.
I
RECIPROCAL PROMISES

Definition
"
A Contract consists of reciprocal promises when one party
makes a promise (to do or not to do something in the future)
in cOl1$ideration of a similar promise (to do or not to do'
something in the future) made by the other party. Such a contract
is an exchange of promises.
Rules
'"
Sections 51-54 and 57-58 of the Contract Act lay down the
rules regarding the performance of reciprocal promises. They are
slated below.
 PERFORMANCE OF CONTRACTS 105

1. Promisor not bound to perform, unless reciprocal promisee

ready and willing to perform
"When a contract consists of reciprocal promises to be
simultaneously performed, no promisor need perform his promise
unless the promisee is ready and willing to perform his reciprocal
promise."-Sec. 51.
£-ramp/es :
(;) A & B contract that A shall deliver goods to B to be paid for by
B on delivery. A need not deliver the goods, unless B is ready and
willing to pay for the goods on delivery. B need not pay for the
goods unless A is ready and willing to deliver them on payment.
(Ii) A & B contract that A shall deliver . goods to B at a price to be
paid by instalments, the first instalment to be paid on delivery. A
need not deliver, unless B is ready and willing to pay the first
instalnlent on delivery. B need not pay the first: instalment, unless
A is rcady and willing to deliver the goods on payment of the first
instalment.

2. Order of performance of reciprocal promises

"Where the order in which reciprocal promises are to be
performed is expressly fixed by the contract, they shall be
performed in that order, and where the order is not expressly
fixed by the contract, they shall be performed in that order which
the nature of the transaction requires."-Sec. 52.
Examples:
(i) A & B contract that A shall build. house for B at a fixed price.
A's promise to build the house must be perfonned before 8's promise
to pay for it.
(jj) A & 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 money. A's promise need not be perf01 med until the security
is given. for the nature of the transaction requires that A should
have security before he delivers up his stock.

3. Liability of party preventing event on which contract is

to take effect
"When a contract contains reciprocal promises, and one party
to the contract prevents the other from performing his promise,
the contract becomes voidable at the option of the party so
prevented; and he is entitled to compensation from the other
party for any loss which he may sustain in consequence of the
non-performance of the contract."-Sec. 53.
106 LAW OF CONTRACT

Example
A & B contract that B shall execute certain work for A for a thousand
rupees. B is ready and willing to execute the work accordingly but
A prevents him from doing so. The contract is voidable at the options
- of A ; and. if he elects to rescind it, he is entitled to recover from
A compensation for any loss which he has incurred by its non-
performance.

4. Effect of default as to that promise which should be first

performed. in-contract consisting of reciprocal promises
"When a contract consists of reciprocal promises, such that
one of them cannot be performed, or that its performance cannot
be claimed till the other has been performed, and the promisor
of the promise last mentioned fails to perform it, such promisor
cannot claim the performance of the reciprocal promise, and must
make compensation to the other party to the contract for any
loss which such other party may sustain by non-performance of
the contract."-Sec. 54.
Examples:
(i) A hires 8's ship to take in and convey, from Calcutta to the Mauritus,
a cargo lO be provided by A. B receiving a certain freight for its
conveyance ... does not provide any cargo for the sh ip. A cannot
claim the performance of 8's promise and must make compensation
to B for the loss which B sustains by the non-perfonnance of the
contract.
(ii) A contracts with 8 to execute certain builder's work for a fixed
price, B supplying the scaffolding or timber, necessary for the work.
B refuses to furnish any scaffolding or timber, and the work cannot
be executed. A need not execute the work, and B is bound to make
compensation to A for any loss caused to him by the non-
performance of the contract.
(iii) A contracts with B to deliver to him, at a specified price, certain
merchandise on board a ship which cannot arrive for a month, and
B engages to pay for the merchandise within a week from the date
of the contract. B does not pay within the week. A's promise to
deliver need not be performed, and A must make compensation.
liv) A promises B to sell him one hundred bales of merchandise, to be
delivered next day and B promises. A to pay for them within a
mcnth. A does not deliver according to his promise. B's promise
to pay need not be performed, and A must make compensation.

5. Reciprocal promises to do things legal and also other

things illegal
"When persons reciprocally promise, firstly to do certain
 PERFORMANCE OF CONTRACTS 107
.
things which are legal, and secondly, under specified circums·
tances, to do certain other things which are illegal, the first set
of promises is a contract, but the second is a void agreement."-
Sec. 57. (See. p. 92)
6. Agreement to do impossible act
An agreement to do an act impossible in itself is void.-
Sec. 56. (See p. 92)

CONTRACTS WmCH NEED NOT BE PERFORMED

Sections 62 to 67 of the Contract Act are listed under the
heading "Contracts which need not be performed". The relevant
provisions are as follows :
I. If by mutual agreement there is Novation, Rescission or
Alteration, the original contract need not be performed. (Sec. 62.
See Chapter I I)
2. The same rule applies in cases of Remission. (Sec. 63.
See Chapter ),1)
3. When a voidable contract is rescinded, the other party
need not perform his promise. (Sec. 64. See "Restitution",
Chapter 11)
4. 'If the promisee neglects or refuses to afford the promisor
reasonable facilities for the performance of his promise, the
promisor is excused by such neglect or refusal as to any non-
performance caused thereby." Sec. 67. (See under, "Breach of
Contract", Chapter II)
ll. Under the Law of Contract the following agreements need
not be performed :
I. Unlawful consideration and object-Sec. 23 (See p. 77-83)
2. Where the performance is unlawful or illegal-Sec. 56
(See p. 92)

ASSIGNMENT OF CONTRACTS
Definition
Assignment means transfer. The rights and liabilities of a
party to a contract can be assigned under certain circumstances.
Assignment may occur (i) by act of parties or (ii) by operation
of law.
108 LAW OF CONTRACT

Rules
The rules regarding assignment of contracts are summarised
below:
I. Contracts involving personal skill, ability, cre~it, or other
personal qualifications, cannot be assigned. Examples: a contract
to marry; a contract to paint a picture; a contract of personal
service; etc.
2. The obligations under a contract, i.e., the burden and the
liabilities under the contract cannot b~ transferred. For example,
if X owes Y Rs. 100 he cannot transfer the liability to Z, and
force Y to collect his money from Z.
Exception-In both cases I and 2, the parties to a contract
may agree to replace the original contract by a new one under
which the obligations of one of the parties are shifted to a new
party. Thus in the example given above if Y agrees to accept
Z as his debtor in place of x: the liability to pay the debt is
transferred from X to Z. Such cases are known as Novation.
3. A contract may be performed through the; agency of a
competent person, if the contract does not contemplate Perfor-
mance by the promisor personally.-Sec. 40. But in this' case
the original party remains responsible for the proper performance
of the obligations under the contract.
4. The rights and benefits under a contract (not involving
personal skill or volition) can be assigned. Thus if X is entitled
to receive Ri;. 500 from Y. he can assign his right to Z whereupon
Z will become entitled to receive the money from Y. But in this
case the assignment is .ubject to all equalities between the
original parties. Thus if Y ~ad already paid a portion of the debt
to X, he will pay to Z correspondingly less.
5. The rights of a party under a contract may amount to
an "actionable claim" or "a chose-in-action". Section 3 of the
Transfer of Property Act defines as actionable claim as "a claim
to any debt (except a secured debt) or to any beneficial
interest... whether such claim or beneficial interest be existent,
accruing, conditional or contingent." Examples of actionable
claims ; a money debt; book debts; the interest of a buyer of
goods in a contract for forward delivery (Jaffer Ali v. Budge
Budge Jute Mills 1) ; an option to repurchase property sold; etc.

1 J4 Cal. 289
 PERFORMANCE OF CONTRACTS 109

Actionable claims can be assigned but only by a written

document. Notice must be given to the debtor.
6. ~ssignment by operation of law occurs in cases of death
or insolvbcy. Upon the death of a party his rights and liabilities
under a .contract devolve upon his heirs and legal representatives
(except ih the case of contracts involving personal qualifications).
In case :,of insolvency, the rights and liabilities of the person
concerned pass to the Official Assignee or the Official Receiver.
I

T~E TIME AND PLACE OF PERFORMANCE

:.
Generaf, Rules
The;: time and the place of performance of a contract are
matters ,to
" be determined by agreement between the parties to
the con'traet. In sections 46 to 50 of the Indian Contract Act
certain 'general rules have been laid down regarding the time and
place 0( performance. They are as follows :
,,'
1. Tini~ for performance without application
"Where, by the contract, a promisor is to perform his promise
withou~ application by dle promisee, and no time for perfonnance
is specified, the engagement must be performed within a rea-
sonable. time."
"EXplanation-The question what is a reasonable time, is,
ID eac~ particular case, a question of fact."-Sec. 46.
:/ /
2. Time and place, where time is specified
"W.hen a promise is to be performed on a certain day, and
the promisor has undertaken to perform it without application
by the promisee, the promisor may perform it at any time during
the usual hours of business on such day and at the place at which
the promise ought to be performed."-Sec. 4 7,
Example:
D promises to deliver goods at 8's warehouse on the first January.
On that day D brings the goods to B's warehouse but after the usual
hour for closing it and they are not. received. D has not performed
his promise.

3. Application for performance to be at proper time and place

"When a promise is to be performed on 1\ certain day, and
the promisor has not undertaken to perform it without application
110 LAW OF CONTRACT

by the prom isee, it is the duty of the prom isee to apply for
performance at a proper place and with in the usual hours of
bu.siness. "
"Explanalioll-The question 'what is a proper time and
place' is, in each particular case, a question of fact."-Sec. 48.
4, To appoint a reasonable place for the performance
"When a promise is to be performed without application by
the promisee, and ,,0
place is fixed for the performance of it,
it is the duty of the promisor to apply to the promisee to appoint·.
a reasonable place for the performance of tile promise, and to
perform it at such place."-Sec. 49.
Example:
D undertakes to deliver a thousand maunds of jute to B on a fixed
day. D must apply to B to appoint a reasonable place for the purchase
of receiving it, and must deliver it to him at such pl~e.

5. Manner and time prescribed or sanctioned by promisee

"The performance of any promise may be made in any
manner or at any time which the promisee prescribes or
sanctions. "-Sec. 50. .
Examples:
(i) B owes A 2,000 rupees. A desires B to pay the amount to A's account
with C. a banker. B, who also banks with C, orders the amount
to be transferred from his account to A's credit and this is done-
by C Afterwards and before.4 knows of the transfer. C fails. There
has been a good payment by B
(ii) .1 and fJ are mutually indebted. A and fJ settle an account by setting
off one item against another. and B pays A the balance found to
be due from him upon such settlement. This amounts to a payment
by A and, B respectively of the sums which they owed to each other.
(ill) D owes /3. 2,000 rupees. B accepts some of C's goods in deduction
of the debt. The delivery oflhe goods operates as pan payment.
(,"1 Q desires B who owes him Rs. 100, to send him a note for Rs 100
hy post. The debt is discharged as soon as B puts into the post
a letter containing the 110te duly addressed to Q.

PERFORMANCE WITHIN STIPULATED TIME

Rules
Section 55 of the Contract" Act lays down certain rules
regarding the effects of failure to perform Ii contract within the
stipulated time. They are as follows :
 PERFORMANCE OF CONTRACTS III

I. In contracts where time is of the essence of the contract,

if there is failure to perform within the fixed time, the contract
(or so much of it as remains unperformed) becomes voidable at
the option of the promisee.
2. In such cases, the promisee may accept performance after
the fixed time but if he does so he cannot claim compensation
unless he gives notice of his inter .ion to claim compensation
at the time of accepting the delayed IJcrformance.
3. In contracts where time is not of the essence of the
contract, failure to perform within the fixed time does not make
the contract voidable, but the promisee is entitled to get
compensation for any loss occasioned to him by such failure.

Case Law
When is time the essence oj the contract? The decisions of .
the Supreme Court, regarding the 'time' of the performance of
contracts, are summarised below :
I. The fixation of the period within which the contract has
to be performed does not make the stipulation as to time the
essence of the contract. Gamathinayagam Pillai v. Palaniswami
Nadar. 1
2. The question whether or not time was of the essence of
the contract would essentially be a question of the intention of
the parties to be gathered from the terms of the contract. Hind
Constn. Co'ntraclors v. Slale oj Maharashtra. 2
3. Even if a contract expressly lays emphasis on time as the
essence of the contract, the condition will be dependent on other
provisions of the contract. The inference that the work must be
complet.. d by a particular date may not be given the fundamental
position because of the presence of such other provisions. If such
other clauses provide for extension of time in certain probabilities
or for payment of fine or penalty on daily or weekly basis if
the work remains unjinished on the expiry of the given period,
the express provision as regards the time being of the essence
of contract will be rendered ineffective. Hind Constn. Contractors
v. Slale oj Maharashtra. (Sec above).
4. When a contract relates to sale of immovable property
it will normally be presumed that the time is not the essence

1 AIR (1967) Supreme Court 86~ , AIR (1979) Supreme Court 720
112 LAW OF CONTRACT

of the contract. Govilld Prasad Chaturvedi v; Hari Dutt Shastri

and Ollother. I
5. In mercantile contracts, the time of delivery of goods is
of the essence of the contract but not the time of the payment
of the price. Mahabir Prasad v. Durga Dutta. 2

RULES REGARDING APPROPRIATION OF

PWMENTS
When a debtor owes -Ieveral distinct debts to the same
creditor and makes a p?yment to the creditor, the question may
arise against whieh debt the payment is to be appropriated. In
England the law on the subjeCt was laid down in ClaytOil's case. 3
In India the rules regarding appropriation of paymentS are
contained in Sections 59-6 I of the Contract Act. The .Iaw on
the point can be summarised as follows
1. Express appropriation by Debtor
If the debtor at the time of making the payment expressly
intimates that the payment is to be appl ied to the discharge of
some particular debt, the payment if accepted, must be appl ied
accordingly.
2. Implied appropriation by Debtor
I f there is no express appropriation, but there are circum-
stances which imply that the debtor intended appropriation to a
particular debt, the debtor's intention must be followed, if the
money is accepted.
Examples:
(i) A owes B among other debts, Rs. 1,000 upon a promissory note
which falls due on 1st June. He owes no other debt of that amount.
On the 1st June A pays to B 1,000 rupees. The payment is to be
applied to the discharge of the promissory note.
(ii) .4 owes to B among other debts, the sum of Rs. 567. B writes to
A and demands the payment of this sum. A sends to B Rs. 567.
This payment is to be applied to the discharge of the debt of which
B had demanded payment. .

3. Principal and Interest when both due

The general rule is that in absence of any appropriation by
I AIR (1977) Supreme Court 1005 2 A[R (1961) Supreme Court 990
'(1816) [ Mer 572. 6[0
 PERFORMANCE Of CONTRACTS III

the debtor at the time of payment. the payment should be

attributed in the first instance to interest and then to the pri~ipal.
Harishchandra and another v. Kailashchandra and another. I
When both principal and interest are due, the debtor can
stipulate that a particular payment made by him is to be
appropriated to the principal, the interest remaining due. If the
. creditor accepts the payment he must also accept the debtor's
appropriation. If he does not like to do so he must refuse to
accept the payment.
4. Appropriation by Creditors
If there is no express or implied appropriation by the debtor,
the creditor may apply the money to any lawful debt which is
due and payable by the debtor. He may even apply it to a debt
which is barred by the law of limitation. .
Example: ,
S was an unregiste'red dentist who. according to the law in force
in England. could not sue for performing a dental operation but
could sue for materials supplied. S had a bill against P for. £45
of which £20 was for performing an operation and £25 for materials
supplied P paid' £20 without appropriating it. In an action by S.
held (I) S could appropriate the £20 towards his professional
'services because it was a lawful debt although irrecoverable and
(2) he could make the appropriation for the first time while giving
evidence in his suit. Seymour v. Pickell. 2

5. Order of appropriation
When neither the debtor' ·nor the creditor makes any
appropriation. the payment shall be applied in disch,uge of the
debts in order of time, whether they are or are not barred by
the law of limitation. If the debts are of equal standing (i.e ..
of the same date) the payment shall be applied in discharge of
each proportionately.
6. The rule in re Hallett's estate
Suppose that a man' h~s an account in a bank in which he
keeps his own money as well as some moneys of which he is
a trustee. He makes a series of deposits and withdrawals, in the
course of which some trust funds are misappropriated. In this

I AIR 11975) Raj. 15 '(1905) I K. B. 71S

Commercial Law - 8
114 LAW OFCONT1lACT

case, the withdrawals are to be debited first to his own moneys

and. theri to the tmst funds; and the deposits are to be credited
first to the trust fund and next to his own fund, whatever be
the order of withdrawals and depOsits. In re Hallett s Estate. I

EXERCISES
I
I. What d~ you understand by performance of a contract? Under what
circumstances a contract need not be performed? (Pages 99, 107)
2. State the essentials of a valid tender. (Pages 99-100)
3. State the rules regarding appropriation of payments.
(pages 112-114)
4. When is time the essence of the contract? (Page 109)
5. Write nOles on :. (a) Devolution of joint promises (rights and
liabilities) ; (b) Reciprocal promises; (c) Assignment of contracts.
[Pages (a) 104-107; (b) 107-108; (c) 107-109J
6. Objective questions. Give short answers :
(i) X tenders a cheque for buying goods from l' Is l' bound to
accept the cheque? (Page 99)
(il) Q promises to paint a picture for B by a certain day on
payment of Rs. 1,000. Q dies before that day. Can this contract
be enforced by Q's representatives or by B?
(Example (il) page 102)

'18 Ch. D. 696.

 TERMINATION OR
DISCHARGE OF CONTRACTS

METHODS OF TERMINATION
When the obligation created by a contract come to an end,
the contract is said to be discharged or terminated. A contract
may be discharged or terminated in any of the following ways :
I. By performance of the prom ise or tender.
II. By mutual consent cancelling the agreement Or substituting
a new agreement in place of the old.
III. By subsequent impossibility of performance.
IV. By operation of law-i.e., death, insolvency, or merger.
V. By lapse of time.
VI. By material alteration without the consent of the other
parties.
VII. By breach made by one yearly.
The rules regarding termination of contracts are discussed
below.

I. TERMINATION BY PERFORMANCE
The obligations of a party to a contrac) come to an end when
he performs his promise. Perfonnance by all the parties, of the
respective obligations, puts an end to the contract completely.
This is the normal and natural mode of discharging a contract.
The offer of performance or tender has the Same effect as
performance. If a party to a contract offers to perform his promise
but the offer is not accepted by the otloer party, the .obligations
of the first party are terminated.

11. TERMINATION BY MUTUAL AGREEMENT

By agreement of all parties. a contract may be cancelled or
its terms altered or a new agreement substituted for it. Whenever
any of these .things happen, the old contract is terminated.
"If the pa~ies \0 a contract agree to substitute a new contract
for it, or to res~ind .. or alter it, the original. contract .need not
be performed.".."..S,ec.
,) " . ~
62. .
Terminatioll by mutual agreen)ent may occur in anyone of
the . (ollowing ways' .. . .

115
 116 LAW Of CONTRACT

Novation
Novation occurs when a new' contract is substituted f~r an
existing contract, either between the same parties or "between
different parties. The definition was given by Lord Selbome in
a House of Lords case, Scarf v. Jardine." I Anson however, is
of opinion that novation an only take place by agreement
between the parties. "Novation cannot be compulsory."2
. It is now held that novation may oCcur by two ways. viz.,
(i) change of . parties and (ii) a substitution of a new contract
in place of the old.
Eramples :
(i) A is indebted to B and 8 to C. By mutual agreement S's debt to
C and A's debt to B is cancelled and C accepts A as his debtor.
There is novation.
(ii) On an amalgamation of two companies into a new company, the
creditors of the old companies can enforce their claims against the
new company. The new company is substituted for. the old com-
panies.
(iii) A owes 8 1,000 rupees under a contract. 8 owes C 1,000 rupees.
8 orders A to credit C with 1.000 rupees in the books, but C does
not assent to tJ:1e arrangement. 8 still owes C 1,000 rupees, and
no new 'contract has been entered into. '
(ip) P lenl DRs. 2,000. Afterwards the parties agreed that D will repay.
to P Rs. 1.000 and a certain amount of ornament at a certain date.
,The former agreement is replaced by the laner.. There is novation.

Alteration
Alteration of a contract means change in one or more of
the terms of a contract. Alteration is valid if it is done with the
consent of all the parties to the contract.
In Alteration there is change in the terms of the contract
but no. change of the parties to it. In Novation there may be
change of' parties. .
Remission
Remission may be defined as the acceptance of less than
what was ,f0ntracted for. According to Se~tlon 63 of Contract
Act, "Every promisee may dispense with or remit, wh011y or 'in
, part, the performance of the promise made to him, or may eJ!:tend
the time for such performance, or may accept instead of it any
1(1882) 7 App. Cases 345 , Anson, LaM' of Colttract, ch. XI
 TERMINATION OR DISCHARGE OF CONTRACTS 117

satisfaction which he thinks fit." So in India a promisee may

remit or give up a part of his claim and a promise to do so
is binding ever though there is no consideration for doing so.
ExDmpl•• :
(i) A owes B Rs. 5,000. A pays to B and B accepts in full satisfaction
for the whole debt. Rs. 2,000. The old debt is dischar,;ed.
(ii) A promises to paint a picture for B B afterwards forbids him to
do so. A is no longer bound to perform the promise.
(iii) A owes B, under a contract, a sum of money. the amount of which
has not been ascertained. A without ascertaining the amount gives
to B. and B. in satisfaction thereof, accepts the sum 2.000 rupees.
This is a discharge of the whole debt whatever may be its amount.
(iv) H. K. was liable to pay Rs. 27 lakhs. His estate was taken over
by a committee to administer it. The cotr.mittee offered to pay
Rs. 20 lakhs to the creditor in full satisfaction and he accepted the
ofTer. But afterwards the creditor sued the debtor for the balance
viz.. Rs. 7 lakhs. The Supreme Court held the case is covered by
Sec. 63 and he is not entitled to sue. Kapur Challd Godho v. Mir
NawaQ Himayarali Khan. I

Accord aDd Satisraction

These two terms are used in English law. According to
English law, a promise to accept less than what is due under
an existing contract, is not supported by any consideration and
is therefore unenforceable. But an exception is made where the
smaller sum is actually paid (or the smaller obligation actually
performed) and accepted by the promisee. In such cases the old
contract is discharged by what is called accord and satisfaction.
Accord means the promise to accept less than what is due under
the old contract. Satisfaction means the payment or the fulfilment
of the smaller obligation. An accord is unenforceable; but an
accord followed by satisfaction discharges the pre-existing
obligation.
EJ:ampi. :
P owes Q Rs. 5,000. Q agrees to accept Rs. 2,000 in full satisfaction
of his claim. This promise is unenforceable' in English law. But when
Rs. 2,000 is actually paid and accepted, there is accord and
satisfaction and the original debt is discharged.
The doctrine of accord and satisfaction is not applied in India.
According to Section 63, a promise may dispense with or remit

I AIR (1963) Supreme Court 250

118 LAW OF (XlNTRACT

wholly or in part, the performance of the promise made tB him.

Therefore if the promise agrees to accept Rs. 2,000 in full
satisfaction of a claim for Rs. 5,000 the promise is enforceable.
Rescission
Rescission means cancellation of all or some of the terms
or a contract. The rescission of a contract may occur under
various circumstances :
I. It may be done by mutual consent.-Sec. 62.
2. Where a party to a contract fails to perform his obligation,
the other party can rescind the contract without prejudice
to his rights to receive compensation for breach of contract.
3. In a voidable contract, one of the parties has the option of
rescinding it.
Section 66 of the Indian Contract Act provides that, '"The
rescission of a voidable contract may be communicated or
revoked in the same manner, and subject to the same rules, as
apply to the communication or revocation of a proposal."
Rescission may be by act of party. It is not necessary, save
in exceptjonal cases, to file a suit for the purpose.
Examples:
(i) P promises to deliver certain goods to Q on a certain date. Before
the date of performance P and Q mutually agree that the contract
will not be performed. The parties have rescinded the contract.
(ii) X was ind\lced to enter into a agreement by coercion. He can rescind
the agreement.
Suit for Rescission: Section 35 of Specific Relief Act (Act I
of 1877) provides that, "Any person interested in a contract in
writing may sue to have it rescinded." The court may grant
rescission in the following cases:
(0) When the contract is voidable or terminable by the plaintiff.
(b) Where the contract is unlawful for causes not apparent on
its face and the defendant is more to blame than the plaintiff.
(c) Where a decree for specific performance of a contract of
sale, or of a contract to take a lease, has been made and
. the purchaser or the lessee makes default in payment of the
purchase money or other sums which the court has ordered
him to pay.
Wai"er
Waiver means the abandonment of a right. A party to a
 TERMINATION OR D1SCIIAROE OF CONTRACTS 119

contract may waive his rights under the contract. Thereupon the
other party is released from his obligations.
Merger
When a superior right and an inferior right coincide and meet
in one and the same peJson. the inferior right vanishes into the
superior right. Th is is known as merger.
Example:
A man holding property under a lease. buys the property. His rights
as a lessee vanish. They are merged into the rights of ownership
which he has now acquired.

III. SUBSEQUENT OR SUPERVENING IMPOSSIBILITY

Pre-contractual Impossibility
A contract "hich at the time it was entered into was
impossible to perform. is void ah initio and creates no rights
and obligations, e.g.. a promise to ride a horse to the sun.
Post..,ontractual Impossibility
A contract. which at the time it was eittered into, was capable
of being perfonned may subsequently become impossible to
perfonn or unlawful. In such cases the contract becomes void. This
is known as the doctrine of Supervening Impossibility. It is also
known as the Doctrine of Frustration. (See pages 124-126)
"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."-Sec. 56, para 2.
Grounds of Frustration. Supervening impossibility ,"ay occur
ID many ways, some of which are explained below :

1. Destruction of an object
In the case Tay/or v. Ca/dwell. 1 Blackburn J. observed as
follows. "In contracts in which the performance depends on the
continued existence of a given person or thing, a condition is
implied that the impossibility of performance arising from the
perishing of the person or thing shall excuse the performance".

'(1863) 122 E. R. 299

120 LAW OF CONTRACT

Examples
(a) A musie hall was let for • series of eoneens on certain days. The
hall was burnt down before: 'he da'e of 'he first concert. The con,ract
becomes void. Taylor v. Caldwell. (See p. 119)
(bl A person eontracted to deliver 200 tons of potatoes from a particular
field. The potatoes were: destroyed by a pest through no fault of
the pany. The eontract was held to be discharged. Howell v.
Coup/and'
(c) Th~ was an agreement between the owner of a theatre: and a
produeer. 10 exhibit a picture:. The Municipal authorities issued order
to demolish the theatre: because it was unsafe. Neither of the parties
knew that. Held. the eontract was discharged. V L. "'aram v.
p S. V lyer'
2. Cbange of law
The perfonnance of a contract may become unlawful by a
subsequent change of law. In such cases, the original contract
becomes void.
Example. :
(i) M sold to N a specified parcel of wheat in a warehouse. Before
delivery, the wheat was requisitioned by the Government under
statutoI)' powers. The del ivel)' being now legally impossible, Ihe
conlract was discharge. Re Ship/on. Anderson & Co'·
(Ii) X. who was governed by Hindu Law and who already had a wife
promises 10 marry r Then tbe Special Marriage Ael is passed
prohibiting polygamous marriage. The contract to merry becomes
void.
3. Failure of Pre-cpnditions
When a contract is entered into on the basis of the continued
existence of a certain state of things, the contract is discharged
if the state of things changes.
This principle has been supported in some cases on the
ground thai evc;ry agreement presumes the existence of a certain
state of things on the basis of which the agreement was entered
into. The continued existence of the same state of things is a
condition precedent to the perfonnance of the contract. Obviously
the contract fails if there is a failure of the condition precedent.
Examples:
(I) A &: B contract to marry each other. Before: the time fixed for the
mlllTiage, A goes mad. The contract becomes void. [Illustration (b)
of Sec:lion '6).

I (1876) I O. B. D. 258 'I. L. R. (1953) Mad. 831

, (1915) 3 K. B. 676
 TERMINATION OR DISCHARGE OF CONTRACTS 121

\ii) II hired a room from K for two days with the object (as both parties
knew) of usihg the room to view the coronation procession of
Edward Vll although the contract continued no reference to the
procession. Owing to the King's illness the procession was aban-
doned. Held, that the contract was discharged and H was excused
from paying rent for the room as the existence of the procession
was the basis of the agreement Krell v. Henry. I
(iii) A, contracts to take cargo for B at a foreign port. A s Government
afterwards declares war against the country in which the port is
situated. The conUact becomes void when war is declared. [Illus-
tration (d) of Section 56. See also para 5, below.)

4. Death or Incapacity for personal services

Where the personal qualification of a party is the basis of
the. contract the contract is discharged in cases of death or
perSonal incapacity.
Examples : .
ti) G contracts to act at a theatre for six months in consideration of
a sum paid in advance by H. On several occasions G is too ill to
act. The contract to act on these occasions becomes void.
(;i) A piano player was prevented from perfonning by a dangerous
illness. Held~ the Contract is discharged because the player could
have insisted on performing when she was unfit to do $0. Robinson
v. Do,·isQn. 2
(iii) A seaman was interned owing to war. His contract of service was
disCharged. lIerlod v. BeaP
(;'.) A music-hall artist was called up for army service. His contract of
service was discharged. Morgan v. Mans,,'

5. Outbreak of War
A contract entered into during war with an alien enemy is
void ad initio. A contract entered into before the war commenced
between citizens of countries subsequently at war, remains
suspended during the pendency of the war. After the termination
of the war, the contract revives and may be enforced.
The above rules regarding the effect of war on contracts were
formulated by English judicial decisions and are applicable to
India. But the following exceptions are to be noted :
(i) In India there may be a valid contract with an enemy alien
during war, if the Central Government specifically permits it.

'(1903) 2 K. B. 740 , 11871) L.~. 6 Ex. 269

J (1916) I A.C 486 4 (1948) I ..: B. 184
122 LAW OF CONTRACT

(ii) Contracts entered into before the outbreak of the war will
be cancelled and not merely suspended, if they amount to
aiding the enemy in the pursuit of war, Eshosito v. Bowde~ll;
or if they are of such a character that they cannot remain
suspended e.g.. when the contract involves the continuous
performance of mutual duties.
Exceptions
Some illustrations are given below of cas~s which do nol
come within the principle of Supervening Impossibility.
I. Difficulty of performance : Dif..iculty does not eX~~3c
performance.
Eramples :
(i) A sold B a certain quantity of Finland timber to be delivered
between July and September. 1914. No deliveries were made before
August when war broke QuI and transport was disorganised so that
.4 could not bring any timber from Finland. Held B was not
concerned with the way in wh ich .-l was going to get timber and
therefore the impossibility of getting timber from Finland did nol
excuse performance. Blackburn Bobbin Co. v. Allen & Sons. 2
(ii) The appellants agreed to sell to the respondents a quantity of
groundnuts to be shipped from Sudan to Hamburg during November
or December, 1956. On November 2nd, the Suez Canal was closed
and remained closed for the next five months. The appellants refused
to perfonn the contract claiming that it had been frustrated by the
closure -.of the canal. The House of Lords held there was no
frustration. ~ since it would still be possible to ship the nuts to
Hamburg around the Cape of Good Hope. Tsakirogloll & Co. Ltd.
v. . Voblee Thor; G. /II. b H. J
2. Commercial impossibility: A wholesale dealer's contract
to deliver goods is not discharged because a manufacturer has
not produced the goods concerned. Similarly increas~ of wages
or prices of raW materials, unseasonable weather or lack of
adequate profits do not excuse performance. The reason is that
'if the parties did not stipulate to the contrary. they mnst have
intended to take the risk of occurrences Iike these.
Example:
In July 1946, the appellants entered into a contract with the
respondents 10 build 78 houses for a fhed sum £ 94.424. Owing

I (1857) 7 E & B 783 J (1962) A.C. 93

'( 1918) 2 K. B. 467
 ,
TERMINATION OR O:SCHARGE OF CONTRACTS 123

tq an unexpected shortage of skilled labour and of certain materials

the contract took twenty~two months to complete instead of the eight
months expected, and cost sum £ 1,15,000. The appellants contended
that the contract had been frustrated and that they were entitled to
claim on a quantum meruit for the cost actually incurred. The House
of Lords held that the performance of the contract was more onerous
but did not discharge the agreement. The situation was still within
the scope of the contract. Davis Contractors Ltd. v. Fare/ram
UD.C.'
3. Strikes, lock-uuls, civil disturbances and riOls : These
events do not terminate contracts unless there is a clause in the
contract providing that in such cases the contract is not to be
performed or that the time of performance is to be extended.
Examples:
(0 The lessee of .certain salt pans. failed to repair them according to
the terms of his contract, on the ground of a strike of the \",'orkmen.
Held, a strike of workmen is not sufficient reason to excuse
perfomlance of a term of the contract. Ha"; La.,·man v. Secretary
of Stare fOl' India'
(ii) A contract was entered into between two London merchants for the
sale of certain Algerian goods. Owing to riots and civil disturbances
in that country, the goods could not be brought. Held. no excuse
for non-perfonnance of the contract. Jacob v. Credit LJOImals.·j
4. Failure of one of the objects : Whe.n there are several
purposes for which a contract is entered into, failure of one of
the objects does not terminate the contract.
Example:
X agreed to let out a boat to r for the purpose of viewing a naval
revie",,· to be held on the occasion of the Coronation of Edward
VII and 10 cruise round the fleet. Owing to the king's illness the
naval review was abandoned but the fleet was assembled and the
boat could have been used to cruise round th~ fleet. Held the contract
was not terminated. Herne Boy Steamboat Co. v. Hullon."

The Ellects of Supervening Impossibility

I. Section 56 (para 2) provides that when the perfomlance
'. of a contract becomes subsequently impossible or illegal, the
contract becomes void.
2. Section 65 provides that when a contract becomes void.
any person who has received any advantage under it must restore
, (1956) A. C. 696 ' (1928) 30 Born. L. R 49
, 12 Q. B. D. 589 4 \ 1903) K. B. 740
124 LAW OF CONTRACT

it, or make compensation for it, to the person from whom he

received it. [See under Restitution, p. 140]
3. Section 56 (para 3) provides that, "where one person has
promised to do something which he knew, or with reasonable
diligence, might have known, and which the promisee did not
know to be impossible or unlawful, such promisor must make
compensation to such promisee for any loss which such promisee
sustains through the non.performance of the promise."
Example:
P contracts to marry B being already married to C. and being
forbidden by the law to which he is subject to practice polygamy.
,~ must make compensation to B for any loss caused to her by the
non·performance of his promise.

THE DOCTRINE OF FRUSTRATION

Definition
When the common object of a contract can no longer be
carried out, the court may declare the contract to be at an end.
This is known as the Doctrine of Frustration. Anson says, "Most
legal systems make provision for the discharge of a contract
where. subsequent to its formation, a change of circumstances
renders the contract legally or physically impossible of
performance."
The law relating to this subject, as in England and India
respectively, is stated below.
English Law
Before 1863 a contract. excepting an illegal agreement, was
enforced literally. All the parties of a contract had an absolute
obligation to perform it. The Doctrine of Frustration emerged
after 1863 through court decisions.
In a very old case, decided in 1647, the facts. were as
follows; A person J got a lease of land from P on a rental basis.
Then a German Prince seized the land and it was not possible
for J to use it. The landlord P sued for rent. The Court held
. that J must carry out all the terms on the contract including the
payment of rent. Paradine v. Jane.' This case illustrated the
rigours cif English Law.
I (1647) Aleyn 26
 TERI,IINATION OR DISCHARGE Of CONTRACTS . 125

Later on many exceptions to die Doctrine of Frustrations

were made and on various grounds the court gave relief to
aggrieved persons. In the following cases English courts accepted
that the contract came into an end : (I) Destructiol) of an object
(2) Change of Law (3) Failure of Pre-conditions (4) Death or
Personal Incapacity and (5) Outbreak of War. The cases on those
subjects have been cited above. (Pages 119·121)
Basis of the Doctrine : In English courts various theories
have been put forward at different times as to the basis of
discharge of contracts by Frustrations. I The theories are
summarised briefly.
(I) The implied terms : [n some cases it has been held that
every contract contained an implied term that a particular thing
or state of things should continue to exist. The continued
existence of the same state of things is a condition precedent
to performance of the contract. Example: Krell v; Henry. (See
p. 121)
(2) Disappearance of the foundation of the cOlltract : If the
goods which are the subject of the contract are destroyed without
any fault of the parties, the contract should terminate. Taylor v.
Caldwell. (See p. 119)
(3) The just and reasonable solu/ion : In British Movie/onews
Ltd. v. London and District Cinemas Ltd. 2 the House of Lords
based the doctrine upon the principles of construction or inter-
pretation of documents. Where the court gathers as a matter of
construction that the contract itself contained impliedly or
expressly a term, according to which it would stand discharged
on the happening of certain circumstances, the dissolution of the
contract would take place under the terms of the contract itself.
(4) Change in the obligation: "Frustration occurs whenever
the law recognizes that without default of either party a
contractual obligation has become incapable of being performed
because the circumstances in which performance is called for
would render it a thing radically different from that which was
undertaken by the contract." Per Lord Radcliffe. Davis Contrac-
lors. Ltd. v. Foreha", U. D. C. (See p. 123)
Li",its: [n English law there are certain limits of the
Doctrine of Frustration.
(0) If the frustration is self-induced by the party (e.g.
negligent acts) the contract is not frustrated.
I Anson. Law of Contract. p. 464 1\ 1952) A. c. 166
126 LAW OF CONTRACT

(b) The frustrating event should defeat the common intention

of the panies. There cannot be frustration on one side only.
Example:
. Blackburn Bobbin Co. v. Allen and Sons. (See. p. 122)
Effects: In English law frustration produces the following
effects: (a) The contract terminates automatically and immedi-
ately. It is void and not voidable only. (b) All future obligations
are discharged. (c) Some reliefs have been given in England by
the Law Refonn (Frustrated Contracts) Act 1943.
Example:
Some English merchants contracted to sell machinery to Polish
buyers. Before delivery was due, Germany occupied Poland. It was
held that the contract was discharged by frustration. Fibrosa etc.
v. Fairbairn etc. I

Indian Law
In Satyabrata Ghosh v. Alugniram Bangur and Co. and
Anorher,2 the Supreme Court oflndia discussed the English cases
relating to frustration and came to the following conclusions :
The doctrine of frustration of contract comes into play when
a contract becomes impossible of perfonnance, after it is made.
on account of circumstances beyond the control of the parties.
It comes within the purview of Sec. 56 of the Indian Contract
Act.· The word 'impossible' in this section has not been used
in the sense of physical or literal impossibility. The perfonnance
of an act may not be literally impossible but it may be
impracticable and useless from the point of view of the object
and purpose whic..h the panies had in view; and if an untoward
event or chang':5oIf circumstances totally upsets the very foun-
'dation upo~ whiqh' the panics rested their bargain,' it can be said
tbat the promisor finds it impossible. to do. the act .whichhe
promised, to do .. (See section 56, pp. 119,120)
ExamPt.; : .
(i) 'l.n agreement waS entered Into for thessle of land subject to th •
.:aDdition that the seller would do some development work on the I
land. Before the work could be 'completed the land was requisitioned
by the Government for war purposes. Held. ·the contract was nbi
!Tuslraled.· Salyahrata Ghqse v. Mugniram, 8,angur & Co. and
AnOlh" (See ..above)
'" ..
'- "
' , .

1 (1943) A.C 32 , (1954) S. c. A. 187 (Supreme Court)

 TERMINATION OR DISCHARGE OF CONTRACTS 127

(ii) There was a contract for sale of goods relating to the Nizam's
leweller) Trust on taking delivery of goods upon payment. Mean-
while the courts restrained the sale by an irjunction. The contract
of sale must be deemed to be frustrated, .H/s Shant; I''ijay & Co.
cle. v. Princess Fa/ima For/zia alld o/hers.1

IV. TERMINATION BY OPER .T:ON OF LAW

A contract terminates by operation of law in case of death,
insolvency, and merger.
Death-In contracts involving personal skill or ability, death
terminates the contract. In other cases. the rights and liabilities
pass on to the legal representatives of the dead man.
Inso~vency-Upon insolvency, the rights and liabilities of the
insolvent are, with certain exceptions. transferred to an officer
of the court, known as the Official Assignee in Calcutta and other
presidency towns and as Official Receiver in other areas.
Merger-Sec p. 119.

V. LAPSE OF TIME
Contracts may be terminated by lapse of time. In civil suits
the obligations and liabilities in contracts are barred by limitation.
The provisions of law are stated in the Limitation Acts. .

VI. TERMINATION BY MATERIAL ALTERATION

If the document containing the terms of a contract is
materially altered by 8 party to the contract, without the consent
of the other partie" the contract is discharged and cannot be
enforced any more.
The term 'material alteration' means a change which affects
or alters, in a significant manner, the rights and liabilities of the
parties. 2
Example:
A change in the amount of money to be paid; the time of payments;
the place of payment; tlie names of the parties etc. --~_
These changesiilvolve tampering with the document wilerein
the tem)s of the contract have been written down. A document
which' has been tampered with in such a way is not admissible
I AIR (1980) Supreme Coun 17
1 Hal,bury's Laws of England ,Founh Editionl. para 1378
128 LAW OF CONTRACT

in evidence and the contract i"ccorded there naturally becomes

unenforceable.
If an alteration (by erasure, interlineation, or otherwise) is
made in a material part of a deed, after its execution, without
the consent of the party or parties liable under it, the deed is
rendered void from the time of the alteration. Loonkaran Sethia
etc. v. Mr. Ivan E. John & others elc. I
An alteration which does not affect the rights and liabilities
of the parties or whiCh are made to carry out the common
intention of the parties '18S no effect on the validity of the
contract.
Example:
Correcting a clerical error in figures, correcting the spelling of a
name elc. (See under, 'Law relating 10 Negoliable Instruments'.
Ch.3).

VII, TERMINATION BY BREACH OF CONTRACT

When a contract is broken by one party, the other party or
parties are freed from the obligation of performing the contract.
They can also take the remedial measures to which they are
entitled:
Breach of contract may arise in two ways: (1) by anticipatory
breach and (ii) by actual breach or pres~nt breach.
Anticipatory Breach of Contract
Anticipatory breach of contract occurs"when a party repu-
diates his liability under the contract before the time for
performance is due or when a party by his own act disables
himself from performing the contract.
Example, :
(i) C enters into a contract to supply B with cenain articles on the
I sl of June. Before 1.1 June he informs B that he will not be able
to supply the goods.
(ii) W agrees to sing at L's theatre on and from a certain date. Before
that date she enters into a long term contract to sing at a ditTerent
lheatre.
(iii) X agrees 10 marry Y Before the agreed date of marriage, he
marries Z

I AIR (1977) Supreme Court 336

 TERMINATION OR DISCHARGE OF CONTRACTS 129

Consequences of AnticiPIltory Breach

When anticipatory breach occurs. the aggrieved party can
take the following steps :
(i) He can treat the contract as discharged, so that he is no
longer bound by any obligations under the contract; and,
(ii) He can immediately adopt the legal remedies available to
him for breach of contract, viz., file a suit for damages or
specific performance or injunction.
Anticipatory breach of contract does not by itself discharge
the contract. The contract is discharged on Iy when the aggrievcd
party chooses to treat it as discharged, i.e., when he accepts tllC
repltdiation of the contract. If he does not accept the repudiation
the contract continues to exist and may be performed by the other
party, if possible. But if the repudiation is not accepted and
subsequently an event happens which discharges the conlract
legally (e.g., a supervening impossibility) the aggrieved party
loses his right to ~ue for damages.
Examples:
(i) D agrees to employ ff as a courier, the service to commence from
1st June. On 1st May he infomls H that his services will not be
required. On I Ith May H files a suit for damages. He is entitled
to do so even though the date_ of performance of the contract has
not arrived. Hochster v. De' la Tou,.. J
(ii) X agreed to load a cargo of wheat on R's ship at Odessa within
a certain number of days. When the ship arrived R refused to load
the cargo. Y did not accept the refusal and continued to demand
a cargo. Before the last date of loading had expired the Crimean
War broke out, rendering the performance of the contract illegal.
Held, the contract was discharged and Y cannot sue for damage-so
Avery v. Bowden. 2
(iii) The defendant promised to marry the plaintiff upon his father's
death; but during his father's life time he renounced the contract.
Held, the plaintiff was entilled to sue without waiting the father's
death. Frost v. Knight. J
Actual Breach of Contract
Actual breach of contract occurs when during the perfor-
mance of the contract or at the time when the performance of
the contract is due, one party either fails or refuses to perform
his obligations under the contract.
The refusal of perfonnance may be express (i.e., by word
r (1853) 2 E & B 678 '(1856) 5 E & B 714
'(18nlL.R.7 Ex. III
Commercial Law - 9
130 LAW Of CONTRACT

or by writing) or implied (i.e., by ~onduct of the party or by

non-action) or abstaining from doing something.
r~anrples :
(i) D agrees 10 deliver 10 B, 5 IOns of sugar on 151 June. He fails
10 do SO on 151 June. There i. breach of contracl by D.
(ii) P agrees 10 deliver 10 Q 5 Ions of sugar on lsI June. On 1st June
he tenders the sugar but Q (for no valid reason) refuses to accept
delivery. There is breach by Q.
(iii) C agreed to supply a railway company with 3,900 tons of railway
chairs. Aller 1787 Ions had been delivered t,he company told C that
no more will be required. There is breach of contract by the
company. Corl v. Anrbe'-gQte Rnih.·ay Company.'

Remedies of Breach of Contract

When a breach of contract occurs, the aggrieved party or
the injured party becomes entitled to the following reliefs :
I. Rescission of Ihe COlI/raCI : The aggrieved party is freed
from all his obligations under the contract. (See p. \18)
Examples:
(i) C promises to deliver 5 tons of sugar to B on a certain date and
B promises 10 pay the price on receipt of the goods. C does nol
deliver the goods on Ihe appointed day. B need nOl pay the price.
(ii) A contracts with B to repair B's house. B neglects or refuses to
point out to A Ihe place, in which his house require. repair. A is
excused for the non-performance of the conlracl if it is caused by
such neglecl or refusal. (Illustralion of Sec. 67)
2. Suit for Damages : The aggrieved party is entitled to
receive compensation for any loss or damage caused to him by
the breach of contract and can file a suit for getting a decree
for damages. .
3. S"il llpon Quantum Meruit: When a contract has been
partly performed the aggrieved party can, under certain circum-
stances, file a suit for the price of the services performed before
breach of contract.
4. Specific performance of the contract : In certain special
cases the court ·can direct a party to perform the contract
according to the agreed terms.
5. Injullctioll : Under certain circumstances the court can
issue an order upon a party whereby he is prohibited from doing
something which amounts to a breach to contract.
The provisions of law regarding the reliefs listed above are
discussed below.
I (1851! 17 Q. B. 1~7
 TERMINATION OR DiSCHARGE OF CONTRACTS 131

DAMAGES
When a contract is broken the injured party can claim
damages from the other party. Damages allowed by the courts
may be of different types as follows :
Compensatory Damages
Compensatory damages are damages calculated in such a way
as to compensate or make up the loss suffered by a .party. They
can also be called Ordinary Damllges.
Spedal Damages - See page 133.
Nominal Damages, Contemptuous Damages
Where the court finds that the party has not actually suffered
much damage or when the court is of opinion that the breach
complained of was too insignificant or petty; the courl a 110\\ s
a paltry sum for damages to the plaintiff. These are called
nominal damages or contemptuous damages.
Exemplary, Punitive or Vindictive Damages
The court may allow damages exceeding the actual loss
suffered by 'Way of punishment. These are called exemplal'),
punitive or vindictive damages. Such damages are unusual. In
Engli'h courts exemplary damages are usually given in cases of
breach of contract of marriage and against bankers refusing to
pay traders cheques where there are sufficient funds of the trader
in the bank. Addis v. Gramophone and Co. I
£:<amp/e :
A scurrilous lied was committed by an author and its publisher
against a distinguished naval officer. The officer sued for damages
in an English Court. He was awarded £15,OOO-compensatory and
12S.000/-exemplary d... nages. against borlt ddendants. The Court of
Appeal (presided by Lord Denning) did not interfere with the
decision of the trial coun. Broome v. Cassell a"d Co. 2

RULES REGARDING THE AMOUNT OF DAMAGES

The principles
The principles, to be followed by the courts in determining
the amount of damages, are laid down in Sections 73 to 75 of
the Contract Act.
'(190<) A. C. 488 '(1971) 2 All E. R. 187
132 LAW OF CONTRACT

Section 73 (para I) provides that in cases of breach of

contract the injured party is entitled to receive compensation for
any loss or damage which arose naturally from the breach or
which the parties knew to be likely to arise from the breach.
"When a contract has been broken, the party who suffers
by such breach is entitled to receive, from the party who has
broken the contract, compensation for any loss or damage caused
to him thereby, which naturally arose in the usual course of things
from such breach, or which the parties knew, when they made
the contract, to be likely to result from the breach of it."-Sec.
73, para 1.
Rules
The' rules on the subject of amount of damages can be
summarised as follows :
1. Actual loss
Ordinarily, the aggrieved party is entitled to recovery by way
of compensation, only the actual loss suffered by him.
2. Natura) ~and usual loss
. In calculating actual loss, the court will take into account
only such'. Joss as may be fairly and reasonably considered as
arising ,ia!urally and in the usual course of things from the
breach. Re.mote damages i.e., damages for remote consequences
are usuall/ not allowed.
Examples :'. : _ "
(i) x,' a· carrier. was entrusted with the delivery of a machine part
(break"ge of a crankshafi) to r. a manufacturer. The delivery was
delayed ..J' claimed from X compensation for the wages of workers
and depreciation charges which were incurred during the period the
~ry~i~b~~~~~~b~~~b~~
might have been made if the factory was working. The first two
items were allowed because they were natural consequences of the
breach. The last item, loss of profits was disallowed because it was
a remote consequence. Hadley v. Baxendale. l
(ii) A contracts to sell and deliver 50 maunds of saltpetre to B, at a
.certain price to be paid on delivery. A breaks his promise. B is
.. entitled to receive from A by way of compensation the sum jf any
by whlch the contract price falls short of the price for which B
.' _.might- have obtained 50 maunds of saltpetre of like quality at the

~ "'(1854)' 9" Ex. 341

 TERMINATION OR DISCHARGE OF CONTRACTS 133

time when the saltpetre ought to have been delivered. [Illustration

(a> to Sec. 73)
(iii) A contracts to pay a sum of money to B in a day specified. A does
not pay the money on that day. B in consequence of not receiving
the money on that day is unable to pay his debts and is totally
ruined. A is not liable to make good to B anything except the
principal sum he contracted to pay, together with interest upto the
day of payment. [Illustration <n> to Sec. 73)
(iv) A hires B's ship to go to Bombay, and there take on board, on the
first of January a cargo which A is to provide, and to bring it to
Calcutta, the freight to be paid when earned. B's ship does not go
to Bombay but A has opponunities of procuring suitable conveyance
for the cargo upon terms as advantageous as those on which he
had chanered the ship. A avails himself of those opportunities. but
is put to trouble and expense in doing so. A is entitled to receive
compensation from B in respect to the trouble and expense.
[1IIustration (b) to Sec. 73)

3. Special damages
The court may allow remote damages i.e., damages not
arising naturally from the breach, if such damages may rcason-
ably be supposed to have been in the contemplation of both the
parties at the time they made the contract.
Damages coming within this category are sometimes called,
"Special Damages".
Exampiel :
(i) A delivers to B, a common carrier, a machine to be conveyed without
delay to A's mill informing B Ihal his milt is Slopped for wanl of
the machine. B unreasonably delays the delivery of the machine and
A. in consequence, losses a profitable contract with the government.
A is entitled to receive from Bt by way of compensation, the average
amount of profits which would have been made by the working
of the mill during the time that delivery of it was delayed. but not
the loss sustained through the loss of the government contract.
[II1ust.tion (i) to Sec. 73)
(ii) P bought from L some copra cake. P sold the cake to B. who sold
it to various dealers who in turn sold it to farmers,· who used it
for feeding cattle. The copra cake was poisonous and the cattle fed
on it died. The various buyers filed suits against their sellers and
obtained damages, The various sellers filed suits against P and
obtained damages. P claimed from L the damages and costs he had
to pay. Held, as it was within the contemplation of the panies that
the copra cake was to be used for feeding cattle. L was liable to
pay damages. Pinnock Bros. \'. Lewis &: Peal Ltd. I

I (1923) I K. B 690
\34 LAW Of CONTRACT

4. Restitutioli and Compensation

The general rule is that, subject to the rules stated above,
the injured party is to be placed in, the same financial position
as he would have been in, if the other party had duly carried
out the contract. "If a contract is broken, law will endeavor, so
far as money can do it, to pla~e the injured party in the same
position as if the contract has been performed."
It follows that damages are given for restitution and
compensation. Damages are not given with the object of
punishment, except in certain special cases, e.g., breach of
contract of marriage.
Generally, in Sale Contracts, damages are given on the basis
of the differences between the contract price and the market price.
See example (iii), page 106.
5. Costs
The injured party is entitled to get the costs of getting the
decree for damages.
6. Minimisation of los.
It is the duty of the injured party to minimise the loss as
much as possible. The law imposes on the plaintiff the duty of
taking all reasonable steps to mitigate the loss consequent on
the breach, and debars him from claiming any part of the damages
which is due to his neglect to take such steps. Jamal v. Moola
Dawood Sons & Ca.'
Example:
The plaintiff took a shop on lease and paid an advance. The
defendant could not give him possession and the plaintiff chose to
do no business for 8 months though there were other shops available
in the vicinity. Held, he was entitled only to refund of his advance
as his duty was to minimise damages and he could have done so
by taking another shop. Neki v. Pirbhu. 2

7. Effect of a peDalty dause

If in a contract a sum of money is named as the amount
to be paid in case of breach, or if the contract contains any
stipulation by way of penalty for failure to perform the

1(1916) 43 L A. 6 2 100 I. C. 662

 TERMINATION OR DISCHARGE OF CONTRACTS 135

obligations, the court will allow reasonable compensation. not

exceeding the sum named.-Sec. 74.
Example:
A contrll:tS with B to pay B Rs. 1000 if he fails 10 pay B Rs. 500
on a certain day. A fails to pay B Rs. 500 on that day. B 's enlitled
ici recover from A such com-pensation. nol exceeding Rs. 1000. as
Ihe court considers reasonable.
8. Difficulty or assessment
Difficulty of calculating damages is no ground for refusing
damages. The court must make an assessment of loss and pass
a decree for it.
Example:
H organised a beauty competition in which 50 ladies were to be
selecled by voles of the readers of certain newspapers. H would
select 12 oul of the 50 and secure theatrical jobs for Ihem. C was
one of the 50 and by Frs breach of contracl was prevented from
being presenl when Ihe final seleclion was made. Held. C was
entilled 10 damages even though it was difficult 16 calculate them.
Chaplin v. Hicks. I

Liquidated Damages and Penalty

A contract sometimes contains a clause in which a sum of
money is named as the amoul\t payable in case of breach of
contract. In such cases the question arises whether the courts of
law will accept this figure as .the measure of damage.
English Law : According to English law, the amount of
money payable is interpreted either as liquidated damages or as
a penalty. It is considered to be liquidated damages when the
amount is fixed by the parties on the basis of a reasonable
estimate of the probable actual loss which a party will su'ffer
in case of breach" On the other hand, the amount fixed is
considered to be a penally if it is not based upon a reasonable
calculation of actual loss but is fixed by way of punishment and
as a threat. Suppose that a contractor agrees to complete the
building of a house by I st June and promises to pay Rs. 50 per
day as damages for each day of default beyond the prescribed
day of completion. If the figure Rs. 50 was arrived at after
calculating the actual loss which the house-owner will suffer for
the breaclt-- of contract, it is liquidated damages. If the actual

1(19\1) 2
"K>1l.~ 786
",
136 LAW OF CONTRACT

damage is considerably less and the amount was fixed in order

to threaten the contractor it is a penalty.
In case of liquidated damages, English courts allow only the
amount stipulated, never more or less even though it is shown
that the actual loss is different from the amount mentioned.
Penalty clauses, however, are treated as invalid. The court allows
only reasonable compensation by way of damages.
Indian Loll' : In India, the distinction between liquidated
damages and penalty is not recognised. Section 74 of the Contract
Act lays down that if the parties have fixed what the damages
will be, the COllrts will never allow more. But the court may
allow less. A decree is to be passed only for reasonable
compensation, not'exceeding the sum named by the parties.
Exception : There is one exceptional case provided for by
Section 74. When any person enters into any bail bond or similar
instrument or gives any bond (to the Central Government or any
State Government) for the performance of any public duty, h~
shall be liable, upon breach of the condition of any such
instrument, to pay the whole sum mentioned therein. In this case
it is not necessary to calculate the actual loss.
Examples:
(i) A contracts with B to pay B Rs. 1000 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.l,OOO, as
the Court considers reasonable. [JIIustration 'a' in Section 74]
(ii) A borrows Rs. 100 from B and gives him a bond for Rs. 200 payable
by five yearly instalments of Rs. 40, with a stipulation that, in default
of payment of any instalment. the whole shall become due. This
is a stipulation by way of penalty. [JIIustration 'g' in Section 74]
(iii) The appellants, sold tyres and tubes, to the respondents who
contracted not to resell them, at a price below the manufacturers'
list prices. The respondents further agreed to pay £5 by way of
liquidated damages for every breach of this agreement. They sold
a lyre at less than the list price. The House of Lords held that
the sum fixed was a pre-estimate of the damage and not a penalty.
Dunlop Pneumalic Tyre Co. LId v. Ne .. Garage and MOlor Co. LId I
(iv) The defendant agreed not to sell anyone of the plaintiffs' cars below
the listed price. For every breach he was to pay £250, as 'agreed
damages'. The Court of Appeal of England held that this was a
penalty. Ford MOlor Co. v. Armstrong.'

'(1915) A. C 79 , (1915) 31 T. L. R. 267

 TERMINATION OR DISCHARGE OF CONTRACTS 137

Can increased interest be called as penalty?

A stipulation that increased interest will be paid from the
date of default of performance may be considered a penalty clause
and disallowed by the courts. If simple interest is payable and
there is a condition in the agreement that the debtor will have
to pay compound interest on failure to pay at the specified date,
the condition will be considered penalty.
When can interest be claimed?
Interest can 'be claimed and awarded for any debt or damages.
The rules regard ing interest were formerly laid down in the
Interest Act of 1839. This Act was repealed in 1978 and was
replaced by the Interest Act of 1978 (Act No. 14 of 1978). The
important rules of the Act of 1978. regarding interest for debt
and damages, are stated below : (1) there must be a debt or a
sum certain; (2) it must be payable at a certain time or otherwise;
(3) these debts or sums must be payable by virtue of some written
contract at a certain time; (4) there must have been a demand
in writing stating that interest will be demanded from the date
of demand; and (5) the rate of interest must not exceed the
current rate of interest. The phrase "the current rate of interest"
means the highest of the maximum rates at which interest may
be paid on different classes of deposits given or issued by the
rules of the Reserve Bank of India.
The rules, stated above, do not apply to any debt or damages
on which (a) interest is payable as of right; by virtue of any
agreement; and (b) when such payment of interest is barred by
virtue of an express agreement. The rules do not apply to
(a) compensation for dishonour under the Negotiable Instruments
Act; and (b) rules under the Code of Civil Procedure. The Court
can award interest upon interest.

QUANTUM MERUIT
Definition
The phrase "Quantum Meruit" means "as much is merited".
A person can, under certain circumstances, claim payment for
work done or goods supplied without any contract and in cases
where the original contract has terminated by breach of contract
by one party or has become void for some reason. This is known
as the Doctrine of Quantum Meruit.
138 LAW OF CONTRACT

Rules
The rules regarding the Doctrine of Quantum Meruit are
stated below.
I. Where there is a breach of contract, the injured party is
entitled to claim reasonable compensation for what he has done
under the contract.
E,amples :
(i) P agreed to write a book to be published by instalments in a
magazine owned by C. After a few instalm~nts were published, the
magazine was abandoned. P is entit'ed to get damages for breach
of contract and payment quantum meruit for the part already
published. Planche v. Colburn.' _
lil) The plaintiff agreed to erect certain building but failed to.o:;..$iete
the contract. The defendant completed the building himself, using
the materials left on the site by the plaintiff. It was held that the
plaintiff could not recover for the work done. but he was entitled
to recover the value of the materials used. Sumpter v. Hedges. 2
2. When a contract is discovered to be unenforceable for
some technical reason, ailY person who had done something under
the contract, is entitled to reasonable compensation. The case is
proved for by Section 65 of the Act. (See p. 140)
Example:
C was employed as managing director of a company by the board
of directors of the company under a written contract. The contract
was found to be void because the directors who constituted the board
were unqualified. C actually worked as managing director for some
time. It was held that he was entitled to remuneration as quantum
meruit. Craven~Ellis v. Canons Lid. 3
3. In certain cases the law presumes an ·implied agreement
to pay for services rendered, for example, when work is done
or goods are supplied by a person without any intention to do
so gratuitously and the benefit of the same enjoyed by the other
party. This case is provided for by Section 70 of the Contract
Act. (See p. 142)
Etample :
A. a trader leaves certain goods with 8 by mistake, not intending
to do so gratuitously. B uses the goods. He must pay for them.
4. Where a contract is not divisible into parts and a lump
sum of money is promised to be paid for the entire work, part
'(1831) 8 Bing 14 2 (1898) I Q. B. 673
1 (1936) 2 K. B. 403
 TERMINATION OR DISCHARGE OF CONTRACTS 139

performance does not entitle a party to claim payment quantum

meruit.
Example:
A sailor was appointed on a ship for a voyage from hmaica to
Liverpool on alum p sum payment of 30 guineas. He died when
only two-thirds of the voyage was completed. Held, his legal
representatives could not recover anything. Curler v. Powell. I
5. Nothing can be recovered for quantum meruit when there
is no evidence of an excess or implied promise to pay for work
already done.
6. A person guilty of breach of contract cannot claim
payment on quantum meruit.

iJ SPECIFIC PERFORMANCE
Under certain circumstances, a person aggrieved by breach
of contract can file a suit for specific performance, i.e., for an
order by the court upon the party guilty of breach of contract
directing him to perform what he promised to do. Specific
performance is a discretionary remedy which is allowed only in
a limited number of cases. Rules regarding the granting of this
relief are contained in 'the Specific Relief Act of 1877.
Generally speaking specific performance is directed only in
cases where monetary compensation is not an adequate remedy.
For example, in contract for the sale of a particular house or
some rare article, monetary compensation is not enough because
the injured party will not be able to get an exact substitute in
the market. In such cases specific performance may be directed.
Specific p~rformance is not allowed in cases where monetary
compensation is" an adequate relief. It is also not allowed in
contracts of a personal nature, e.g., a contract to marry or a
contract to paint a picture. Where it is not possible for the court
to supervise the performance of the contract, e.g., a building
contract, specific performance is not granted.

INJUNCTION
Injunction means an order of the court. In cases of breach
of contract, the injured party can, under certain circumstances,

I 101 E. R. 573
140 LAW OF CONTRACT

get a negative injunction, i.e., an order prohibiting a party from

doing something. Injunctions are usually granted to enforce
negative stipulations in cases where damages are not adequate
relief. II is particularly appropriate in cases of anticipatory breach
of contract.
Examp/es :
(i) G agreed to buy the whole of the electric energy required for his
house from a certain company_ This was interpreted as a promise
not to buy electricity from any other company. He was therefore
restrained by an injunction from buying electricity from any other
company. Afelropolilan Electric Supply Company v. GindeJ: I
(ii) N, a film actress agreed to act exclusively for Warner Bros. for one
year. During the year she contracted to act for X. Held. she could
be restrained by an injunction from acting for X Warner Bros v.
/\/elson. 2 It is to be noted that in this case an order directing .v to
act for Warner Bros. (specific performance of the contract) was not
passed because the contract was of a personal nature and performance
could not have been supervised by the courts,

RESTITUTION OF BENEFIT
Section 64 of the Contract Act provides that when a person,
at whose option a contract is voidable, rescinds such contract,
he must restore to the other party any benefit which he may have
received from him. For example, when a contract for the sale
of a house is avoided on the ground of undue influence, any
money received 011 account of the price must be refunded.
Section 65 provides that when an agreement is discovered
to be void or when a contract becomes void, any person who
has received any advantage under such agreement or contract is
bound to restore it or to make compen~ation for it, to the person
from whom he received it.
This section applies to contracts 'discovered to be void' and
contracts which 'becomes void'. It does not apply to contracts
which are known to be void. Thus if A pays Rs. 100 to B to
beat C. the money is not recoverable.
The expression 'become void' is interpreted liberally. In
Muralidhar Challerjee v. The III/ernational Film Co. I it was held
that when one party rescinds a contract for the default of another
he is entitled to damages (if he has suffered any) but he must

I (1901) 2 Ch. 799 '(1937) 1 K.B. 209

 TERMINATION OR DISCHARGE OF CONTRACTS 141

restore to the other party any advantage he has received under

the contract.
Examples:
(a) .4 pays B Rs. 1000 in consideration of B·s promising to marry C.
.4's daughter. C is dead at the time of the promise. The agreement
is void but B musl repay A Rs. 1000.
(b) A. a singer contracts with B the 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 a hundred rupees for each night's
performance. On the sixth night A wilfully absent herself from the
theatre and B. in consequence. rescinds the contract. B must pay
A for the five nights on which she had sung. (B can of course claim
damages against A for breach of contract.)

EXERCISES
1. State the circumstances under which a contract is said to be
discharged. (Page 115)
2. Discuss the circumstances under which a contract can be terminated
by consent of the parties. (Pages 115-119)
3. What do you understand by 'Novation'? What is the difference
between Alteration and Novation? (Page 116)
4. Discuss the effect of supervening impossibility in the performance
of a contract. (Pages IIQ-124)
5. Explain tbe Law of Frustration of Contract. Give illustrations.
(Pages 124-127)
6. Define : Special Damages; Exemplary Damages; Nominal
Damages. (Pages 131-133)
7. Describe the rules for determination of compensation payable in
case of breach of contract. (Pages 128-134)
8. Explain 'Anticipatory breach of contract'. What are the conse-
quences of the breach? (Page 128)
9. What are the consequences of breach of a contract?
(Pages 129 -30)
10. State the remedies allowed to the aggrieved person in case of breach
of contract.' (Pages 128-130)
II. E'plain the tenns . Penalty' and 'Liquidated Damages' clearly
indicating the difference between the two. (Pages 134-136)
12. What is the effect of a contract on : (i) Strike, Lock-out and Riots,
iiI) Material alteration, and (iii) Lapse of time ~
(Para 3, page 123, 127)

I AIR (1943) Privy Council 34

•
142 LAW OF CONTRACT

13. Write notes on : (a) Alteration, (b) Remission. (c) Accord and
Satisfaction, (d) Rescission. (e) Waiver. (j) Merger. (g) Quantum
Meruit.
[(a) 116, (b) 116, (c) 117, (d) 118, (e) 118·119, (j) 119, (g) 137·139)
14. Problem :
(a) A pays Rs. 10.000 to B in consideration of B's promise to marry
C. A's daughter. C dies and the marriage does not take place.
Can A claim a refund of the money from B? Discuss fully.
(Example (a) page 141)
(b) A agreed to let his hall to B, for SOme public cntenainment
on 1st December, 1965. On 28th November, 1965 the hall was
destroyed by accidental fire. Discuss the respective right of A
and B. (Example (a) page 120)
(c) A debtor agreed to pay compound interest on failure to pay
.simple interest at the due date. Is it liquidated damage or
pcnalt) ? (Page 137)
15. Objective questions. Give shon answers:
(I) Write two ways of termination of Contract. (Pages 115)
(ii) Write two remedies of breach of contract. (Page 130)
(iii) State the different damages which can be given for breach of
contract. (Pages 131·132)
@ QUASI-CONTRACTS

DEFINITION AND EXPLANATION

When one person obtains a benefit at .he expense of another
and the circumstances are such that he o .• ght, equitably, to pay
for it, the law will compel payment, e\en :hough there is no
contract between the parties by which payment is promised. The
parties will be put in the same position as they would have
occupied if there was a contract between them. Such cases are
called quasi-contracts because the relationship between the
parties in sllch cases resembles those created by contracts.
Sections 68-72 of the Contract Act describe the cases which are
to be deemed quasi-contracts under the Indian law.
I. Necessaries for incapable persons
"If a person, incapable of entering into a contract, or any
one whom he is legally bound te Sllpport, is supplied by another
person with necessaries suited to his condition in life, the person
who has furnished sllch supplies is entitled to be reimbursed from
the property of sllch incapable person."-Sec. 68. (See Page 51)
hamples : ~ 't·4;.e..L,
P' .4;- !..
(i) A supplies B, 8 lunalic mlh necessaries suilable 10 his condition
in life. A is enlitled 10 be reimbursed from B's property.
(ii) A supplies Ihe wife and children of B. a lunalic with necessaries
suitable to their condition in life. A is entitled to be reimbursed
from B's property.
This section covers the case of necessaries supplied to a
minor and other incap •• ble persons (e.g., a lunatic) and to persons
whom the incapable person is bound by law to maintain (e.g.,
his wife and minor children). The things supplied must come
within the category of necessaries. The priee to be paid is
reasonable price-not the price which the incapable person might
have "agreed to" (legally speaking an incapable person cannot
agree to an)1hing). Only the property of the incapable pers!,n
is liable. He is not personally liable.
2. Reimbursement of interested persons
"A person who is interested in the payment of money which
143
144 I.AW OF CONTRACT

another is bound by law to pay, and who therefore pays it, is

entitled to be reimbursed by the other."-Sec. 69.
Requisites : The provisions of section 69 are as follows
I. The payment is to be given to a person interested.
2. The payment is for the protection of his own interest.
3. The person is entitled to repayment.
4. The patty must be bound to pay by law.
Examples:
(i) 8 holds land in Ber'·lal on a lease granted by A. the zamindar. The
revenue payabl, by A to the Government being in arrear, his land
is advertised for sale by the Government. Under the revenue law.
the consequence of such sale will be annulment of 8's lease. B to
prevent the sale and the consequent annulment of his own lease,
pays to the Government the sum due from A. A is bound to make
good to B the amount so paid. (Illustration to Sec 69).
(ii) X's goods were wrongfully attached in order to realise arrears of
Government revenue due by Y X pays the amount to save the goods
from sale. ,r is entitled to recover the money from Y. Tulsa Kltm~'ar
v. .Iageshal' Prasad. I
(iii) A, Hindu mother incurred expenses for her daughter's marriage. She
is entitled to re.cover the expenses from the other members of the
Hindu Joint family. raikumam v. Kallapiram. 2

3. Benefit of non-gratuitous act

"Where a person lawfully does anything for another person,
or delivers anything to him, not intending to do so gratuitously,
and such other person enjoys the benefit thereof, the latter is
bound to make compensation to the former in respect of, or to
restore. the thing so done or delivered."-Sec. 70.
The three ingredients to support the cause of action under
Section 70 are these: First, the goods are to be delivered lawfully
or anything has to be done for another person lawfully. Second,
the thing done or the goods delivered is so done or delivered
"not intending to do so gratuitously." Third, the person to whom
the goods are delivered "enjoys the benefit thereof." Union of
India v.· Sira Ram JaislYalJ
Examples:
«(I) .1. a tradesman. Icaves goods at B's house by mistake. B treats the
goods as his own. He is bound to pay for them.

I (1906) 28 All 563 '(1900) 23 Mad .. 512

., AIR (1977) Supreme Court 329
 Ql'ASI-CONTRACTS 145

(b) A saves B's property from fire, A is not entitled to compensation

from B if the circumstances show that he intended to act gratuitously.
(el A contractor, on the request of an officer of the State of West Bengal,
consitucted a Kaleha road, office, kitchen etc, for the clerks. The
State accepted the works but tried to evade liability because no
contract had been concluded according to the formalities of the
Government of India Act. Since the State had enjoyed the benefit
of the works, the Supreme Court decreed the contractor's claim.
SIal. oj West Bengal v. B. K Mondal & Sons. 1
(d) A person supplied spare motor parts and the Pune Corporation
accepted the goods. But the corporation said that the contract of
sale was not according to the Bombay Municipal Corporation Act.
The claim was decreed by Supreme Court. Plilo DhllnjishaU' v.
MuniCipal Corporation o/the city of Poona. 2

4. Finder of goods
"A person who finds goods belonging to another and takes
them into his custody, is subject to the same responsibility as
a bailee."-Sec. 71 (See pp. 168-169)

5. Delivery by mistake or under coercion

"A person to whom money has been paid, or ~nything
delivered by mistake or under coercion, must repay or return
it."-Sec. 7?,
"The section in terms does not make any distinction between
a mistake of law or mistake of fact. The term 'mistake' has been
used without any qualification or limitation whatever." Sales-tax
Officer. Banaras v. Kanhaiya Lal Mukund Lal Sara!)
Examp/es :
(a} A and B jointly owe 100 rupees to C A alone pays the amount
to C. and B, not knowing this fact, pays 100 rupees over again
to C. C is bound to
repay the amount to B.
(h) A railway company refuses to deliver up certain goods to the
consignee. except upon the payment of an illegal charge for carriage.
The consignee pays the sum charged in order to obtain the goods.
He is entitled to recover so much of the charge as was illegally
excessive.
(e) A certain amount of sales-tax was paid by a firm under the LJ. P.
Sales Act u~er a mistake of law, The firm was allowed [0 get
back the money, See case of Kan'!i.l-'a Lal Sara! above,

1 AIR (I %2) Supreme Court 779 I AIR (1970) Supr;me Court 1201
) AIR (1959) Supreme 'Court 135

Commerci~1 Law - 10
146 'LAW OF CONTRACT

Com pensation in ease of Quasi Contracts

Under the Contract Act Section 73, para 3, provides the
compensation for loss and damages under the Quasi Contracts.
The relevant provision under the Act is quoted below :
"Compensation for failure to discharge obligation resembling
those created by contract: When an obligation resembling those
created by contract has been incurred and has not been dis-
charged. any person injured by the failure to discharge it is
entitled to receive the same compensation from the party in
default, as if such person had contract to discharge it and had
broken his contract.
Explanation: In estimating the loss or damage arising from
a breach of contract, the m~al1s which existed of remedying the
inconvenience caused by the non-performance of the contract
must be taken into account."

EXERCISES
1. What is a quasi-contract? Give some examples of quasi-contract.
(Page 143)
2. State the law regarding the following: (a) Necessaries; (b) Finder
of goods. (Pages (a) 143, (b) 146. 168)
3. A supplies food to C who is a lunatic. C has assets worth Rupees
One lac. On non-payment, can A proceed against the assets of C ?
Would your answer be the same if C instead of being a lunatic
is an infant? (Examples (il) page 143)
4. Objective questions. Give short answers.
(i) Write two examples of quasi-contracts. (Page 143)
(ii) X an infant in a school bought eleven fancy waistcoats from
r He was at the time adequately provided with Clothing. Can
Y get the price for the waistcoats.
(See Nash v. Inman. Page 51)
. @ INDEMNITY AND GUARANTEE

CONTRACTS OF INDEMNITY
Definiticm
Section 124 of the Contract Act defines a contract of
indemnity as a contract by which one party promises to save
the other party from loss caused to him by the conduct of the
promisor himself, or by the conduct of any other person. P.
contracts to indemnify Q against the consequences of any
proceeding which R may take against Q in respect of a certain
sum of Rs. 200. This is a Contract of Indemnity. P is called
the Indemnifier and Q the Indemnity-holder.
Characteristics
Characteristics (or the requisites) of a Contract of indemnit}
are as follows :
I. A contract of guarantee must satisfy all the essential
elements of a contract. For example. the object must be lawful.
there must be free consent etc.
2. The Contract may be express or implied. An express
contract is by word or by writing. An implied contract of
indemnity comes from the circumstances of the case or the
relationship between the parties.
3. Section 69 implies a promise to indemnify (See p. 144)
Definition Dot exhaustive
Section 124 of the Indian Contract Act does not give an
exhaustive definition of contracis of indemnity. This section
includes (i) only eipress promises to indemnify and (ii) only
those cases where the loss arises froll1 the conduct of the promisor
or of any other person. \1 does not include (i) implied promises
to indemnify and (ii) cases where loss arises from accidents and
events not depending on the conduct of any person.
It has been held in a number of cases in India that a duty
to indemnify may arise by operation of law.even in the 'absence
of express agreements. A promise to indemnify may be either
0,'

.. 147
148 LAW OF CONTRACT

express or implied from the circumstances of the case. The

illustration given above is an example of an express promise to
indemnify. The following is an example of an implied promise
to indemnify.
A broker forged the signature of the holder of a Government
promissory note and endorsed it to the Bank of India. The bank
got the note renewed from the Government. The holder sued the
Government and recovered damages. The Government sued the
bank for indemnity. The Privy Council decreed the suit, quoting
with approval the following observ~tions of Lord Halsbury : "It
is a general principle of law that when an action is done by one
person at the request of another which act is not in itself
manifestly tortious to the knowledge of the person doing it, and
such act turns out to be injurious to the rights of a third party,
the person doing it is entitled to indemnity from him who
requested that it should be done." Secretary of State etc. v. Bank
of India.'
Under English law, contracts of indemnity cover a much
wider field than that included in section 124 of the Indian
Contract Act. In England contracts of illllcmnity include prom-
ises, express and implied, to indemnify a person from loss caused
by events or accidents which may not depend upon the conduct
of any person. In a Bombay case it was held that, "Sections 124
and 125 of the Contract Act are not exhaustive of the law of
indemnity and the courts here would apply the same equitable
principles that the courts in England do." Gajanan v. Moreshar. 2
Rigbts of tbe Indemnity-bolder
Section 125 of the Contract Act lays down that the indem-
nity-holder is entitled to get from the indemnifier :
I. all damages wbich 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 such suits
(provided he acted prudently or with the authority of the
indemnifier); and
3. all sums which he may have paid upon compromise of
such suit (provided the compromise was prudent or was authorised
by the indemnifier).
, (1938) 6S I. A. 286 (Privy Council) 2 (1942) Born 402, 670
 INDEMNITY AND GUARANTEE 149

Comments: It has been held that the rights of the Indemnity-

holder, under Section 125, are not exhaustive. The indemnity-
holder may be entitled to other equitable reliefs also.
Bombay and Nagpur High Courts have held the indemnifier
will be liable only after the actual loss was incUired. But
according to the High Courts of Calcutta, Madras and A'lahabad,
the indemnity-holder can compel payment from the indemnifier
even before he (the indemnity-holder) has met his liability.
Osman Jamal & Sons v. Gopal. 1

CONTRACTS OF GUARANTEE
Definition
A contract of guarantee is a contract to perform the promise
or discharge the liability, of a third person in case of his
default.-Sec. 126. P lends Rs. 5,000 to Q and R promises to
P that if Q does not pay the money R will do so. This is contract
of guarantee. Q is called the Principal Debtor. P the Creditor,
and R the Guarantor or the Surety.
Classification
Contracts of guarantee may be of three types: (I) for
payment to the Creditor to the Principal Debtor by the Guarantor;
(2) payment of price for goods sold, and (J) 'fidelity guarantee'
i.e. to discharge the liability of a person for good conduct of
a service-holder.
A contract of guarantee may be for (1) a future debt or
obligation or for (2) an existing debt.
A guarantee can also be (J) a Simple Guarantee or (2) a
Continuing Guarantee (see p. 152)
Essentials of a Valid Guarantee
I. A contract of guarantee must satisfy all the essential
eleulents of a contract. (For example, the object must be lawful;
there must be free consent etc.) But the following points are to
be noted.
2. A contract of guarantee may be either oral or written.-
Sec 126.

I (1919)56 Cal 262

150 LAW OF CONTRACT

3. In a contract of guarantee there are three parties i.e .• the

creditor, the principal debtor and the surety. All the parties must
join the contract.
4. In a contract of guarantee. the primary liability is that
of principal debtor. The liability of surety arises only when there
is a default of the principal debtor. Therefore, the liability of
the surety is secondary.
5. In a contract of guarantee the principal debtor may be
a minor. In this case the surety is liable to pay even though the
minor may not be. The contract will be enforced as between the
surety and the creditor.
6. Consideration : In a contract of guarantee, the consi-
deration received by the principal debtor is taken to be sufficient
consideration for the surety. "Anything done. or any promise
made. for the benefit of the principal debtor may be sufficient
consideration to the surety for giving guarantee."-Sec.) 27.
Examples:
(i) R requests P to sell and deliver to him goods on credit. P agrees
to do so, provided (" will guarantee the payment of the price of
goods. C promises to guarantee the payment in consideration of P's
promise to deliver the goods. This is a sufficient consideration for
C's promise.
(ii) P sells and delivers goods to B. C afterwards requests P to forbear
to sue B for the debt for a year and promises that if he does so,
(" will pay for them in default of payment by B, P agrees to forbear
as requested. This is a sufficient consideration for C's promise.
(Iii) P sells and delivers goods to B. C afterwards. without consideration
agrees to pay for them in default of B. The agreement is void.

Contracts of Guarantee which are invalid

A contract of guarantee is invalid in the following cases
I. Misrepresentation: Any guarantee which has been obtained
by means of misrepresentation made by the creditor, or with his
knowledge and assent. concerning a material part of the
transaction, is invalid.-Sec. 142.
2. Concealment : Any guarantee which 'the creditor has
obtained by means of keeping silence as to material circums-
tances is invalid.-Sec. 143.
Examples:
(0) D engages B as clerk to collect money for him. B fails to account
for some of his receipts, and D in consequence calls upon him to
 INDEMNITY AND GUARANTEE 151

furnish security for his duly accounting. C gives his guarantee for
8's duly accounting. D does not acquaint C with 8's previous
conduct. 8 afterwards makes default. The guarantee is invalid.
(h) G guarantees to C payment for iron to be supplied by him to 8
to the amount of 2000 tons. 8 and C have privately agreed that
8 should pay five rupees per ton beyond the market price, such
excess to be applied in liquidation of an old debt. This agreement
is concealed from G. G is not liable as a surety.
3. When CO-Slirety does not join : Where a person gives a
guarantee upon a contract that the creditor shall not act upon
it lIntil another person has joined in it as co-surety, the guarantee
is not valid if that other person does not join.-Sec. 144.
4. Lack of essential elements: A contract of guarantee is
invalid if it lacks one or more of the essential elements of a
contract (e.g., if there is want of free consent or if the object
is illegal).

DIFFERENCES BETWEEN INDEMNITY AND

GUARANTEE
I. In a contract of indemnity, there arc two parties : the
indemnifier and the indemnity-holder. In a contract of guarantee
there are three parties: the creditor, the principal debtor. and
the surety.
2. In a contract of indemnity it is necessary to have only
one contract, i.e., between the indemnity-holder and the indem-
nifier; in a contract of guarantee it is necessary to have three
contracts, between the parties, i.e., between the creditors, the
principal debtors and the surety.
3. In a contract of indemnity, the liability of the indemnifier
is primary: in a contract of guarantee, the liability of the surety
is secondary i.e., the surety is liable only if the principal debtor
fails to perform his obligations.
4. In a contract of guarantee there is an existing debt or
duty, the performance of which is guaranteed by the surety. In
a contract of indemnity, the liability of the indemnifier arises
only on the happening of a contingency.
5. In a contract of indemnity the indemnifier can sue only
the indemnity-holder for his loss, because there is no contract
between the indemnified and other parties unless there is an
assignment on his favour; in a contract of guarantee the surety
can proceed against principal debtor.
152 LAW OF CONTRACT

6. In a contract of guarantee the surety, after he discharges

the debt owing to the creditor, can proceed against the principal
debtor; in a contract of indemnity the loss falls on the
indemnifier except in certain special cases.

CONTINUING GUARANTEE
Definition
A guarantee which extends to a series of transactions is
called a Continuing Guarantee. (Sec. 129). A guarantee covering
a single transaction may be called a Simple.Guarantee or Specific
Guarantee.
Examples:
(il D. in consideralion Ihal B will employ C in coliecling Ihe renls
of B's zamindari, promises B to be responsible, to the amount of
5,000 rupees, for Ihe due collection and paymenl by C of Ihose
rents. This is a continuing guarantee.
(Ii) P guaranlees paymenl to B a lea dealer, 10 Ihe amounl of Rs. 1000
for any lea he may from lime to lime supply to C. B supplies C
with tea to the value of Rs. 1000 and C pays B for it. Aller-wards
B supplies C wilh tea to the value of Rs. 2000. C fails to pay.
The guarantee given by P was a continuing guarantee. and he
is accordingly liable to B to the extent of Rs. 1000.
(iii) P guarantees payment to B of the price of five sacks of flour to
be delivered by B to C to be paid for in a month. B delivers five
sacks to C. C pays for them. Afterwards B delivers four sacks to
C. which C does not pay for. The guarantee given by P was not
a continuing guarantee. and accordingly he is not liable for the price
of the four sacks.

How a Continuing Guarantee is Revoked

A continuing guarantee is revoked under the following
circumstances.
I. By notice of revocation by the surety: The notice operates
to revoke the surety's liabilities as regards transactions entered
into after the notice. He continues to be liable for transactions
entered into prior to the notice.-Sec. 130.
2. By the death of the surety : "The· death of the surety
operates, in the absence of a contract to the. contrary, as a
revocation of a continuing guarantee, so far as regards future
transactions. ·'-Sec. "3
I.
The estate of the surety is liable for all transactions entered
 INDEMNITY AND GUARANTEE 153

into prior to the death of the surety unless there was a contract
io the contrary. It is not necessary that the creditor must have
notice of the death.
A continuing guarantee is terminated under the same c ir-
cum stances under which a surety's liabil ity is discharged. (See
below.)

THE EXTENT OF THE LIABILITY OF THE SURETY

Surety's Liability
The liability of the surety is co-extensive with that of the
principal debtor, unless it is otherwise provided by the contract.-
Sec. 128.
C:Xomp/e :
G guarantees to B the payment of a bill of exchange by C. the
acceptor. The bill is dishonoured by C. G is liable not only for
the amount of Ihe bill but also for any inlerest and chorges which
may have become due on it.
A creditor is not bound first to proceed against the principal
jebtor. He can sue the surety without suing the principal debtor
)r without making the principal debtor a co-defendant. When the
~rincipal debtor is a minor, the surety alone is liable to the
oreditor.
Liability of two persons, primarily liable, not affected by
arrangement between them that one shali be surety on other's
default
Where two persons contract with a third person to undertake
a certain liability, and also contract with each other that one of
them shall be liable only on the default of the other, the third
person not being a party to such contract, the liability of each
of such two persons to the third person under the first contract
is not affected by the existence of the second contract, although
such third person may have been aware of its existence.-Sec.
132.
Example:
A and B made a joint and several promissory note 10 C. A makes
it, in fact, as surety for Band C knows this as the time when the
note is made. The fact that A. to the knowledge of C made the
note as surety for 8. is no answer to a suit by C against A upon
the note.
154 LAW OF CONTRACT

WHEN IS A SURETY DISCHARGED FROM

LIABILITY?
The liability of a surety under a contract of guarantee comes
to an end under anyone of the following circumstances :
1. Notice of revocation
In the case of a continuing guarantee, a notice by the surety
to the creditor stating that he will not be responsible, will revoke
his liability as regards all future transactions. He will remain
liable for all transactions entered into prior to the date of the
notice.-Sec. 130.
2. Death of surety
In the case of a continuing guarantee the death of a surety
discharges him from all liabilities as regards transactions after
his death unless there is a contract to the contrary.-Sec. 131.
3. Variation of contract
Any variance, made without the surety's consent in the terms
of the contract between the principal debtor and the creditor,
discharges the surety as to transactions subsequent to the
variance.-Sec. 133.
Examples:
(0) .-l becomes surety to C for 8's conduct as a manager in C's bank.
Afternards Band C contract. without .1"5 consent, the B's salary
shall be raised and that he shall become liable for one·founh of
the losses on overdraft. B allows a customer to overdraw, and the
bank loses a sum of money. 0-1 is discharged from his suretyship
by the variance made without his consent, and is not liable to make
good this loss.
(b) C agrees to appoint B as his clerk to sell goods at a yearly salary,
upon A's becoming surety to C for 8's accounting for moneys
received by him as such clerk. Afterwards. without A's knowledge
or consent, C and B agree that B should be paid by a commission
on the goods sold by him and not by a fixed salary. A is not liable
for subsequent misconduct of B.
(c) A gives to l a continuing guarantee to the extent of 3,000 rupees
for any oil supplied by C to B on credit. Afterwards B becomes
embarrassed, and without the knowledge of A. B and C contract
that C shall continue to supply B with oil for ready money and
that the payments shall be applied to the then existing debts between
B and C. A is not liable on his guarantee for any goods supplied
after this n·ew arrangement.
 INDEMNITY AND GUARANTEE 155

(d) C contracts to lend B 5,000 rupees on the 1st March. A guarantees

repayment. C pays the 5,000 rupees to B on the 1st January. A is
discharged from his liability. as the contract has been varied
inasmuch as C might sue B for the money before the 1st March.

4. Release or discharge of principal debtor

The surety is discharged by any contract between the creditor
and the princit1al debtor, by which the principal debtor is released,
or by any act or omission of the creditor, the legal consequence
of which is the discharge of the principal debtor.-Sec. 134.
Effect of Debt Relief Acts: The Madras High Court held
that if the liability of the principal debtor is reduced under the
provisions of an Act for debt relief, the surety is liable only for
the reduced amount. Subramania Chelliar v. M. P. Narayanswami
Gounder. I The Nagpur and the Kerala High Courts have held
similar decisions.
Examples:
(a) G gives a guarantee to C for goods to be supplied by C to B. C
supplies goods to B and afterwards B becomes embarrassed and
contracts with his creditors (including C) to assign to them his
property in consideration of their releasing him from their demands.
Here B is released from his debt by the contract with C and G
is discharged from his suretyship.
(b) A contracts with B to grow a crop of sugarcane on A's land and
to deliver it to B at fixed rate. and C guarantees A·s performance
of this contract. B diverts a stream of water which is necessary for
irrigation of A's land and thereby prevent him from raiSing the crops.
e is no longer Hable on his guarantee.
(c) D contracts with B for. fixed price to build. house for B within
a stipulated time. B supplying .he necessary timber. C guarantees
D's performance of the contract. B omits to supply the timber. r
is discharged from hi~ suretyship.

5. Arrangement with principal debtor

A contract between the creditor and the principal debtor. by
which the creditor makes a composition with, or promises to give
time to, or not to sue, the principal debtor, discharges the surety,
unless the surety assents to such contract.-Sec. 135.
With a third person
But where a contract to give time to the principal debtor
I AIR (1951) Mad. 48
156 LAW OF CONTRACT

is made by the creditor with 8 third person, and not with the
principal debtor, the surety is not discharged.-Sec. 136.
Example:
C. the holder of an overdue bill of exchange drawn by D as surety
for B. and accepted by B. contracts with M to give time to B. D
is not discharged.
6. Creditor's forbearance to sue doC!! not discharge surety
Mere forbearance on the part of the creditor to sue the
principal debtor or to enforce any olher remedy against him does
not, in the absence of any provision in the guarantee to the
contrary, discharge the surety.-Sec. 137.
Examples:
(i) B owes to C a debt guaranteed by G. The debt becomes payable.
C does not sue B for a year after the debt has become payable.
G is not discharged from his suretyship.
(ii) Failure-to sue the principal debtor until recovery is barred by Statute
of Limitation does not operate as a discharge of the surety. Mohanl
Singh v. Ba Yi. I

7. Release of one co-surety

Where there are co-sureties, a release by the creditor of one
of them does not discharge the others; neither does it free the
surety so released from his responsibility to the other sureties.-
Sec. 138.
8. Act or omission impairing surety's eventual remedy
If the creditor does any act which is inconsistent with the
rights of the surety, or omits to do any act which his duty to
the surety requires him to do and the eventual remedy of the
surety himself against the principal debtor is thereby impaired,
the surety is discharged.-Sec. 139.
Examples:
(a) B contracts to build a ship for C for a given sum, to be paid by
instalments as the work reaches certain stages. S becomes surety
to C for B's due performance of the contract. C. without the
knowledge of S. prepays to B the last two instalments. S is
discharged by the prepayment.
(b) C lends money to B on the security of a joint and several promissory
note made in C's favour by B and by S as surety for B. together
with a bill of sale of B's furniture, which gives power to C to sell

I AIR (1939) P. c. 410 (Privy Council)

 INDEMNITY AND GUARANTEE 157
the furniture, and apply the proceeds in discharge of the nole.
Subsequently, C sells the furniture, but, owing to his misconduct
and wilful negligence, on Iy a small price is realised. S is discharged
from liability on the note.
(c) S puts M as apprentice to B, and gives a guarantee to B. for .Ifs
fidelity. B promises on his part that he will, at least once a month.
see M make up the cash. B omits to see this done as promised.
and M embezzles. S is not liable to B on his guarantee.

9. Loss of security
If the creditor loses or parts with any security given to him
by the principal debtor at the time the contract to guarantee was
entered into. the surety is discharged to the extent of the value
of the security. unless the surety consented to the release of such
security.-Sec. 141.
10. Miscella neous
A contract of guarantee is invalid if it is obtained by means
of misrepresentation (Sec. 142). silence as to material circum-
stances (Sec. 143), or if a co-surety fails to join according to
the terms of the contract (Sec. 144). Seepp. 1SO-IS\'

THE RIGHTS OF THE SURETY

A surety has the following rights
Against tbe Principal Debtor
I. Right oj Subrogation: Upon payment of performance of
all that he is liable for. he is invested with all the rights which
the creditor had against the principal debtor.-Sec. 140.
2. Right to Indemnity: In every contract of guarantee there
is implied promise by the principal debtor to indemnify the
surety; and the surety is entitled to recover from the principal
debtor whatever sum he has rightfully paid under the guarantee,
but no sums which he has paid wrongfully.-Sec. 145.
Examples:
(a) B i. indebted to C and A is surcty for the debt. C demands payment
from A. and on his refusal sues him for the amount. A defends
the suit, having rcasonable grounds for doing so, but is compened
to pay the amount of the debt with costs. He can recover from B
the amount paid by him for costs, as well as the principal debt.
(b) C lends B a sum of money and A. at the request of B accepts a
bill of exchange drewn by B upon A to secure the amount. C. the
158 LAW OF CONTRACT

holder of the bill, demands payment of it from A, and on .4's refusal

to pay, sues him upon the bill. A not having reasonable grounds
for so doing, defends the suit, and has tn pay the amouill of the
bill and costs. He can recover from 0 the amount of the bill, but
not the sum paid for costs, as there was nO real ground for defending
the action.
(e) A surety settled with the creditor by paying a sum smaller than the
amount guaranteeel Held, he can recover only what he paid. Reed
v. Norris.'

Against the Creditor

RighI of SecurilY : A surety is entitled to the benefit :>f every
security which the creditor has against the principal debtor at
the time when the contract of suretyship is entered into. Whether
the surety knows of the existence of security or not is imma-
terial.-Sec. 141.
"The expression 'security' in Section 141 is not used in any
technical sense; it includes all rights which the creditor had
against the property of the principal debtor at the date of
contract." Slale of M P v. Kaluram. 2
Etamples :
(a) C advances to 0 his tenant, 2000 rupees on the guaratltee of A,
C has also a funher security for the 2000 rupees by a mongage
of B 's furniture. B cancels the mortgage. B becomes insolvent. and
C sues A on his guaratltee. A is discharged from liability to the
amount of the value of the furniture.
(b) C, a creditor whose advance to B is secured by a decree, receive~
also a guarantee for that advance from A. C afterwards takes O's
goods in execution under the decree, and then, without the
knowledge of A, withdraws the execution. A is discharged.
(e) A is surety for D,rnakes a bond jointly with D to C, to secure a
loan from C to O. Afterwards, C obtains from 0 a funher security
for the same debt. Subsequently, C gives up the funher securily.
A is not discharged.
Against the Co-surety-See Below.

CONTRIBUTION BETWEEN CO-SURETIES

Definition
Where several persons guarnntee a debt or duty, they are
called co-sureties.
'2 Bing 361 2 AIR (1961) Supreme Court 1105
 INDEMNITY ANP GUARANTEE 159

Co-sureties liable to contribute equally

Where two or more persons are co-sureties for the same debt
or duty, either jointly Or severally, and wheHler under the same
or different contracts, and whether with or without the knowledge
of each otmir, the co-sureties in the absence of any contract to
the contrary, are liable as between tllel')selves, to pay each an
equal share of the whole debt, or of that part of it which remains
unpaid by the principal dcbtor.-Sec. 14C.
£'oeamples :
(a) A. Band C are sureties to D for the sum of 3,000 rupees lent to
E. £ makes default in payment. A. Band C are liable as between
themselves, to pay 1000 rupees each.
(h) A. Band C are sureties to D for sum of 1000 rupees knt to E
and there is a contract between A, Band C that A is to be responsible
10 the extent of one-quarter. B to the extent of one-quarter, and C
to the extent of one-half. £ makes default in payment. As between
the sureties A is liable to pay 250 rupees, B 250 rupees and C 500
rupees.

Liability of Co-surcties bound in different sums

Co-sureties who are bound in ditTerent sums arc liable to
pay equally as far as the limits of their respective obligations
permit.-Sec. 147.
Examples
(a) A. Band C as sureties for D, enter into three several bonds. each
in a different penalty, namely A in the penalty of 10,000 rupees,
B in that of 20,000 rupees, C in that of 40.000 rupees, conditioned
for D's duly accounting to E D makes default to the extenr of 30.000
rupees. A. Band C are each liable to pay 10,000 rupees.
(b) A, Band C. as sureties for D. enier into three several bonds each
in a different penalty, namely A in the penalty of 10,000 rupees,·
B in the that of 20.000 rupees, C in that of 40,000 rupees,'
conditioned for D's duly accounting to E D makes default to .he
extent of 40.000 rupees. A is liable to pay 10.000 rupees. and B
and C 15,000 rupees.
Release of one co-surety - See para 7, p. 156.

EXERCISES
I. Define a contract of indemnity. Distinguish between a contract of
guaranree and a contract of indemnity. (Pages 147. 150)
2. Discuss the nature and extent of the liabilit), of a surety.
(Page (53)
160 LAW OF CONTRACT

3. State the law relating to continuing guarantee. (Page 152)

4. What are the rights of a surety against the principal debtor and
against the co-sureties. (Pages 157-159)
5. Explain the rule that between co-sureties there is equality of the
burden and benefit. (Pages 158-159)
6. Problems : (a) Bowes 10 C a debt guaranteed by A. The debt
becomes payable. C does not sure for a year after the debt has
become payable. Is A discharged from his suretyship? Give
reasons. (Example (I) page 156)
(b) P sells and delivtrs goods to B. C afterwards, without
consideration. agre'-s to pay for them in default of B. Is the
agreement valid? Give reasons. (Example (iii), page 150)
7. Objective question. Give short answer.
(i) Give an example of continuing guarantee. (Page 152)
 \.14) BAILMENT AND PLEDGE

DEFINITION AND FEATURES

~efinition of Bailment
"A bailment is the delivery of goods by one person to another
for some purpose, upon a contract that they shall, when the
purpose is accomplished be returned or otherwise disposed '·.of
according to the directions of the persons delivering them":-
Sec. 14. .
The person delivering the goods it called the Bailor. The
person to whom' they are delivered is called the Bailee. The
transaction is called Bailmen/.
Examples:
(i) P lends his book to Q.
(ii) P delivers a pen to Q. for repair.
(iii) P gives Q. his watch as security for a loan.
In all these cases P is the bailor and Q. is the bailee.

Characteristic Features or the Requisites of Bailment

Bailment has the following characteristic features :
I. Delivery: It is delivery of goods by one person to another.
2. Purpose : The goods are delivered for some purpose.
3. Re/urn : It is agreed, that when the purpose is accom-
plished the goods are to be returned or otherwise disposed of
according to the direction of the bailor.
4. Con/rae/ : Bailment arises from express o~ iJ1lPlied
contract. In case of finder of goods bailment arises by implication
of law.
5. Ownership : In bailment the bailor continues to be the
owner of the goods. Therefore bailment does not cause any
change of ownership.
6. Movable goods: Bailment is concerned with only mov-
able goods. Money is not included in the category in movable
goods. A deposit of money is not bailment.
Deposit of money in a bank does not constitute bailment.
The relationship between depositor and the bank. is that of
borrower and the lender.
Commercial Law - J I 161
 162 LAW OF CONTRACT

7. Possession: A person already in possession of the goods

may become a bailee by a subsequent agreement, express or
implied.
Example:
X is a seller of motof cars, having several cars in his possession.
Y buys a car and leaves the car in the possession of X. A fier the
sale is complele. X becomes a bailee. although originally he was
the owner.

Delivery to bailee bow made

"The delivery of goods to the bailee may be made by doing
anything which has the effect of putting the goods in the
possession of the intended bailee or of any person authorised
to hold them on his behalf'.-Sec. 149.

I /
_
Different kinds of Bailment
Bailments may be classified into; (I) Gratuitous Bailments
and (2) Bailment for Reward.
A gratuitous bailment is one in which neither the bailor, nor
the bailee is entitled to any remuneration, e.g., loan of an article
grut is: safe custody without charge, etc.
A bailment for reward is one where either the bailor or the
bailee is entitled to a remuneration, e.g.. a motor car let out for
hire; goods given to a carrier for carriage at a price; articles given
to a person for being repaired for a remuneration; pawn, etc.

Il' ~ DUTIES OF THE BAILEE

~ty of reasonable care
The bailee is bound to take as much care of the goods bailed
to him as a 11I/In of ordinary prudence would, under similar
circumstances, take of his own goods of the sal)l€ bulk, quality
and value as the goods lfailed.-Sec. 151. ..../
The degree of care to be taken by a bailee is that of a man
of ordinary prudence. If he takes that amount of care, he will
not be held responsible for loss, destruction or deterioration of
the goods bailed. (Sec. 152). The degree of care required from
the bailee is the same whether the bailment is for reward or is
gratuitous.
There may be a special contract between the bailor and the
bailee by which the bailee is required to take a higher degree
 BAILMENT AND PLEDGE 163

of care 01; under which he is responsible for compensating in

full fot' loss, destruction or deterioration of the goods. Such
r a l terms are usually incorporated in contracts of carriage.
fl. Bailee's liability for negligence of servants
A bailee is liable for damages caused by negligence of the
servants about the use or custod of !tie thmgs balled, when
acti L But the bailee IS not liiiiile
fo amages caused by the acts or default of third persoll which
c~not be prevented by ordinary diligence. The bailee is also
not liable for unauthorised acts of his servants outside the scope
of/'Ieir employment. Sanderson v. Collins. I
.¥ Unauthorised use of goods
If the bailee makes unauthorised ,!se of goods bailed, i.e.,
uses them in a way not authorised by Ihe terms of the bailment,
he is responsible for all damages to the goods and mllst pay
compensation to the bailor. This liability arises even if the bailee
is not guilty of any negligence, and even if th~ damage is the
result of accidenL-Sec. 154.
Examples:
(i) A lends a horse to B fOT'his own ridlllg only. B allows C a member'
of his family. to ride the horst. C rides with care, but the horse
accidentally falls and is injured. B is liable to make compensation
to A for the injury done to the horse.
(if) A hires a horse in Calcutta from B expressly to march to Benares,
A rides with due care, but marches to Cuttack instead. The horse
accidentally falls and is injured. A is liable to make comrensation
to B or the injury to the horse.

4. Mixture of Bailor's goods "ilh the Bailee's

If the bailee m;'~' up his own g('(J\~' '\Ilh tho'e 0f the bailor.
the following rules apply:
(a) "If the bailee, with consent of the bailor. mixes the goods
of the bailor with his own goods, the bailor and the bailee shall
have an interest, in proportion to their respective shares, in the
mixture thus produced."-Sec. 15S.
(b) "If the bailee, without the consent of the bailor mixes
the goods of the bailor with his own goods, and the goods can

1(1904) 1 K. B. 628
164 LAW OF CONTJlACT

be separated or divided, the property in the goods remains in

the parties respectively; but the bailee is bound to bear the
expense of separation or division, and any damage arising from
the mixture."-Sec. 156.
Example:
D bails 100 bales of cotton marked wilh a particular mark 10 B.
B wilhoUI D's consenl mixes the 100 bales with olher bales of his
own, bearing a differenl mark. D is enlitled to have his 100 bales
returned, and B is bound to bear all Ihe expenses incurred in Ihe
separation of Ihe bales, and any other incidenlal damage.
(c) "If the bailee, without the consent of the bailor, mixes
the goods of the bailor with his own goods, in such a manner
that it is impossible to separate the goods bailed from the other
goods and deliver them back, the bailor is entitled to be
compensated by the bailee for the loss of the goods."-Sec. 157.
F.xample :
D bails supe . ur worth Rs. 45 10 B. B. wilhoul D's consent
mixes t our with inferior flour of his own, worth only Rs. 25.
B I mpensale D for the loss of his flour.
returning goods
is the duty of the bailee to return or deliver according
e bailor's directions, the goods bailed, without demand, as
soon as the time for which they were bailed has expired, or the
purpose for which they were bailed has been accomplished."-
Sec. 160.
"If, by the default of the bailee, the goods are not returned,
delivered or tendered at the proper time, he is responsible to the
bailor for any loss, destruction or deterioration of the goods from
that time."-Sec. 161.
Example:
G agreed to carry certain goods of B expeditiously. The driver of
the van which was carrying Ihe goods, left Ihe van unattended for
one hour for lunch. During Ihal lime Ihe goods were slolen, B filed
a suil for damages against G. Held, the carrier has a dUly 1';:.. 10
deliver the goods or relum Ihem. The carrier could nol do so. The
van driver's departure constitutes a fundamental breach of the
contract to carry the goods forthwith to the destination. Damages.
were awarded. Bontex Knilr;ng Works Ltd. v. Sf.. John Garage. I

1(1944) 2 All E. R. 690

 - '1
BAILMENT AND PLEDGE 165
~
6 Accretion to the goods bailed
"In the absence of any contract to the contrary. the bailee ~
is bound to deliver to the bailor, or according to his directions,
any increase or profit which may have accrued from the goods
bailed:'-Sec. 163. / ....- - .....~
Example:
C leaves a cow in the custody of B to be taken care of. The cow
has a calf. 8 is bound to deliver the calf as well as the cow to C

7. Liabilities of Innkeeper and Hotelkeepers

In England Innkeepers were governed by the Common Law.
They were regarded as insurers, i.e.. loss of or damages to
customer's goods had to be fully made up, except certain special
cases. This rule was applied in Bombay High Court in an old
case (1886). It is now held that the liabi lities of innkeepers and
hotel-keepers are as bailees and are governed by Sections 151
and 152 of the Contract Act. (See para I, p. 162) Rampal Sing
v. Alurray & Co' ; Jan & Son v. Cameron. 1
8. Liabilities of Carriers - See Book V, Ch I.

DUTIES OF THE BAILOR

l. Bailor's duty to disclose faults in goods bailed
"The bailor is bound to disclose to the bailee faults in the
goods bailed, of which the bailor is aware, and which materially
interfere with the use of them, or expose the bailee to extra-
ordinary risk. and, if he does not make such disclosure, he is
responsible for damage arising to the bailee directly from such
faults.
If the goods are bailed for hire, the bailor is responsible for
such damage, whelher he was or was not aware of the existence
of such faults in the good bailed."-Sec. 150.
£\.... mples :
(i) ..1 lends a horse which he knows to be vicious to 8. He does not
disclose the fact that the horse is vicious. The horse runs away,
B is thrown and injured . .of is responsible to B for damage suslained.
(ii) A hires a carriage of B. The carriage is unsafe, though 8 is not
aware of it. and A is injured. B is responsible to A for the injury.

I (189Q) 22 All 164 2 (1922) 44 All 735

166 LAW OF CONTRACT

2. Payment of expenses in Gratuitous Bailment.

"Where by the conditions of the bailment, the bailee is to
receive no remuneration, the bailor shall repay to the bailee the
necessary expenses incurred by him for the purpose of the
bailment."-Sec. 158.
3. Responsibility for breach of warranty of title
The bailor is responsible to the bailee for any loss which
the bailee may sustain by reason that the bai lor was not entitled
to make the bailment, or to receive back the goods or to give
direction respecting them.-Sec: 164.
Example:
A gives B's car to C for use without B"s knowledge of permission.
B sues C and receives compensation. C is entitled to recover his
losses from A.

BAILEE'S RIGHTS
1. Enforcement of rights
The bailee can, by suit, enforce the duties of the bailor.
2. Bailment by several joint owners
'"If several joint owners of goods bail them, the bailee may
deliver them back to, or according to the directions of, one joint
owner without the consent of all, in the absence of any agreement
to the contrary."-Sec. 165.
3. Bailee not responsible on re-delivery to bailor without title
"If the bailor has no title to the goods, and the bailee, in
good faith, delivers them back to, or according to directions of
the bailor, the bailee is not responsible to the owner in respect
of such delivery."-Sec. 166.
4. Bailee's Particnlar Lien
Lien means the rights to retain property unti I some debt or
claim is paid. The right of lien is given by law in certain cases.
Lien may be of two types: General Lien and Particular Lien.
General lien means the right to retain all the goods of the other
party until all the claims of the holder are paid. Particular lien
means the right to retain particular goods until claims on account
of those goods are paid.
 BAILMENT AND PLEDGE 167

A bailee bas a particular lien, when he has rendered any

service upon an article and is entitled to some remuneration for
it according to the terms of the contract between him and the
other party. The following limitations upon the bailee's particular
lien are to be noted.-Sec. 170.
(i) The particular lien is available only if the service rendered
by the bailee is one involving the exercise of labour or skill
in respect of the goods bailed. There is no lien for custody
charges or other charges for work not involving labour or
skill.
(ii) The right of lien cannol be exercised until Ihe services have
been performed in full. When a bailee has done only a part
of the work contracted for he cannot claim lien for part
payment.
(iii) The lien cannot be claimed if there is an agreement to pay
the money on a future date.
(iv) The lien can be exercised only so long as the goods are
in the possession of the bailee. If possession is lost for' any
reason, the lien is also lost.
£'(ampies :
(i) A delivers a rough diamond to B, a jewelier, to be cut and polished,
which is accordingly done. B is entitled to retain the stone till he
is paid for the services he has rendered.
(ii) A gives cloth to B. a tailor, to make into a coat, B promises A to
deliver the coat as soon as it is finished. and to give a three months'
credit for the price. B is not entitled to retain the coat until he is paid.

5. Bailee's General Lien

Section 171 provides that bailees coming within the follow-
ing categories have a general lien: bankers, factors, wharfingers.
'attorneys of High Court, and policy brokers. Such bailees can
retain all goods of the bailor so long as aQ)'thing is due to them.
The general lien in all these cases may not exist if there is a
conlract to the contrary. Bailees failing in categories other than
those\mentioned above may have a general lien if there is an
express agreement to that effect.

BAILOR'S RIGHTS
1. Enforeeme~of rights
The bailor can enforce by suit all the liabilities or duties
of the bailee.
168 LAW OF CONTRACT

2. Act inconsistent with the terms

"A contract of bailment is voidable, at the option of the
bailor, if the bailee does any act with regard to the goods bailed
inconsistent with the conditions of the bailment."-Sec. 153.
Example;
A leIS to B, for hire. a horse his own riding. B drives the horse
in carriage. This is, at the option of A. a termination of the bailment.

3. Restoration of goods lent gratuitously

When goods are lent gratuitously. the bailor can demand their
return whenever he pleases, even though he lent it for a specified
time or purpose. But if the bailee in such cases had acted in
such a manner that the return of the goods before til!; stipulated
time would cause loss greater than the benefit which he has
received, the bailor must indemnify him for the loss if he compels
an immediate return.-Sec. 159.'

TERMINATION OF BAILMENT
A contract of bailment terminates lInder the following
circumstances :
I. Efflux of time: If the bailment is for a stipulated period,
the bailment terminates as soon as the stipulated period expires.
2. Fulfilment of purpose : If the bailment is for a specific
purpose, the bailment terminates as soon as the purpose is
fulfilled.
3. Act inconsistent with the terms : If the bailee does any
act. with regard to the goods bailed, which is inconsistent with
the terms of the bailment, the bailment terminatcs.-Sec. 153.
4. Goods lent gratuitously: A gratuitous bailment can be
terminated any time but if premature termination causes any loss
to the bailee, the bailor must indemnify the bailee.-Sec. 159.
5. Death: A gratuitous bailment terminates upon the death
of either the bailor or the bailee.-Sec. 162.

RIGHTS AND DUTIES OF FINDER bF GOODS

Rights
A finder of goods is in the position of a bailee if he takes
charge of the goods. '(See p. 132) The rights of the finder of
goods can be summarised as follows.-Sections 168 and 169 :
 BAILMENT AND PLEDGE 169

I. Possession: He can retain possession of the goods against

everybody except the true owner.
2. Compensalioll alld Lien: H~ is entitled to be compensated
for the trouble and expense incurred by him to preserve the goods
and to find out the owner. He has a Iien upon the goods for
the payment of these sums i.e .. he can refuse to return the goods
until they are paid.
3. Reward: He cannot file a suit for the expense he has
incurred but can sue for any reward which the owner might have
offered for the return of the goods lost.
4. Sale: If the goods found are commonly the subject-matter
of sale and if the owner cannot with reasonable diligence be'
found or if he refuses to pay the lawful charges of the finder,
the goods can be sold provided the following further conditions
are fulfilled-
(a) When the thing is in danger of perishing or of losing
the greater part of its value.
(n) When the lawful charges of the finder alllount to two-
thirds of its value.
Duties and Obligations
The finder of goods is a bailee. Therefore. he has the
following duties and obligations: (i) He IllUSt take reasonable
care of the goods (Sec. 151). (ii) He must not mix the finder's
goods with his own goods (Secs. 155-157). (iii) The goods must
be returned to the real owner (Sees. 160 & 161). (iv) If there
is an accretion to the goods bailed, it mllst be given to the real
owner (Sec. 163). (\") He must not use the goods for his purpose.
(vi) He must try to find out the true own(;r of the goods.~

StlITS BY BAILEES OR BAILORS AGAINST

WRONG-DOERS
I. Right to interplead
If a person, 'other than the bailor, claims the goods bailed,
he may apply to the courts to stop delivery of the goods bailed
and to decide the title to the goods.-Sec. 167.
2, Suit by bailor or bailee against wrong-doer
If a third party wrongfully deprives the bailee of the use
of the goods bailed or does them any injury, the bailee is entitled
 170 LAW OF CONTRACT

to use all such remedies as the owner of the goods might have
used. Either the bailee or the bailor may file a suit against the
third party in such cases.-Sec. 180.
3. Apportionment of relief or compensation obtained by
such suits
Whatever is obtained by way of relief or compensation in
any such suits shall, as between the bailor and the bailee be dealt
with according to their respective interests.-Sec. 181.

BAILMENTS BY WAY OF PLEDGE OR PAWN

~Definition
The bailment of goods as security for payment of a debt
or performance of a promise is called Pledge or Pawn. The bailor
in this case is called the Pledgor or. the Pawnor. The bailee is
called the Pledgee or the Pawnee.-Sec. 172.
Difference between Bailment and Pledge
Pledge is a particular kind of bailment. The difference
between Pledge and other kinds of bailment lies in the purpose
or objective of the transaction. The purpose of a pledge is to
provide security for a debt or the performance of a promise. In
other kinds of bailment there are other purposes for example.
repair. safe-custody etc. The pledgor and the pledgee have certain
special rights and duties.
When can a non-owner make a valid Pledge?
The owner of goods can always make a valid-pledge. In. the
following cases, one who is not an owner can make a v-alid
pledge.
l. Mercantile Agent
A mercantile agent who is. with the consent of the owner,
in possession of the goods or of the documents of title to goods.
can make a valid pledge of the goods while acting in the ordinary
course of business of a mercantile agent. Such a pledge will be
valid even if the agent had no authority to pledge, provided that
the pawnee acts in good faith and has not at the time of the
pledge any notice that the pawnor has no authority to pledge.-
Sec. 178.
 BAILMENT AND PLEDGE 171

2. Possession under a voidable contract

A person having possession of goods under a voidable
contract can make a valid pledge of the goods so long as the
contract is not rescinded. The pawnee gets a good title to the
goods provided he acts in good faith and without notice of tht!
pawnor's defect of tide.-Sec. 178A.
£r.ample
A gets an ornament by inducing the owner to sell it to him by undue
influence. Before the contract is rescinded by the owner, he pawns
it to B. B will get a good title to the ornamenl provided he acted
in good faith and was unaware of A'5 defective title.

3. Pawnor with a limited interest

Where a person pledges goods in which he has only a iimited
interest, the pledge is valid to the extent of that interest.-Sec. 179.
4. Possession with co-owner
If one of several co-owners is in sale possession of Ihe goods
.vith the consent of the owners, he can make a valid pledge of
.he goods.-Sec. 30 (I). Sale of Goods Act.

RIGHTS OF PLEDGEE OR PAWNEE

1. Right of Retainer
"The .pawnee can retain the goods pledged not only for
payment of the debt or the performance of the promise, but also
for the interest of the debt and all necessary expenses incurred
by him in respect of the possession or for the preservation of
the goods pledged."-Sec. 173.
2. Retainer for subsequent advance
The pawnee's lien is a particular lien, i.e .. he ~dnnot retain
the goods for any debt other than the debt for wh icII tne security
was given unless there is an express contract to the contrary.
If the pawnee makes fresh advances to the same debtor it will
be presumed that the debtor has agreed to create on the goods
already pledged a lien for the fresh advance.-Sec. 174
3. Extraordinary expenses
The pawnee is entitled to receive from the pawnor extra-
ordinary expenses incurred by him for the preservation of the
goods pledged.-Sec. 175.
172 LAW OF CONTRACT

4. Pawnee's right where pawnor makes default

"If the pawnor makes a default in payment of the debt, or
performance, at the stipulated time of the promise. in respect of
which the goods were pledged, the pawnee may bring a suit
against the pawnor upon the debt or promise. and retain the goods
pledged as collateral security; or, he may sell the thing pledged
on giving the pawnor reasonable notice of the sale.
If the proceeds of such sale are less than the amount due
in respect of the debt or promise, the pawnor is still liable to
pay the balance. If the proceeds of the sale are greater than the
amount so due, the pawnee shall pay over the surplus to the
pawnor.-Sec. 176.

RIGHTS OF PLEDGOR
l. Defaulting pawnor's right to redeem
"If a time is stipulated for the payment of the debt, or
performance of the promise, for which the pledge is made. and
the pawnor makes default in payment of the debt or performance
of the promise at the stipulated time, he may redeem the goods
pledged at any subsequent time before the actual sale of them;
but he mllst, in that case, pay, in addition, any expenses which
have arisen frol11 his default."-Sec.I77.
2. Preservation and maintenance
The pledgor can enforce the preservation and proper main-
tenance of the goods pledged.
3. Protection of debtors
The pledgor as a debtor has variolls rights given to him by
statutes enacted for the protection of debtors e.g., the Money-
lenders Acts.

EXERCISES
I. Define baihnenl. State the degree of care to be taken by • bailee.
What are the duties of the bailee? (Pages 161-165)
2. What is a pledge? What are the rights of • pawnee?
(Pages 170-1 72)
3. Can a person other than the true owner make a valid pledge of
goods? (Page 170)
 BAILMENT AND PLEDGE 173

4. Define bailment. State the rights and liabilities of a finder of goods.

(Pages 161, 168-169)
5. Explain 'Bailment'. What are the rights of the parties in case of
accretion during the period of bailment? (Pages 161, 165)
6. State the pawnee's rights when the pawnor makes default.
(Pages 171-172)
7. Write notes on the following :
(a) Mixture of bailor's goods with tne bailee's. (Page 163)
(b) Negligence of servants. (Para 2, page 163)
(e) Liabilities of Hotel-keepers. (Para 7, page 165)
(d) Right of Retainer. (Para I & 2, page 171)
8. Distinguish between :
(i) Bailor and Bailee. (Page 161)
Ui) Finders of goods and Bailee. (Pages 161, 168)
Uil) Bailment and Pledge. (Page 170)
U\") Bailee's Particular Lien and Bailee's General Lien.
(Pages 166-167)
9. Objective questions. Give short answers :
(i) "A deposit of money in a bank is not bailment." True or false?
(Para 6, page 161)
(ii) "A bailee has a duty to return the goods bailed." True or false ?
(Para 5, page 164)
(iii) Give three examples of termination of bailment. (Page 168)
(iv) What is 'Pawn' ? (Page 170)
10. Problems :
(a) A lends his horse to B for his own riding only. B allows C,
a member of his family to ride the horse. C rides with care,
but the horse accidentally fails and is injured. What remedy
has A against B? (Example (i), page 163)
(b) A hires a motor car of B. The car is unsafe, though B is not
aware of it, and A is injured. Is B responsible to A for the
injury? (Example (ii), page 165)
(e) A kept some valuable ornaments in the custody of B, his
neighbour, B kept A 's ornaments along with his own. A's
ornaments as well as B's ornaments were lost on account of
. carelessness of B. Can A hold B responsible for his loss? (Para
I, page 162)
(d) A leaves a cow in the custody of B to be taken care of. The
cow has given birth to a calf. Who is entitled to the calf?
(Para 6, page 165)
 DEFINITIONS
&finition and Nature of Agency
"An 'Agent' is a person employed to do any act for another
or to represent another in dealings with third persons."~Sec.182 .
. The person for whom such act is done, or who is so
represented, is called the Principal. P appoints X to buy 50 bales
of cotton on his behalf. P is the principal and X is his Agent.
The relationship between P and X is called Agency.
~ower of Attorney
An Agent may be appointed by the Principal, executing a
written and stamped document. Such a document is called Power
of A tlorney. There are two kinds of Power of Attorney: General
and Special. A general power is one by which the agent is given
an authority to do certain general objectives, e.g., managing an
estate or a business. A special or particular power may be
appointed by which an agent is authorised to do a specific thing,
e.g., selling some goods. A man dealing with a particular agent
is bound to find out the limits of the authority by which the
authorIty of the agent can act accordingly.
~orcement and consequences of Agent's contracts
The function of an agent is to bring about contractual
relations between the principal and third parties. Usually agents
are appointed with specific instructions and authorised to act
within the scope of their instructions. Acts of the agent within
the scope of the instructions bind the principal as if he has done
them himself. There is a legal maxim regarding agency viz" 'Quit
facit per alium fadl per se', which means-"He who does
through another does by himself." The act of an agent is the
act of the princi pal.
"Contracts entered into through an agent, and obi igations
arising from acts done by an agent, may be enforced in the same
manner and will have the same legal consequences, as if the

174
 LAW OF AGENCY 175

contracts had been entered into and the acts done by the principal
in person."-Sec. 226.
Examples :
(0) A buys goods from 8, knowing that he is an agent for their sale,
but not knowing who is the principal. 8's principal is the person
entitled to claim from A the price of the goods, and A cannot in
a suit by the principal, set off against th,' rl,im a debt due to himself
from B.
(b) A, being B's agent with authority to ;eeeive money on his behalf,
receives from C a sum of money due to B. B is dlscharged of his
obligation to pay the sum in question to 8

The Test of Agenty

Agency exists whenever a person can bind another by acts
done on his behalf. When this power does not exist the
relationship is not one of agency. Thus a wife is not the agent
of the husband except under special circumstances and for special
purposes. But the constituted attorney of a person is his agent
for the purposes mentioned in the power of attorney.

f Agent and Servant ~

The differences between an Agent and a Servant were
discussed in the case Lakhminarayan Ram GopaJ & Sons v.
Hyderabad Government. I The points are summarised below.
I. An agent is to exercise his authority in accordance with
the principal's instructions; but he is not subject to the principal's
direct control or supervision. A servant has to act according to
the orders of the master in every particular.
2. An agent is appointed and employed to bring the principal
into contractual relationship with third parties. The servant cannot
do that.
3. An agent can bind the principal to the third parties. A
servant cannot do so.
4. The mode of remuneration of an agent may vary, including
a commission on the basis of the work done. A servant is
generally paid through wages.
5. An agent is liable for wrong done within the scope of
his authority. A master is liable for the wrong of his servant
if it is committed in course of the servant's employment.

I AIR (1954) Supreme Court 364

 176 LAW OF CONTRACT

6. An agent may work for several principals. A whole-time

servant serves only one master.
7. A servant can, however, be appointed as an agent for some
purposes.
~nt and an Independent Contractor
A person who undertakes to do something for another is
called an independent con •. ~ctor, if the manner of doing the thing
is left to him. An indepen('ent contractor does not represent the
other contracting party nor can he bind him by contracts entered
into with others. An agent is one who acts according to the
instructions of the principal and can bind the principal by entering
into contracts with other persons within the scope of his authority.
Agen t and Bailee
The differences between an Agent and a Bailee are
summarised below.
I. The bailee has possession of goods of the bailor. An agent
may not have possession of any goods or property of the
principal.
2. The bailee has no power to create any contractual
relationship with the third party. An Agent has that authority.
3. Under certain circumstances a bailee may act as an agent.
~o can appoint an Agent?
"Any person who is of the age of majority according to the
law to which he is subject, and who is of sound mind, may
employ an agent."-Sec. 183.
Who may be an Agent?
~Any person may be an agent, even a minor. A minor acting
as agent can bind the principal to third parties. But a minor is
not himself liable to his principal.-Sec. 184.
~t Principals .
Several principals can jointly appoint one agent. The agent
can act 'in respect of those affairs in which all the co-principals
are jointly interested. The Power of Attorney, by virtue of which
the agent was created, has to be strictly construed and what it
authorized depend on the terms and the purposes for which it
 LAW OF AGENCY 177

was executed. Syed Abdul Khader v. Rami Reddy and olhers.'

The Supreme Court in the judgment quoted Halsbury. "co-
principals may jointly appoint an agent to act for them and in
such case become jointly liable to him and may jointly sue him."2
Consideration in Agency Contracts
No consideration is necessary to create an agency (Sec. 185).
The acceptance of the office of an agent is regarded as sufficient
consideration for the appointment. The agency contract generally
provides for the amount of remuneration payable by the principal
to the agent.
DIFFERENT CLASSES OF AGENTS
The relationship between the principal and agent and ·the
extent of the authority of the latter are matters to be determined
by agreement of the parties.
There are, however, certain well-known varieties of agency
contracts where the powers and duties of the agent are settled
by usage and custom of trade recognised by the courts of law.
Some of these particular kinds of agency-contracts, together with
their legal incidents are described below.
1. Broker
A broker is one who brings buyers and sellers into contract
with one another. His duties are at an end when the parties are
brought toge~ The contract of·sale and purchase is entered
into directly by the..parties. The broker does not keep the goods
or the property of the principal in his possession.
2. Factor
A factor is a mercantile agent with whom goods are kept
for sale .. He has got discretionary powers to enter into contracts
of sale with third parties. He has a general lien on the goods
for money due to him as agent.
3. A Commission Agent
A commission agent is one who secures buyers for a seller
of goods and sellers for a buyer of goods in return for a

I AIR (1979) Supreme Court 553

'Halsbury's Laws of England, vol I, 4th Ed., para 726 .

Commercial 1....aw - 12
 178 LAW OF CONTRACT

commission on the sale. A commission agent may have posses-

sion of the goods or not. His position is very similar to that
of ~oker.
WAuctioneer
An auctioneer is one who is authorised to sell goods of his
principal by auction. He has a particular lien on the goods for
his remuneration. He has the goods in his possession and can
sue the buyer in his own name for the purchase price. An
auctioneer acts in a double capacity. Up to the moment of sale
he is the agent of the seller. After the sale he is the agent of
the buyer. An auctioneer has implied authority to sell the goods
without any restriction. Therefore a sale by him in violation of
instructions is binding on the owner. If the owner directs the
auctioneer not to sell below a reserve price and the auctioneer
sells it below the price the sale is binding on the owner except
in cases where the buyer knew that there was a limitation on
the auctioneer's authority.
5. A Del Credere Agent
A del credere agent is one who, for extra remuneration,
guarantees the performance of the contract by the other party.
If the other party fails to pay the price or otherwise causes
damage to the principal, the del credere agent must pay
compensation to the principal.
6. General Agent and Particular Agent
A general agent is one who represents the principal in all
mailers concerning a particular business. A particular agent is
one who is appointed for a specific purpose e.g.. to sell a
particular article. Faclors and commission agents are usually
general agents.

ME ODS OF CREATING AGENCY

be created in anyone of the following ways;
by Express Agreement
A contract of agency may be created by express agreement.
The agreement may be either oral or wrillen. It is usual in many
cases tn appoint agents by executing a formal power of allorney
on a \\rillCIl and stamped document.
 /' LAW OF AGENCY 179

~ency by Implied Agreement

An agency agreement may be implied under certain circum-
stances from the conduct of the parties or the relationship
between them. Agency by estoppel and agency of necessity are
cas;y ~plied agency.
~ncy by Estoppel or by Holding Out
Agency may be created by estoppel. When a man has by
his conduct or statements induced others to believe that a certain
person is his agent, he is precluded from subsequently d~nying
it. Thus an agency is created by implication of law.
Examples:
(i) r allows his servant X to buy goods for him on credit regubrl~
On one occasion the servant buys SL1me goods not ordered b) hj~
master, on credit. }' is responsible tu the shopkeeper for the price
because X will be deemed to be his agent by estoppel.
(ii) P employed X a broker, to buy hemp for him and at p's request
it was kepi in a warehouse in )\"'5 name. X without p's authority
sold the hemp. Held, P was bound by the sale because he had
allowed Y to asslime the apparent right of disposing of the hemp
in the ordinal) course of business. flickering v. BIl~h 1
There are three possible cases of agency by estoppel:
(a) A person can be held Olll a' an agenl although he' "
actually not so--Example (i) .bm,.
(b) A person acting as an agent may be held out as having
mOre authority than he actually has--£TGmple (ii) above.
(c) A person may be held out as agent after he has ceased
to be so.
Section 237 provides as follo\\ s : "When an agent has.
without authority, done acts or incurred obligations to third
persons on behalf of his principal, the principal is hound by such
acts or obligations if he has by his \\ord; or cC:"II1duct induced
such third persl'I" to believe that such aClS or obligations "ere
within the scope of the agent's authority." .
~wmples :
(a) A consigns goods to B for sllle and gives him instructiuns not to
sell under a fixed price. C. being ignorant of B's instructions. C'llkrs.
into a contract with B to buy the goods at a price lower than the
reserved pri~c. A is b0U~d by the contract.

I (181:!) 15 East 38
1<'10 LAW OF CONTRACT

(b) A entrusts B with negotiable instruments endorsed in blank. B sells

them to C in violation of private orders from A. The sale is goods.

4. Agency of Necessity
Circumstances sometimes force a person to act on behalf of
another without any express authority from h~. In such cases
an agency of necessity is said to be created
t
Three conditions must be satisfied before an agency can be
created by necessity: (a) It must be impossible to get the
principal's instructions. (b) There must be an actual necessity
for acting on his behalf. (c) The agent of necessity must act
honestly in the interest of the par:ties concerned.
F..xamples :
(i) The captain of a ship finds himself in a distant port without money.
The owner cannot be communicated with. The captain can pledge
the ship for obtaining money. He will be considered the agent of
the owner by necessity.
(ii) A horse, sent by a train. arrived at a station with nobody to receive
it. The railway company fed the horse. Held, the railway company
was an agent of necessity and was entitled to recover the money
from the owner. G N. Ry v. Swaffield. I

Husband and Wife

A wife is an agent of necessity, having power to pledge her
husband's credit for necessaries of life, when she is not properly
provided for by him or when she has been descrted by the
husband. But if the husband gives her a sufficient allowance,
she has no authority to pledge his credit and can never be the
agent of necessity. In Gray (Miss) Ltd. v. Cathcart 2 a wife was
supplied with clothes of the value of £ 215 by a shopkeeper. The
shopkeeper sued the husband. It was found that the husband was
giving the wife an allowance of £ 960 per year. It was held that
the husband was not liable to pay the dues of the shopkeeper.
, The general rule iS"that the wife is not the agent of her
husband and the husband is 'not the agent of his wife'. But one
of them may be the agent of the other by expre,ss appointment,
by holding out, by ratification, or because of ilecessity.

S. Agency by Ratifitation
Ratjficatlon means the subsequent adoption and acceptance
1(1874) L. R, 9 Ex, 132 1 (1922) 38 T.L.R, 562
 LAW OF AGENCY 181

of an act originally done without instructions or authority. P buys

ten maunds of wheat on behalf of Q. Q did not appoint P as
his agent and did not instruct him to buy wheat for him. Q may.
upon hearing of the transaction, accept it. If he does so, the act
is ratified and P becomes his agent with retrospective effect.
Effect of ratijictilion : "Where acts are done by one person
on behalf of another, but without his knowledge or aut! ority, he
may elect to ratifY or to disown such acts. If he ratifies them,
the same effects will follow as if they had been performed by
his authority."-Sec. 196.
Ratification may be express or implied, i. e.. it may be by
express words or by conduct.-Sec. 197.
Emmples of implied ratification :
(i) D. without authority, buys goods for B Afterwards B sells them
to C on his own account. 8's conduct implies a ratification of the
purchase made by D for him.
(ii) D, without B's authority lends B's money to C. Aftenvards B accepts
interest on the money from C B's conduct implies a ratification
of the loan.
Ratification when validly made is retrospective in operation,
i.e:, it relates back and dates from the time when the agent entered
into the contract.
Conditions : To be valid, a ratification must fulfil the
following conditions :
I. The agent must expressly contract as agent. A man cannot
enter into a contract in his own name and later shift it
on to a third party. .
2. The act to be ratified must be a lawful one. There can
be no ratification of an illegal act or an act which is void.
3. Ratification must be made within a reasonable time.
4. No valid ratification can be made by a person whose
knowledge of the facts of the case is materially defec-
tive.-Sec. 198.
< Ratification must be of the whole contract. There cannot
be partial ratification and partial rejection.-Sec. ! 99.
6. For valid ratification, the agent must have a principal who
is in actual existence at the time of the contract.
Example-a company cannot ratify a contract entered into
by a promoter on its behalf before the company came
into existence by incorporation.
182 LAW OF CONTRACT

7. The principal must have contractual capacity at the date

of the contract and at the date of the ratification.
8. Ratification is not valid where the effect of ratification
is to subject a third person to damages or of terminating
any right or interest of a third person.-Sec. 200.
£l(omples :
(i) A, not being authorised thereto by B, demands on behalf of B, the
delivery of. chattel, tho property of B. from C who is in possession
of it. This demand cannot be ratified by B, so as to make C liable
for damages for his refusal to deliver.
(ii) A holds a lease from B, terminable on three months' notice. C. an
unauthorised person, gives notice of termination to A. The notice
cannot be ratified by B. so as to be binding on A.

AGENT'S AUTHORITY
Express and implied authority
"The authority of an agent may be expressed or implied."-
5ec.186.
The authority is said to be express when it is given by words
spoken or written. The authority is said to be implied when it
is to be inferred from the circumstances of the case. The inference
as to implied authority; may be drawn from things spoken or
written, or the ordinary course of dealing between the parties
and others.-Sec. 187.
Example:
A owns a shop in Serampur, living himself in Calcutta. and visiting
the shop occasionally. The shop is managed by B, and he is in the
habit of ordering goods from C in the name of A for the purposes
of the shop, and of paying for them out of A's funds with A's
knowledge, B has an implied authority from A to order goods from
C in the name of A for the purposes of the shop.

Extent of agent's authority

"An agent having an authority to do an act has authority
to do every lawful thing which is necessary in order to do such
act.
An agent having an authority to carry on a business has
authority to do every lawful thing necessary for the purpose, or
usually done in the course of conducting such business."-
Sec. 188.
 LAW OF AGENCY 183

Examples :
(a) A is employed by B. residing in London, to recover at Bombay a
debt due to B. A may adopt any legal process necessary for the
purpose of recov.. ing the debt and may give a valid discharge for
the same.
(h) A constitutes B his agent to carry on his business of a ship-builder.
B may purchase timber and other materials, and hire workmen, for
the purpose of carrying on the business.

Authority in an emergency
"An agent has' authority, in an emergency to do all such acts
for the purpose of protecting his principal from loss as would
be done by a person of ordinary prudence, in his own case, under
similar circumstances."-Sec. 189.
Examples:
(a) An agent for sale may have goods repaired if it be necessary.
(h) A consigns provisions to B at Calc una with directions to send them
immediately to C at Cuttack. B may sell the provisions at Calcutta.
if they will not bear the joumey to Cuttack without spoiling.

What happens when the agent exceeds hi. authority?

Whell the authority is separable: "When an agent docs more
than he is authorized to do, and when the part of what he does.
which is within his authority, can be separated from the part
which is beyond his authority, so much only of what he does
as is within his authority, is binding as between him and his
principal."-Sec.227.
Example:
.t being owner of a ship and cargo, aUlhorizes B to procure an
insurance for 4,000 rupees on the ship. B procures a policy for 4,000
rupees on the ship, and another for the like sum on the cargo. A
is bound to pay the premium for the policy on the ship, but not
the premium for the policy on the cargo.
When the authority cannot be separated: "Where an agent
does more than he is authorized to do and what he does beyond
the scope of his authority cannot be separated from what is within
it, the principal is not bound to recognize the transaction."-
Sec. 228.
Example:
A. authorizes B to buy 500 sheep for him. B buys 500 sheep and
200 lambs for one sum of 6,000 rupees. A may repudiate the whole
transaction.
184 lJ\W OF CONTRACT

When -the principal is bound by unauthorized acts of agent.

The principal may be bound by unauthorized acts of the agent
in two cases: (I) Where by the rule of estoppel the principal
is precluded from denying the authority of the agent. (See cases
cited under "Agency by Estoppel", p. 179.) (ii) Where an agency
has been terminated, but notice of termination has not been
received by the other parties concerned (See pp. 188-189)
Effects of notice to agent or information obtained by agent
Any notice given to or information obtained by the agent
(provided it be given or obtained in the course of the business
transacted by him for the principal) shall have the same legal
consequences as if it has been given to or obtained by the
princip.al.-Sec. 229.
Examples: ;
(a) A is employed by 8 10 buy from C certain goods of which C is
the apparent owner, and buys them accordingly. In the course of
Ihe trealy for Ihe sale, A learns Ihal Ihe goods really belonged to
D. bOI 8 is ignoranl of. Ihal fac\. 8 is nOI enlitled III sel-ofT a debt
owing 10 him from C against the price of Ihe goods.
(b) A is employed by 8 10 buy from C goods of which C is the apparenl
oymer, A. was before he was so employed, a servant of C and .hen
learnl Ihal Ihe goods really belonged to D. but 8 is ignorant of
that fact. In spile of the knowledge of his agent, 8 may set-off
against the price of the goods a debt owing to him from C.

Representation as to Liability
When a p.:?rson who has made a contract with an agent
induces the agent to act upon the belief that the principal only
will ~ held liable, he cannot subsequently hold the agent liable
on the contract. Similarly if a person induces the principal to
act on the belief that the agent only will be held liable, he cannot
afterwards hold the principal liable on the contract.-Sec.234.
Pretended Agents
A person untruly representing himself to be the authorized
agent of another, and thereby inducing a third person to deal
with him as such agent, is liable, if his alleged employer does
not ratify his acts, to make compensation to the other in respect
of any loss or damage which he had incurred by so dealing ....!...
Sec. 235.
 LAW Of AGENCY 185

A pretended agent has no authority to act as agent. When

the other party to the contract suffers damage as a result of such
want of authority, he can sue the agent for breach of warranty
of authority. The pretended agent is liable to pay damages under
the Law of Torts. The liability arises even when the agent acted
innocently.
Example:
A firm of solicitors were instructed by a client to defend a suit.
Subsequently the client became insane (and the solicitors' authority
as agent lenninated by law). The solicitors in ignorance of the fact
took steps to defend the suits. Held. the solicitors were personally
liable for the cost of the other side, as on a breach of warranty
of authority. longe v. Toynbee. I
A person with whom a contract has becn entered into in
the character of agent, is not entitled to require the performance
of it if he was in reality acting, not as agent, but On his own
account.-Sec. 236.
Misrepresentation and Fraud by Agents
Misrepresentations made, or frauds committed, by agents
acting in the course of their business for their principals, have
the same effect on agreements made by such agents as if such
misrepresentations or frauds had been made or committed by the
principals.
But misrepresentations made, or frauds committed, by agents,
in matters which do not fall within their authority, do not affect
their principals.-Sec. 238.
Examples:
(i) A. being 8's agent for the sale of goods, induces C to buy them
by a misrepresentation, which he was not authorised by 8 to make.
The contract is voidable, as between B and C. at the option of C.
(ii) A. the captain of 8's ship, signs bills of lading without having
received on board the goods mentioned therein. The bills of lading
are void as between 8 and the pretended consignor.
(iii) A solicitor's managing clerk had authority to transact conve)-ancing
business on behalf of his employtr. He induced a client, who was
an old lady, to sign a conveyance of her properties to himself. With
tbe help of the document the clerk sold the properties to another
and decamped with the proceeds. Held, that as the clerk was acting
in course of the business of the solicitor, the solicitor must make
good the loss of the lady. Lloyd v. Grace Smilh & Co.'

'(1910) I K.B. 215 1 (1912) A.C. 716

186 LAW OF CONTRACT

~D-AGENT AND CO-AGENT

Rule
The general rule is that an agent cannot appoint an agent.
("Delegatlls nOll potest delegare.") "An agent cannot lawfully
employ another to perform acts which he has expressly or
impliedly undertaken to perform personally."-Sec. 190.
Exceptions
But there are two exceptions to this rule. An agent can
appoint an agent (i) when it is permitted by the custom of the
trade with which the agency is concerned; and (ii) when it is
necessary because of the nature of the agency.
Sub-agent
An agent appointed by an agent is called a sub-agent. "A
sub-agent is a person employed by, and acting under the control
of, the original agent in the business of the agency."-Sec. 191.
The consequences of the appointment of a sub-agent are
stated below :
I. A sub-agent is appointed by and acts under the control
of the original agent.-Sec. 191.
2. The principal is represented by the sub-agent and is bound
by and responsible for his acts as if he was an agent
appointed by the principai.-Sec. 192.
3. The agent is responsible to the principal for the acts of
the sub-agent.-Sec. 192.
4. The sub-agent is responsible for his acts to the agent. The
sub-agent is not responsible to the principal except in case
of fraud and wilful wrong.-Sec. 192. .
5. Where an agent improperly appoints a sub-agent, the
agent is responsible for his acts both to the principal and
to third parties. The principal in such cases is not
represented by the sub-agent nor is he responsible for the
acts of the sub-agent.-Sec. 193.
Co-agent
A co-agent is a person appointed by the agent according to
the express or implied authority of the principal, to act on behalf
oj the prillcipal in the business of the agency.-Sec. 194.
 LAW OF AGENCY 187

Such a person is an agent of the principal and is responsible

to trim. A co-agent is sometimes called a Substituted Agent.
In case of a co-agent there is direct privity of contrac1
between the principal and the co-agent. There is no direct privit)
of contract between the principal and the sub-agent, except ir
cases of fraud and wilful wrong-doing.
Examples:
(i) A directs B, his solicitor, to sell his estate by auction, and to eruplo}
an auctioneer for the purpose. B names C an auctioneer, to conduci
the sale. C is not a sub-agent, but is A's agent for the conduct 01
the sale.
(ij) A authorizes B a merchant in Calcutta to recover i1te moneys due
to A from C & Co. B instructs D a solicitor, to take legal proceedings
against C & Co. for the recovery of the money. D is not a sub-
agent but is solicitor for A.
An agent in appointing a co-agent must exercise the same
amount of discretion as a man of ordinary prudence would
exercise in his own case. If he does this he is 110t responsible
to the principal for acts of negligence of the co-agent.-Sec. 195.
Examples:
(i) A instructs B, a merchant. to buy a ship for him. B employs a ship
surveyor of good reputation to choose a ship for A. The surveyor
makes the choice negligently and the ship turns out to be unsea-
worthy and is lost. B is not. but the surveyor is, responsible to A
(ii) A consigns goods to B. a merchant for sale. B in due course, employs
an auctioneer in good credit to sell the goods of A and allows the
auctioneer to receive the proceeds of the sale. The auctioneer
afterwards becomes insolvent without having accounted for the
proceeds. B is n sponsible to A for the proceeds.

TERMINATION OF AGENCY
An agency may b~ terminated by ac: of parties or by
operation of Jaw. The different possible circumstances leading
to the termination of agency are enumerated below.-Sections
201-210.

t:
Termioatioo by act of parties
Revocation and Renunciation: The principal may, by notice,
revoke the authority of the agent. The agent may similarly, by
notice, renounce the business of agency.
Revocation and renunciation can be express or may be
implied from the conduct of the parties.
188 LAW OF CONTRACT

Example
A empowers B to let A's house. Afterwards A lets it himself. There
is an implied revocation of B's authority.
Compensation for revocation or renunciation : Where there
is an express or implied agreement to continue the agency for
any length of time, and the contract of agency is revoked or
renounced without sufficient cause, compensation must be paid
to the injured party.-Sec.205.
Irrevocable agency: The principal cannot revoke the author-
ity of the agent in the following cases :
I. When the agent has an interest in the subject-matter of
the contract, his authority cannot be revoked so as to prejudice
that interest. This is known as agency coupled with in/eres/.-
Sec. 202.
Examples:
(i) A gives authority to B to sell A's land to pay himself out of the
proceeds, the debts due to him from A. A cannot revoke this
authority. nor can it be terminated by his insanity or death.
(ii) A consigns 1000 bales of cotton to B. who has made advances to
him on such cotton, and desires B to sell the cotton, and to repay
himself out of the price. the amount of his own advances. A cannot
revoke this authority, not is it terminated by his insanity or death.
2. The authority of the agent cannot be revoked once it has
been exercised so as to bind the principal.
3. When the agent has partially exercised his authority, the
ptincipal cannot by revocation affect the acts already done.
II. Termination by operation of Law
An agency may terminate by operation of law in any of the
following ways :
I. Efflux of time : When the agency is for a fixed period
of time, it terminates on the expiry of that time.
2. Performance of the object : Where the agency is for a
particular object, it terminates when the object is accomplished
or when the accomplishment becomes impossible.
3. Determination of subjec/-maller. When the subject-matter
of the agency comes to an end, the agency terminates.
4. Death or insanity of the principal or agent : Death or
insanity of the principal or the agent, terminates the agency. In
case of a company, its winding up and in case of a firm, its
d issol ution has the same effect.
 LAW OF AGENCV 189

5. Insolvency of the principal: If the principal is adjudicated

an insolvent, the agency terminates. But insolvency of the agent
does not terminate the agency.
6. The principal becoming an alien enemy: If the principal
and the agent belong to different countries and war breaks out
between the two countries, the contract of agency is terminated.
7. Termination of the sub-agent s authority: The sub-agent's
authority comes to an end when the agent's authority terminates.
When termination of agent's authority takes effect
The termination of thi: authority of an agent takes effect,
as regards the agent from the time it becomes known to him.
As regards third parties it becomes effective when it becomes
known to them.-Sec. 208.
F~amples :
U) A directs B to sell goods for him. and agrees to give B five per
cent commission on the price fetched by the goods. A afterwards.
by letter, revokes 8's authority, B after the letter is scnt, but before
he receives it, sells the goods for 100 rupees. The sale is binding
on A. and B is entitled to five rupees as his commission.
(ii) A. at Madras, by lener directs B to sell for him some cotton lying
in a warehouse in Bombay, and afterwards by letter, revokes his
authority to sell, and directs B to send the cotton to Madras. B.
after receiving the second letter enters into a contract with C. who
knows of the first lener, but not of the second. for the sale to him
of the cotton. C pays B the money. with which B absconds. B's
payment is good as against A.
(iii) A directs B, his agent, to pay certain money to B. A dies and D
takes out probate to his will. B after A's death but before hearing
of it, pays the money to C The payment is good as against D.
th~executor. .

/I. ENT'S DUTIES TO PRINCIPALS~

I. Ag nt s duty in conducting principals business: An agent
is bound to conduct the business of his principal according to
the directions given by the principal, or, in the absence of any
such directions, according to the custom which prevails in,(j.o\n~
business of the same kind at the place where the agent conducts
such business. When the agent acts otherwise, if any, loss be '"
sustained he must make it goods to his principal, and, if anY~
profit accrues, he must account for )I..--Sec. 211. .
190 lAW OF CONTRACT

Examples
(0) A. an agent engaged in carrying on for B a business, in which it
is the custom to invest from time to time, at interest, the moneys
which may be in hand, omits to make such investment. A must make
good 10 B the interest usually obtained by such investments.
(b) B. a broker, in whose busine.:;s it is not the custom to sell on credit,
sells goods of A on credit to C, whose credit at the time was very
high. C. before payment, becomes insolvent. B must make good the
loss to A.
2. Skill and diligence required from agent : An agent is
bound to conduct the business of the agency with as much skill
as is generally possessed by persons engaged in similar business
unless the principal has notice of his want of skill.
The agent is always bound to act with reasonable diligence,
and to usc such skill as he possesses; and to make compensation
to his principal in respect of the direct consequences of his own
neglect, want of skill or misconduct, but not in respect of loss
or damages which are indirectly or remotely caused by such
neglect, want of skill. or misconduct.-Sec.212.
Er:amples :
ta) 0·1. a merchant in Calcutta, has an agent 8, in London to whom
a .sum of monc), is paid on .Ts account, with orders to remit. n
relains the money for a considerable time. A, in consequence of
not receiving, the money. becomes insolvent. B is liable for the
money and interest from the day on which it ought to have been
p.lio ar.::cording to the usual rate, and for any further direct 1055.-
:l'~ '.' g. by var;ation of ratc of exchange-but not further.
(b) .1. an agent for the sale of goods, having authority to sell on credit.
sells to IJ on credit, without making the proper and usual enquiries
as to the solvency of B. B, at the time of such sale, is insolvent .
•-1 must make compensation to ~js principal in respect of any loss
thereby sustaineu.
(c) A. an insurance broker, employed by B to effect an insurance on
a ship. omits- to see that the usual clauses are inserted in the policy.
The ship is afterwards lost. In consequence of the omission of the
"':!,l:i':.('s nothing can Ix' fl.-covered from the underwriters. A is bound
to m~lke good the loss to B.
(d) A. a merchant in England~ directs 8. his agent at Bombay, who
accepts the agency, to send him 100 bales of collon by a certain
.!thip. 8 having il in his power to send the cotton. omits to do so.
The ship arrives sufely it:1 England. Soon after her arrival the price
or cotton rises. n is· bourid to make good to A the profit which
he might have made by the 100 bales of cotton at the time the
ship arrived, but not any profit he might have made by: the
subsequent rise.
 LAW OF AGENCY 191

(e) K employed II' to sen a house. On 29th May II' received an offer
of £6,150 from E and communicated it 10 K who directed him to
accept it 'subject to contract". On 3rd Jun, D offered £6,750 but
this offer was not communicated to 1.:. On 8th June a written contract
was entered into between J...- and E. K sued IF for breach of duty
in not communicating D's offer. Held, there was breach of dut)
and II' was directed to pay to K the difference between the two
prices. Keppel v. Whee/el: I
3. Agenls dUly 10 render aecoun's : An agent is bound to
render proper accounts to his principal on demand, or periodically
if so provided in the agreement.-Sec.213.
4. Agenl; dlll)' 10 communicale 10 principal: It is the duty
of an agent, in cases of difficulty, to use all reasonable diligence
in communicating with his principal, and .in seeking to obtain
his i~lsJl'ctions.-~.Sec. 214.
?jAgelll 1101 10 deal on his 01111 accoulIl : If an agent geals
on hIS own account in the business of the agency, without first
obtaining the consent of his principal and acquainting him with
all material circumstances which have come to his own knowl-
edge on the subject, the principal may repudiate the Iransaction.
if the case shows either that any material fact has been
dishonestly concealed. from him by the agent, or that the dealings
of the agent have been disadvantageous to him.-Sec. 215. The
agent has a duty to avoid conflict of inlerest between the agent
and the principal.
Examples:
(a) A directs B to sell A's estate. B buys the estate for himself in the
name of G. A. on discovering that /3 has brought the estate for
himself. may repudiate the sale, if he c:m show that 8 has dishonestly
concc~l.!cd any material fact, or that the sale has been disadvanta-
geolls to him.
lb) A directs H to sell A's estate. fl, on 100kil112. over the estate before
selling it, finds a mine on the estate whi;h is unknown to A. B
informs A that he wishes to buy the estate for himself; but conceals
the discovery of the mine. A allows B to buy, in ignorance of the
existence of minc. A, on discovering that B knew of the mine at
the time he bought the estate, may either repudiate or adopt the
sale at his option.
6. Principal 10 gel benefil of agenl S delliing, : If an agent.
without the kn0wledgc of his principal, deals in the business 0f
the agency on. his own account, instead of on account of his
I (Jq~7) I K.R '77
192 LAW OF CONTRACT

principal, the principal is entitled to claim from the agent any

benefit which may have resulted to him from the transaction.-
Sec. 216. The agent has a duty not to make secret profits.
Example:
A directs B, his agent, to buy a certain house for him. B tells A
it cannot be brought, and buys the house for himself. A may, on
i overing that B has brought the house, compel him to sell it to

is
J;
¥otiliO
a the price he ga'/e for it.
/., 1E!!!.1l S duty 10 - . . e or pril i
ay to his prtncipal all sums received 0
The agent
is account
after deducting therefrom his dues on account of remuneration
and expenses.-Sec. 218.
8. Principal S dealh or insanity : When an agency is
terminated by the principal dying or becoming of unsound mind,
the agent is bound to take on behalf of the representatives of
his late principal, all reasonable steps for the protection and
preservation of the interests entrusted to him.-Sec.209.
9. Miscellaneous: The Agent has other duties also. The agent
must give all information to the principal. He must not delegate
his authority. He must avoid the clash between his duty and self-
interest. He should be loyal to the principal. He must not set
up an adverse title against the principal. He is not entitled to
remuneration in certain circumstances.

~PRINCIPAL'S DUTIES TO AGENT

I. Agent to be indemnified against consequences of lawful
acts: The principal is bound to indemnify the agent against the
consequences of all lawful acts done by such agent in exercise
of the authority conferred upon him.-Sec.222.
£'camples :
(a) B. at Singapore, under instructions from A of Calcutta contracts with
C to deliver certain goods to him. A does not send the goods to
B, and C sues B for breach of contract. B informs A of the suit,
and A authorised him to defend the suit. B defends the suit, and
is compelled to pay damages and costs, and incurs expenses. A is
liable to B for such damages. costs and expenses.
(b) E, a broker at Calcutta, by the orders of A. a merchant there contracts
with C for the purchase of 10 casks of oil for A. Afterwards A
refuses to receive the oil, and C sues B. B informs A. who repudiates
the contract altogether. B. defends, but unsuccessfully, and has to
pay damages and costs and expenses. A is liable to B for such
d~mages.costs and e~penses.
 LAW OF AGENCY 193

2. Agent to be indemnified against consequences of aCls

done in good faith : Where one person employs another to do
an act, and the agent does the act in good faith, the employer
is liable to indemnifY the agent against the consequences of that
act, though it causes an injury to the rights of third persons.-
Sec. 223.
Examples:
(a) A. a decree-holder and entitled to execution of 8's goods, requires
the officer of the Court to seize certain goods. representing them
to be the goods of 8. The omcer seizes the goods and is used by
C. the true owner of the goods. A is liable to indemnify the omcer
for the sum which he is compelled to pay 10 C in consequence
of obeying A's directions.
(bl B, at the request of A. sells goods in the possession of A. but which
A had nol right to dispose of. B does not know this and hands
over the proceeds of the sale to A. Afterwards C? the true owner
of the goods .. sues B and recovers the value of the goods and CDSb-.
A is liable to indemnify B for what he has been compelled to pay
to (' and for H's Own expenses.
3. Non-liability for criminal acts: But wh"re one person
employs another to do an act which is criminal. the employer
is not liable to the agent, either upon an express or an implied
promise. to indemnify him against the consequences of that acl.-
Sec. 224.
Examples:
(a) A employs B to beat C, and agrees to indemnify him against all
consequences of the act. B thereupon beats C. and has to pay
damages to C for so doing. A is not liable to indemnify B for those
damages.
(b) B. the proprietor of a newspaper publishes, at A's request, a liable
upon C in .the paper, and A agrees to indemnify B againsl the
consequences of the publication, and all costs and damages of any
action in respect thereof. B is sued by C and has to pay damages,
and also incurs expenses. A is not liable to B upon the indemnity.
4. Compensation for principal's neglect: The principal must
make compensation to his agent in respect of injury caused to
such agent by the principal's neglect or want of skill.-Sec. 225.
Example:
.. I employs B as a bricklayer in building a house and puts up th.
scalTolding himself. The scaffolding is unskilfully put up and B is
in consequence hurt .. -' must make compensa.tion to B.

Commercial Law - 13
194 tAW OF CONTRACT

PRINCIPAL'S RIGHTS
I. Compensation: The principal is entitled to compensation
for any breach of duty by the agent.
2. Agent s duties: The agent's duties are the principal's rights.
3. Revocation: The principal can revoke the agent's author-
ity. subject to certain conditions.

~~[NT'S RIGHTS
I. Enforcement of rights : The agent can enforce all the duties
of the principal. The principal's duties are the agent's rights.
s
2. Agenl Right of Retainer: An agent may retain, out of
any sums received on account of the principal in the business
of the agency, all moneys due to himself in respect of advances
made or expenses properly incurred by him in eonducti:lg such
business, and also such remuneration as may be payable to him
for acting as agent.-Sec.217.
3. When agenl"s remulleralion becomes due: In the absence
of any special contract, the agent's remuneration does not become
due lIlltil he has completed the act for which he was appointed
agent. -But ail agent may detain moneys received by him on
account of goods so Id, a !though the whole of the goods consigned
to him for sale may have heen sold, or although the sale may
be actually complete.-Sec.219.
4. Agent not entitled to renllmer(l/ion for business miscon-
ducted : An agent who is guilty of misconduct in the business
of the agency is not entitled to any remuneration in respect of
that part of the business which he has misconducted.-Sec.220.
Examples:
(a) A employs B to recover Rs. 100,000 and to lay it out on good
security. B recovers, Rs. 100.000 and lays out Rs. 90,000 on good
security but lays out Rs. 10,000 on bad security whereby A loses
Rs. 2.000. B is entitled to remuneration for recovering Rs. 100,000
and for investing Rs 90,000. He is not entitled to any remuneration
for investing Rs. 10,000 and must make good the loss of Rs. 2,000
to A. .
(b) A employs B to recover Rs. t,OOO from C Through B's misconduct
. the money is not recovered. B is entitled to no remuneration for
his .. rvices, and must make good the loss.
5. Agent s Lien : In the absence of any contract to the
contrary, an agent is entitled to retain gOOds, papers and other
 LAW OF AGENCY 195

property. whether movable or immovable of the principal.

received by him, until the amount due to himselffor commission.
disbursements and services in respect of the same has been paid
or accounted for to him.-Sec. 221.
PERSONAL RESPONSIBILITY OF AGENT
It is provided by Section ~30 that. in the absence of any
contract to that effect. an agent cannot personally enforc~,
contracts entered into by him on behalf of his principal. nor "
he personally bound by them.
But if there is an agreement to that effect, express or implied.
the agen1 may enforce the contract and may also be personally
liable on it. Such a contract shall be presumed to exist in the
following cases :
I. Foreign principal : Where the contract is made by an
agent for the sale or purchase of goods for a merchant
resident abroad.
2. Undisclosed principal : Where the agent does not dis-
close the name of his principal.
3. When principal cannot be .med : Where the principal.
though disclosed. cannot De sued (for example. if he is
a foreign sovereign or a foreign State).
The agent is also personally responsible in the following
cases :
4. Fictilious person or a nOIl-existenl person : If the prin-
cipal does not exist. Example: When a promoter makes
a contract for a company which has not yet been
registered.
5. Unauthorised Acts: Agcnt acting beyond the principal's
authority.-Secs. 227, 228. (p. 183)
6. Misrepresentation or fraud by agent : An agent is
personally responsible if he makes misrepresentations or
frauds acting in course of the business of the principal.-
Sec. 238. (p. 185)
7. Pretended agents : A pretended agent does not have
authority. When the other party to the contract suffers
damage. he can sue the agent for breach of warranty of
authority. The pretended agent is liable to pay damages
under the Law of Torts. The liability arises even when
the agent acted innocently.-Sec.235 .

..
196 LAW OF CONTRACT

8. Representation as to liability: If a person induces the

principal to act on the belief that the agent only will be
held liable. he cannot afterwards hold the principal liable
on the contract.-Sec. 234.
j(,ght of person dealing Wilh agel/l personally liable : In
cases where the agent is personally liable. a person dealing with
him may hold either him or his principal, or both of them
liable.-Sec. 233.
CONTRACTS WITH AN UNDISCLOSED PRINCIPAL
An agent may enter into a contract with a person without
disclosing the name of the principal. The legal consequences of
contracts with undisclosed principal are as follows :
I. Principal ma.\' require pel/ormance of the contract ~ If
an agent makes a contract with a person who neither knows. nor
has reason to suspect. that. he is an agent, his principal may
rcqu ire the performance of the contract. But the other contracting
party has, as against the principal. the same right as he would
have had as againsl.the agent if the agent had been principal.-
Sec. 23 I. <Para I)
2. Other purty may refuse to flilfil the contract : If the
principal discloses himself before the contract is completed, the
other contracting pany may refuse to fulfil the contract, If he
can show that, if he had known who was the principal in the
contract, or if he had known that the agent was not a principal,
he would not have entered into the contract.-Sec. 23 I. (Para 2)
3. l'el/ormance is subject to the rights and obligations
between agent and the other purl)' : Where one man makes a
contract with another, neither knowing nor having reasonable
ground to suspect that the other is an agent, the principal. if he
requires the performance of the contract, can only obtain Stich
performance subject to the rights and obligations subsisting
between the agent and the other party to the contract.-Sec. 232.
£wmp/e :
..I. who owes Rs. 500 to B, sells Rs. 1,000 worth of rice to Ii. A
is acting as agent for C in the transaction. but B has no knowledge
nor rC3.sooable ground of suspicion that such is the case. C cannot
compel.B to- take the rice without allowing him to set off .·1"5 debT.
4. Agent ;s personally liable. In contracts with an undis-
closed principal, ~he agent is. in the absence of a contract to
the contrary, personally liable on the contract. The other pany
 LAW OF AGENCY 197

may hold either the agent or the principal or both liable.-

Sec. 233.
£mmpie :
A enters inlo a contract with B to sell him 100 bales of cotton,
and aftern,ards discovers that B was acting as agent for C A may
sue either 8 or C, or both. for the price of the cotton.

EXERCISES
1. In what ways an agency oan be created 0 (Pages 178-182)
2. What are the different ways an agency can be tenninated?
(Pages 187-189)
3. When is a Principal bound by the unouthorised acts of his Agent?
(Pages 182-183)
4. State the duties of the principal to his agent. (Pages 192-193)
5. State the duties of an agent to the principal. (Pages 189-192)
6. State the respective rights and duties of a principal and an agent.
when the principal is undisclosed. (Pages 196-197)
7. Explain the instances when an agent can be made personaliy liable
in respect of contracts entered into by him on behalf of the
principal. (Pages 195-196)
S. Explain the following terms: (a) Principal (b) Agent (e) Power
of Attorney (d) A Del Credere Agent (e> Sub-agent and Co-agent
(j) Ratification (g) Agency of necessity.
(Pages (a) 174. (b) 174. (e) 174. (d) 17S. (e) 186.
(j) ISO. (g) 180)
9. Distinguish between:
(i) Agent and Servant. (Page 175)
(iI) Agent and Contractor. (Page 176)
(iii) Agent and Bailee. (Page 176)
(il") Express authority and Implied authority of agent. (Page 182)
(v) Sub-agent and Co-agent. (Page 186)
(\"i) Agent and Pretended agent. (Page 184)
10. Objective questions. Give shon answers.
(i) "An agent can be appointed orally." True or false?
(Page 178)
(ii) State three varieties of agency contracts. (Page 177)
(iii) Give three examples of how agency can be created. (Page 178)
(;,0) "The wife is not the agent of her husband". True or false?
(Page 180)
(v) Give three examples of termination of agency. (Page 187)
(VI) "An agent is bound to render accounts to the principal. ·Tro.
or false ? (Page 191)
(vii) Give two exceptions to the rule "an agent cannot appoint an
agent"". (Page 186)
 BOOK II
THE· LAW RELATING To
SALE OF GOODS

CHAPTER I Definition. 200 - 220

Application 200; Buyer, Seller and Goods 200; Sale and
Agreement to SeH 201 ; Differences between a Sale and .n
Agreement to Sell 202; The Essential Elements 203 ; Price
204 ; Destruction of Goods 205 ; Eamest Money 206 ; Hire-
Purchase Agreements 206; Sale and other Contracts 208 ;
Condit;ons and Warranties 210 ; Implied Conditions 213 ; The
Doctr;ne of Caveat Emptor 216; Implied Warranties 218;
Liabilities of the Seller Apart from the Contract of Sale 219.
Ow'rER 2 Transfer of Ownership 221 - 231
When does Property pass from ttlt: Seller to the Buyer? 221 ;
Reservation of the Right of Disposal 224; Transfer of
Ownership 225; Transfer of title by Non-Owner 226.
CHAPTER 3 Perform.n~e of tbe Contra~t of Sale 2J2 - 246
Delivery 232; Rules Regarding Delivery 232; Duties of
Seller of Goods 236; Duties of Buyer of Goods 237 ; Rights
of Buyer of Goods 238; Rights of Seller of Goods 239 ;
Rights of the Unpaid Seller and Remedial Measures 239;
Seller's Lien or Vendor's Lien 240 ; The Rights of Stoppage
in Transit 241 ; The Right of Resale 242 ; Suit for the Price
242 ; Suit for damages 243 ; Claim. for interest and special
damages 243; Distinction between lien and stoppage in
transit 243 ; Sub,sale or Pledge by Buyer 243 ; Consequences
of Breach of contract of Sale 244; Auction Sales 244.

199
CD
.; -
DEFINITIONS

APPLICATION
The law relating to the sale of movable goods ·is contained
in the Sale of Goods Act (Act III of 1930). The Act came into
force on I st July. 1930. It closely follows the English Act on
the subject.

BUYER, SELLER AND GOODS

Buyer : Bllyer means a person who buys or agrees 10 buy
go,'ds.-Sec. 2( I l.
Sdl"r : Seller means a person who sells or agrees to sell
gt10ds.---Scc. 2( 13).
Goods
The term ··Goods· includes every kind of movable property
""cpt (i) actionable claims and (ii) money.-Sec. 2(7)
An actionable claim means a debt or a claim for money
\\ hich a person may have against another and which he may
recover by suit. (see p. 109) Money means legal tender money.
These two types of movable property are not included ill the
definition of the. term goods as used in the Sale of Goods Act. All
other types of movable property are "goods" under the Act.
Movable articles like furniture, clothing etc. and shares and
debentures are goods. Things attached to the earth are not
mo\able. But growing crops and grass, which can be easily
separated from the earth before sale, and fruits wHch can be
severed from trees, are included within the definition of movable
goods.
Goods may be classified into three types: Existing Goods,
Future Goods and Contingent Goods.
Existing Goods
Existing goods are goods which are already in existence and
which are physically present in some person's possession and
ownership.-Sec. 6( I).

200
 DEFINITIONS 201

Existing goods may be either (i) Specific and Ascertained

or (ii) Gel/eric alld Unascertained. Specific Goods are goods
which can be clearly identified and recognised as se!?arate things
e.g.. a particular picture by a painter; a ring with distinctive
features; goods identified and agreed upon at the time of the
contract of sale etc. The term Ascertained Goods is used in the
same sense as Specific Goods.
Generic Goods or Unascertained Goods are goods indicated
by description and not separately identified. If a merchant agrees
to supply one bag of wheat from his godown to a bu)'er, it is
a sale of unascertained goods because it is not known which bag
\\ill be delivered. As soon as a particular bag is separated out
and marked or identified for delivery it becomes specific goods.
Future Goods
Future Goods are goods which will be manufactured Or
produced or acquired by the seller after the making of the contract
of sale.-Sec. 2(6).
Example
P agrees to st!'11 to Q all the mangot.!s which will be produced in his
garden next year. This is an agreement for the sale of future goods.
Contingent Goods
There may be a contract for the sale of goods the acquisition
of which by the seller depends upon a contingency wh ieh may
or may not happen. [Sec. 6(2)] In such cases the goods sold are
called Contingent Goods. Contingent goods come within the class
of future goods.
Eyample :
X agrees to sell to Y a certain ring provided he is able to purchase
it from its present o\\ner. This is an agreement for the sale of
contingent goods.

SALE AND AGREEMENT TO SELL

Sale
A contract for the sale of goods may be either a sale or
an agreement to sell (Sec. 4). Where under a cooillact of sale
the property in the goods (i.e .. llle ownership) is transferred from
the seller to the buyer the contract is called a sale. The transaction
is a sale even though the price is payable at a later date or
202 LAW RELATING TO SAlE OF OOOOS

delivery is to be given in the future, provided the ownership of

the goods is transferred from the seller to the buyer.
Agreement to sell
When the transfer of ownership is to take place at a future
time or subject to some condition to be fulfifled later, the contract
is called an agreement to sell.
When an agreement to sell becomes a sale? An agreement
to sell becomes a sale when the prescribed time elapses or the
conditions, subject to which the property in the goods is to be
transferred, are fulfilled.
Where by a contract of sale the seller purports to effect a
present sale of future goods, ·the contract operates as an
agreement to sell the goods.
Examples:
(i) P agrees to buy from 8 a haystack on 8's land, with liberty to come
on 8's land to take it away. This is a sale because the property
in the goods has passed to the buyer.
Iii) P agrees to buy a quantity of soda to arrive by a certain ship. This
is an agreement to sell because the property in the goods will pass
to the buyer when the goods come and the agreement is naturally
subject to the condition that the ship arrives in port with the goods.

DIFFERENCES BETWEEN A SALE AND AN

AGREEMENT TO SELL
I. Transfer of ownership
In an agreement to sell. the property in the goods remains
with the seller until the agreement to sell becomes a sale by the
expiry of the agreed time or the fulfilment of the agreed
conditions. Till this happens the goods can be resold by the seller
or attached in execution of a decree against him. In case of a
sale the property passes to the buyer and the goods cannot be
seized in execution of a decree against , the seller.
2. Transfer of Risk
Where the transaction amounts to a sale. the goods belong
to the buyer and' he has to bear the loss if the goods are
subsequently damaged or destroyed.-Sec. 26.
J, Remedial measures'
In the case of a sale, the unpaid seller has certain reliefs
available, e.g.. lien, stoppage in transit. resale etc. In case of
 DEFINITIONS 203

an agreement to sell, the seller's remedy for breach of contract

by the buyers, is a suit for damages.
4. Nature of contract
'Sale' is an 'executed contract' because in a sale, consid-
eration moves simultaneous with the promises. of both parties.
Also, in a sale the property of specific goods is transferred to
the buyer immediately. But an 'agreement to sell' is an 'executory
contract' because the consideration is to move at a future date.
Also the property of specific goods pass to the buyer later. (See.
p. 36 and ch.2 'Transfer of Ownership').
THE ESSENTIAL ELEMENTS
The essential elements of a contract for the sale of goods
are enumerated below :
I. Movable Goods : The Sale of Goods Act deals' on 1)1 with
movable goods, excepting actionable claims and money.-
Sec. 2(7). This Act does not apply to immovable properties.
2. Afol'able Goods for Money : There mllst be a contract
for the exchange of movable goods for money. Therefore in a
sale there must be money-consideration. (See 'Price', p. 204-205)
An exchange of goods for goods is not a sale. But it has been
held that if an exchange is made partly for goods arid partly for
money, the contract is one of sale. Aldridge v. Johnson. I
. 3. Two Parties: Since a contract of sale involves a change
of Ownership, it follows that the buyer and the seller must he
different persons. A sale is a bilateral contract. A man cannot
buy from or sell goods to himself. To this rule there is one
exception provided for in section 4( I) of the Sale of Goods Act.
A part-owner can sell goods to another part-owner. Therefore
a partner may sell goods to his finn and the firm may sell.goods
to a partner. Re Mac/aren. 2
Examples:
Q are each of them
(i) P &: t owners of a certain stock of movable
goods. P can sell his rights to Q. After the sale Q becomes owner
I
of '2 share.
(ii) A club supplies food to the members. Any member taking it has
to pay its cost to the club. Thus a member of the club pays to
the members jointly (i.e., to the club). This Iransaction is a release
of joint inle~est of the other members of lhe club. "Members of
I (18S7) 7 E&B 88S ! (1879) II Ch. Div. 68
204 LAW RELATING TO SALE OF GOODS

a club or yoluntary society are undivided joint owners, not part-

owners.". Therefore it is not a sale. Graff v. Evans. I
4. Formalion of Ihe conlracl of sale : A contract of sale
is made by an offer to buy or sell goods for a price and the
acceptance of such offer. The contract may provide for the
immediate delivery of the goods or immediate payment of the
price or both. Or for the delivery and payment by instalments,
or that the delivery or payment or both shall be postponed.-
Sec. 5(1).
5 . .\felhod offormillg Ihe cOlllracl : Subject to the provision
of an\ law for the time being in force, a contract of sale may
be i wriling. or by word of moulh, or may be implied from
the conduct of the parties.-Sec. 5(2)
6. The lerms of cOll/racl : The parties may agree upon any
term concerning the lime, place, and mode of delivery. The terms
may be of two types: essential and non-essential. Essential terms
are called Conditions, non-essential terms are called Warranties.
The Sale of Goods Act provides that in the absence of a contract
to the contrary, certain conditions and warranties are to be
implied in all contracts of sale.
7. Olher esscnlial elemenls : A contract for the sale of goods
must satisfy all the essential elements Ilecessary for the formation
of a valid contract, e.g.. the parties mllst be competent to contract,
there must be free consent, there must be consideration, the object
mllst be lawful etc. (See. p. 13)
PRICE
Definition
"Price" means the money consideration for a sale of goods.-
Sec .• 2( I 0)
Ascertaining of price
The price in a contract of sale may be fixed by the contract
of sale or may be left to be fixed in a manner agreed between
the parties. [t may also be determined by the course of dealing
between the parties. Where there is no provision made in the
contract regarding price, the buyer must pay a reasonable price.
What is a reasonable price is a question ot: fact depending upon
the circumstances of the case.-Sec. 9.

I (1882) 8 Q. B. D. 373
 DEFINITIONS 205

Goods may be sold on a condition that the valuation is to

be made by a thIrd party. In such cases if the third party cannot
or does not make the valuation, the agreeMent to sell becomes
void. But if the goods or any part thereof had been delivered
to and appropriated by the buyer, he shall pay a reasonable price
therefor.-Sec. I O( I)
Where such third party is prevented from making the
valuation by the fault of the seller or buyer, the party not in
fault is entitled to damages.-Sec. 10(2).

DESTRUCTION OF GOODS
Goods perishing before making a contract
"Where there is a contract for the sale of specific goods,
the contract is void if the goods without the knowledge of the
seller have, at the time when the contract was made, perished
or become so damaged as no longer to answer to their description
in the contract."-Sec. 7.
D:ample :
There was a sale of cargo of corn. Without the knowledge of the
seller, the cargo had before the sale become 'heated and was therefore
landed at another port and sold. The sale is void. COll/uricl" v.
Hastie. I

Goods perishing before sale but, after agreement to sell

"Where there is an agreement to sell specific goods, and
subsequently the goods without any fault on the part of the seller
of buyer perish or become so damaged as no longer to answer
to their description in the agreement before the risk passes to
the buyer, the agreement is thereby avoided."-Sec. 8.
£:xample :
There was a contract fOT the sale of a horse. The buyer would use
it for eight days for trial and it was not suitablc+ it would be returned,
Three days before the delivery of the horse, it died, without an)'
fault on the either party. The contract was avoided. Elphick v.
Barnes 2

EARNEST MONEY
The payment of earnest money to mark the formation of an
agreement for sale is a long standing custom in India as well
'(1856) 5 H. L. C. 673 1 (1880) 5 C.PD. 321
•
206 LAW RELATING TO SALE OF GOODS

as in England. There is usually an understanding that if the

contract is broken by the buyer, the seller is to retain the earnest
money as compensation; whereas if the contract is fulfilled the
amount is credited to the purchase price payable. Earnest money
is security for the fulfilment of agreement. A provision for the
forfeiture of earnest money is not consideration to be penalty
• clause.-Sec. 74.
In Shree Hanuman Calion Mills and Am: v. Tala Aircraft Lid I,
the purchaser deposited Rs. 2,50,000 as earnest money, being the
25 per cent of the value of goods. He agreed that the full value
of goods will be paid, before taking delivery but he failed to pay
it. Held, the seller was entitled to forfeit the earnest money.
Sale-amounl paid whether advance or earnesl money :
Money may be paid by the buyer to the seller at the time of
the formation of an agreement of sale. If usually expressly
stipulated whether the money is an 'advance' or an 'earnest
money'. In the absence of any stipulation, the payment is
interpreted as advance if it is a large part of the contract price.
If the money paid is a small part of the contract price, it can
be interpreted as earnest money. Afarimuthu Goul/der v.
Rama.,wamy Gounder and others. 2
HIRE-PURCHASE AGREEMENTS
Definition
A hire-purchase agreement is one under which a person takes
delivery of goods promising to pay the price by a certain number
of instalments and, until full payment is made, to pay hire charges
for using the goods. From this definition it can be said that a
hire-purchase agreement is a bailment plus an agreement 10 sell.
Formerly, hire purchase agreements were frequently worded
ambiguously and it was difficult to determine whether a particular
transaction was a sale or a hire-purchase agreement. The law
regarding this subject has been codified by the Parliament in
1972, viz .. the Hire-Purchase Act (No. 25 of \972), but the Act
has not been applied yet.
Summary
The main provisions of the Hire-Purchase Act are summarised
on the next pages:

I (1970) 2 S.G.A. 482 ,Supreme Court) 2 AIR (1979) Mad. 189

 IlEF1NmONS 207

1. Hire.-Purchase Agreement Means an agreement under

which goods are leI on hire and under which the hirer has an
option to purchase them in accordance with the terms of the
agreemenl and includes a agreement under which,
(i) pr..ssession of loods is delivered by the owner thereof to
a person on condition that such person pays the agreed
amount in periodical instalme"lts, and .
(;1) the proper\)' in 1he goods is tt pass to such person on the
payment of the last of such instalment. and
(iiI) such person has a right to terminate the agreement at any
time before the property so passes.-Sec.2(e).
2. Hire-Purchase agreement must be in wriling and signed by
parties. A surety. if any. must sign the hire-purchase agreements.
The agreement shall be void if the above requirements have
not been complied with.-Sec.3.
3. Contents of hire-purchase agreement must include the
foIlO\ying.-Sec. 4 :
(i) the hire-purchase price of the goods to which the agreement
relates;
(ii) the cash price of the goods i.e .• the price at which tM
goods may be purchased by the hirer for cash;
(iii) the date on which the agreement shall be deemed to have
commenced ;
(iv) the nUJ!1ber of instalments by which the hire-purchase price
is to be paid. the amount of each of those instalments and
the date. or the mode of determining the date. upon which
it is payable. and the person to whom and the place where
it is payable ;
(v) the goods to which the agreement relates. in a manner
sufficient to identify them;
(vi) where any part of the hire·purchase price is. or is to be.
paid otherwise than in cash tr by cheque. the hiro-purchase
agreement shall contain. a .escription of that part of the
hire-purchase price; and
(vii) where any of the above requilCments has not been complied
with. the hirer may institutt a suit for getting the hire-
purchase agreement rescindel ; and the court may. if it is
satisfied that the failure to c~ply with any such require-
ment has prejudiced the hiTt. rescind the agreement on
208 LAW RELATING TO SALE OF GOODS

such terms as it th inks just, or pass such other order as

il thinks fit in the circumstances of the case.
4. The purchaser has the option of paying the fu II price
before it was due. In that case the purchaser is entitled to get
a rebate.-Secs. 9, 10.
5. In every instalment of the full price, it includes the hire
of the goods and the pU"hasing price.-Sec. 7.
6. The seller can recov." the possession of the goods, if the
purchaser fails to pay any of the instalment price.-Sec. 17.
7. The Act provides that there will be certain warranties and
conditions to be implied in the hire-purchase agreement. The
words and expressions are defined in Contract Act and the Sale
of Goods Act.-Sec. 6.
8. The Act shall not apply in relation to any hire-purchase
agreement made before the commencement of this Act.-Sec. 31.

SALE AND OTHER CONTRACTS

Sale and Hire-purchase
In a sale, the property is transferred to the buyer; he can
deal with the property as he likes and the transferee of the
purchase gets a good title even if the price is unpaid. But in
a hire-purchase agreement, the purchaser does not become owner
till the full price is paid and therefore, the transferee from a
person who has not paid the full price, gets 110 title.
In a Bombay case it has been laid down that (i) if the
purchaser has no option of terminatil1!! the agreement by returning
the goods, the transaction is a sale and not hire-purchase
agreement and (ii) the transaction is hire-purchase agreement only
if the buyer has the option of returning the goods. Bhimji v.
Bumbay Trust Corporation. I
Hire-purchase and Instalment Sale
There are differences be!Ween a hire-purchase agreement and
an instalment sale, In the flrmer, a sale is concluded after the
total price and the hire charges are completely paid. The
purchaser is not entitled " transfer the goods until the terms
of the agreement are fully tarried oilt.· In the latter, (instalment

J 3~ 80m. LR. 6·L

 DEFINITIONS 209

sale) the purchaser becomes the owner of specific goods

immediately, although the total price is to be paid in a number
of instalments.
Sale and Bailment
Bailment does not change ownership of the goods. A sale
involves transfer of ownership.
In a bailment, the party delivering the goods is entitled to
get back what he has delivered. In a sale the seller gets the price
and there is no question of returning of goods.
Sale and Contract for Work and Labour
A contract of sale may be distinguished from a contract for
work and labour. A contract of sale of goods cont~mplates the
delivery of movable goods; but if in substance the contract is
one for the exercise of skill, it is a contract for work and labour.
"A contract of sale is a contract whose main object is the
transfer of the property in and the delivery of the possession
of, a chattel as a chattel to the buyer. Where the main object
of work undertaken. by the payee of the price is not the transfer
of a chattel qua chattel, the contract is one for work and labour."
Union of Ind.", v. The Central India Machinery Manufacturing
Co. Ltd. and. others. 1
The distinction between the two types of contracts is of
importance in England but not in India, except for taxation
purposes.
Examples :
(i) A dentist agreed to make a set of artificial teeth to fit the mouth
of a customer. Held. it is contract for the sale of goods. Lee v.
Griffin.'
(ii) G engaged an artist to paint a portr8it and supplied the canvas and
paint. Held. it is a contract for work and labour and not one for
the sale of goods. Robinson v. Graves. 3
(iii) r entered into three contracts with Western Railway for construction
of railway coaches on the under-frames supplied by the Railway.
Labour and materials were supplied by " Held, under the Bombay
Sales Tax Act or 1953, the contracts were works contracts and not
a sale. Slale of Gujaral v. A-l's Variety Body Builder.}. 4

I AIR (1977) Supreme COdrt. 1537 1 (1861) 30 L.J.K.B. 252

l (1935) I K.B. 579 • AIR (1976) Supreme Court. 2108

Commercial Law - 14
210 LAW RELATING TO SALE OF GOODS

(iv) The Railway Board entered into a contract with a company for the
manufa.;tur. and sal. of wagons to the Union of Indi. by the
company. Even though some advance was taken from the Railway
Board. the bulk of the material used in the construction belonged
to the manufacturer who sold the end product for a price. Held.
the contract was not one for work and labour but aile for sale. Union
of India v. The Central India Machinery A'anu!acluring Co. LId
and o/hers. (see p. 209)

CONDITIONS AND WARRANTIES

Section 12 of the Sale of Goods Act states that a stipulation
(or term) in a contract of sale with reference to goods may be
a. cond ition or a warranty.
Condition
A condition is a stipulation essential to the main purpose
of contract. the breach of which gives rise to a right to treat
the contract as repudiated.-Sec. J 2(2).
Warranty
A warranty is a stipulation collateral to the main purpose
of the contract. the breach of which gives rise to a claim for
damages but not a right to reject the goods and treat the contract
as repudiated.-Sec. 12(3).
Whether a stipulation in a contract of sale is a condition
or a warranty depends in each case on the construction of the
contract. A stipulation may be ·a condition. though called a
warranty in the contract.-Sec. 12(4).
Conditions and Warranties may be expressly stated in a
written document or may be implied from the circumstances
under which the contract was entered into.
It is fOf the court to find out whether a particular term was
intended by the parties to· be a condition or whether it was
intended to be a warranty only. The intention of the parties is
always t,. be given effect to.
Stipulation as to· time.
Unless a different i>etention appears from the terms of the
contract, stipulations as to time of payment are not deemed to
be of the essence of a contract of sale. Whether any other
stipulation as to time is of the essence of the contract or not
depends on the terms of the contract.-Sec. II. (Sec pp. 110-111).
 •
DEFINITIONS 211

Example:
There was a contract for sale of goods, c.i,f,·Antwerp, Delivery was
to be given on October, Owing to a strike in the port of loading
the goods were not shipped 'until November, Held, buyer were
entitled to reject. J. Aron & Co, v. Camp/air Wegimont I
Reasonable lime a question of facl: Where in this Act any
reference is made to a reasonable time, the quesiion what is a
reasonable time is a question of fact.-Sec. 63.
When a Condition can be treated as a Warranty-
I. Voluntary waiver of a condition : The buyer may elect
tei treat a breach of condition a~ a breach of warranty, i.e. instead
of repudiating the contract he may accept performance and sue
for damages, if he has suffered any.-Sec, 13(1). .
Where a contract of sale is subject to a condition to be
fulfilled by the seller, the buyer may waive the condition.
2. Compulsory waiver of a condition: Where ,a contract of
sale is not severable and the buyer has accepted the goods or
. a part thereof, he cannot repudiate the contract but can only sue
for damages, In such a case, the breach of condition can only
be treated as a breach of warranty, unless there is a contract \0
the contrary.-Sec. 13(2).
If a buyer prevents the fulfilment of a condition contained
in the contract, the condition becomes invalid.
Example
Certain goods were promised to be delivered on 1sf June, time being
madt~ the essence of the contract. The goods ",ere delivered on Ihe
tnd June. The buyer may accept the goods.

~tion between Condition and Warranty

I. Condition is a term which IS essential to the main purr"sc'
of the contract. Warranty is only a collateral term, It is sunsidiary
to the ma;" purpose of the contract.
2, Breach of a condition gives the aggrieved party a right
to repudiate the contract. It also creates a right to get damages,
Breach of warranty entitles the aggrieved party to claim damages
only,
3. A breach of condition may under certain circumstances, be
treated as a warranty. But a warranty cannot become a condition.

I (1921) 3 f.:.B. 435

 212
•
LAW RELATING TO SALE OF GOODS·

/ /consequences of Breach of Conditions

~ ./" ~ I. If a condition is broken there arises a right to treat the
contract repudiated.-Sec. 12(2).
2. Repudiation of ContraCt before due date : Where either
party to a contract of sale repudiates the contract before the date
of delivery, the other may either treat the contract as subsisting
and wait till the date of delivery, or he may treat the contract
as rescinded and sue for damages for the breach.-Sec. 60.
Consequences of Breach of Warranty
I. A breach of warranty gives rise to a claim for damages
but not to a right to reject the goods and treat the contract as
repudiated.-Sec. 12(3).
2. Under certain circumstances a 'condition' is to be treated
as 'warranty' .-Sec. 13( I) and 13(2).-See above.
3. Nothing in Section 13 shall affect the case ofany condition
or warranty fulfilment of which is excused by law by reason
of impossibility or otherwise.-Sec. 13(3). "It merely saves the
rights of the sellcr, in appropriate cases, to re)y upon the
impossibility as· an excuse to himself, if sued by the buyer."1
4. Remedy for breach of warranty : (I) Where there is a
breach of warranty by the sellcr, or where the buyer elects or
is compelled to treat any breach of a condition on the part of
the seller as a breach of warranty, the buyer is not by reason
only of such breach of warranty entitled to reject the goods, but
he may-
(a) set up against the seller the breach of warranty in
dim inution . or extinction of the price; or
(b) sue the seller for damages for breach of warranty.
(2) The fact that a buyer has set up a breach of warranty
in diminution or extinction Of the price does not prevent him
from suing for the same breach of warranty if he has suffered
JUrther damages.-Sec.59.
J Implied condition and warranfies
A stipulation (or term) in a contract of sale of goods may
be express or implied. Express terms are those which have been
expressly agreed upon by the parties. Implied terms are those
which have been enacted in the Sale of Goods Act. Sections 14

I Pollock and Mull •• Indian Sale of Goods .-fCI.

 DEFINITIONS 213

to 17 of the Act contain a list of conditions and warranties which

are implied in a contract for the sale of goods, unles.. the
circumstances of the contract are such as to show a different
intention. The implied conditions and warrants are stated below.

~ IMPLIED CONDITIONS
/condition as to title
There is an implied condition on the part of the seller that,
in the case of a sale hc has the right to sell the goods, and in
the case of an agreement to sell, he will have the right to sell
the goods at the time when the property is to pass.-Sec.14(a).
Examples:
(il R bought a motor car from D and used it for four months. D had
no title to the car. R was forced to return the car to the true owner.
Held, there is a breach of the implied condition as to title and R
is entitled to get back the purchase money paid notwithstanding the
fact that he had used the car for 4 months. Rowland" Di,·e//. 1
(ii) If the goods delivered can be sold only by infringing a trade mark,
the implied condition of title is violated and the buyer can recover
damages. Nib/ell Lid. v, Confectioner of Motedals Co. 2
(iii) In a contract for the sale of shares there is an implied condition
that there is no encumbrance of charge on the shares in favour of
a third party. Kissenchand v. Ramprolap.'

'~Sale by description
Where there is a contract for the sale of goods by description,
there is an implied condition that the goods shall correspond with
the description. Sec ! 5 -
Goodsare to be sold by description when the contract
contains a description of the goods to be supplied. Such
description may be in terms of the physical characteristics of the
goods or may simply mention the trade mark, trade name, brand
or label under which they are usually sold. A sale of 50 boxes
of X brand soap or of 10 tons of Y brand mustard oil, is a sa Ie
of gnods'by description. In such cases the goods supplied must
be the same as the goods described.
Example:
(i) A certain quantity of copra cake was sold "not warranted free from
defect." The copra cake was adulterated with castor beans to such
1 (1923) 2 K.B 500 , (1921) 3. K. B. 387
'44 C'. W.N. 50S
 214 LAW RELATING TO SALE OF GOODS

an extent that it could not be described as copra cake. Held, there

was a violation of the implied condition and the buyer waS awarded
damages. Pinnock Bros. v. Lewis & Peat Lid I
(ii) M sold to L, 3000 cases of canned fruits, each case to cO.ntain 39
tins. M delivered 3000 cases, but about half the cases contained
24 tins each. Although the market value of the 24 tin cases were
the same as the 30 tin cases, it was held that the buyer was entitled
to reject the goods. Re Afoore & Co., and Landauer & Co. '2

v/i Sale by sample

When goods are to be supplied according to a sample agreed
upon, the following conditions are implied.-Sec. 17.
(a) The bulk shall correspond with the sample in quality.
(h) The buyer shall have a reasonable opportunity of
comparing the goods with the sample.
(c) The goods shall be free from any defect rendering them
unmcrchalllahle. which would not be apparent on reasonable
examination of the sample. If 'the defect is easily discoverable
on inspection and the buyer takes delivery after inspection, he
has no remedy.
Merchantable
This term was defined as follows : "The article in such
quality and in such condition that a reasonable man, acting
reasonably, would after a full examination accept .it under the
circumstances of the case in performance of his offer to buy that
article, whether he buys for his own use or to sell again." Brislol
Tral/lways Co. v, Fial Afolors LId.)
Ewmp/e :
Some mixed worsted coatings were sold by sample. It was found
that owing to a hidden defect of the cloth which could not be
detected on reasonable examination, coats made out of it could not
stand ordinary wear and were. therefore unsalable. The buyer was
held to be entitled to damage. James Drummond and Sons v.
£. H. Ian Ingen & CR'

Sale by sample as well as by description

When goods are sold by sample as well as by description,
the goods shall correspond both with the sample and with the
description.-Sec, IS,
I (1923) I K. B. 690 '(1921) 2 K.B. 519
'()910) 2 K. B. 831, CA. 1(1887) 12 A.C. 284
 DEFINITIONS 215

Example:
N agreed to sell to G some oil described as "foreign refined rape
on warranted only equal to sample.n The samples contained an
admixture of hemp oil and the oil delivered was adulterated in the
same way. Held, the oil supplied was not rape oil and therefore
the buyer was entitled to reject the goods. Niclrol v. GOdIS. 1
/
. S.Condition as to fitness or quality (Sec. 16)
There is an implied condition as to quality or fitness for the
purpose of Ihe buyer under the following circumstances only:
A. Where the buyer, expressly or by impl ication, makes
known to the seller the particular purpose for which the goods
are required, so as to show that the buyer relies on the sellers
skill, or judgment, and the goods are of a description which it
is in the course of the seller's business to supply (whether he
is the manufacturer or not).
£'Cmnples : .
(i) W supplied J with tinned salmon v,hich was poisonous . .J fell ill
and his wife dieu as a result of eating the salmon. Held, there 'was
an implied' condition of fitnc!;s because the seller obviously kncv,i
that the salmon was being purchased for consumption. The condition
was violated by the grocer and damages were recoverable. Jackson
v. Watson & Sons. 2
(ii) AI. a milk dealer supplied F with milk which was consumed by
F and his family. The milk contained germs of typhoid. F·s wife
was infected and died. Held. there was a breach of an implied
condition of fitness and A was liable to pay damages. Frost v.
Aylesbury Dairy Co. Ltd 3
(iii) There was a contract to supply 500 tons of coal for the 5.5.
"Manchester Importer". The coal supplied was found to be unfit
for this ship. It was held that the buyer was entitled to get damages.
Alullcheste,. Lines v. Rea Ltd.' In this case it was held that a buyer
relies on the skill of the seller when he makes known to him the
purpose for which the goods are required and the circumstances are
such that any reasonable seller would take it that his judgment is
being relied upon.
(iI) The plaintiff who was a draper and had no special knowledge of
hot water bottles. went to a chemist and asked for a "hot water
bottle". Held. that the bottle supplied must be fit for use as a hot
water bottle. Prets( v. Last. S

'(1854) 10 Ex 191 2 (1909) 2 K. B. 193

'(1905) 1 K.B. 608 '(1922) 2 A.C. 74
'(1903) 2 K.B. 148
216 LAW RELATING TO SALE OF GOODS

B. An implied condition of fitness may be annexed to a

contract of sale by usage of trade or custom of the locality.
C. When goods are bought by description from a seller who
deals in goods of that description (whether.he is the manufacturer
or producer or not) there is an implied condition that the goods
are of merc11antable quality, that is, fit to sell.
There is one txception to rule C.-If the buyer has examined
the goods, there shall be no implied condition as regards defects
which that examination ought to have revealed.
£'wnlples of rule C :
(i) Some motor-horns were to be delivered by instalments. The first
instalment was accepted but the second contained a substantial
quantity of horns which were damaged owing to bad packing. Held,
the buyer was entitled to reject the whole instalment as the goods
were not saleable quality. Jackson v. Rotax MOlor elC. I
(ii) .\l asked for a bottle of Stone's ginger wine in a restaurant. When
he was drawing the cork the bottle broke and AI was injured. Held,
the sale was one by description and since the bottle was
unmerchantable, At was entitled to recover damages . .\(orelli v. Fitch
Gibbons.'
(iii) B wanted to purchase some glue. The seller showed him the glue
which was stored in his warehouse in casks. B did not have the
casks opened, which he could have done easily, but merely looked
at the outside of the casks. The glue was found to have defects
which would have been found out if B had inspected the contents
of the casks. Held, there was no implied condition as to merchant-
able quality. Thornetr & Fehr v. Beer & SOliS.'

THE DOCTRINE OF CAVEAT EMPTOR

Definition
Caveat Emptor is a Latin expression which means, "buyers
beware". The doctrine of caveat emptor means that, ordinarily,
a buyer must buy goods after satisfying himself of their quality
and fitness. If he makes a bad choice he cannot blame the seller
or recover damages from him. "The rule probably originated at
a time when goods were mostly sold in market overt, and the
buyer therefore had every opportunity to satisfy himself as to
the quality of the goods or their fitness for a particular purpose,

I 11910) 2 K. B. 937 '(1928) I K.B. 636

, (1919) I K.B. 436
 DEFINITIONS 217

and at common law it was presumed that where the buyer could
examine the goods even though he did not, he relied upon his

, own skill and judgment.'"

Exceptions
Subject to certain exceptions, the doctrine of caveat emptor
applies to India. Section 16 of the Sale of Goods Act 'Iays down
that in a contract for the sale of goods there shall be no implied
condition as to quality or fitness for particular purpose except
under the circumstances mentioned under tbat section. The
exception are as follows ;
(a) Where the buyer relies upon the skill and judgment of
the seller. (See examples given under rule A' above p. 215)
(b) Where by custom an implied condition of fitness is
annexed to a contract of sale. (Rule B above p. 216)
(c) Where there is a sale of goods by description, there is
an implied condition that the goods are fit for sale. (See examples
under rule C above p. 216)
(d) Where the seller is guilty of fraud. A contract of sale
of goods must satisfy all the essential elements of a contract and
therefore if the consent of the buyer was obtained by fraud, the
seller is not protected by the doctrine of caveat emptor.
In cases not falling under any of the four exceptions noted
above, the seller is not liable to any penalty if the goods
purchased are found to be unfit by the buyer for the purposes
he had in mind.
The case of patented artides
( Para 2 of Section 16(1) of the Sale of Goods Act provides
thar"in the case of a contract for the sale of a specified article
under its patent or other trade name, there is no implied condition
as to its fitness for any particular purpose)' Thus if a machine
is patented as a "cotton cleaning machine' and is sold as such
in the market there is 110 implied undertaking by the seller that
the machine would clean cotton. If a buyer writes to a
manufacturer, "send me one of your patented cotton cleaning
machines", he cannot claim damages if he finds the machine
useless. But if the buyer asks the manufacturer to supply a

1 Pollock &. Mulla. Indian Sales of Good.. Act.

218 LAW RELATING TO SALE OF GOODS

machine which will clean cotton, h" relies on the judgment of

the manufacturer and if the machine supplied is found to be
unsuitable, he can claim damages.
~~:
B told a motor car dealer that he wanted a comfortable car for
,
touring purposes. The dealer recommended a car which was being
sold under the trade name of X The car was found to be unsuitable
and B sued the dealer for damages. It was held that B had relied
on the skill and judgment of the dealer and was entitled 10 get
damages. BaldlY v. Marshall.'

IMPLIED WARRANTIES
I n the absence of an agreement to the contrary, the following
warranties are implied in every contract of sale:
I. The buyer lIlust get quiet possession : The buyer shall
have and enjoy quiet possession of the goods. [Sec. 14(b)]. Since
disturbance to quiet possession is likely to arise only where the
vendor does not possess the right to transfer the goods, this clause
may be regarded as an extension Of the implied condition of title
provided for by Section 14(a).2
2. The goods must be free from encumbrance: There is an
implied warranty that the goods shall be free from any charge
or encumbrance in favour of a third party not declared or known
to the buyer before or at the time when the contract is made.-
Sec. 14(c).
The effect of this clause is that if the buyer pays off the
charge or encumbrance, he will be entitled to recover the money
from the seller.
3. Fitness of goods. required for a purpose, may be
warranted by usage of trade : A warranty as to fitness for a
particular purpose may be annexed to a contract of sale by a
custom or usage of trade.-See. 16(3).
Exclusion of implied terms and conditions
Where any right, duty or liability would arise under a
contract of sale by implication of law, it may be negatived or
varied by express agreement or by the course of dealing between
the parties, or by usage, if the usage is such as to bind both
parties 10 the contract.-See. 62.

'(1925) ) K.B. 260 2 Pollock & Mull., Indian Sale of Goods .-lei
 DEFINITIONS 219

Comment: Section 62 of the Act provides that the liabi'!ity

for implied warranties under a contract of sale, can be excluded
(i.e., negatived) by three methods, namely: (i) express contract,
, (ii) by the course of dealing between the parties, and (iii) by
usage.

LIABILITIES OF THE SELLER APART FROM THE

CONTRACT OF SALE
The Sale of Goods Act deals only with the contractual
liabilities of the seller. But the seller may alsp be liable to pay
damages under the law of torts if he causes injury by a wrongful
act. Such damages may sometimes he recovered by a third party,
i.e., one wi1h whom the seller never entered into any contract.
Some example are given below.
Examples:
(I) N sold tl? C a tin of disinfectant powder knowing that it would
be dangerous to open the tin \\'ithout special care. C Vvithout
knowledge of the danger, opened the tin, \ ...·hcrcupon the powder·
Hew into her eyes and injured them. r sued for damages. Held .
.\' should have warned C of the possible danger and having failed
to do so, was liable to pay damages. Clarke v. Army ]\'QI}' ("0-
operatin: Sociely Ud 1
(ii) The plaintiff went to a restaurant with a friend and ordered a bottle
of ginger beer manufactured by the defendant. She drank a part of
the bottle. \Vhen the remainder was poured into. the glass a
decomposed snail appeared with the liquid. For the resulting mental
and bodily shock, she filed a suit for damages against the
manufacturers. Damages were granted. The H.ouse of Lords held that
a manufacturer of goods intended for consumption, is under a duty
to take reasonable care that the goods are free from defects which
render them noxious or dangerous. Donoghue v. Sfe\'enso.II::!

EXERCISES
I. Define 'goods' and state the different types of 'goods'.
(Pages 200-20 I)
2. Explain the difference between a condition and warranty. Under
\\·hat circumstances can a breach of condition be treated as a breach
of warranty' (Pages 210-211)

1 (1903) 1 Kl3. l55 , (193::') A.C. 562

220 LAW RELAllNO TO SALE OF GOODS

3. Distinguish a 'condition' from a 'warranty' as used in the Indian

Sale of Goods Act, and state the consequences for breach of
condition and warranty. (Pages 211-216)
4. What do you understand by :Caveat Emptor'? Are there any
exceptions to its application to sale of goods ? (Pages 216-217)" ~
s. Explain the condition of fitness or quality and the exceptions to
it. (Pages 2IS-216)
6. What are the implied conditions in a contract of sale of goods by
sample? (Pages 213-218)
7. Explain the following terms: Buyer; Seller; Earnest money; Price
of goods. (Pages 200, 204, 206)
8. What is a contract of Sale of Goods? What are the distinctions
between sale and agreement to sell ? When are agreement to sell ?
When an agreement to sell becomes sale? Illustrate.
(Pages 201-203)
9. When stipulation in a contract of sale will amount to conditions
and warranties? State the conditions which may be termed as
implied conditions in relation to goods. (Pages 210-216)
10 Explain the terms 'Condition' and 'Warranty'. Distinguish between
the two. When can a condition be treated as warranty? State the
implied conditions in a contract of sale of goods.
(Pages 210-216)
II. State the differences between the following :
(a) Sale and hire-purchase. (Page 208)
(b) Sale and agreement to sell. (Pages 201-202)
(e) Hire-purchase and instalment sale. (Page 208)
(d) Condition and Warranty. (Page 210)
12. Objective questions. Give short answers
(I) "Goods may be classified into three types". What are they?
(iI) Give one example of implied condition in a contract of sale
of goods by sample. (Pages 200-201, 213)
 TRANSFER OF OWNERSHIP

WHEN DOES PROPERTY PASS FROM THE SELLER

TO THE BUYER?
Rules, Sections 18 to 25 of the Sale of Goods Act lay down
the rules which determine when ownership of property passes
from the seller to the buyer. These rules may be summarised
as follows : -
v.buascertained Goods
When there is a contract for the sale of unascertained goods,
property in the goods is not transferred to the buyer unless and
until the goods are ascertained.-Sec.18.
An agreement to sell SO maunds out of a large quantity of
rice in a godown does not make the buyer the owner of anything.
He can become owner of SO maunds of rice only after this
quantity of rice has been separated out from the other rice in
the godown. "The individuality of the thing to be delivered" must
be established before property in it can pass from the seller to
the buyer. (Lord Ellenborough in, Busk v. Davis. I)
~be Intention of tbe Parties
In a contract for the sale of specific or ascertained goods,
the property passes at such time as the parties to the contract
intend it to pass. For the purpose of ascertaining the intention
of the parties regard shall be had to the terms of the contract,
the conduct of the parties and the circumstances of the case. If
the intention of the parties cannot be otherwise determined, the
rules mentioned below are to be applied.-Sec.19.
\Y.Specific goods
Where there is an unconditional contract for the sale of
specific goods in a deliverable state, the property in the goods
passes to the buyer when the contract is made, and it is immaterial
whether the time of payment of the price or the time of delivery
of the goods, or both, is postponed.-Sec. 20.
1 (1814) 2 M & S 397

221
 222 LAW RELATING TO SALE OF GOODS

;PrQJ?er;t:y. passes at the time of entering into the contract of

sale if the foHowing cpnditions jlI"e fulfilled :
(i) The goods are specific goods.
(ii) The goods can be immediately delivered.
(iii) The contract of sale is without any condition.
(iv) The parties therT!selves haW not fixed a different time for
the passing of property.
~ Deliverable State
Goods are said to be in a 'Deliverable state', when they are
in such state that the buyer would under the contract be bound
to take deliver)' of them.-Sec. 2(3). •
F.xamp/e :
On the 4th January, a haystack lying on the seller's land was sold.
It was agreed that the price was to be paid on' 4th February, The
haystack will remain on the seller's· land till 1st May and no hay
was to be cut till the price was paid. The haystack was destroyed
.bY fire. Held, the property in the haystack had passed on the making
/' of the contract and the buyer must bear .the loss. Tar!ing v. Baxler. i

,/4. When ,,,lIer has something to do

Where there is a contract for the sale of specific goocts and
the seller is bound to do something to the goods for the purpose
of putting them into a deliverable state. the proper!)' docs not
pass until such thing is done and the buyer has notice thereof.--
Sec. 2 I.
Example
The contents of a cistern of oit was sold, the 'oil was to be filled
into casks by the seller and then tilken away by the buyer. Some
of the casks were filled in the presence of the buyer but, before
the remainder could be filled, a fire broke o'ut and the entire quantity
of oil \\0'35 destroyed. Held, the buyer must bear the loss of the oil
which \\las put into casks and the seller must bear the loss of the
remainder. Rugg v. Jfmnel. 2

~hen goods are to be measured, tested, etc.

Where there is a contract for the' sale of specific goods in
a deliverable state, but the seller is bound to weigh, measure,
test or do some .other act or thing with reference to the goods
for the purpose of ascertaining the price, the property docs not
1(1827) 6 B & C 360 'II East 210
 TRANSFER OF OWNERSHIP 223

pass until such act or thing is done and the buyer has notice
thereof.-Sec. 22.
Example:
A certain quantity of bark was sold at a fixed price per ton. It was
agreell that for determining the money payable by the buyer. the
bark would be weighed by the agents of the parties. After a certain
quantity was weighed taken away, the re '. ~.as carried away by flood.
Held. the buyer is liable to pay for' ne part taken away by him
and the loss of the remainder must be borne by the seller. Simmons

~
6. Unconditional appropriation
Unconditional appropriation means doing something which
identifies and determines the actual goods to be delivered.
Pmperty passes when such unconditional appropriation is made
by one party with the consent of the other.
Where there is a contract for the sale of unascertained or
future goods by description and goods of that description and
in a deliverable state are unconditionally appropriated to the
contract. either, by the seller with the assent of the buyer or by
the buyer with the assent of the seller, the property in the goods
thereupon passes to the buyer. Such assent may be expressed or
implied, and may be given either before or after appropriation
is made.-Sec. 23( I).
Example :
G sold to P, 140 bags of rice out of his stock (sale of unascertained
goods). After the price was raid G sent a delivery order for 125
bags and wrote a letter saying that the remai!1ing 15 bags ",'cre ready
for delivery at his warehouse. P sent fur the 15 bags after about
a month, when it was discovered that the bags were stolcn. Held,
there was uncondilional appropriation of the 15 bags by the seiler,
there was implied consent of the buyer to the appropriation (because
he did not object) and therefore property in the 15 bags has passed
10 the buyer_ He must. therefore bear the loss and is not entitled
to get back the price paid by him for them, Pignataro v. Gilroy 2

7. Delinry to the carrier

Where in pursuance of the contract, the sellcr delivers the
goods to the buyer or to a carrier or other bailee (whether named
by the buyer or not) for the purpose of transmission to the buyer,

'(18:!6) 5 B & C 857 , (1~191 1 K.B. 549

 224 LAW RELATING TO SALE OF GOODS

and does not reserve the right of disposal, he is deemed to have

uncondiiionally appropriated the goods to the contract.-Sec.
23(2).
The general rule is that when the seller delivers the goods
to a carrier for being taken to the buyer, there is unconditional
appropriation on his part and the property passes to the buyer.
To this rule there is one exception : property does not pass if
the seller reserves th~ 'right of disposal" of the goods.
Reservation of the Right of Disposal
(Sec. 25) Reservation of the right of disposal means any
action by the seller which expresses an intention on his part not
to part with control over the goods until certain conditions are
fulfilled. In such cases, the property, passes when the conditions
are fulfilled.
An intention to reserve the right of disposal may be presumed
when a Bill of Lading or a Railway Receipt makes the goods
deliverable to the order of the seller.
When the Bill of Lading or the Railway Receipt for the
goods, and the Bill of Exchange for the price are sent together
and the Bill of Lading or the Railway Receipt is deliverable to
the buyer only when the Bill of Exchange is accepted or paid,
the buyer is bound to return the Bill of Lading or the Railway.
Receipt if he does not honour the bill of exchange. If he
wrongfully retains the Bill of Lading or the Railway Receipt,
the property in the goods does not pass to him.
Examples:
(i) X sends certain goods by lorry for delivery to W without reservation
of the right of disposal. The property passes to W as soon as the
goods are handed over to the carrier.
(ii) X sends certain goods by lorry to Y and instructs the lorry driver
not to deliver the goods until the price is paid by Y to the lorry
driver. The property passes only when the price is paid.

~ Goods sent on approval or "on ~ale

or return"
(Sec. 24) When goods are delivered to the buyer on approval
or "on sale or return" or other similar terms, the property therein
passes to the buyer-
(a) when he signifies his approval or acceptance to the seller
or does any other act adopting the transaction :
 TRANSFER OF OWNERSHIP 225

(b) If he does not signify his approval or al:ccptance to the

seller but retains the goods without giving notice of rejCl:tion,
then, if a time has been fixed for the return of the goods, on
the expiration of such time, and if no time has been fiKed, on
the expiration of a reasonable time.
Examples:
(i) K delivered some jewellery to X on sale or return. X pawned the
jewellery with A. Held, X's act amounts to an acceptance' of the
sale transaction and hence .., 's rights an: protected. KirlcJram v.
AJlen!lQro~IL' --
(ii) Certain goods were delivered to A on sale or return. A delivered
the goods to B on similar terms, B to C. and C to D. D lost the
goods. Held, since A was unable to return the goods 10 the seller,
the sale was complete and must pay the price. aen" v Winuil
(iii) P sends certain books to Q on approval. Q does not return them
or ask the seller to take them away, for six months. He is deemed
to have approved the sale and must pay the price.

TRANSFER OF OWNERSHIP : TIME OF

Sale of goods involves transfer of ownership of property
from the seller to the buyer. It is necessary to determine the
precise moment of time at which the ownership of the goods
passes from the seller to the buyer, because of the following
reasons:
I. Risk passes with property·: The general rule is that risk
passes with the property. If the goods are lost or damaged by
accident or otherwise, then, subject to certain exceptions, the loss
falls on the person who is the owner at the time when the goods
are lost or damaged.
2. Who can take action?: When there is danger of the goods
being damaged by the action of third parties it is the owner who
can take action.
3. What is the effect of insolvency?: (n case of insolvency
of either the buyer or the seller it is necessary to know whether
the goods will be taken over by the official Assignee. The answer
depends 'upon whether the ownership of the goods is with the
party who has become insolvent.
Passing of risk
SCl:tion 26 lays down the rules regarding the pa~sing of risk.
'(1897) ( Q.B. 201 I (t912) 107 L.T.434

Commercial Law - IS
226 I.AW RELATING TO SALE Of GOODS

The general rule is that goods remain at the seller's risk until
the ownership is transferred to the buyer. After the ownership
has passed to the buyer, the goods are at the buyer's risk whether
delivery has been made or not. "Risk follows ownership." (See
examples given in pages 224-225).
There are two exceptions to the rule stated above.
I. Where delivery has been delayed through the f<lult of
either the buyer or the seller, the goods are at the risk of the
party in fault as regards any loss which might not have ,accurred
but for such fault.
2. The parties may agree that the risk will pass at a time
different from the time when ownership passed. For example,
the seller may, in a particular case, agree to. be responsible for
the goods even after the ownership has passed to the buyer.
Destruction of part of goods sold
Sec examples in p. 204 , and paragraphs 4, 5 and 6, pp.
222-223.

TRANSFER OF TITLE BY NON-OWNER

<!eneral Rule
The general rule is that only the owner of goods can sell
the goods. No one can convey to a transferee a better litle than
he himself has. If a person transfers articles nOI belonging him,
-the transferee gets no title. This principle is expressed by the
Latin phrase,"Nemo quod qui non habel", which means "none
can give who does not himself possess". This rule applies to
both movable and immovable property. Bllt as regards movable
goods it is subject to certain exception noted below. In each of
-the followin'g cases, a person who is not an owner, can give to
the transferee a valid lille 10 the goods :
I. Ji:stoPPfl
Undl" ccrtain circumstances the true owner may be prevented,
,by his conduct, from denying the seller's authority to sell.
Suppose that X is the owner of certain goods. X acts in such
a manner that Y is induced to believe that the goods belong to
Z. On that bel ief Y buys the goods from Z. Under these
•,jrcumstances, the court will not allow X 10 prove his ownership.
ThllS Y gets a good title to the goods -even Ihough he has
purchased Ihem from Z who is not their owner.
 TRANSFER OF OWNERSHIP 227

Example:
P. the owner of certain machinery, left them in th~ possession of
Q. A person named R who had obtained a decree against Q. seized
the goods in ex!!cution of the decree. P took no steps for several
months to claim the goods. He also conversed with R's solicitor
, regarding the executiun withOllt mentioning his title to (hI.:: machin-
ery. R then had the machinery sold in execution. It was held that
P was estopped from denying that the machinery was Q '5. Pickard
/v. Sl!ar:r
l

~"J/. Sale by a mercantile agent

Sale of goods by a mercantile agent gives a good title to
the purchaser c\<en in cases where the agellt acts beyond his
authority. provided the following conditions arc satisfied.-··
Sec. 27 :
(i) The agent 'is in possession of the goods or of a doculllent
of title to the goods.
(ii) Such possession in \\'ith the consent of the 1..1\\ !lCr.
(iii) The agent sells the goods in the ordinary course of
business,
(i<. rhe purchaser acts in gOOd Llith and has no notice that
the agi,;:nt had 110 al,thvrity i.~) ::.dl.
!"J.\/' !"l'ol1tile Agent "-'\lcrcantilc agent' mcan~ an ag:cnt
hal, ,11~ in the customary cours(; of business as such agt:l1t
authority either to sdl goods, or to , \.Jllsign goods for the purpose
uf salc~ or tll buy goods. or to raise money on th~ st.'(:urit) of
goods.-Scc. 2(9)]

3. Sal,> hy one of scnral joint owncrs

If one of several joint owners of goods has the sl)lc
po=:oscssion of them by p~mli5sion of the co-owners, the proper1)
in thl: goods is transferred to any rt~r50n who buys them from
such jnint 0\\ 11<..:1 pn-'vi,k-J the buyer acts in good faith 311(.1
withe·lIt notice that the seller had no authority to sell.-Sec 2~.

4. Sale uf goods obtained under a "oidable agreement

When the seller of goods has obtaincd possession thereof
under a voidable agreement but the agreement has not bcen
rescinded at the time of sale, the buyer obtains a good title w
the goods. provided he buys them in good faith and without notice
of the seller's defect of title.--Scc 2<).
'(1937) 6,\ & E. 469
 228 LAW RELATING TO SAlE OF GOODS

Example
x: buys a ring from Y at a low price by undue influence and sells
it to Z woo is an innocent purchaser without notice of X's defective
title. Z has a good title and Y cannot recover the ring from him
eVC1 if the agreement with X is subsequently rescinded.
It is to be noted that the above section applies when the
goods have been obtained under a voidable agreement, not when
the goods have been obtained under a void or illegal agreemenl.
If the original agreement is of no legal effect (void ab initio)
the title to the goods remain with the true owner and cannot
be passed on to anybody else.
Example:
In Cundy v. Lindsay (see p. 74) goods were obtained by an
agreement which was found to be void. It was held that no title
passed to the buyer though he was a bona fide purchaser for value
and without notice of any defect in the seller's title.

5. ~Ie by tbe seller in possession of goods after sale

\ . / Where a person, having sold goods, continues to be in
possession of the goods or of the documents of title to the goods,
a transfer of title by him or his agent by way of sale of pledge,
gives a good title to the transferee provided the transferee was
acting in good faith and had no knowledge of the seller's want
of title.-Sec. 30(1). The original buyers in such cases can obtain
damages from the seller but cannot recover the goods from the
second buyer.
t:Xample
M has 50 barrels of tobacco at a warehouse on the dock. The dock
warrant was issued to him. M sells the tobacco to J who leaves
the dock warrant to M but takes no step to have the tobacco
transferred to J's name. M subsequently pledges the tobacco and
delivers the dock warrant to C Held. C. acting in good faith, will
acquire .good title against J. Johnson v. Credit Lyannals. I
["Document of title 10 goods" includes a bill of lading, dock-
warrant, warehollsekeeper's certificate, wharfingers' certificate,
railway receipt, warrant or order for the delivery of goods and
any other document used in the ordinary course of business as
proof of the possession on control of goods, or authorising or
purporting to authorise, either· by endorsement or by delivery,

I (1877) 3 G.P.D. 32
 TRANSFER OF OWNERSHIP 229

the possessor of the dotument to transfer or receive goods

thereby prepresented.-Sec. 2(4»).
6. Buyer in possession of goods over which the seller
has some rights
When goods are sold subject to some lien or right of the
seller (fer example for unpaid price) the buyer may sell, pledge,
or otherwise dispose of the goods to a third party and give him
a good title, provided the following conditions are satisfied.-
Sec. 30(2).
(i) The first buyer is in possession of the goods or of the
documents of title to the goods with the consent of the
seller.
(ii) The transfer is by the buyer or by a mercantile agent acting
for him.
(iii) The person receiving the same acts in good faith, and
without notice of any lien or other right of the original
seller.
Exampl.:
Furniture was delivered to X under an agreement that the price \'vas
to be paid in two instalments, the furniture to becamt! the property
of X on payment of the second instalment of the price ..r sold the
furniture before the second instalment was paid. It was held that
there was a binding agreement by X to buy the goods and therefore
a transfer by him to a bona fide purchaser for value without notice
conveyed a good title. Lee v. BUller I

7. An unpaid seller
An unpaid seller of goods can under certain circumstances,
re-sell the goods. The purchaser of suth goods gets a valid tille
of the goods.-Sec. 54. (See p. 242)
S. Sale under the Contract Act
(a) A pawnee may sell the goods of pawnor if the latter
mak., a default of his dues. The purchaser under such a sale
gets a good title.-Sec. 176, Contract Act (See p. 172)
(b) A finder of goods can sell the goods under certain
circumstances. The pllrchaser gets a good title.-Sec. 169.
Contract Act. (See p. 169)

1,18931 2 Q. B. 318
230 LAW RELATING TO SALE OF GOODS

Cases not coming within the exceptions

It is to be noted that apart from the cases mentioned above,
the general rule applies, and no seller can give a better title that
he himself has. Some examples arc given below.
Examples:
(i) X found a ring. He made a reasonable search for the owner but
did not find, him. He then sold the ring to r It was held that the
true Q\"'ncr can recover the ring from r Farquaharson Bros. v. King
{'( Cn l

(ill A horse was sold at a public auction. The horse was stolen property
but this was not known to either the auctioneer or the buyer. Held,
the true owner can recover the horse. Lee v. Bayes. 2
(rii) B let Ollt a motor car on hire to ,\1 at £ IS per month. It was agreed
lX:I\\een the parties that j\f could purchase the car by paying in all
£ 4:::!4 at any time within 24 months. After a few months .H p\edgcJ
the car viilh C. B sued to recover the car from C. It was hdd that
as .It had only an option to purchase, the cannot give good title
to C and hence lJ can rec·O\·cr the car. Ht!lsi:e A!olor ~(,;upply (·0.
v Cox. 3

EXERCISES
I. State the rules of ,,:scertaining the intention of the parties as to
the tllne when the property in the specific and unascertained good
is to pass the buyer. (Pages 211-225)
2. \Vhat arc unascertained goods? \Vhcn docs property pass in a
contract for the sale of s~ch goods? (Pages 200, 221)
3. Enumcrate the rulcs under which property in goods is transferred
from the seller to the buyer (Pages 221-;425)
4. When docs prQperty in goods sold pass from the seller to the
buyer,? Discuss the e;\ception, to the rule that no one can give
4

be\ter title to the goods than he has himself'.

(Pages 221-225, 226-230
5. (a) The general la" is that no seller of goods can give the buyer
of goods a better title to the goods than he himself has. Explain.
(Page 226)
(b) Are there any exceptions to the above general law ? If so, what
are they? (Pages 226-230)
6. "No seller of goods can give the buyer of goods a better title to
those goods than he himself has". Discuss. (Pages 226-230)

t \ 1902) A,C 325 '(1856) 18 CB. 599

3 (1914) 1 K.B. 244
 TRANSFER OF OWNERSHIP 231
.,
7. ~ does property in goOds pass from the seller to the ~yer
in a 'contraCt or sale of goods? (Pages 22S-t26)
S. Ptd1!1em:
(a) A. buys, by sample 100 bales of "hir Bengal Cotton" ; goods
according to sample were c!elivered but the cotlon was nol ~Fair
Bengal Cotlon". Is the buyer enlitled to reject the good.: ? Give
reason. (Pages 213-214)
(b) A. a sbipbuilder, contracts to sell to B for a stated price, a
vessel lying in A's yard; the vessel is to be rigged and fitted
for a voyage, and the price is to be paid on delivery. Hils the
property in the vessel passed to B? (Para 4, page 222)
(e) A is the owner of a pen but he does [I()( know Ihat. X pretends
to be the owner of that pen and sells it to A. Is il a valid
sale? (Para I, page 226)
(d) On 1st MJrch, A agrees to sell one particular horse to B for
Rs. 5.0110. According to the term. of the agreement, the horse
is to be delivered on 5th April when payment will be made.
When does propetty in the horse pass from the seller to. the
buyer? (Para 3 & 6, pages 221 & 223)
(e) X handed over a mOlOr car to a mercantile agent for sale on
condition that the car would not be sold below a specified price.
In spite of the agreement the agent sold it to A below the price
and ran away with the money obtained. A then resold the car
to B in good faith. Can X recover the car from B?
(Para 2, pages 227)
9. Objective Questions.
(a) 'The general rule is that only the owner of goods,. can sell the
goods", Mention tWo exceptions to I.he general rule .
. (Page 226)
(b) Who is a mercantile agent? (page 227)
(e) Answer the best alternative : I",.a sale, if the &oqdoi are
destroyed, the loss falls on (i) the b~yer; (ii) the s~Uer.
. (Page 205)
 PERFORMANCE OF THE
CONTRACT OF SALE

DELIVERY
Delivery means a "voluntary transfer of possession from one
person to another."-Sec. 2(2). Sir Frederick Pollock has defined
'·delivery" 'as "voluntary dispossession in favour of another.'"
llhe mode of giving possession is to be determined by the
parties. Delivery may be Actual, Symbolic or Constructive.
I. Actual delivery occurs when the goods themselves are
delivered : the goods are physically handed over to the seller
or to his agent.
2. Symbolic delivery occurs when the buyer gets the means
of obtaining possession. Example : Certain specifliC goods were
locked in the godown and the seller gives the key of the godown
to the buyer. It transfers possession and gives it actual control
of the place.
3. Conslructive delivery occurs when a change in the
possession of the goods without any change in the actual and
visible custody, e.g., the delivery of the bill of lading with which
goods may be obtained. Hurry v. Mangles. 2

RULES REGARDING DELIVERY

The Sale of Goods Act lays down the following rules
regarding delivery and other matters concerning the performance
of the contract of sale :
I. Possession or Buyer
Delivery of goods sold may be made by doing anything
which the parties agree shall be treated as delivery or which has
the effect of putting the goods in the possession of the buyer
or of any person authorised to hold them on his behalf.-Sec. 33.
2. EfI'ce! of part deHvery
A delivery of part of goods. in progress of the delivery of
the whole, has the same effect, for the purpose of passing the
, Pollock and Mulla, Sale of goods Act. p. 7.
J (1808) I Camp. 452.

232
 PERFORMANCE OF THE CONTRACT OF SALE 233

property in such goods, as a delivery of the whole; but a delivery

of part of the goods, with an intention of severing it from the
whole. does not operate as a delivery ofthe.remainder.-Sec. 34.
Example" :
(i) Some goods lying at a wharf. were sold and the seller instructed
the wharfinger to give delivery to the buyer. The buyer weighed
the goods and took away a part of them. There is delivery of the
whole. If the part remaining on the wharf is lost the 1055 will fall
on the buyer. Hammond v. Anderson. I
(ii) X sold 5 bales of certain goods to 1:.)' received and paid for one
bal. and refused 10 accepllhe olherS. The amounls 10 part delivery.
.'.Ii/chell Reid Co. v. Bllideo Do... 2
3. Application for delivery
Apart from any express contract the seller of goods is not
bound to deliver them until the buyer applies for delivery.-
Sec. 35.
4. Place of delivery
Whether it is for the buyer to take possession of the goods
or for the seller to send them to the buyer is a question depending
in each case on the contract, express or implied, between the
parties. Apart from any such contract, goods sold are to be
delivered at the place at which they are at the time of the sale,
and goods agreed to be sold to be delivered at the place at which
they are at the time of the agreement to sell, or if not then in
existence, at the place at which they are manufactured or
produced.-Sec. 36( I).
5. Time of deHvery
(I) Where under the contract of sale the seller is bound to
send the goods to the buyer but no time for sending them is
fixed, the seller is bound to send them within a reasonable
time.-Sec. 36(2).
(2) Demand or tender of delivery may be treated as
ineffectual unless made at a reasonable hour. What is a reasonable
hour is a question of fact.-Sec. 36(4).
6. Possessioa of a third persoa
Where the goods at the time of sale are in the possession
of a third person, there is no delivery by seller to buyer unless

18 RR 763 2 ( I 888) 15 Cal J.

234 LAW RELATING TO SALE OF QOOOs

and until such third person acknowledges to the buyer that he

holds the goods on his behalf.-Sec. 36(3). This is called
Delivery by Attornment.
7. Expenses of delivery
Unless otherwise agreed, the expenses of and incidental to
putting the goods into' a deliverable state shall be borne by the
seller.-Sec. 36(5).
8. Delinry of tbe Wrong Quantit!,
(I) Where the seller delivers to the buyer a quantity of goods
less than he contracted to sell, the buyer may reject them, but
if the buyer accepts the goods so delivered he shall pay for them
at the contract rate.-Sec. 37( I).
(2) Where the seller delivers to the buyer a quantity of goods
larger than he contracted to sell, the buyer may accept the goods
included in the contract and reject the rest, or he may reject the
whole. If the buyer accepts the whole of the goods to delivered,
he shall pay lor them at the contract rate.-Sec. 37(2).
Example:
The right to reject the goods is not equivalent to right to cancel
rhe contract., If the buyer rejects the goods, the seller has a right
to tender again the contract quantity subject to the terms and
conditions of the contract and the buyer is bound to accept the same.
80/'roll'man Phillips & Co. v. Free and Hollis'; fIIas Udyog Ltd
v. Prog Vanaspa(i. 1

(3) Where the seller delivers to the buyer the goods he

contracted to sell mixed with goods of a different desctiption
not included in the contract, the buyer may accept the goods
which are in accordance with the contract and reject the rest or
may reject the whole.-Sec. 37(3).
(4) The provisions of Section 37 are subject to any usage
of trade, special agreement or course of dealing between the
parties.-Sec. 37(4).
9. Instalment Delivery
(I) Unless otherwise agreed (I) the buyer of goods is not
bound to 'sccept delivery thereof by instalments.-Sec. 38( 1).

I (1878) 4 Q.B.D. 500 ~ AIR (1975) Guj. Ifl

 PERFORMANCE OF TIlE CONTRACT OF SALE 235

(2) Section 38(2) provides that where instalment delivery and

separate payment for each instalment has been agreed upon, and
either party fails to perform his obligations about one of the
instalments, the failure may amount to (i) a repudiation of the
whole contract or (ii) a severable breach for which damages can
be claimed but the contract cannot be repudiated. The question
is to be decided on the basis of the terms of the contract and
the circumstances of the case.
10. Delivery to the Carrier or Wharfinger
Section 39 provides that delivery of goods to a carrier for
transmission to the buyer or to wharfinger for safe custody, is
Prima facie deemed to be delivery to the buyer. The seller shall,
unless otherwise authorised by the buyer, make a reasonable
contract with the carrier or the wharfinger. If he docs not do
so and the goods are lost or damaged, the buyer may refuse to
treat such delivery as delivery to himself or may hold the sellcr
responsible for the damages. In cases of set transit, in circum-
stances where it is usual to insure, the seller shall notify the
buyer so that he can insure. If the seller fails to do so. the goods
remain at his risk during the transit.
11. Examining the goods
The buyer has the right to examine the goods for the purpose
of ascertaining whether they are in conformity with the contract.
-Sec. 41.
12. Acceptance
The buyer is deemed to have accepted the goods when he
intimates to the seller that he has accepted them. or when the
goods have been deliver.ed to him and he does any act, in relation
to them which is inconsistent with the ownership of the seller,
or when, after the lapse of a reasonable time. he retains the goods
without intimating to the seller that he has reje~ted them.-
Sec. 42.
13. Buyer is not bound to return rejected goods
Unless othenvise agreed, where goods are delivered to the
buyer and he refuses to accept them. having the right so to do,
he is not bound to return them to the_seller, but it is sufficient
if he intimates to the seller that he refuses to accept them.-
Sec. 43.
236 LAW RELATINO TO SALE OF GOODS

14. Liability of Buyer

The buyer is liable to the seller for any loss occasioned by
his neglect or refusal to take delivery. and also for a reasonable
charge for the care and custody of the goods.-Sec. 44.

DUTIES OF SELLER OF GOODS

1. Delivery
( I) It is the duty of the seller to del iver the goods and of
the buyer to accept and pay for them, in accordance with the
terms of the contract of sale.-Sec. 31.
(2) Unless otherwise agreed, delivery of the goods and
payment of the price are concurrent conditions. that is to say,
the seller shall be ready and willing to give possession of the
goods to the buyer in exchange of the price. and the buyer shall
be ready and willing to pay the price in exchange of possession
of the goods.-Sec. 32.
The seller of goods has the duty of giving delivery according
to the terms of the contract and according to the rules contained
III the Sale of Goods Act. (See pp. 232-235)

2. Risk of deterioration in the goods

Where the seller of goods agrees to deliver them at his own
risk at a place other than that where they are when sold. the
buyer shall. nevertheless. unless otherwise agreed. take any risk
of deterioration in the goods necessarily incident to the course
of transit.-Sec. 40.
3. Damages for non-delivery
Where the seller wrongfully neglects or refuses to deliver
the goods to the buyer, the buyer may sue the seller for a damages
for non-dclivery.-Sec. 57.
4_ Specific Performance
Under certain circumstances in any suit for breach of contract
·to deliver specific or ascertained goods,the Court may, if it thinks
fit, on the application of the plantiff, by its decree direct that
the contract shall be performed specifically. The power of the
court to order specific performance in such cases is to be used
subject to rules contained in the Specific Relief Act regarding
specific performance of contracts.-Sec. 58.
 PERFORMANCE OF THE CONTRACT OF SALE 237

DUTIES OF BUYER OF GOODS

The buyer of goods has the following duties
1. Payment of prke
He must pay the price of goods according to the terms of
the contract.-Sec. 31.
2. Compensation
If he wrongfully refuses to accept delivery, he must pay
compensation to the seller.-Sec. 32, Sec. 42, and Sec. 56.
3. Delivery
Unless otherwise agreed, the seller is not bound to deliver
the goods without the application of the buyer for delivery.-
Sec. 35.
4. Liability of Buyer
When the seller is ready and willing to deliver the goods
and requests the buyer to take delivery, and the buyer does not
within a reasonable time after such request take delivery of the
goods, he is liable to the seller for any loss occasioned by his
neglect or refusal to take delivery, and also for a reasonable
charge for the care and custody of the goods.-Sec. 44.
5. Interest and Special Damages
The seller or the buyer may recover interest or special
damages in any case where by law interest or special damages
may be recoverable. He may also recover the money paid where
the consideration for the payment of it has failed.
In the absence of a contract to the contrary, the Court may
award interest at such rate as it thinks fit on the amount of the
price-
(a) to the seller in a suit by him for the amount of the price-
from the date of the tender of the a;oods or from the date
on which the price was payable.
(b) to the buyer in a suit by him for the refund of the price
in a case of a breach of contract on the part of the
seller-from the date on which the payment was made.-
Sec. 61.
238 LAW RELATING TO SALE OF GOODS

RIGHTS OF BUYER OF GOODS

1. Delivery
The buyer has the right to have delivery of the goods
according to the terms of the contract.-Sec. 37.
2. Repudiation
Unless otherwise agreed, the buyer of goods is not bound
to accept delivery by instalments.-Sec. 38.
The buyer is not bound to accept the delivery of a wrong
quantity (short delivery or extra-delivery}.-Sec. 37.
3. Buyer's right of examining goods
(I) Where goods are delivered to the buyer which he has
not previously examined, he is not deemed to have accepted them
unless and until he has had a reasonable opportunity of examining
them for the purpose of ascertaining whether they arc in
conformity with the contract.-Sec. 41 (I).
(2) Unless otherwise agreed, when the seller tenders delivery
of goods to the buyer, he is bound. on request, to afford the
buyer a reasonable opportunity of examining the goods for the
purpose of ascertaining whether they are in conformity with the
contract.-Sec. 41 (2).
~. Buyer is not bound to return rejected goods.
Sec. 43. See p. 235, para 13.
5. Damages for non-delivery
Sec. 57. See p. 236~ para 3.
6. Specific performance
Sec. 58. See p. 236. para 4.
7. Remedy for Bread. of Warranty
Sec. 59. See p. 212, para 4.
8. Repudiation of Contract
Sec. 60. See p. 212, para 2.
9. Effects of Tax Changes
Where in a contract of sale there is no stipulation for the
payment of taxes or there was no tax on the articles in question
or where the contract is for the sale of goods tax paid, and.
subsequently any customs or excise duty or any tax on the sale or
 PERFORMANCE OF THE CONTRACT OF SALE 239

purchase of goods is imposed, increased, decreased or remined,-

(u) the seller may add to the price the amount of duty imposed
or increased, and
(b) the buyer may deduct from the price the amount of duty
decreased or remitted.
The aforesaid provisions will not apply if a contrary intention
appears from the terms of the contract.' -·<:ec. 64A.
RIGHTS OF SELLER Of' COODS
1. Remedies
Unpaid, sellers have certain remedies I'i=.• Sellers Lien,
Right of Stoppage in Transit, Right of Resale and Suit for the
Price. (See pp. 240-241)
2. Enforcement of liabilities of buyer
The seller can enforce the liabilities of buyer for not taking
delivery.-Sec. 44. (See para 14, p. 236)
3. Other rights
The seller has been given certain rights to the aggrieved party
for the following reasons: Damages for Non-delivery (Sec. 57):
Remedy for breach of warranty (Sec. 59); repudiation of contract
(Sec, 60); interest and special damages (Sec. 61); increasing
of the amount of duty imposed or increased (Sec. 64A). See pages
237-239.

RIGHTS OF THE UNPA1D SELLER AND REMEDIAL

MEASURES
Who is aD unpaid seller?
The, seller of goods is deemed : to be an unpaid seller
(a) when the "hole of the price has not been paid or tendered
or (b) when a bill of exchange or other negotiable instrument
has been received as conditional payment. and the condition on
which it ",as received has not been fulfilled by reason of the
dishonour of the in,trllment or otherwise.-Sec. 45( I).
The term 'seller includes any person who is in the position
of a seller, e.g., agent of the seller.
Suppose that goods worth Rs. 500 are sold. The sellcr is
deemed to be all unpaid seller under any of the following
~ ircu~stances ;
240 LAW RELATING TO SALE OF GOODS

(a) If the whole of the purchase price (Rs. 500) is not paid
on the due date.
(b) If payment is made in the form of a negotiable instrument
(bill of exchange or cheque) and the instrument is
dishonoured.
Unpaid Seller's Rights
Rights of an un:,aid seller can be listed as follows,
(I) against the goods- Seller's Lien, Stoppage in Transit, and
Resale, (2) against the bl.yer personally-Suits for Price. Damages
and Interest. The right are explained below.
1. Sellers Lien or Vendor's Lien (Sections 47-49)
When can the right of lien be exercised? The unpaid seller
of goods, who is in possession of them, is cntitled to retain
possession until payment or tender of the price in the following
cases:
(a) where the goods have been sold without any stipulation
as <:redit ;
(b) where the goods have been sold on credit but the term
of credit has expired;
(c) where the buyer becomes insolvent.
Rules regarding seller s Lien : (I) The seller may exercise
his right of lien notwithstanding that he is in possession of the
goods as agent or bailee for the buyer.
(2) If the goods have been sold on credit, the seller cannot
refuse to part with possession unless the term of credit has
expired.
Example:
Goods are sold on 1st November on condition that the price is to
be paid on 1st December. The seller must give delivery. But if the
buyer does not take delivery and the seller is in possession on 1st
December, the seller can refuse to pan wiih possession till the price
is paid.
(3) Lien can be exercised for non-payment of the price, not
for any other charges.
Example:
The seller cannot claim lien for godown charges which he had to
incure for storing the goods in exercise of his lien for the price.
(4) When an unpaid seller has made a part delivery of the
goods he can exercise lien on the balance of the goods not
 PERfORMANCE Of THE CONTRACT Of SALE 241

delh'ered unless the part delivery was made under such

circumstances as to show an intention to waive the lien.
(5) The seller can abandon or waive the lien if he so desires.
(6) The unpaid seller does not lose his lien by reason only
that he' has obtained a decree for the price of the goods.
Loss of right of lien: The unpaid seller of goods loses his
lien thereon in the following cases :
(a) Where he delivers the goods to a carrier or other bailee
for the purpose of transmission to the buyer without
reserving the right of disposal of the goods;
(b) when the buyer or his agent lawfully obtains possession
of the goods; and
(c) by waiver thereof.

2. The Right of Stoppage in Transit (Sections SO-52)

Explanation : When the buyer of goods becomes insolvelll.
and the goods are in course of transit to the buyer, the sclkr
can resume possession of the goods from the carrier. This is
known as the right of stoppage in transit.
Rules regarding the course of transit: The following points
are to be noted in connection with the right of stoppage in transit.
(i) The goods are deemed to be in course of transit from
the time they are delivered to the carrier to the time they arc
delivered to the buyer or his agent.
(ii) The right of stoppage in transit comes to an end as soon
as the goods are delivered to the buyer or his agent. The carrier
may become the agent of the buyer under some circumstances,
e.g., if after the arrival of the goods at the appointed destination,
the carrier acknowledge to the buyer that he holds the goods
on his behalf. The seller's right to resume possession comes to
an end in such a case. A shipowner carrying goods may be acting
as the agent of the buyer if the circumstances so indicate.
(iii) [f the carrier wrongfully refuses to deliver the goods to
the buyer's the transit is at an end, and the seller's right is lost.
(iv) Where a part delivery has been made, the remainder of
the goods may be stopped in transit unless it is shown that the
part delivery was made uncler such circumstances as to show an
. agreement to give up possession of the whole of the goods.
Who is an insolvent? The term insolvent is used here to
denote a person who is financially embarrassed .. ft is not
C'j>mmcrcial Law - 16
•
242 LAW RELATING TO SALE OF GOODS

necessary that the buyer should be declared insolvent by a court

of law before the right of stoppage in transit can be exercised.
The method of taking possession: The right of stoppage in
transit is to be exercised .by the seller by taking actual possession
or by gil'ing notice to the carrier to redeliver the goods to the
seller. The carrier, upon such notice being given, is bound to
redeliver the goods to the seller or his agent. The expenses of
redelivery must be borne by the seller.
3. The Right of Resale
(Sec. 54). The unpaid seller who has retained possession of
the goods in exercise of his right of lien or who has resumed
possession from the carrier upon insolvency of the buyer, can
resell the goods.
(a) if the goods are of a perishable nature. without any notice
to the buyer, and
(b) in other cases after notice to the buyer, calling upon him
to payor tender the price within reasonable time, and upon failure
of the buyer to do so.
If the money realised upon such resale is not sufficient to
compensate the seller, he can sue the buyer for the balance. But
if he receives more than what is due to him, he can retain the
excess.
A resale does not absolve the buyer from his liabilities to
compensate the seller for damages he may have suffered.
The person who buys the goods upon such resale gets a good
title even if the seller has failed to give notice to the first buyer.
But if no notice is given and the goods are sold, the seller cannot
sue the first buyer for damages for breach of contract and must
pay back to the first buyer any profit which he has realised from
the resale (i.e .. the amount received in excess of the original
price).
4. Suit for the Price
(Sec. 55) Where under a contract of sale the property in the
goods has passed to the buyer and the buyer wrongfully neglects
or refuses to pay for the goods. according to the terms of the
contract, the seller may slle him for the price of the goods.
Where under a contract of sale the price is payable on a
certain day irrespective of delivery and the buyer wrongfully
 PERFORMANCE OF THE CONTRACT OF SALE 243

neglects or refuses to pay such price, the seller may sue him
for the price although the property in the goods has not passed
and the goods have not been appropriated to the contract.
5. Suit for Damages
Where the buyer wrongfully neglects or refuses to accept
and pay for the goods, the seller may sue him for damages for
non-acceptance.-Sec. 56.
6. Claim for Interest and Special Damages
The seller may recover interest or special damages in any
case where by law interest or special damages may be recoverable.
He may also recover the money paid where the consideration
for the payment of it has failed.-Sec. 61 (See p. 237, para 5)

DISTINCTION BETWEEN LIEN AND STOPPAGE IN

TRANSIT
1. The right of Stoppage in Transit is applicable to the
insolvent buyer. But the right of Lien is applicable to all persons.
solvent or illsolvellt.
2. The right of Lien is applicable to goods which are in th"
possession of the seller. The right of Stoppage in Transit is
applicable to the goods which are in possession of the carrier.
3. The right of Stoppage in Transit is applied to the bu)er
throu~ the carrier. Therefore stoppage means the seller's right
to 'regaill' the goods. But Lien means the right to 'retail!' the
goods. Of course both the righb are applicable to goods only.

SUB-SALE OR PLEDGE BY BUYER

I. The unpaid seller's right of lien or stoppage in transit
is not affected by any sale or other disposition, of goods which
the buyer may have made, unless the seller has assented thereto :
Provided where a document of title to goods has been issued
or lawfully transferred to any person as buyer or owner of the
goods, and that person transfers the document to a person who
takes the document in good faith for consideration. then, if such
last mentioned transfer was by way of sale, the unpaid sellers
right of lien or stoppage in transit is defeated, and, if such last
mentioned transfer was by way of pledge or other disposition
for value, the unpaid seller's right of lien or stoppage in transit
244 LAW RELATING TO SALE OF GOODS

can only be exercised subject to the rights of the transferee.-

Sec. 53( I).
2. Where the transfer is by way of pledge, the unpaid seller
may require the pledgee to have the amount secured by the pledge
satisfied in the first instance, as far as possible, out of any other
goods or securities of the buyer in the hands of the pledgee and
available against the buyer.-Sec. 53(2).
CONSEQUENCES OF BREACH OF CONTRACT OF SALE
The Sa Ie of Goods Act gives the following rights to the
aggrieved parties when there is a breach of contract of sale of
goods:
Seller's Remedies Against the Goods : (J) Seller's Lien,
Sections 47-49. (2) Stoppage in. Transit. Sections 50-52.
(3) Resale. Sec. 54.
Remedies of the Seller Against Buyer Personally: (I) Suit
for Price. Sec. 55. (2) Damages for Non-acceptance. Sec. 56.
(3) Claim for Interest and Special Damages. Sec. 61.
Buyer's Remedies Against the Seller: (I) Damages for Non-
delivery. Sec. 57. (2) Specific Performance. Sec. 58. (3) Remedy
for Breach of Warranty. Sec. 59. (4) Repudiation of Contract.
Sec. 60.
The rights stated above have been discu'5ed in pages
236-237, 239-24 J
AUCTION SALES
The following rules are contained in the Sale of of>ods Act
regarding sale of goods by auction.--Sec. 64.
J. Where goods are put for sale in lots, each lot is prima
facie. deemed to be the subject of a separate contract of sale.
2. The sale is complete when the auctioneer announces its
complction by the fall of the hammer or in other customary
manner, and until such announcement is made, any bidder may
retract his bid ..
Since an offer can be refused, and a bid is an offer, it follows
that the auctioneer is not bound to accept the final or any other
bid. A lot can be withdrawn after bidding had taken place for
some time.
3. A right to bid may be reserved expressly by or on behalf
of the seller. If such right is expressly reserved, the seller Or
anyone person on his behal f may, bid at the auction.
4. Where the sale is not notified to be subject to a right
 PERFORMANCE OF THE CONTRACT OF SALE 245

to bid on behalf of the seller, it shall not be lawful for the seller
to bid himself or to employ any person to bid at such sale, or
for the auctioneer knowingly to take any bid from the seller or
any such person; and any sale contravening this rule may be
treated as fraudulent by the buyer.
S. The sale may be notified to be subject to a reserved or
upset price, i.e., there may be a price below which the goods
will 1I0t be sold. The reserve price may be kept secret.
6. If the seller makes use of pretended bidding to raise the
price, the sale is voidable at the option of the buyer.
Case Law 00 Auction Sales
(1) A bid by an intending buyer is construed as an ofTer. As an offer,
it can be withdrawn any time before acceptance, which in this case
occurs by the fall of the hammer, or any other customary manneI'.
It has been held that it is customary in this country to repeat the
final offer three times. Agra Bank. v. lJamlin. I
(2) A combination between intending buyers not to be bid against each
other is kno~n as a "knock 01:11" agrcl!ment. Such agreements arc
not illegal. Jyo(i v. Jhoh'mull. 2
(J) Agreements which are likely to prevent the property put up from
realising its fair value and to damp the sale. \...'ould certainly be
against the public good, but an agreement between two or more
persons not to bid against each other at an auction is not illegal
or against public good. Lachhman Das and others v. lIakim Sita
Ram and o/hers.)
(4) Sec. 64(2) of the sale of goods Act does not deal with question
of the passing of the property in the goods sold at auction sale
but instead it deals v.ith the completion of the contracts of sale.
Consolidated Coffee Ltd v. Coffee Board. Bangalore.'
(5) An auctioneer can set his own terms and conditions for holding
an auction. If he does so those conditions would govern the rights
of the parties. The seller is not bound to accept the highest bid,
it necessarily implies that he can accept any lower bid. Lapses on
the receipt of a higher bid, and if the highest ·bid was not to he'
accepted for any reason, the auction must be abandoned and fresh
auction would be required to be held. !f. Lachia Setty and Sons
Ltd. v. The Coffee Board, Bangalore.'

EXERCISES
I. Does the Indian Sale of Goods Act provide for any rules as to
delivery? What are the rules? (Pages 232-233)

1(1890) 14 Mad 235 1 (1909) 36 Cal \34

3AIR (1975) Delhi 159 'AIR (1980) Supreme Court 1468
'AIR (1981) Supreme Court 162
246 LAW RELATING TO SALE OF GOODS

2. Enumerate the duties of the seller in respect of the sale of goods.

(Page 236)
3. State the rights of a buyer in case of (,) short delivery, (i,) delivery
in excess of contract goods and (iii) delivery of contract goods
together with other goods. (Para 8, pages 234)
4. Who is an unpaid seller of goods and what are his rights against
the goods? Has he any remedy against the buyer personally?
(Pages 239-241)
5. What is the meaning of vendor's lien? How does it arise and how
is it lost? Has a vendor any power over goods which have passed
from his possession? If so, when? (Pages 240, 24 J)
6. Describe the rights of an unpaid seller against the buyer personally.
When and under what circumstances can the seller exercise right
of re-sale? (Pages 239, 242)
7. Distinguish clearly between seller's right of lien and right of
stoppage in transit. Add illustrations. (Pages 243)
8. Write a note upon the remedies of the buyer of good where there
is a breach of warranty by the seller. (Page 244)
9. State the consequences of re-sale without giving notice to the
original buyer. (Pages 242-243)
10. What are the rules regarding sub-~ale or pledge by a buyer?
(Pages 243-244)
II. Under the Sale of Goods Act, what remedies are available in the
event of a breach of contract? (Page 244)
12. State the rules regarding Auction Sales. (Pages 244-245)
13. (o) Problems: A agreed to sell to B 1200 tons of coal to be
delivered in monthly instalments of J00 ton each. After three
instalments had been delivered A refused to deliver any further
coal under the contract. Discuss the rights of A and B after
this refusal. (Para 9, page 234»
(b) A sells his horse to B for Rs. 500. B pays A Rs. 400. Is A
an unpaid seller? (Page 239)
(e) S agrees to sell potatoes to B to be delivered on arrival of
ship X The ship arrives buWlo potatoes on ship. Discuss the
liability of the seller. (Para I & 3, page 236)
(d) P sells some quantity of goods to Q on credit. The goods have
been delivered to Q. Q on due date refuses and/or neglects
to pay the price. What is the remedy available to P?
(Para 4, page 242)
14. Objective questions. Give short answers.
(,) Mention two rights of the unpaid seller. (Page 240)
Ii,) Who is an unpaid seller? (Page 239)
 BOOK III
THE LAW -OF t PARTNERSHIP

CHAPTER I Nature or Partnership 248 - 261

Application 248; The Essential Elements of a PannelShip
248 ; The Tests of a True PartnelShip 249; Who can be a
Partner? 251 ; PartnelShip and Certain Similar Organisations
252 ; Co-ownership 252; Club 252 ; Company 253 ; Joint
Hindu Family Firm 253 ; PartnelShip Forbidden by Law 254 ;
Some Definitions 255; Registration of Firms 258;
Consequences of Non-registration 259.
CHAPTER 2 Rights and Liabilities or Partners 262 - 277
Relations of Partners to one Another 262 : The Authority of
a. Partner 264; Admission by a Partner 266 ; Notice to a
Partner 266 ; Liability of Panners to Outsiders 267 ; Rights
of Partners 268; Duties of Partners 269; Partnership by
Holding Out or Estoppel 270 ; Minor Admitted as a Partner
271 ; Reconstitution of a Firm 273 ; Rights of an Outgoing
Partner 275.
CHAPTER 3 Dissolution or Firms 278 - 286
What is dissolution? 278 ; The Grounds of Dissolution 278 ;
The Consequences of Dissolution 281 ; Mode of Settling
Accounts upon Dissolution 283; Sale of Goodwill afier
Dissolution 285.

247
 NATURE OF PARTNERSHIP

APPLICATION
The Indian Partnership Act of 1932 (Act IX of 1932) applies
to partnerships created by agreement between parties. The Act
is not retrospective; it does not affect any right, title interest,
obligation or liability acquired or incurred betorc the act came
into operation in 1932. (Sec. 74). The Act is not exhaustive. It
does not apply to joint Hindu Family firms.

/}Hf ESSENTIAL ELEMENTS OF A }'ARTNERSHIP"

~efinition and characteristics
Section 4 of the Partnership Act defines a partnership as
follows: "Partnership is the relation between persons who have
agreed to share the profits of a business carried on by all or
any of them acting for all." A partnership, as defined in the Act,
must have three essential elements :
I. There 'must he an agreement\,entered int~by two or more
persons.
~he agreement must be to share the profits of a business. D
3. The business must be carried on by all or any of them
acting for all.
0 . Voluntary Agreement
The first element~<?wsl the yoluntary contractual rMme of
partnership, ,A partnership can o;>nly arise as a result of an
-agreement: '-express or imp Iied, between two or more persons~
where'ihere is no agreement there is no partnership_ But a
partnership cannot be formed with more than ten persons. in
-banking and twenty persons in other types of business! A
partnership with persons exceeding the above _limits muSt be
registered under _a Compaiiies Act.
- "Person"-See p. 251 -- ---
tartnership is not created by status!: Section 5 states that,
"The relation of partnership arises from contract and not from
status_" In particular the members of-a Hindu undivided family

248
•
 •

NATURE OF PARTNERSIlIP 249

carryirig on a family business, as such, are not partners in such

business.
Example:
The sole proprietor of a business dies leaving a number of heirs.
The heirs inherit the stock in trade of the business including the
goodwill of the business but do not become partners until there in
an agrcemen~, express or impli~d, to cartY on \he business as
partners. '~ifab;b Bux v. Sa~1Ue!. Fi!~ ~u) ~;' j,

2. Sharing of Profits of a Business V"

The second element states the motive undcrlying the infor-
mation of a partnership. \t also lays down that the existence of
a busireg is ~sential to a partnershi . Business includes any
trade. occupation or pro e. . two or more persons join
together to form a music club it is not a partnership because
there is no business in this case. Ilut if two or more persons
join together to give musical performances to the public \\ ith
a view to earning profit. there is a business and a partnership
is formed.
3. Mutual Agency.../'!
The third element is the most important feature of partncr-
ship.( It states that persons carrying on business in partnership
are agents as well as prinCipals. The business of a firm is carried
on by all or by anyone or more of them on behalf of all. Every
partner has the authority to act on behalf of al\ and can, by his
actions, bind all the partners' of the firm, Each partner is the
agent of the others in all matters connected with the business
of the partnership. The law of partnership has therefore becn
called a branch of the law of agency.
The Tests of a True Partnership
~
In a true partnership. all the essential elements mentioned
aboye must be present. Section 6 of the Partnership Act lays
down that in determining whether a group of persons is or is
not a firm, or whether a person is or is not a partner in a firm.
regard shall be had to the real relation between the parties, as
shown by a\l relevant facts taken together.
If all the relevant facts taken together show that a\l the three
'11925) 23 All. L. 1. 96t
250 THE LAW OF PARTNERSHIP

essential elements are present, the group of persons doing

business together will be called a partnership.
Of the three elements, the second element, viz., sharing of
profits, is important but not conclusive. ShariQg of profits may
exist under circumstances where there is no question of partner-
ship. As examples the following cases may be cited :
(i) A creditor taking a share of profits in lieu of interest and
part-payment of principal.
(ii) A creditor who supervises the conduct of a debtor's trade
with an agreement that he will be paid out of the profits
of the business. The creditor does not thereby become his
partner. Mollow March & Co. v. Court oj Wards.'
(iii) An employee getting a share of profits as remuneration.
(iv) Share of profits given to workers as bonus.
(v) Share of profits given to the widow or children of deceased
partners as annuity.
In all the above cases the third essential element of
partnership, (viz .. agency) is absent. A creditor .or an employee,
or the widow and children of deceased partners cannot bind the
firm by any act done on behalf of the firm. Only those who have
authority to bind the firm by their actions can be called partners.
Thus, the most important test of partnership is agency and
authority.
The tests of a true partnership were first laid down by the
House of Lords in the case of Cox v. Hickman. 2 In that case,
-a debtor transferred his business to trustees with instructions to
carry on the business and use the profits for paying his creditors.
It was held that the creditors were not partners of the business.
Section 6 of the Partnership Act is a comprehensive restatement
of the rule laid down in this case.
Circumstances which the court must take into consideration
in determining the existence oj partnership : The court must take
into account all the relevant circumstances, e.g., the terms of the
agreement, if any; the conduct of the parties; the mode of doing
business; who controls the property; the mode of keeping
accounts; the manner of distribution of profits etc.
Sharing .oj losses : Sharing of losses is a consequence of
partnership rather than a test of partnership. Losses arc not

1(1872) L.R. 4 P.C. 419 '(1860) 8 H.L.C. 268

 NATURE (,f PARTNERSHIP 251

mentioned in the definition of partnership as given in Section 4.

Bu! in determining whether a partnership exists or not, the court
must take into account how losses are shared. In Raghunandan
v. Hormasjil it was held that partners may agree that one or more
of them shall not be liable for losses. But such an agreement
will be binding only among themselves. All the partners will be
liable to third parties for the debts of the firm.
Who can be a partner?
I. Person: Under the _ _ Partnership Act, a person may
be partner if he has the capacity to enter into a contract
("Capacity of parties" see p. 49)
Who is a 'person'? For the purposes of the Partnership Act,
the. term 'person' does not include a partnership or a limited
company. Thus a Company P cannot form a partnershi with a
Company Q. G. M Refining Co. v. Commr. of /- Tax. 2 .i9Li 9
Similarly. a fir", X cannot orm a partners Ip Wit'· firm Y
But all the partners of firm X and all the partners of firm Y
can .form a single partnership, subject to the rules regarding the
number of partners. (See, Section 11, p. 254 and para 5 below).
2. Minor: A minor cannot be a partner. But in an existing
partnership, a minor can be admitted into a firm if all the partners
of the firm agree. (See p. 271) Such a minor gets all the benefits
of the partnership.
3. Person of unsound mind : A person who is of unsound
mind Cinnot become a partner.
4. ;Voman: A woman can be a partner, married or unmarried.
Of course a woman cannot be a partner if she is a minor or
she is of unsound mind.
'-P. Company : In a Company the capdcity to enter into
contract IS determined -by the Memorandum and Articles of the
Association of the company. The liability of the members of a
firm under the Partnership Act, for the debts of the firm, is
unlimited. But a company cannot incur unlimited liability.
Therefore a company cannot become a partner of a firm.
6. An alien enemy:cannot enter into a contract of partnership
with a citizen of India. (See p. 55)

'(1949) 51 Born. 342 1 AIR (1967), Cal. 429

252 THE LAW OF PARlNERSHlP

PARTNERSHIP AND CERTAIN SIMILAR

ORGANISATIONS
Partnership and Co-ownership
Co-ownership means joint ownership. A and B jointly
purchase a horse. They are co-owners but not necessarily
partners. The distinction between co-ownership and partnership
can be described as follows :
4. In a partnership each partner is the agent of the others
but a co-owner is not the agent of the other owners. The rights
of a co-owner cannot be affected by any act done by the other
owners.
4'2. Partnership always arises out of agreement. Co-ownership
may arise by agreement or by operation of law. A and B inherit
a house from their father. They become co-owners by operation
of the law of inheritance. Habib Bux v. Samuel Fitz & Co. (See
p. 249)
.'l'3. A ,a-owner can trtlnt(er his interest to a third party
without the consent of the other co-owners. t2 partner can transfer
his interest, under certam circumstances, but the transferee can
n'ever become ~rtner of the business without the consent of
the other partners .
.?t. A partnership ~ays implies a business. Co-ownership
may exist without any business, e.g. joint ownership of a
residential house.
~5. Since co-ownership may exist without a business, the
question of sharing profits or losses is immaterial if! a co-
ownership. In a partnership there must be sharing of profits.
6. A partner has a lien on the partnership assets for moneys
spent by him for the partnership. A co-owner has no lien under
.
simi lar circumstances .
Partnership and a Club
A club is an 'association of persons' formed for social
purposes. It differs from a partnership in the following respects-
it is not a business; there is no motive of earning profits and
sharing them; a member of a club is not the agent of the other
members; a member is not responsible for the debts of the club
unless he participated in the transaction; and, the death or
resignation of a member does not affect the existence of the club.
 NATURE OF PARTNERSHIP 253

Partnership and a Company

See Company Law, Book XI.
Partnership and a Joint Hindu Family Firm
A Hindu joint family wMch carries on a trade inherited from
its ancestors is called a Hindu Joint Family Firm. Such firms
are very common in India, particularly among Hindus governed
by the Mitakhsara school. The points of difference between such
a finn and a contractual partnership can be enumerated as
follows :
I. Method of creation : A partnership is created by agree-
ment; a joint family firm is created by operation of law.
Membership of a joint family firm is the result of status, i.e.,
position of the person concerned as member of a joint family
or coparcenary.
2. Authority oj members: In a joint family firm the manager
or Karta has authority to bind the members by all acts coming
within the scope of the joint family business but no other
members has any such authority. In a partnership every partner
has authority to bind the firm by his actions and can participate
in the business of the firm.
3. Liability af members: In a partnership every partner is
liable to an unlimited extent for the debts of the firm. In a joint
family firm only the Karta has unlimited liability; the other
members are liable only to the extent of their share in the joint
family business.
4. Position of minors: The minor members of a joint family
are members of the firm from the date of their birth. In a
partnership a minor cannot be a member, except in onc special
case. (See p. 271) The reason is that a partnership is the result
of an agreement and a minor does not have capacity to enter
into an agreement.
5. Position of women : A woman can be a partner under
the Act, but not in a Joint Hindu Family finn.
6. Number of members : In a contractual partnership, the
number of members must not exceed lOin a banking firm and
20 in other kind of firms. There is no limit on the number of
members in joint family. firms. r
7. Death of memb'ers' : The dcail]"of a member of a joint
family finn has no effe'ct on the firm.Jhe firm continues with
\
254 1lfE LAW OF PARnlERSHlP

the other members. In a partnership, dcath of a partner dissolves

the firm unless otherwise agreed by thc partner's.
-P;gistration : In a partnership registration is optional. A
jomt family firm does not require registration.
9. Dissolution and accounts: A member of a joint family
firm when severing his connection with the firm cannot ask for
accounts of past profits and losses, but a partner of a firm under
similar circumstances can.
10. Law : A partnership is governed by the Partnership Act;
a joint family firm is governed by Hindu law.
II. Partnership: The karta of a joint Hindu family and an
undivided member of that family can join a partnership. But the
Hindu undivided family cannot as such enter into a contract of
partnership with another person or persons. Commissioner of
Income Tax, W B. v. Kalu Babu. I
12. A floating body: A Hindu undivided family is a floating
body. Its composition changes by births, deaths, marriages and
divorce.
13. Ullity of oWllership : In a joint Hindu family business
no member of the family can say that he is the owner of one-
half, one-third or one-fourth. The essence of joint Hindu family
property is unity of ownership and community of interest, and
the shares of the members are not defined. Nanchand Gallguram
Shetji v. Mallappa Mahalingappa Sadalge alld other. 2
14. A precarious existence: A partnership is likely to have
a precarious existence, because a partnership can be ended at
any time. Aggarwal & Co. v. Commissioners of Income Tax. l

PARTNERSHIP FORBIDDEN BY LAW

Number of partners : Section II of the Companies Act,
1956 prohibits the formation of the partnership for the purpose
of carrying on the business of banking with more than ten persons
and for any other purpose with more than twenty persons. If it
is desired to carry on business with more than' 10 or more than
20 persons for banking and non-banking business respectively,
a company must be fonned.
2. An agreement to form a partnership, for the purpose of
carrying on an illegal trade ora prohibited trade, is void,
I AIR (1959) Supreme Court 1289 ,2 AIR (1976) Supreme Court 835
3 AIR (1970) Supreme Court 1 3 4 3 " .
 NATURE Of PARTNERS
2S~
Firm, Firm-name, Partner
Persons who have entered into partnership with one another
are called individually "partners" and collectively "a firm" and
the name under which their business is carried on is called the
"firm-name."-Sec. 4, para 2.
lie Legal Status or a Firm
il"\A firm is not an artificial person like a company. It is merely
a collective name for the individual who are trading in partner-
ship. Therefore, a firm is not a legal person or a legal entity.
A partnership firm cannot be distinguished from its partners. The
rights, duties and obligation of a firm are actually the rights,
duties and obligations 0 th jlMSOns who own the firm.
~ Classes or P e
Partners can be classified as below :
£ 'Active Partner : An active partner is one who actually
participates in the business of the firm. A person becomes a
partner only by agreement.
.~ Dormant. Sleeping Or Nominal Partner : These partners
join the finn by agreement but do not take any active part in
the business. Their liabilities are same as of Active Partners.
1f' Sub-Partner : The transferee of a share of a partner's
interest in a fimt is called a Sub-Partner. Suppose P. the owner
of ~ of finn, transfers ! of his share to Q. Q will be called
a sub-partner. His rights and liabilities are limited.
Name of a Partnership
The partners may select any finn-name they please, subject
to the following restrictions :
(0) They must not select a name which will fraudulently
imply that their business is the same as some other competing
concern.
(b) They cannot use words like 'President', 'Royal', etc. which
will imply that the finn is enjoying the patronage of the state.
The names of all the partners may be used together as the
firm-name or the name of any particular partner may be so used.
It may happen that the name of a partner is used as the finn-
name but that name is identical ",:ith the firm-name of a ri\'al
 256 THE LAW OF PARTNERSHIP

trade. This is not illegal. A man is·entitle4 'to use his own name
for carrying 011 business even though it i~ identical with, the name
of another person carrying 011 a similar business. But' if there
is any fraudulent intention, he may be stopped from doing so.
Turton v. Turtoll. l .

~Classes of Partnershil!.s
Partnerships can be classified as below :
,.1. Partnership-at-w.: I : A partnership is called a partnership-
at-will (I) when the partr. ership is !fat for a fixed period of time
and (ii) when no provision is made as to when and how the
partnership will come to an end.-Sec. 7.
A partnershlp-at-wIII can be dissolved whenever any partner
chooses to do so.
2 Particular Partllership--Joint Venture : A particular
partnership is one which is formed lor a partic'ular allventure or
a particular undertaking. (Sec. 8). Such a ·partnership is usually
dissolved on the completion of the adventure or undertaking.
3. Limited Partnership : In Great Britain, according to the
provisions of the Partnership Act of 1907, a partnership may be
formed ill which the liability of all partners (except one) is
Iimited. There must be at least one partner with unlimited
liability. In India there is nO such provision. In India the liability
of all the partners must be unlimited.
Partnership Property
The property of the firm includes all property and rights and
interests in property originally brought into the stock of the firm
or acquired by purchase or otherwise, by or for the firm. or for
the purposes and in the course of the business of the firm, and
includes also the goodwill of the business.-Sec.14.
Thus, property of the firm means (i) property originally
brought in by the partners, (ii) property obtained while the firm
wa~ in business and (iii) the goodwill of the firm.
Goodwill of a firm is an asset of the firm. In the absence
of any provision expressly made or clearly implied, the normal
rule is that the share of a decreased partner, including goodwill,
devolves upon his legal representatives. Khurshal Khengar Shah
& Ors. ~.i Khorshedballu Dadiba Boatwalla & Drs. 2

'(1889) 42 Ch. D. 128 2 (1971i S.C.A. 16 (Sup'en:'e <;:oan) .

 NAlURE OF PARTNERSHIP 257

Unless the contrary impression appears, property and rights

and interests in property acquired with money 'belonging to the
firm. are deemed to have been acquired for the firm.
Application of the property of the firm : Subject to contract
between partners the property of the firm shall be held and used
by the partners exclusively for the purpose of the business.-
Sec. 15.
Examples of Partllership Property: A partnership is formed
witlt X. Y and Z as partners. }( contributes to the stock of the
firm a plot of land, Ya motor lorry and, Z t~e sum of Rs. 10,000.
Subsequently the firm purchases, out of its earnings, a house.
All these properties, and the goodwill of the business, are
properties of the firm.
Goodwill
Goodwill is not defined in the Partnership Act. Goodwill may
be described as the advantage which is acquired by a firm (over
and above the value of the stock-in-trade and capital and funds)
from the connections it has built up with its customers and the
reputation it has gained.
"Goodwill, I apprehend, must mean every. advanlage .... that
has been acquired by the old firm in carrying on its business,
whether connected ~ith the premises .in which the business was
previously carried on;' or' with the name afthe late firm, or with
any other matterearrying with it the benefit of the business."
Churton· v. Douglas,' '
"The gOodwill of a business 'is the whole advantage of the
reputation and 'connexion formed with customers together with
the circumstances, whether of habit or otherwise, which tend to
make such connexion permanent. it represents in conn~xion witll
any business or business product the value of the attraction to
customers which the name and reputation possesses."-Halsbury. 2
GO\?dwill is part of the prdperty of the' firm. Section 55 of
the Partnership Act provides that in setting the accounts of a
firm after dissolution, the goodwill shall. subject to contract
between the partners,' be includ~ in the assets and it may be
sold either separately or along with other property of the firm,

'(1859) 28 L.J. Ch, 841, 845 'La... of England. 3,d Edition, p. 360

C omme,cial Law - 17
2S1 THE LAW OF PARTNERSHIP

At the time Qf valuation of goodwill 1\ IS necessary to

consider the type of business and the type of customer which
such a business is inherently likely to attract as well as all the
surrounding circumstances. Mehl'1l Belgam Vola and another v.
G. Bell cf Co. and others. I
The rartttenhip Agree.eat
The agreement to carry on business in partnership may be
oral or in writing. If it is in writing, the 004;ument in which the
terms are incorporated is called the Deed of Partnership or the
Articles of Partnership.
Written documents of partnership usually contain exhaustive
provisions regarding matters concerning the business and the
relationship between the partners. The following matters are
generally included: name and address of the partners; firm-
name; nature of business; place of business and the business
address: duration of the partnership and the mode of dissolution :
the amount of capital to be contributed by each partner; the share
of profits to be taken by each partner; the mode of management ;
the powers of the partners; terms on which a partner can retire ;
expulsion of partners; introduction of new partners etc.

* REGISTRADON 0' fIRMS

The registration of a partnership is DOl compulsory.
an unregistered firm is not an _!lJegaL~iation... But . ~
unregiSl~ff~ XtolllC~rtajn_cliSlibilitics and tbeRfoR
~
rellSbailon is necessary for cmying on
---- ----- -- ---- -~~ - -- --- ----_.-- -----'!!!linn. ._~-

..... , .......tia., ..........

( (~tions 56-71). The rqiS1nllioil of a flflll ~ be cft'ccted
at any time by sending by post or dcliveriDg to the .......
of Finns of the locality. a ~ in the pmc:ribed f _ IIId
accompanied by the prescribed fcc, stating the following
particulars; (q) the f~ (6) the place or principal place
of business of the fina, (c) tile a.ncs of any othc.- plac:cs where
the flflll carries on business, (d) Jbe date when each partner joined
the firm. (e) the names in full and permanent addresses of the
partners and if) the duration of the firm.
I AIR (1913) Mad 3$1
 NATURE Of PARTNERSHIP 259

t The statement shall be signed and verified by all the partners,

or their agents specially authorised on this behalf. On receipt
of the statement and the fees, the, Registrar records an entry of
the statement in the Register of Finn and the firm is thereupon
considered to be registered.
AIterations in any of the above particulars have to be
recorded.
The Register of Firms can be inspected and copies of entries
taken by any person on payment of the necessary fees.
Under Section 56 of the Act, the Government of any State
may, by notification, declare that the provisions relating to the
registration of firms shall not apply to the State or any part
thereof. .....,/'
TI..e ror Registration
A firm may be registered at anytime. Bul an un.registered
firm cannot file certain suits. (See below). A fIrm must be
registered before it can file suits or claim set-off. A firm can
be registered even after the partners have agreed \0 dissolve the
firm.
CODsequeDCH or Non-registration (Sec. 69)
An unregistered lirm and the partners thereof suffer from
certain disabilities :
I. A partner of an unregisteredlirm cannot file a suit (against
the firm or any partner thereof) for the purpose of enforcing a
right arising from contract or a right conferred by the Partnership
Act.
2. No suit can be filed on behalf of an unregistered firm
against any third party for the purpose of enforcing a right arising
from a contract.
3. An unregistered firm cannot claim a set-off in a suit. [' Set-
off" means a claim by the defendant which would reduce the
amount of money payable by him to the plaintiff].
The effect of Section 69 is (I) to bar all suits by an
unregistered lirm against third parties for the enforcement of
rights arising from contracts, and (ii) to bar ;III suits between
partners inter se for the enforcement of partnership rights. ~
section does not bar suits in respect of torts, i.e., civil suits for
damages for the VIOlation of a right. r -
 260 THE LAW OF PARTNERSHIP
·,
Exceptions: There are certain exceptions to the rules stated
abo"e.
L A' partner of an unregisteretl finn can file a suit for the
dissolUiion of the finn and f~r' accounts.
, 2.'Surts can'be filed for the realisation of the properties of
a dissolved firm even though .it was unregistered.
3. The Official Assignee or Receiver can realise the prop-
erties of an insolvent partner of an unregistered finn.
4. There is no bar to suits by unregistered firms and by the
partners thereof in areas where the provisions relating to the
registration' of firms do not apply by 'notification of a State
Government under Section 56.
5. An unregistered finn can file a suit (or claim a set off)
It)r a sum not exceeding Rs. 100 in value, provided. the suit is
of such a nature that it has to be filed in the Small Causes Court.
Proceedings incidental to such suits, e.g, execution of decrees,
are also allowed.
6. An unregistered firm suffers from certain disabilities but
it is not an illegal association. TIlerefore registration of a firm
is optional.

EXERClSES
L What are the essentials of a partnership? (Pages 248·249)
2. What is the test of determining whether a partnership between A
and B does not exist? (Pages 249-250)
J. "Sharing of profits is only prima facie evidence of partnership."
Discuss, (Pages 248-249)
4. What is partnership property? For what purposes can it be used?
• (Page 256)
5. How far can a partner of a firm be considered as an agent of the
other panners? (Pages 249, 264)
6. Explain the following terms: Firm: P"rtner; Donnant; Sleeping
or Nominal Partner; Partnership at will; Partnership property;
Partnership agreement; Goodwill. (Pages 254-258)
7. Must a finn be registered? What arc the effects of non-reg,istration
of a finn? (Pages 258-260)
8. Although regIstration of firms is not compulsory, finns arc usually
registered. \\-'hat arc the disad'vantages qf non-regiST! ~tion of il finn
under tile law of partnership?' . (Pages 2~8-266)
9. Distinguish between the folloWirig :
(a) Part[lershipfinn and'. Hindu' joint'f?mily finn. (Page 253)
 NAnJRE OF PARTNERSHIP 261
, i -~
/!
(b) eartnership and c().()\lmership. (Page 252)
(e) Partnership and a club. (Page 252)
(d) Active partner and Sleeping
. . , partner. (Page 255)
10. Problems :
(a) X is the sole owner of a firm. He admits Y as a partner on
the following terms; (i) Y is not to bring any capital; (ii) r
is not to be responsible for any loss; (iii) Y is to receiveRs.
200 p.m. in lieu of profits; and (iv) Y is to have all the powers
of a partner. Discuss the legal position of Y in the firm.
(Pages 249-250)
(b) A and B agree to share profits of the business carried on· by
them but do not state anything in the Deed about sharing of
losses. Is it a valid partnership? (PageS 250-251)
(el A person wants to join a firm as a partner on the following
conditions: he will devote himself entirely to business of the
firm, but he will not bring in any capital and will nQt be
responsible for any loss of the firm. Discuss.
(Pa~es 249,250)
II. Objective questions.
(a) Define Partnership. (Page 248)
(6) What do you understand by partnership·at·will? (Page 256)
 RIGHTS AND LIABILITIES
OF PARTNERS

RELATIONS OF PARTNERS TO ONE ANOTHER

Determination of rights and duties of partners by contraet
between the parlners : The mutual rights and duties of the
partners of a firm may be determined by contract between the
partners. Such contract may be expressed or may be implied from
the course of dealings of the firm. The mutual rights and duties
may be altered any time with the consent of all the partners.-
Sec. 11(1).
The Partnership Act lays down two general rules' regarding
the conduct of the partners to one another.
I. General dulies of partners : "Partners are bound to carry
on the business of the firm to the greatest common advantage,
to be just and faithful to each other. and to render true accounts
and full information of all things affecting the firm to any partner
or his legal representative."-Sec. 9.
This section lays down that the relationship between partners
is one of utmost good faith. Though partners are not trustees
for one another, it has been held in some cases that the
relationship between them is of a fiduciary character.
2. Indemnify: "Every partner shall indemnify the firm for
any loss caused to it by his fraud in the conduct of the business
of the firm."-Sec. 10.
This rule follows logically from the .rule laid down in the
previous section. Since partnership implies utmost good faith. a
partner must not act fraudulently against the firm. If he does,
he must make up the loss.
Subject to the general principles stated above the following
rules are laid down in the Act regarding the relationship between
the partners as regards the management of the business and their

~
u I rights and duties .

.l'P ules regarding tile rondlld 01 tlte b.si_ (Sec. 12)

. . Subject to any agreement to the contrary, the following rules
apply as regards the management of a firm :
(a) every partner has a right to take part in the conduct of
the business;

262
 RIGKTS AND UABlLlTJES Of PARTNERS 263

(b) every partner is bound to attend diligently to his duties

in the conduct of the business;
(e) and dift'eience arising as to ordinary matters connected
with the business may be decided by a majority of the
~ners, and every partner shall have the right ttl express
his opinion before the matter is decided but no change
may be made in the nature of the business without the
consent of all the ~ners; and
(d) every partner has a right to have access to and to inspect
and COPy any of the books of the firm.
Subject to contract between the partners, the property. of the
firm shall be held and used by the partners exclusively for thc
purposes of the business.-Sec. 15.
The partners may distribute the work of management among
themselves in any way they like. There may be a partner who
takes no active part in the business.
The partnership contract may provide that a partner shall not
carry on any business othcr than that of the firm while he is
a partner. Such an agreement is not void on the ground of restraint
of trade.-Sec. 11(2).
JlMa.... ...... .... daties (Sec. 13)
I Subject to any contract to the contrary, the mutual rights and
duties of partners are as follows:
(a) a partner is not entitled to receive remuneration for
taking part in the conduct of business;
(b) the partners are entitled to share equally in the profits
earned and shall contribute equally to the losses sus-
tained by the finn;
(e) where a partner is entitled to interest on the capital
subscribed by him such interest shan be payable only
out of profits ;
(d) a partnCf making. for the purposes of the business. any
payment or _vam:e beyond the amount of capital he
has lIgreed to subsc:n"be. is entitled to interest thereon
III the rate of six per cent per aORum;
(e) the finn shall indemnify a partner in respect to payments
made and liabilities incurred by him-{i) in the ordinary
and proper conduct of the business, and (II) in doing
such Kt. in any emergency, for the purpose of protecting
264 LAW OF PARTNERsHIP

the firm from loss, ai would be done by a person of

ordinary prudence, in his own ClISC, under similar
circumstances; and .
(f) a partner shall indemnify the firm for any loss caused
to it by his wilful neglect in tbe conduct of the business
of the firm. '
3. Personal profits earned by partners (Secret Pniftts-Sec. 16)
Subject to contract between the partners,
(a) if a partner derives any profit, foi-himself from any
transaction of the firm, or from the use· of the property
or business connection of the firm or the firm name,
he sha II account for Ihat profit and pay it 10 the firm ;
(b) if a partner carries on any business of the same nature
as and competing with ihal of the finn, he shall account
for and pay to the firm all profits made by him in that
business.
Examples:
(i) A partner without the knowledge of his olher partners obtained for
his own benefit the renewal of the lease of the busi"ess prtmises
of the finn. Held, the renewed lease was. partnership property.
Fealherslonehallgh v. Fenwiclc,l
(ii) P and Q were partners of a finn. Q was appoinled 10 buy sugar
for the finn. Without the knowledge of P. he supplied his own
sugar to the firm at the market price and made large profits. Held,
he must make over the profits 10 the finn.· Ben/ley ~ Craven.'

4. Continuance or pre-existinc terms (Sec:. 17)

Subject to contract between the panners, tile relationship
between them is presumed to remain the same if the constitution
. of the firm changes for any reason, or· if the fmn was for a fixed
period and continues to exist after the elqliry of. the term, or
when business not included in the original ~I)t ...ct is. undertaken.

THE AUTHORIT¥ OF A PARTNER

Agency
Parlner 10 be agenl of lhe firm : "Subject to the provisions
of this AC.t, a partner is the agent of tbC firm for the purposes
1(1810) 17 Ves. 298 2 (1853) 18 Bllav. 75
 RIGHTS AND UAPILITIES OF PARTNERS 265

of the business of the firm." (Sec. 18) When two or more persons
agree that they would carry on a business jointly and share the
profits earned thereby, each is a principal and each is an agent
for the others. Each is bound by any of the other's contracts
entered illto with third parties in course of the business of the
partnership. The principle of agency governs the relationship
between the partners. It has therefore been said that the law of
partnership is a branch of the law of agency.
The authority of a partner to act on behalf of the finn can
be divided into two categories: Express Authority and Implied
Authority.
Express Authority
Any authority which is expressly given to a partner by the
agreement of partnership called Express Authority. The tirm is
bound by all acts done by a partner by virtue of any express
authority given to him.
Implied Authority
Implied Authority means the authocity to bind the firm which
arises by implication of law from the facts of partnership.
Section 19 of the Act lays down that the act of a partner
which is done to carry on, in the usual way, business of the kind
carried on by the firm, binds the finn.
Mode of doillg act to bind firm : Se4:tion 22 provides that
in order to bind a firm, an act or instrument done or executed
by a partner (or other person on behalf of the finn) shall be
done or executed in the firm name, or in any other manner
expressing or imp,lying an intention to bind the firm.
Examples :
(i) X, the panner of a firm of confectioners, purchases sugar on credit
in the firm'S name. The firm is bound to pay for the sugar.
(ii) P. the panner of a firm of confectioners, purchases a horse on credit
in the firm's name. The firm is not bound in the absence of any
express authority. from the other partners because this act docs not
come within the scope of a confectioner'S business.
(iii) r. the panner of a firm borrows money in his personal narne. The
J!rm is not bound beeause it is not an act of the firm.

LimitatioDSof a partner's Implied Authority [See, 19(2»)

In the absence of any usage of custom of trade to the
266 LAW OF PAInWERSHlP

a
contrary, the implied authority of partner does not empower
him to-
(a) submit a dispute relating to the busiMSS of the firm to
arbitration,
(b) open a banking account on behalf of the finn in his own
name,
(c) compromise or relinquish any claim or portion of a claim
by the finn,
(d) withdraw a suit or proceeding filed on behalf of the finn,
(e) admit any liability in a suit or proceeding against the finn,
(j) acquire immovable property on behalf of the finn,
(g) transfer immovable property belonging to the finn, or
(h) enter into partnership on behalf of the finn.

AlteratioD or Authority (Sec. 10)

The express or implied authority of a partner may be altered,
extended, or restricted by agreement between the partners at any
time. Out notwithstanding any such restrictions, any act done by
a partner which falls within the implied authority of a partner,
binds the firm unless the person with whom he is dealing knows
of restriction or does not know or believes that partner to be
a partner.
Authority iu .. EDlel'lcacy (Sec. 11)
A partner has authority in an emergency, to do all such acts
for the purpose of protecting the firm from loss as would be done
by a person of ordinary prudence, in his own case, acting under
similar circumstances, and such acts bind the finn.

ADMISSION BY A PARTNER
An admission or representation made by a partner concerning
the affairs of the firm is evidence against the;, fum, if it is made
in the ordinary course of business.-5ec. D.

NOTICE TO A· PARTNER
Notice to a partner who habitually acts in the business of
the firm of any matter re\;lting to the affairs of the ftrlll operates
as notice of, the firm, except in the case of a fnud on the firm
c:ommined by or with the consent of that panner.-see. 24.
 RIGHTS AND LIABIlITIES Of PARllIERS 267

From the above it follows that a notice to a dormant partner

is not notice to the firm.

L ILITY OF PARTNERS TO OUTSIDERS

partner's liabilities can be discussed in three ca~es.
I. lability of a Partner for Acts of the Firm
Every partner is liable, jointly with all the other partners
and also severally for all acts of the firm done while he is a
partner.-Sec. 25.
This section lays down the rule that every partner is liable,
to an unlimited extent, for all debts due to third parties from
the firm incurred wh iIe he was a partner.
As between the partners, the liability isadjustsble according
to the terms of the partnership agreement. Thus if a partner is
±
entitled to receive th share of profits he is liable to pay th±
share of the losses. The accounts between the partners will be
adjusted on this basis. But a third party, who is a creditor of
the firm, is entitled to realise the whole of his srlaim from any
one of the partners.
There is no difference between working partners and dormant
partners as regards liability to third parties. A dormant partner
also iytrable to an unlimited extent for all debts of the firm.
II. t!abillty of tile Firm for wrongful ads of a Partner
Where, by the wrongful act or omission of a partner actil'g
in the ordinary course of the business of a finn, or with the
authority 0 his partners, loss or injury is caused to any third
party, or y penalty is incurred the firm is liable therefore to
the sa extent as the partner.-Sec. 26.
IabiUty of Firm for misapplication by Partaers
Where-
(a) a partner acting within his apparent authority receives
money or property from a third party and misapplies it, or
(6) a firm in the course of it5 business receives money or
property from a llrird party, and the money or property
is misapplied by any of the partners while it is in the
custody of the firm, the firm is liable to make good the
loss.-Sec. 2"1.
 268 LAW OF PARTNERSHIP

Example
X. a member of a firm of solicitors, obtained a loan for AI. from
some other clients of the firm. X said to M lilat the. mortgagee
required collateral security for the loan and M depOsited certain share
warraj1l paya!>l. to bearer. The security was actually not necessary.
The other partners of the firm and the mortgagee had no knowledge
of this, deposit. X then misapp;opriated the share and absconded.
Held, the transaction was within (be apparent authority of the other
partners, and was an act of firm. Therefore tbe act was binding
on the firm. The firm had to pay the loss. AI. Rhodes v. MOliles. I

\ RIGHTS OF PARTNERS/
The rights of partners, and the relations of partners to one
,~ another, are determined by the agreement of the partners. Where
ft::- there is no express or implied terms in the agreement, the rules
:>A.. , stated in the Partnership Act will be applied. Subject to any
T' con~tract to the contrary, the important rights of partners are
summ ised below:
· Conduct of business : Every partner has a right to take
part in the conduct of the business.-Sec. 12(a).
¥Can express opinion: Every partner shall have the right
to express his opinion.-Sec. 12(c).
¥ Access. inspection, copy : Every partner has a right to
hav~accss to and to inspect and copy any of the books of the
firm. ec. 12(d).
· Equality of profits : The partners are entitl.ed to share
equally in the profits earned.-Sec. l3(b) .
. 5. Interest on capital: A partner is entitled to get interest
on the capital out of profits only.-Sec. l3(c).
:;;Ilnterest on advance : A partner, paid or advanced to the
firm bey d the amount of capital, is entitled to interest thereon
at the ate of six per cent per annum.-Sec. 13(d).
To get indemnity: Th" finn shall indemnif)!.a partner in
respect of payment's made and liabilities incurred by him, in the
or~ina a. nd proper. conduct of the business and in doing such
act, i any emerge.n.cy.-Se.c. 13(e).
· Application ofproperly offirm : TIte property of the firm
shall be held and used by the partners exclljsively for the
purposes of the business.. -Sec. 15. .
9. Partner s authority: Every partner has right to act on behalf
orthe firm. He has express and implied authority.-Secs. 18 and 19.
1(1895) ch. 236
 RIGHTS AND UABllmES OF PARlNERS 269

~wers in an emergency: He has certain powers in an

emergency.-See. 21.
II. Reconstitution : The constitution of a firm may be
changed by the introduction of a· new partner, death, retirement,
insolvency, expulsion or by the transfer of a partner's share to
an outsider. The rights and liabilities of the incoming and
outgoing partners have been stated in the sections 29 & 31 to
38. (See under "Reconstitution", p. 273).
12. Dissolutioll : A partner has the right to get the firm
dissolved under appropriate circumstances. Upon dissolution, the
partners have the right to get accounts of the firm and surplus
assets according to their shares. (See p. 278)
13. Righ/ /0 carryillg Oil a competillg busilless : By a special
agreement, an outgoing partner can be prevented from carrying on
a similar business within a specified period or local limits. But
if there is no restraining agreement, an outgoing partner can carry
on a competing business and may advertise such business. But,
subject to contract to the contrary, he cannot use the firm-name.
represent himself as carrying on the firm business or solicit the
custom of the former buyers of the firm.-Sec. 36. (See p. 276)
14. Right to share profits after retirement; If aftcr retiremcnt
(or death) and the continuing partners carry on the business of
the firm with the property of the firm (without any final
settlement of accounts) the outgoing partner (or the legal
representative of the deceased partner) is entitled to get share
of profits or 6% per annum of his share of the property of the
firm, at their option.-Sec. 37. (See p. 276)

6 DUTIES OF PARTNERS
v T~ important duties of partners are summarised below :
Vf. Jus/ice, Faifhfi""ess, True ACCOUllts, Full 111/ormatioll :
Partners are bound to carry on the business of..th'c· fir~ to:.the greatest
co",~lon advantages, to be just and faithfufto eacl;'oihcr, and to
render true accounts and full infennation of allthing~ affecting the
fi~ny partner or his legal represcntative.-Sec,~6.
2. To pay indemnify: Every partner shall indemnify !he firm
for any loss caused 10 it by his fraud in the conduct ;f the
business of Ihe firm.--Sec. 10. '.
270 LAW OF PARTNERSHIP

/ r o aI/end diligently : Every partner is bound to attend

diligCJllly to his duties.-Sec. 12(b).
\4. No remlllleration; Subject to any contract to the contrary,
a partner is not entitled to receive remuneration for taking part
in the contract of the business.-Sec. 13(a).
5. Equality of losses : Subject to any contract to the contrary,
partners are bound to pay the losses of the firm equally.-Sec.
l3(b). Nowell v. Nowell. (See p. 283)
Va pay indemnity for wilful neglect : A partner shall
indemnify the firm for any loss caused to it by his wilful neglect
in .the~nduct of the business of the firm.-Sec. 13(f).

~
NO rivate benefit : A partner cannot use the partnership
propert' ,directly or indirectly, for his own benefit.-Sec. 15
. To account for ~ecret profit : If a partner derives any
profits for himself from any transaction of the firm, or from the
use of the property or business connection of the firm or the
firm name, he shall account for that profit and pay it to the
firm'~F' l6(a).
\/]/No secret profit : If a partner carries on any competing
business of ~he firm, he shall account for and pay to the firm
all profits made by him in that business.-Sec. l6(b).
10. Unlimited liability. Every partner is liable for the acts
of the firm done while he is a partner. The liability is joint and
severa I.-Sec. 25. (See p. 267).

PARTNERSHIP BY HOLDING OUT OR ESTOPPEL

A person may, under certain circumstances. be liable for the
debts of a firm although he is not a partner. If a person, by words
spoken or written, or by conduct. represents himself or knowingly
permits himself to be represented, to be a partner in a firm, he is
liable as a partner in that flllTl to anyone who has on the faith
of any such representation given credit to the firm.-Sec. 28.
If X induces Y to believe that X is a partner of a firm AD
and Y. believing that X is a partner, gives credit to AB, X will
be responsible for compensating Y. He will not be beard to
say that he is not a partner of AB. This is known as partnership
by Holding Out or Estoppel. ("Estoppel"-See p. 52)
Examples:
Ii) Two brothers ..l and 8 carry on a business in the family name.
Another brother C. having the same name anencls the place of
 RIGHTS AND L1ABIUTJES Of PARll'iERS 211

business uuI beIuwa willi outsiders as if he was • partner. C is

liable .s a .,.,.,. by holding out.
(II) X carried on business as R. S. & Co. and employed a person named
R. s.. to act as ........er of the business. 1\ was held that R. S. is a
partDer by the principle of estoppel. lkm" v. 1M Nal;OIIal Ba"k Ltd. I
To hold a person liable as a partner by holding out, it is
necessary to cstablish the following ~
I. He represented himself, or know'ugly permitted himself
to be represented as partner.
2. Such representation occurred by words spoken or written
or by conduct.
3. The other party on the faith of thaI representation gave
credit to the finn.
It is not necessary that there should be any fraudulent
intention on the part of the person holding himself out as partner.
Nor is it necessary that he should be aware of the fact that a
penon is giving credit on the faith of the representation.
A partner by holding out is liable to make good the loss
which the person giving credit, may suITer. But thereby he
acquires no claim upon the finn.
A ",il'ed portner ~ A partner who has retired from the firm
but allows the use of his name in connection with the finn may
become liable to third parties by the principle of holding out.
1M «ceQ$rd pm-nter : The legal representatives of a
deceased partner do not become liable for the debts of the firm
merely because the _ of the deceased is used as a part of
the finn name.

*" MINOR ADMrrn:D AS A PARTNER

A minor cannot enter into.a contract of partnership because
an agreement by • minor is void. But if all the partners agree.
a minor may be admitted to JIIe benefits of an existing firm. The
rights and liabilities of such a minor partner are governet! by
the following rules. (ScI;. 30) :
1. The minor has a right to such share of Ihe property and
of the profits of the finn as may be agreed upon by the partners.
2. The minor may have access to and inspect and copy any
of the accounts of the finn.
I (1906) 21 T.L.R. 65
272 LAW OF PARTNERSHIP

3. The share of the minor in the profits and in the assets

of the firm are liable for the ads of the firm but the ininor is
not personally liable for any such act. (His personal properties
are not liable).
4. So long as the minor continues to be a member of the
firm, he cannot file a suit against the other partners for an account
or for the payment of hi'. share of the property or profits of the
firm. He can file such ,a suit only wh,en .he wants to sever his
connection with the firm. [If the minor files such a suit, the
minor's share shall be determined by valuation in ,accordance,
as far as possible, with the procedure laid down in Sec. 48 of
the Act for taking accounts of a dissolved partnership].
5. At any time within six months of his attaining majority,
or of his obtaining knowledge that he had been admitted to the
benefits of partnership, whichever date is later, the minor may
give publ ic notice that he has elected to become or that he has
elected 1I0t 10 become. a partner in the firm. Such notice shall
determine his position as regards the firm. If he gives no notice,
he shall become a partncr of the firm on the expiry of the said
six months.
["Public Notice"-The mode of giving public notice is laid
down in Section 72 of the Act. [n the case of a regist~red firm :
(i) a copy of the notice is to be sent to the Registrar:,Qf Firms, .
and (ii) a copy must be published in the local official Gazette
and in at least one vernacular newspaper circulating in the district
where the firm has its place or principl,e place of business. In
the case of unregistered firms, only (ii) is necesSilfY.]
(If the minor wants to take advantage of the fact that he
had no knowledge of being admitted. ,into the, .benefits of a
partnership, the burden of proving such lack of knowledge is
upon him.) ,
6. The following rules apply when a minor elects to become
a partner or bccori\,es, a partner by failing to notifY otherwise :
• (a) His rights and .liabilities asa minor continue up to the
date on which he becomes a partner, but he also becomes
'personally liable to third parties for all aCts o(ilie firm
done since h~' w~s admitted to the benefits of partner-
. ship. .
(b)' His share in the property··aud'.Pfofits of the firm shall
be Ihe share to which he was, entitled as.a Jhino~...
 RIGHTS AND LIABILITIES OF PARlNERS 273

7. The following rules apply when the minor elects not to

become a partner :
(a) His rights and liabilities continue to be those of a minor
up to the date on which he gives public notice.
(b) His share is not liable for any acts of tho firm done
after the date of the notice.
(c) He is entitled to use the partners for his share of the
property and profits of the firm.

RECONSTITUTION OF A FIRM L
Incoming and Outgoing Partners . !Ef)
The constitution of a firm may be changed by the introduction
of a new partner; death, retirement, insolvency and expulsion
of a partner; or by the transfer of a partner's share to an outsider.
All these are included within the term Reconstitution of a firm.
Upon reconstitution, the rights and liabilities of the incoming and
outgoing partners have to be determined. The provisions of the
Partnership Act regarding such cases are stated below.
Introduction of a New Partner (Sec. 31»)Ii(
A new partner can be. introduced only with the consent of
all the partners. The share of profits which a new partner is
entitled to get is fixed at the time he becomes a partner. He is
liable for all the debts of the firm after the date of his admission
but he is not responsible for any act of the firm done before
he became a partner, unless otherwise agreed. These rules do
not apply to a minor becoming a partner under Section 30.
Retirement of a Partner (Sec. 32) ~
A new partner may retire (a) witi'the consent of all the
other partners, (b) in accordance with the terms of the agreement
of partnership, or (c) where the partnership is at will, by giving
notice in writing to all the other partners of his intention to retire.
A retire partner may be discharged from any liability to any
third party for acts of the firm dOlle before his retirement if it
is so agreed with the third parcy and the partners of the
reconstituted firm. Such agreement may be implied from th.e
course of dealing between the firm and the third party after he
had knowledge of the retirement.
Commercial Law - 18
274 LAW OF PARTNERSHIP

The retired partner continues to remain liable to third parties

for all acts of the firm until public notice is given of the
retirement. Such notice may be given either by the retired partner
or by any member of the reconstituted firm.
[The mode of giving Public Notice is laid down in Sec. 72
of the Act. See p. 272)
A retired partner is not liable for the debts of the firm
incurred after public notice of his retirement.
Expulsion of a Partner (Sec. 33)
A partner can be expelled only When the following conditions
are fulfilled:
(a) When the contract of partnership contains a provision
for expulsion under stated circumstances.
(b) The power to expel is exercised in good faith by the
majority of the partners.
(c) The expelled partner has been given notice of the
charges against him and has been given an opportunity
to answer the charges. Carmichael v. Evans. I
The liabilities of an expelled partner for the debts of the
firm arc the same as those of a retired partner.
Insolvency of a Partner (Sec. 34)
When the partner of a firm is adjudicated an insolvent, he
ceases to be a partner from the date on which the order of
adjudication was passed by the court. Whether the firm is thereby
dissolved or not depends on the terms of the agrt--ement between
the partners.
If the firm is dissolved, the usual procedure in case of
dissolution is adopted (i.e., the assets are collected and the debts
and charges are paid). If any balance remains due to the insolvent
out of the assets, the same is handed over to the Official Assignee
or the Official Receiver.
If the firm is not dissolved by ttu: insolvency the share of
the insolvent partner vests in the Official Assignee or the Official
Receiv:er. Thereafter the estate of the insolvent partner is not
liable for any act of the firm and the firm is not liable for any
act of the insolvent dono- after the date of the order of
adjudication.
1(1904) 1 Ch. 486
 RIGHTS AND LIABILITIES OF PARTNERS 275

Death of Partner (Sec. 35)

Ordinarily the death of a partner has the effect of dissolving
the firm. But it is competent for the partners to agree that the
firm will continue to exist even after the death of partner.
Where the firm is not dissolved by the death of a partner.
the estate of the deceased partner is not liable for any act of
the firm done after his death.
Transfer of a Partner's Interest (Sec. 29)
A partner may transfer his interest in a firm to an outsider.
The transfer may be absolute or partial. The interest may also
be sold to a third party in execution of a decree of a court. The
transferee in such cases gets very limited rights over the firm.
His rights can be described as follows :
I. The transferee does not become a partner of the firm. He
cannot interfere in the conduct of the business or require accounts
or inspect the books of the firm.
2. The transferee is entitled to receive the share of profits
of the transferring parlner. But he has to accept the account of
profits agreed to by the partners.
3. If the firm is dissolved or if the transferring partner ceases
to be a partner, the transferee is entitled, as against the remaining
partners, to receive the share of the assets of the firm to which
the transferring partner is entitled. For the purpose of ascertaining
that share, the traiisferee is entitled to au account as from the
date of dissolution.
Sub-Partnersbip
The transferee of a share of a partner's interest in a firm
is sometimes called a Sub-partner and the relationship a Sub-
partnership. Suppose that X. the owner of ~ share of a firm.
transfers !of his share to Y The transferee r becomes a sub-
partner. The position of a sub-partner is tile same as that of a
transferee of a partner's interest. (See above)

RIGHTS OF AN OUTGOING PARTNER

1. Restraint of trade
By a special agreement among the parillers. an outgoing
partner may be prevented from carrying ,}11 a .',niL" husin~ss
within a specified period or within specified \oc.,; 1,111il'. Such
276 , LAW OF PARTNERSHIP

an agreement is valid and is an exception to the general rule

that agreements in restraint of trade are void.-Sec. 36(2).
2. To carry on competing business
If there is no restraining agreement, an outgoing partner may
carry on a business competing with that of the firm and he may
advertise such business. But, subject to contract to the contrary,
he may not (a) use the firm name, (h) represent himself as
carrying on the business of the firm, or (e) solicit the custom
of persons who were dealing with the firm before he ceased to
be a partner.-Sec. 36( I).
3. To share subsequent profits
Where any member of a firm has died or otherwise ceased
to be a partner, and the surviving or continuing partners carry
on the business of the firm with the property of the firm without
any final settlement of accounts as between them and the
outgoing partner or his estate, the share of the profit of the
outgoing partner or his representatives is to be decided in the
following way :
(i) he or his estate is entitled at fhe option of himself or his
represenfalives to such share of the profits made since he
ceased to be a partner (as may be attributable to the usc
of his share of the property of the firm) or,
(ii) to interest at the rate of six per cent per annum on the amount
of his share capital in the property of the ·firm.
But this rule will be followed only if by contract between the
partners an option is given to surviving or continuing partners to
purchase the interest of a deceased or outgoing partner. And, if
the option is duly exercised, the estate of the deceased partner, or
the outgoing partner or his estate, as the case may be, will not be
entitled to any further or other share of profits. But, if any partner
assuming to act in exercise of the option does not abide in all
material respects by the terms thereot: he is liable to account under
the foregoing provisions of this section.-Sec. 37.
4. Revocation of continuing gnarantee' by change in firm
A continuing guarantee< given to a firm or to a third party
in respect of the transactions of a firm is, in the absence of
agreement to th'c contrary; revoked as to future Vi!nsactions from
the date !Jf,any~change in the c.""t""lion ,?[1hVfi~m<:-~Sec. '·8.
 RIGHTS AND LIABILITIES OF PAR rNERS

EXERCISES
I. Can a partner of a finn be considered agent of other pOI t;1<[' "
(Pages ::'6·l-':.:>f,)
2. What are rights and liabilities of a minor who has bc~n admittl"..l
10 the benefits of a partnership 0 (Pages 271-" 7' ;
3. Can a minor become a member ofa partnership finn: Ifso. di~\..'.:::-"
his rights and liabilities. (Pages 27! -::! 7~;
4. What arc the laws r"garding personal profi16 camed by p~rtncr:-. '.J
(Page J(,...1)
5. State the rights regarding an outgoing partner (I) to C.l1TY 1\1;
competing business and (ii) to share in the subsl?qucnt rrofib.
(Paf!,t:'s :7;;:_""~~1

6. ~'hat liabilities, If any. has a person who holds QUI as a [l,lrll1":

in regard to his relations with the public? (Pages 2;1;-~~ 1,1
7. Discuss the rights and liabilities of partners of ~ firm.
(Pages ~67-~6t»
8. Define partnership. What do you undcl ·;,md by impbed authori!)
of a partner? Are there any limitations on implied authority. ?
(Pages 248, 264-266)
9. What are the con<equences of insolvency of a partner 0
(Pages 274-275)
10. State the law of relations of partners to one another.
(Pages 262-263)
II. What are the rights and duties of panners as between themselves?
(Page 2(3)
12. What are the duties of a partner 0 (Page 2(,9)
13. What are the rights of a partner as against the olher partners of
a finn? (Pages 268-269)
14. Objective questions. Give !ihort answers.
(i) "A partner n~ay transfer his interest in a firm by sale, mortgage
or charge". True or False? (Page 275)
(ii) State the procedure to be followed by a minor in a partnership
firm in order to give public notice on attaining his Illajorit)-
(Pages 271-271)
(iii) Mention the authority to whom intimation will be sent in case
a minor partner wants to continue as a partner on att,tining
majority. (Pages 271-272)
 DISSOLUTION OF FIRMS

What is Dissolution?
Dissolution of a firm means the end of a firm by the break
up of the relation of partnership between all the partners.
Dissolution is to be distinguished from reconstitution of a finn.
In the latter case, the partnership continues but there is a change
in the number of partners. In the former case there is complete
severance of jural relations between all the partners.
THE GROUNDS OF DISSOLUTION
A finn may be dissolved on any of the following grounds
~y Agreement (Sec. 40)
A firm may be dissolved any time with the consent of all
tile partners of the finn. Partnership is created by contract, it
can also be terminated by contract.
~Compulsory Dissolution (Sec. 41)
A finn is dissolved-
(a) by the adjudication of all the partners or of all the
partners but one as insolvent, or
(b) by the happening of any event which makes the business
of the firm unlawful.
But if a firm has more than one undertaking, some of which
become unlawful and some remain lawful, the firm may continue
to carryon the lawful undertakings.
---A. On the happening of Certain Contingencies (Sec. 42)
Subject to contract between the partners, a firm is dissolved- ..
(a) if constituted for a fixed term, by the expiry of that term; •
(b) if constituted to carry out one or more adventures or • •
undertakings, by the ·completion thereof: •
(e) by the death of a partner; and
(d) by the adjudication of a partner as an insolvent.
The partnership agreement may provide that the firm will
not be dissolved in any of the aforementioned cases. Such a
pro\ision is valid.

278
 DISSOLUTION OF FIRMS 279

~Y notice (Sec. 43)

Where the partnership is at will, the firm may be dissolved
by any partner giving notice in writing to all other partners of
his intention to dissolve the firm. The firm is dissolved as from
the dale mentioned in the notice as the date of dissolution, or,
if no date is mentioned, as from the date of communication of
the notice.
~solution by tbe Court (Sec. 44)
At the sui! of a partner, the court may dissolve a firm on
anyone of the following grounds :
(a) Insanity
If a partner hav become of unsound mind. The suit for
dissolution in .Ihis case can be filed by the next friend of the
insane partner or by any other partner.
(b) Permanent Incapacity
If a partner becomes permanently incapable of performing
his duties as a partner. Permanent incapacity may arise from an
incurable illness like paralysis. In Whitwell v. Arthur l a partner
was attacked with paralysis which on medical evidence was found
to be curable. Dissolution \\ as not granted.
The suit for dissolutil'll in this case must be brought bJ a
partner other than the person who has become incapable.
(e) Guilty Conduct
If a partner is guilty of conduct which is likely to affect
prejudicially the carrying on of the business, regard being had
to the nature of the business. Tojustify dissolution under this
clause the misconduct must be of such a nature as to affect
adversely the particular business concerned. Misconduct which
affects one business may not affect another business. Therefore
the court musl take inlo account the nature of business Ihal the
partnership carries on. The test generally applied is whether the
act complained of is likely to affect the credit and custom of
the particular business.
The suit for dissolution on the ground mentioned in this
clause must be brought by a partner other than the partner who
is guilty of misconduct.
I (t865) 35 Beav. 140
280 LAW OF PARTNERSHIP

Examples
. (i) The partner of a firm of solicitors was convicted of travelling on
the railway without a ticket and with intent to defraud. It was held
that since the conviction was for dishonesty, it was likely to be
detrimental to the partnership business and dissolution was granted.
Carmichael v. Evans. I
(ii) In English cases dissolution has been granted for the following
acts-c:or.",'iction for an offence involving moral turpitude ~ misap-
plication of the monies of a client by a solicitor; adultery by a
doctor; speculation in shares by the partner of a regular mercantile
business. 2
(tf) Persistent Breach of Agreement
If a partner wilfully and persistently commits breach of the
partnership agreeme11l regarding management or otherwise
conducts himself in such a way that it is not reasonably
practicable for the other partners to carry on business in
partnership with him.
The suit for dissolution in cases coming under this clause
is to be brought by a partner other than the partner guilty of
the acts complained of.
&ample :
In English cases the following acts have been held to be sullieient
ground for directing dissolution; refusing to account for monies
received; taking away the books of account; the application of
monies belonging to the firm in payment of his private debts ;
continued quarrelling, and such a state of animosity as precludes
reasonable hopes of reconciliation and friendly co-operation. 3

(e) Transfer of whole Interest

If a partner has transferred the whole of his interest in the
firm to an outsider or has allowed his interest to be sold in
execution of a decree.
Transfer of a partner's interest does not by itself dissolve
the finn. But the other partners may ask the court to dissolve
the finn if such a transfer occurs.~nly the transfer of the entire
interest of the partner gives ground for action. The transfer of
a part of the partner's interest does not provide any ground for
dissolution. The fonnation of a sub-partnership is, therefore, not
a ground for dissolution.
1 (1904) 1 Ch. 486 2 Lindley, (9th edition), p. 690
'Lindley, p. 691
 DISSOLUTION OF FIRMS 281

The suit for dissolution on the ground mentioned in this

clause must be brought by a partner other than the partner whose
interest has been transferred or sold.
(f) Loss
If the business of the firm cannot be carried on except at
a loss. Since the motive, with which partnerships are formed,
is acquisition of gain, the courts have been given discretion to
dissolve a firm in cases where it is impossible to make profits.
(g) Just and Equitable clause
If the court considers it just and equitable to dissolve the
firm. This clause gives a discretionary power to the court to
dissolve a firm in cases which do not come within any of the
foregoing clauses but which are considered to be fit and proper
cases for dissolution.
Example:
Dissolution has been granted under the clause in the following
cases--dcadlock in the management; partners not on speaking
terms; disappearance of the substratum of the business.

THE CONSEQUENCES OF DISSOLUTION

1. Acts done after dissolution
Until public notice is given of the dissolution, the partners
continue to be liable to third parties for all acts done in
connection with the affairs of the firm.-Sec. 45.
2. Winding up
,, Upon dissolution, the firm comes to an end and its affairs
must be wound up according to the rules laid down in the Act.
The assets of the firm must be collected and applied in payment
of the debts and liabilities. The surplus, if any, is to be distributed
among the partners according to their rights. The deficit, if any,
is to be paid by the partners according to the terms of the
agreement of partnership.-Sec. 46.
3. Continuing Authority of Partners for Purpose of Winding up
Notwithstanding the dissolution, the authority of each partner
to bind the firm (and the other mutual rights and obligations of
the partners) continue (i) so far as may be necessary to wind
282 LAW OF PARTNERSHIP

up the affairs of the firm, and (ii) to complete transactions begun

but unfinished at the time of the dissolution.
After dissolution, a partner cannot bind the firm in any case
other than the two cases mentioned above. A partner who has
been adjudicated insolvent cannot bind the firm in any case after
the order of adjudication has been passed.-Sec. 47.
4. Personal Profits earned after Dissolution
If any partner earns any profit from any transaction connected
with the finn after its dissolution, he must share it with the other
partners and the legal representatives of the deceased partners.-
Sec. SO.
5. Return of Premium
Where a partner has paid a premium on entering into
partnership for a fixed term, and the firm is dissolved before
the expiration of that IeI'm otherwise than by the death of a
partner, he shall be entitled to repayment of the premium or of
such part thereof as may be reasonable, regard being had to the
terms upon wh ich he became a partner and to the length of time
during which he was a partner, unless-
(a) the dissolution is mainly due to his own misconduct, or
(b) the dissolution is in pursuance of an agreement
containing no provision for the return of the premium
or any part of it.-Sec. 5 I.
6. Rescission for Fraud or Misrepresentation
Where a contract creating partnership is rescinded on the
ground of the fraud or misrepresentation of any of the parties "
thereto, the party entitled to rescind is, without prejudice to any
other right entitled-
(a) to a lien on the assets of the finn remaining after the
debts of the firm have been paid, for any sum paid by
him for the purchase of a share in the finn and for any
capital contributed by him;
(b) to rank as creditor of the firm in respect of any payment
made by him towards the debts of the firm; and
(c) to be indemnified by the partner or partners guilty of
the fraud or misrepresentation against all the debts for
the firm.-Sec. 52.
 DlSSOLU1ION OF FIRMS 283

7. Right to Restrain from use of Firm-name or Firm Property

After a finn is dissolved, every partner of his representative'
may, in the absence of a contract between the partners to the
contrary, restrain any other partner or his rcpresentative from
carrying on a similar business in the firm name or fro!:l using
any of the property of the firm for his own benefit, until the
affairs of the finn have been completely wound up, But a partner
who has purchased the goodwill of the firm, cannot be restrained
from using the firm name,-Sec, 53,
8. Agreements in Restraint of Trade
Partners may, upon or in anticipation of the dissolution of
a firm, make as agreement that some or all of them will not
carry on a business similar to that of the firm within a specificd
period or within specified local limits, Such an agreement will
not be void on the ground of restraint of trade.-Sec. 54.

MODE OF SETTLING ACCOUNTS UPON

DISSOLUTION
The settlement of accounts between partners upon dissolution
is to take place in the mannel' provided for in the partnership
agreement Subject to such agreement. the Partnership Act lays
down the following rules regarding the matter :
I. Losses are to be paid first out of profits. next out of capital,
and, lastly if necessary by the partners individually in the
proportions in which they were entitled to share profits. Capital
deficiency is to be treated as loss and is to be borne by the partners
in proportion to the profit sharing ratio.-Sec. 48 (a).
£tamples :
(i) P and Q were partners. P contributed £ 1929 and Q £29 to the capital.
It was agreed that the profits and losses of the business were to
be shared equally. Upon dissolution the losses amounted £14,000,
Held, whatever may be the capital contributions of the partners, the
losses must be shared equally. Nowell v. ..vowell. I
(ii) A, B & C are three partners in a firm. Their capital contributions
are, A-Rs. 10,000, B-Rs. 5,000, C-Rs. 1,000. They share profits
equally. Upon dissolution it is found that realisable assets are-
Rs. 20,000 and debts payable are-Rs, 13,000,
From the above it follows that available assets are Rs. 7,000.

I (1869) 7 Eq. 538

284 LAW OF PARrnERSHIP

Therefore capital deficiency is Rs. 9,000. Each panner must

contribute Rs. 3,000 towards capital deficiency, because they have
equal shares in profits.
The final position is that A is to pay Rs. 3,000 and receive Rs.
10,000; B is to pay Rs. 3,000 and receive Rs. 5,000; C is to pay
Rs. 3,000 and receive Rs. 1,000.
C therefore contributes Rs. 2,000. This contribution together with
the available assets Rs. 7,000, amounts to Rs. 9,000. Out of this
A gets Rs. 7,000 and B gets Rs. 2,000.
2. The assets of the finn including any sums contributed by
the partners to make up deficiencies of capital, shall be applied
in the following manner and order :
(a) in paying the debts of the firm to third parties;
(b) in paying to each partner ratably what is due to him from
the firm for advances as distinguished from capital;
(c) in paying to each partner ratably what is due to him
on account of capital; and
(<I) the residue, if any, shall be divided among the partners
in the proportions in which they were entitled to share
profits.-·Sec. 48(b).
3. If a partner becomes rt.solvent or otherwise cannot pay
his share of the contribution, the capital of the solvent partners
cannot be returned in full. In this case, the solvent partners must
share ratably lhe available assets (including their own contribu-
tion to the capital deficiency). i.e .. the available assets will be
distributed in proportion to their original capital. This result
follows from the language of sub-section (ii) of Section 48(b).
In the English case, Garner v. Murray. I a similar rule is laid
down.
Example:
In the example given above if C is insolvent, he will pay nothing.
The available assets will be Rs. 7.000 plus Rs. 6.000 (the
contributions of A and B) i.e .. in all Rs. 13,000. The amount will
be shared between A and B in the ratio of 2 : 1 which is the ratio
between their capital.

4. Payment of the Firm Debts and of Separate Debts

Where there are joint debts from the firm, and also separate
debts due from any partner, the property of the finn shall be
applied in the first instance in payment of debt of the firm, and
1(1904) 73 L. J. Ch. 66
 DISSOLUTION OF FIRMS 285

if there is any surplus, then the share of each partner shall be

applied in payment of his separate debts or paid to him. The
separate property of any partner shall be applied first rn the
payment of his separate debts, and the surplus (if any) in the
payment of the debts of the firrn.-Sec. -19.

SALE OF GOODWILL AFTER DISSOLUTION

Goodwill is a part of the property of the fim1- (See p. 257).
Section 55 of the Partnership Act provides that in settling the
accounts of a firm after dissolution, the goodwill shall, subject to
contract between the partners, be included in the assets and it may
be sold either separately or along with other property of the firm.
Rigbts of Buyer and Seller of Goodwill
The purchaser of the goodwill gets the exclusive rights to
represent himself as carrying on the old business. He also gets
the exclusive right to use the name of the old firm.
But the sellers of the goodwill (i.e., the partners of the firm)
or anyone or more of them may carryon a business competing
with that of the buyer and may advertise the business. This .right
is given by Section 55(2) of the Partnership Act because of the
general principle that a man may adopt any trade, occupation,
or profession that he chooses.
To protect the buyer of the goodwill in case of competition
with the partners of the old firm. Section 55(2) 'provides that
such a partner or partners cannot (a) use the firm name,
(b) represent himself as carrying on the business of the firm,
or (c) solicit the custom of persons who were dealing with the
firm before its dissolution (unless there is an agreement with the
buyer of goodwill permitting any of these).
Agreements in Restraint of Trade
The buyer of the goodwill may fu,rther' protei'·t himself from
the competition of the old partners by entering ·into an agreement
with any partner prohibiting such partner from·.carrying on any
business similar to that of the finn IYithin a specified period or
within specified local limits. Such an agrccmc,j( spall pc valid
if the restrictions imposed arc reasonable (llliLwithstaflding the
fact. that the agreement may amouni to re>lraiilt of trade).-
Sec. 55(3).
286 LAW OF PARTNERSHIP

EXERCISES
I. What is meant by "dissolution of a firm"o What are the rights and
obligations of partners after the dissolution of partnership?
(Pages 278, 281·283)
o What are the grounds of dissolution of a partnership finn 0
(Pages 278·281)
3. What are the circumstances in which a finn may be dissolved by
the court 0 (Patges 279·281)
4. Define partnership. Discuss the different modes of dissolution of
portnership. (Pages 248, 278·281)
5. If there arc no rules in the absence of partnership agreement how
is settlement of accounts by a firm done after its dissolution?
(Pages 283·285)
G. Jlo\\' <'Ife the assets of the firm and its pJrtners liable for the debts
of the finn on the dissolution of the lirm 0 (Pages 283·285)
7. State the mode of settlement of accounts between partners after
dissolution of the finn (Pages 283·285)
S. State the rights of the buyer and seller of Goodwill.
(Pages 283·285)
q. Objective Questions.
(a) A partner of a firm was attacked with paralysis, will the finn
be uissolvcd? (Para (h). page 279)
(b) A partner (If a firm was convicted of travelling withuut lickd,
Will he be expelled from the firm 0 (Para (e). page 279)
(c) Stat\? the t\..·o grounds und~T which a firm may be compulsorily
dis~()lvcd. (Para 2, page 278)
 BOOK IV
THE LAW RELATING To
NEGOTIABLE INSTRUMENTS

CHAPTER I Definitions 289 - 311

Negotiable Instruments 289 ; The Pro'nissory Note, Pro-Note
or Hand Note 289; Bill of Exchange 292; Cheque 294 ;
Holder and Holder in due course 299; Essential Features
of Negotiable Instruments 301 ; Banker's Draft 303; Different
types of Bills and Notes 304 ; Joint Notes and Bills 304 ;
Undated Notes and Bills 30~ : Bearer Instruments and Order
Instruments 304; Notes and Bills Payable to the Bearer on
Demand 305 : Ambiguous Instrument ~U6 : Inchoate Stamped
Instrument 306; In1(111(.1 Instruments and Foreign Instruments
307 ~ Accommodation Bi!b 307 : Fictitious Bills 308; Bills
in Sets 308: Documentary Bills 309; Escrow 309;
Reasonable Time 309.

CIIAPTER 2 Acceptance and r;egotiation 312 - 321

Acceptance 312 : Negotiation 315 : Indorsement 317 ; Types
of Indorsement 317 ; Instruments which are Not Negotiable
319; Indorsements Excluding Personal Liability 319;
Negotiation back 320; Rcstricti\'~ Indorsement 320;
Facultative Indorsement 320 ; Partial Indorsemenf 320 ; "Once
a Bearer Instrument, Always <l Bearer Instrument" 321.

CHAPTER 3 Rights and Liabilities of Parties 322 - 343

\\'ho can be Parties to a Negotiable Instrument? 322:
Liability of the Parties 324 ; The Principle of Suretyship 325 ;
The Extent of Llaoility 32~ : Presentment for Payment 327 ;
Payment of Negotiabic Instrument 330: Maturity of a nole
or bill 330: Payment in Due Course 33 I ; Usance 331 ;
Interest on Rills and Notes 332 : Lost Negotiable Instruments
332; InStruments obtained Illegally 333 ~ Forged Instruments
334 ; l.ack of Consideration 335 ; Discharge of Parties from
Liability 335; Matcrial Alteration 337; Special rules of
Evidence 339; Presumptivlls as to Negotiable Instruments
339 ; Presumption on proof of protest 340 ; Burden of Proof
340; Estoppel 341 ; International Law 341.

287
288 THE LAW RELATING TO NEGOTIABLE INSTRUMENTS

CHAPTER 4 Dishonour of A Negotiable Instrument 344-351

Mode of Dishonour 344; Dishonour by Non-Acceplance
344; Dishonour by Non-payment 344; Consequence of
Dishonour 344; Notice of Dishonour 345 ; Notary Public
346 ; Noting 347 ; Protest 347 ; Acceptance for Honour 349 ;
Payment for Honour 350.

CHAPTER 5 Hundis 352 - 354

Definition 352; The Law Applicable to Hundi 352 ; Types
of Hundi 352; Gent fal Terms 353.

CHAPTER 6 Bankers And Customers 355-362

Law 355; Definition of Banking 355; Banker and the
Customer 355 ; Duties of Banker 356 ; Payment of Cheques
by Banks 357; Collection of Cheques and Drafts 361.
 DEFINITIONS

NEGOTIABLE INSTRUMENTS
Documents of a certain type, used in commercial transactions
and monetary dealings, at'e called Negotiable Instruments.
"Negotiable" means transferable by delivery and "instrument"
means a written document by which a right is created in favour
of some person. The term negotiable instrument, literally means
"a document transferable by delivery". In English mercantile law,
the term is used in this wide sense. Thus a negotiable instrument
is one in which, "the true owner could transfer, the contract or
engagement contained therein by simple delivery of the
instrument".
In India the term negotiable instrument is used in a restricted
sense. The law relating to such instruments is contained in the
Negotiable Instrurrients Act" of 188 I which states that, "A
Negotiable Instrument means a promissory note, bill of exchange
or cheque payable either to order or to bearer".-Sec. 13(1). Thus
in India only three kinds of instruments are recognised as
negotiable instruments viz., promissory notes, bills of exchange
and cheques.
Bills of lading, dividend warrants, Hundis and similar other
documents are not covered by the Negotiable Instruments Act.
But as these documents are, in various respects, analogous to
notes and bills, the rules laid down in the Act relating to
negotiable instruments are, under certain circumstances, applied
to them.
The Negotiable Instruments Act is based on English law. It
is more or less a codification of the English common law rules
on the subject.

PROMISSORY NOTE (PRO~NOTE OR HAND NOTE)

Definition
"A promissory note is an instrument .in writing (not being
a bank note or a currency note) containing an ~nconditional
undertaking signed by· the maker, to pay ~ certain sum of money
Commercial Law - 19 289
290 THE LAW RELATING TO NEGOTIABLE INSTRUMENTS

only to, or to order of a certain person, or to the bearer of the

instrument."-Sec. 4.
The person who makes the promise to pay is called the
Maker. He is the debtor and must sign the instrument. The person
who will get the money (the creditor) is called Payee.
Essential Elements
From the definition given in the Act it is apparent that the
following essential requirements must be fulfilled by an instru-
ment intended to be a promissory note :
I. The instrument must be in writing.
2. The instrument must be Signed by the maker of it. A
signature in pencil or by a rubber stamp of facsimile is good.
An illiterate person may use a mark or cross instead of writing
out his name. 'The signature or mark may be placed anywhere
on the instrument, not necessarily at the bottom. It may be at
the top or at the back of the instrument. (Date.-See p. 304)
3. The instrument must contain a promise to pay. The
promise to pay must be express. It cannot be implied or inferred.
A mere acknowledgement of indebtedness is not enough.
Example:
"Mr. Sen I. O. U. Rs. 1000". Here I. O. U. stands for, "lowe you."
This is only an admission of indebtedness. There is no promise to
pay and therefore the instrument is not a promissory note. Laxmihai
v. Raghunarh. I
4. The promise to pay must be unconditional. If the promise
to pay is coupled with a condition it is not a promissory note.
Examples:
(i) "I promise to pay B Rs. 300 first deducting thereout any money
which he may owe me."
(ii) "I promise to pay B Rs. 500 on D's death provided D leaves me
enough to pay this sum."
(iii) "I promise to pay B Rs. 500, seven days after D's marriage."
These instruments are not promissory notes because the promise to
pay is coupled with a condition. "I promise to pay B Rs. 500 on
demand" is a note with an unconditional promise.
Stipulations of the following type are not regarded as
conditions : promise to pay at a specified time or at a specified
place or after the occurrence of an event which is certain to occur,
or payment after calculating interest at a certain rate.
'29 Born. 373
 DEFINITIONS 291

Example:
"I promise to pay B Rs. 500 on 1st April, 1980." "I promise to
pay B Rs. 500 on demand at Bombay." "I promise to pay B Rs.
500 seven days after the death of C" These are all valid promissory
notes.
S. The maker of the instrument must be certaill alld defillite.
6. A Promissory note must be stamped according to the
Indian Stamp Act.
7. The sum of money to be paid must be certain.
Examples:
(i) "I promise to pay B Rs. 500 and all other sums which shall be
due to him."
(ii) "[ promise to pay Some money on the occasion of his marriage."
The above instruments are not promissory notes because the sum
of money to be paid is uncertain.
8. The payment must be in the legal tender mOlley of India.
A promise to pay certain quantity of good, or a certain amount
of foreign money is not a promissory note.
9. The money must be payable to a defillite persoll or
according' to his order. A note is valid even if the payee is
misnamed or i5 indicated by his official designation only.
Evidence is admissible to show who the payee really is
f:..xamp/e :
A document, if it otherwise satisfies the definition of promissory
note, will not cease to be so merely because the words "to order"
are absent in the document. K. A. Lana elC, v. ,\{s Dad{J Haji
Ibrahim Hilad & Co. and others. I
10. The promissory note may be payable On demand or after
a certain defillite pt!l'iod of time.
II. The Reserve Bank Act prohibits the creation of a
promissory note pavanle on demand to the bearer of the note.
except by the Res" .... e Bank ar.d the Government of India.
(See p. 305)
Specimens of Promissory Notes
An instrument is valid as a promissory note if it is so drafted
as to satisfy the essential requirements of a promissory note.
Subject to'thls'condition the parties may use any form desired.
Some typical forms are given below.
(i) "On demand I promise to pay A. B. of No. 37, College Street

I AIR (1981) Kerela 86

292 THE LAW RELATING TO NEGOTIABLE INSTRUMENTS

or order Rs. 1000 (Rupees one thousand only) with interest at

8 per cent per annum. for value received in· cash." SdlX Y
Date _ _ _ __
Address._ _ _ __
(iiJ "One year after date I promise to pay·CD. or order Rs. 1000."
SdlX Y
Dale _ __
(iii) "On demand 1 promise to pay B or order Rs. 500."-SdIX Y
(i"j "I acknowledge myself to be indebted to B in Rs. 1000 to be
paid on demand, for value received."-SdIX Y

BILL OF EXCHANGE
Definition
"A Bill of Exchange is an instrument in writing containing
an unconditional order. signed by the maker. directing a certain
person (0 pay a certain sum of money only to, or to the order
of a certain person or to the bearer of the instrument."-Sec. 5.
The maker of a bill of exchange is called the Drawer. The
person who is directed (0 pay is called the Drawee. The person
who will receive the money is called the Payee. When the payee
has custody of the bill. he is called the lIolder. It is the holder's
duty to present the bill to the drawee for his acceptance. The
drawee signifies his acceptance by sighing on the bill. After such
signature the drawee becomes the Acceptor.
In a bi II of exchange sometimes the name of another person
is mentioned as the person who will accept the bill if the original
drawee does not accept it. Such a person is called the Drawee
in case of Need.
Essential Elements of a Bill of Exchange
A Bill of Exchange to be valid must fulfil the following
requ irements :
I. The instrument must be in wriling.
2. The instrument must be $igned by the drawer. (Date-
See p. 304) I
3. The instrument must contain an order 10 pay. which is
express and lIncandilianal.
4. The drawer. drawee and the payee must be cerlain and
dejinile individuals.
5. The amount of money to be paid must be cerlain.
 DEFINITIONS 293

6. The payment must be in the legal tender money of India.

7. The money must be payable to a definite person Or
according to his order.
8. A bill of exchange must be properly stamped.
9. The bill may be made payable on demand or after a definite
period of time. But no one except the Reserve Bank and
the Government of India can draw a bill payable on demand
to the bearer of the bill (See p. 305)
Comments: The requirements are more or less the same
as in promissory notes and are subject to similar conditions as
regards signature etc.
If any of the requirements mentioned above is nol fulfilled,
the document is not a bill of exchange. .
£xample.t :
(i) " Please let the bearer have seven pounds and oblige." This is not
a bill of exchange because it is a request and not an order. lillie
v. Slackford '
(ji) "We hereby authorise you to pay on our account to the order of
X. £600." This is not a bin of exchange because it is not an order
to pay. HamiJlon v. SpoltisU"oode. 2

Specimens of Bills of Exchange

A bill of exchange may be drawn in any form. provided the
requirements mentioned above are fulfilled.
E:campl.:s :
To A. B.
(i) Six months after date pay P. Q. or order Rs. 1000
Sdl X I:
Date
Stamp-
(ii) One month after sight pay to P. Q or bearer (or order) Rs. 500.
Sd/.\ l:
D.t< _ _ __
St.mp-

Diff.rences between a promissory note and a bill of exchange

1. Number of parties
In a promissory note there are two parties-the maker and
the payee. In a bill of exchange there are three parties-the
drawer. the drawee and the payee.
'1(818) M & W 171 2 (1849) 4 Ex. 200
294 THE LAW RELATING TO NEGOTIABLE INSTRUMENTS

2. Promise and order

In a promissory note there is a promise to pay. In a bill of
exchange there is an order to pay.
3. Acceptance
A promissory note is signed by the person liable to pay;
therefore, no acceptance is necessary. A bill of exchange except
in certain cases, requires to be accepted by the drawee before
it is binding upon him.
4. Liability
The maker of promissory note is primarily liable on the
instrument. The drawer of a bill is liable only when the drawee
does not accept the instrument or pay the money due.
5. Relationship
In a Promissory Note the maker stands in an immediate
relationship to the payee. In a Bill of Exchange a drawee stands
in immediate relationship with the acceptor and not to the payee.
"The drawer of a bill of exchange stands in immediate
rdation with the acceptor. The maker of a promissory note, bill
of exchange or cheque stands in immediate relation with the
payee and the indorser with his indorsee. Other signers may by
agreement stand in immediate relation with a holder".-Sec 44,
Explanation.
6. Notice
In case of non-payment or non-acceptance of a bill, notice
must be given to all persons liable to pay. This is called the
notice of dishonour. In the case of a promissory note, notice of
dishonour to the maker is not necessary.
7. Protest
In case of dishonour, a foreign bill must be protested if such
a protest is necessary according to law of the place where it is
drawn. In case of dishonour of a promissory note, protest is not

CHEQUE
D mition
A cheque is a bill of exchange drawn upon a specified banker
and payable on demand.-Sec. 6.
 / DEFlNmONS 295

~ti~l ~eatures of Cheque

\. A cheque must fulfil all the essential requirements of a
bill of exchange.
2. A cheque may be payable to bearer or to ord~r but in
either case it must be payable on demand.
3. The banker narned must pay it when it is presented for
p.3Yment to him at his office during the usual of!jce hours;
provided the cheque is validly-drawn and the drawer has'
sufficient funds to his credit.
4. Bill and ~otes may be written entirely by hand. There
IS no legal bar to cheques being hand-written. Usually however.
banks provide their customers with printed cheque forms which
. """. ·fitled up and signed by the drawer. '
5. The signature must tally with the specimen signature of
the drawer kept in the bank. .
6. A cheque must be dated. A banker is entitled to refuse
to pay a cheque which is not dated. A cheque becomes due for
payment on the date specified on it.
7. A cheque drawn with a future date is valid but it is payable
on and after the date specified. Such cheques are called post-
dated cheques.
8. A cheque may be presented for payment after the due
date but if :here is too much delay the bank is entitled to consider
the circumstance suspicious and refuse to honour the cheque. The
period after which a cheque is considered too old or stale varies
according to custom from place to place. It is usually six months
in Indian cities.
9. In some certain circumstances the bank is not bound to
pay the cheques. (See ch. 6)
The usual form of a cheque
Cheques are usually printed in the form shown below.
Example:
To X r Bank
Date._ __
Pay A. B. or order (or bearer) the sum of Rupees Five Hundred
only. Rs. 500/-
SdJC. D.
296 THE LAW RELATING TO NEGOTIABLE INSTRUMENTS

.frerent types of cbeques

A crossed ch . one which has two short parallel lines

mar ed across its face. A cheque marked in this fashion can be
paid only.to another banker. Naturally it Will nOI be paid across
ihe counter. The system of crossing cheques arOse by mercantile
usage and was later on sanctioned by law. The advantage or
crossin is that it reduces the danger of unauthOrised persons
ettin ossession of a c eque an cas 109 I . crosse c eque-
san only be cas ed through a an of whlclitl1e payee onhe'
;heque is a customer.
There are different modes of crossing a cheque. The s.impL~st
mode of cross 109 is to put two parallel lines across Ihe face of
tire cheque. I hiS IS called General Crossing. A cheque crossed
generally wi II be paid to any bank through which it is presented.
When the name of bank is written between the parallel lines,
it is called Special Crossing. A cheque crossed specially will be
paid only when it is presented for collection by the bank named
between the parallel lines. Such crossing affords a greater
measure of protection against loss.
In addition to general or special crossing, Ii cheque may
conLain various remarks written on it, the effect of which is to
restrict payment in certain ways. The usual remarks are "Account
Payee" and "Not Negotiable."
"Account Payee Only"
The words 'account payee' on a cheque is interpreted as a
din;ction on the banker to credit the proceeds of the cheque to
the account of the payee. The negotiation of such cheques is
not prohibited, therefore such a cheque remains transferable.
Regarding negotiable instruments, there is a general principle that
if the cheque is negotiable in its origin, (that is payable to order
or bearer), the words "Account Payee Only" prohibiting transfer
or indicating an intention not to transfer will not defeat the
transferability or negotiability of the cheque. National Bank v.
Silke. 1

I (1891) 1 Q. B. 435
 DEFINITIONS 297

Comments : But although the payee is entitled to transfer

the cheque to anyone, the transferee will face difficulty in getting
the cheque collected for him. The words "account payee only"
suggests that the collecting banker shall receive proceeds of the
cheque only for the payee and shall credit only to his account.
If the banker goes against this order, he will be guilty of
negligence. Hence "account payee only" crossing is not nego-
tiable practically, as banks will collect it on behalf of no person
other than the payee.
"Not Negotiable"
A cheque marked with the words "not negotiable" can be
transferred or assigned by the payee. The transferee will get the
same rights, as regards payment, as the transferor had. But the
transferee will not get the rights of a holder in due course.
"A person taking a cheque crossed generally or specially,
bearing in either case the words not negotiable, shall not have, and
shall not be capable of giving a better title to the cheque than that·
which the person from whom he took it had."-Sec. 130.
From the language of the Sec. 130 it follows that the
transferee of such a cheque takes it at his own risk. Great Western
Ry. Co. v. London and County Banking Co. I
See also the 'comments' on "Account Payee Only", above.
Certification of Cheques by Banks
In some countries there is a custom of marking a cheque
with the words 'good for payment" by the drawee bank (e.g.,
in U.S.A.). The effect of this practice is that, it cannot be
countermanded by the drawer, and the payee is certain of getting
the money. It has been held in Balik of Baroda v. Punjab National
Bank2 that the practice of marking or certify;ng cheques has not
been established in India, either by judicial decisions or by
statutes. Therefore even if a particular cheque is market as good,
the drawee bank in India may refuse to honour it if there are
insufficient funds. By inter-bank agreement, the marking of
cheques have been stopped.
Crossing after Issue
Section 125 of the Negotiable Instruments Act provides as
follows:

'(1901) A.C. 414 , AIR (1944) Privy Council 58

298 THE LAW RELATING TO NEGOTIABLE INSTRUMENTS

Where a cheque is uncrossed, the holder may cross it

generally or specially.
Where a cheque is crossed generally, the holder may cross
it specially.
Where a cheque is crossed generally or specially, the holder
may add the words, "not negotiable".
Where a cheque is crossed specially, the banker to whom
it is crossed specially may again cross it specially to another
banker, his agent, for collection.
Who can· Cross a Cheque?
A cheque can be crossed by the Drawer, the Holder and
Bank (for collection). The Holder and the Bank can cross the
cheque under the circumstances described in Sec. 125. (See
above). The Drawer can cross a cheque (generally or specially)
before issuing it.
~n between Bill of Exchange and Cheque
I. A bill of exchange can be drawn upon any person,
including a bank. A cheque can be drawn only upon a bank.
Thus every cheque is a bill of exchange but every bill of
exchange is not a cheque.
2. Except under certain specified circumstances, a bill of
exchange requires acceptance. A cheque does not require any
ac~eptance.

3. A cheque is always payable on demand. The acceptor of

a bill of exchange is allowed a grace period of three days, after
the maturity of the bill, to make the payment.
4. The drawer of a bill is discharged from liability if the
bill is not presented to the acceptor for payment at the due time.
But the drawer of a cheque is discharged from his liability only
if he soffers damage owing to delay in presenting the cheque
for payment.
Example:
The holder of a cheque retains it for two months after the due date
without attempting to cash it. In the meantime the bank goes into
liquidation. Had the cheque been presented for payment earlie; it
would have been paid. Owing to the undue delay in presentation
the drawer has lost his money. He is therefore, not required to pay
the holder again. What is undue delay is a questi(lO of fact depending
on the circumstances of the case.
 DEFINITIONS 299

5. If a bank fails to pay a cheque, it is not necessary to give

notice of dishonour to the drawer to make him liable to compen-
sate the payee. In the case of bills of exchange, it is necessary
to give notice of dishonour, except in certain special casp.s.
6. A cheque may be crossed; there is no provisio'1 for
crossing a bill.
7. The payment of a cheque may be countermanded by the
drawer. The payment of a bill cannot be countermanded.
8. A cheque does not require any stamp. A bill of exchange
(except in certain cases) must be stamped.

HOLDER AND HOLDER IN DUE COURSE

Holoer
The holder of a negotiable instrument means any person
entitled in his own name to the possession thereof and to receive
or recover the amollnt due thereon from the parties thereto.-
Sec.8.
The person legally entitled to receive the money due on the
instrument, is called the Holder. Thus clerks or servants having
the instrument in their custody are not holders except as agents
of the holder. A person who obtains possession of the instrument
by illegal means (e.g., theft) is not a holder.
The Holder in due Course ..
The holder in due course is a particular kind of holder. The
holder of a negotiable instrument is called the holder in due
course if he satisfies the following conditions.-Sec. 9.
I. He obtained the instrument for valuable consideration.
2. He became- holder of the instrument before its maturity,
i.e., before the amount mentioned in it became payable.
3. He had no cause to believe the ' any defect existed in the
title of the person from whom he derived his title.
Explanation: From the aforesaid conditions it is clear that
a person cannot be a holder in due course if,
I (0) he has obtained the instrument by gift or for all unlawful
consideration or by illegal methods;
(b) if he has obtainei the instrument after its maturity; and
(c) if the circumstances are such that a reasonable person
would suspect that the title of the transferor is defective.
300 THE LAW RELATING TO NEGOTIABLE INSTRUMENTS

Examples
(;) An instrument tom to pieces and pasted together is suspicious.
Baxendale v. Bennett. I
(;i) An instrument containing erasures is suspicious.
(iii) A post dated cheque does not indicate any defective title and
therefore the transferee of such a cheque may be a holder in due
course if the other conditions are satisfied. Hilhcock v. Edwards. 2
(iv) If the hundi is payable to order, then, to be holder in due course,
it is not necessary for endorsee or payee to show that they obtained
hundi for consideration. But if the hundi is payable to bearer then
the person possessing the bill will be holder in due course only
if he has. come in posseSJoion of the hundi for consideration. A-fadhya
Bharal Khadi Sangh v-BJ Kishen Kapoor and olhers.3

Rights of a Holder in Due Course

The holder in due course is in a privileged position. Under
the law he has the following rights;
I Defects of instruments are eliminated: The holder in due
course gets a good title to the instrument even though the title
of the transferor is defective. If X obtains an instrument by fraud,
he cannot get payment. But if X transfers the instrument to Y
under circumstances which make Y a holder in due course, Y
can sue on the instrument and get the amount due on it. The
party liable to pay can take, as against x:
the defence of fraud
but as against Y he will not be allowed to take such a defence.
2. Unauthorised acts of an agents ma.v be valid: Negotiable
instruments are sometimes handed over to agen/s for a par/icular
purpose; e.g., for collection. If the agent acts beyond his
authority and transfers the instrument to a person who satisfies
the conditions of a holder in due course, the latter can recover
the amount mentioned in the instrument. The party liable to pay
cannot plead that the agent acted without authority.
3. Good /itle in an inchoa/e s/amped ins/rument: The holder
in due course gets a good title even though the instrument was
originally an inchoate stamped instrument and the transferor
completed the instrument for a sum greater than what was
intended by the maker.-Sec. 20 (See p. 306)
4. Liabili/y of prior parlies /0 holder in due course: Every
prior party to a negotiable instrument is liable thereon to a holder
in due course until the instrument is duly satisfied.-Sec.36.

I (1878) 3 Q.B.D. 525 ., (\889) 60 L.T. 636

3 AIR (1979) All 253
 DEFINITIONS 301

5. Holder can file a suit in his own name: The holder in

due course can file a suit, against the parties liable to pay, in
his own name.
6. Acceptance of bill drawn in fictitious name: The acceptor
of a bill exchange drawn in a fictitious nome and payable
according to the drawer's order is liable to pay to the holder
in due course, if there is an endorsement on the bill signed in
the same hand as the drawer's signature and purporting to be
made by the drawer. The acceptor cannot plead, by way of
defence, that the bill is drawn in a fictitious name.-Sec. 42.
7. Unlawful instruments: Instrument obtained by unlawful
means or for unlawful consideration is valid when the possessor
or indorsee of the instrument is a holder in due course.-Sec. 58.
8. Estoppel against denying original validity of instrument :
The maker of a promissory note, the drawer of a bill of exchange
or cheque, and the acceptor of a bill of exchange for the honour
of the drawer, in a suit thereon by the holder in due course,
is not permitted to deny the validity of the instrument as
originally made or drawn.-Sec. 120.
But section 120 does not prevent a minor from taking the
defence of minority. Also, there is no liability if the signature
is forged.
9. Estoppel against denying capacity of payee 10 indorse :
No maker of a promissory note and no acceptor of a bill of
exchange payable to order shall, in a suit thereon by a holder
in due course, be permitted to deny the payee's capacity, at the
date of the note or bill, to indorse the same.-Sec. 121.
10. Estoppel against denying capacity of payee to indorse :
The indorser of a negotiable instrument, in a suit thereon by a
subsequent holder, is not permitted to deny the signature or the
capacity to contract of any prior party to the instrument.-Sec. 122.
11. Transferee from a holder in due course : A holder of
a negotiable instrument who derives title from a holder in due
COurse has the rights thereon of that holder in due course.-
Sec. 53.

ESSENTIAL FEATURES OF NEGOTIABLE

INSTRUMENTS
1. Writing and Signatur~
Negotiable Instruments must be written and signed by the
302 THE LAW RELATING TO NEGOTIABLE INSTRUMENTS

parties according to the rules relating to Promissory Notes, Bills

of Exchange and Cheques.
2. Money
Negotiable Instruments are payable by legal tender money
of India. The liabilities of the parties of Negotiable Instruments
are fixed and determined in terms of legal tender money.
3. Negotiability
Negotiable Instruments can be transferred from one person
to another by a simple process. In the case of bearer instruments,
delivery to the transferee is sufficient. In the case of order
instruments two things are required for a valid transfer:
indorsement (i.e., signature of the holder) and delivery. An
instrument may be made non-transferable by using suitable
words, e.g., "Pay to X only."
4. Title
The transferee of a negotiable instrument, when he fulfils
certain conditions, is called the holder in due course. The holder
in due course gets a good title to the instrument even in cases
"here the title of the transferor is defective.
5. Notice
It is not necessary to give notice of transfer of a negotiable
instrument to the party liable to pay. The transferee can sue in
his own name.
6. Presumptions
Certain presumptions apply to all negotiable instruments.
Example : it is presumed that there is consideration. It is not
necessary to write in a promissory note the words "for value
received" or similar expressions because the payment of consid-
eration is presumed. The words are usually included to create
additional evidence of consideration. (See. p. 340)
7. Special Procedure
A special procedure is provided for suits on promissory notes
and bills of exchange. (The procedure is prescribed in the Civil
Procedure Code). A decree can be obtained much more quickly
than it can be in ordinary suits.
 DEFINITIONS 303

8. Popularity
Negotiable instruments are popular in commercial transac-
tions because of their easy negotiability and quick remedies.
9. Evidence
A document which fails to qualify a, a negotiable instrument
may nevertheless be used as evidence of the fact of indebtedness.
E:tample :
P writes to Q "I. O. U. Rs. 500·'. This is not a promissory note
but the document can be used as evidence to show that P is indebted
to Q for Rs. 500.

BANKER'S DRAFT
A Bill of Exchange is sometimes called a Draft. A Bill of
Exchange drawn by a bank is called a Banker's Draft.
Banker's Drafts are of two kinds: (i) from one office to
another of the same bank and (ii) from one bank to another. The
first type cannot be payable to a bearer on demand. (Section 3 I
of Reserve Bank of India Act). Section 131A of the Negotiable
Instruments Act provides that a draft drawn by one branch of
a bank upon another and payable to order, is governed by the
same rules as a crossed cheque.
The characteristic features of Bank Drafts are stated below :
(i) It is drawn by a banker upon its branch or upon another
bank.
(ii) It is payable on demand.
(iii) It cannot be payable to bearer.
(i\') It cannot be stopped or countermand~d, except by order
of the Court.
From the consideration of S. 8SA and S. 10 it follows that :
(I) The relationship between the purchaser of a draft and
the bank from which that draft has been purchased, it merely
that of the debtor and creditor.
(2) The purchaser of the draft can, therefore, call upon the
bank from which he has purchased it to cancel the draft and
pay back the money to him at any time before the draft has been
delivered to the payee.
(3) If, however, the sole object of the issue of the draft was
to transmit the money to another person, a fiduciary relationship
is created between the purchaser of the draft and the bank which
304 THE LAW RELATING TO NEGOTIABLE INSTRUMENTS

issued it, and the purchaser of the draft can countennand payment
only if the bank has not actually parted with the money held .by
it as agent, thus terminating the relationship of principal and agent.
(4) Ordinarily, a bank issuing a draft cannot refuse to pay
the amount thereof, ·unless there was some doubt as to the identity
of the person presenting it as being or properly representing the
person in whose favour it was drawn, or, in other words, unless
there is reasonable grnll' d for disputing the title of the person
presenting the draft.
(5) Once the dra;t hus been delivered to the payee or his
agent, the purchaser is not entitled to ask the issuing bank to
stop payment of the draft to the payee on other grounds such
as matters relating to consideration, and the issuing bank can
thereafter pay back the amount of the draft to the purchaser of
the draft only with consent of the payee. Tukaram Bapuji Nikam
v. The Be/gaum Bank Limited. I

DIFFERENT TYPES OF BILLS AND NOTES

Joint Notes and Bills
A promissory note or a bill of exchange may be signed by
two or more persons jointly. In such cases their liabilities are
joint and several.
A negotiable instrument may be payable to two or more
persons jointly. But it cannot be made payable to or by two
persons alternatively. A promissory note signed by X or Y is valid
as against X but not as against Y.-Sec. 13(2).
Undated Notes and Bills
A negotiable instrument without a date is not necessarily
invalid. If the legal requirements for th~ validity of an instrument
are fulfilled, the instrument is valid and the date of execution
can be proved by oral or other evidence. The holder in due course
can insert the true date on the instrument and such insertion is
not considered to be a material alteration.
Bearer Instruments and Order Instruments
A negotiable instrument may be payable to bearer or to the
order of a person. An instrument is payable, /0 bearer (i) when
I AIR (1976) Bam. 185
 DEFINITIONS 305

it is expressed to be so payable, i.e., when words like the

following are used : "Pay bearer" or "Pay X or bearer", and
(ii) whim the last indorsement on the instrument is an indorsement
in blank, i.e., when there is an order to pay but the name of
the payee is not mentioned.
When an instrument is payable to bearer, any person lawfully
in possession of it as holder is entitled to receive the payment
due on it. It is not necessary that his name should be written
on the instrument. But after the bearer of the instrument is paid.
he may be required to acknowledge receipt of the money by
signing on the instrument.
A negotiable instrument is payable 10 order in lI;e following
cases:
(0) When it is expressed to be payable to order, e.g., "Pay
to X or order". An instrument payable "to the order of P" is
payable to P or according to his order.
(b) When it is payable to a particular person and the
instrument does not contain words prohibiting or restricting
transfer. Example: ';Pay to Q". The money is payable to Q or
according to his order.
To negptiate an. instrument payable to order, the signature
of the holder is necessary.
A Negotiable Instrument is payable on demand in the
following cases :
(I) "A promissory note or bill of exchange. in which no time
for payment is specified. and a cheque. are payable on demand"~
Sec. 19.
(2) A cheque is' payable on demand.
(3) A promissory note or a bill of exchange is payable on
demand ifit is marked, "At sight"". or, "On presentment."~See. 21.
Notes and Bills Payable to the Bearer on Dem"nd
It is provided by Section 31 of the Reserve Bank of India
Act that a promissory note or a bill of exchange payable 10 Ihe
bearer on demand call be issued' only by the Reserve Bank of
India or by the Central Government. The reason is that a bill
or note payable to the bearer on demand may circulate from hand
to hand and be used as money. Private persons are not allowed
to create stich documents. If a note or bill, is. by error, made
payable to bearer On demand it will be treated by law as payable
to order.

Commercial Law - 20
306 THE LAW RELATING TO NEGOTIABLE INSTRUMENTS

Ambiguous Instrument
An instrument which owing to faulty drafting, can be
interpreted either as a promissory note or as a bill of exchange,
is called an Ambiguous Instrument.
Example:
P signs an instrument which purports to be an order upon B to
pay a certain sum of money to the order of P and negotiates the
instrument to C B is a non-existent person. The instrument is drafted
like a bill but it can be interpreted as a promissory note by P because
B being a flon-existent person, P is liable to pay to the holder the
money due on it.
An ambiguous instrument can be treated either as a bill or
as a note, at the option of the holder.-Sec. 17. The holder must
decide Once for all, whether to treat the instrument as a bill or
as a note. After he decides One way he cannot change his mind.
Figures versus Words
If the amount undertaken or ordered to be paid is stated
differently in figures and in words, the amount stated in words
shall be the amount undertaken or ordered to be paid.-Sec. 18.
E:r:ample :
A promissory note is written as follows. "On demand I promise
to pay B Rs. 200 (Rupees onc hundred only)." The note is valid
for Rs. 100 only.
Inchoate Stamped Instrument
An inchoate stamped instrument is a paper signed and
stamped in accordance with the law relating to negotiable
instruments and either wholly blank or containing an incomplete
negotiable ir,.itrument. When one person gives to another such
a document, the latter is prima facie entitled to complete the
decument and make it into a proper negotiable instrument up
to the value mentioned in the instrument, if any, or up to the
value covered by the stamp affixed on it. The person signing
the instrument is liable on it, in the capacity in which he signell
it, to any holder in due course for SQch amount. But persons
who are 1101 holders il1 due course cannot recover more than the
amollnt intended to be paid by the signatory.-S~c. 20.
E"(ample :
X signs a promissory note without staling the amount payable, puts
stamp ()Il it sufficient h -·vcr Rs. 500 and hands it to his clerk
 DEFINITIONS 307

Y, for making certain purchases, instructing Y to put in the value

of the purchases as the amount payable. Y purchases goods worth
Rs. 400 but puts in Rs. 500 in the promissory note. The note is
ncgotialed to Z, who takes it for consideration without any notice
of the real transaction. Z can recover Rs. 500 from X But the shop-
keeper is presumably aware of all the circumstances and if he had
retained the instrument he would have been entitled to recover only
Rs. 400.

Inland Instruments and Foreign Instruments

A negotiable instrument drawn or made in India, and made
payable in, or drawn upon any person resident in India is called
an Inland Instrument-Sec. I I.
Inland instruments are those which are (i) made or drawn
in India, and (ii) payable in India or payable by a persoll resident
III India.
Forei!lD instruments are those which are (i) made or drawn
in India but are payable by a person resident outside India, or
(ii) which are. made or drawn outside India but are payable in
India.-Sec.12.
The distinction between inland instruments and foreign
instruments is important because an inland bill need not be
protested for dishonour. while a foreign bill may have to be
protested for dishonour if the law of the place where it is drawn
to requires.
Accommodation Bills
An Accommodation Bill is one which has been signed by
a person, as drawer, acceptor or indorser, without any consid-
eration, with a view to oblige some other person, i.e .. to provide
him with funds.
Example:
)' desires to have Rs. 1000 and approaches X for the purpose. X
has no funds in hand but has credit in ~!1e market. It is arranged
thai]' will draw a bill on X for Rs. 1000, payable after three months,
and X will accept the bill. )' can negotiate the bill and get the money.
Before the maturity of the bill Y will provide X with funds sufficient
to meet it. Thus Y is able to get the required funds for three months.
Such a bill is called an accommodation bill.
The party accommodating (X) is called the "Accom!11odation
Party" and the party accommodated (Y) i,s called the
"Accommodated Party". Sometimes a party may be 'accommodat~d
308 THE LAW RELATING TO NEGOTIABLE INSTRUMENTS

hy indorsing an existing bill without consideration. Such indor,cr

is called the "Backer". Backing a bill gives it value because the
endorser is liable to all suhsequent parties.
The Negotiable Instruments Act lays down the following
rules regarding accommodation bills :
I. The accommodation party is liable to pay the money due
on the instrument to any holder for value. Thus in the ahove
example if the bill was endorsed to P, I' can on the maturity
of the bill demand the money from X I' is entitled to receive
the money even if he was aware that X is an accommodation
party, X can, of course, recover from Y whatever he pays on
the bill.-Sec.43.
2. The accommodated party (Y. in the example given abow)
cannot demand the moncy from the accommodation party ('\) if
he holds the bill till maturity.
3. An accommodation bill can be negotiated after maturity.--
Sec. 59.
4. Non-presentment of an accommodation bill to the acceptor
for payment does not discharge the drawer. .. -Sec. 76.-
5. In the case of an accommodation bill, failure to give notice
of dishonour does not discharge the liability of the prior parties,
as it does in the case of other bills.-Sec.98.

Fictitious Bills
A Bill is called a fictitious bill when the name of the drawer
or the payee \)r both "are fictitiolls.
A fictitious bill, payable It, the order of the drawer, and
accepted by a genuine person becomes a good bill in the hands,
of a holder in due course. The holder In due course is entitled
'" payment from the acceptor if he can show that the first
endorsement on the bill and the signature of the supposed drawer
arc in the same handwriting. If the holder knew that the drawer's
name is fictitious, he cannot claim the money oecallse, in this
case, he is not a holder is due course.--Sec.42:

Bills in Sets'
Sometimes a bill of exchange is drawn in several parts, (twn.
three or four. as the circumstances ma\ require). This is usually
done in the cise of foreign bills because thev liav,,' tobe sent
ewer long distances and there exists a possibilit) of loss or delay.
 DEFINITIONS 309

RilleS regllrding Bills in Sets. Sections 132 and 133

I. Each part of a bill in set must be numbered and must
contain a provision that it shall continue payahle onl:' so long
as the others remain unpaid. All the parts together make a set
and the whole set constitutes one bill. Each part requi 'es to be
stamped.
2. The entire bill is extinguished when one of the parts is
extinguished (e.g., when payment is made on one part).
3. When a person accepts or indorses different parts of the
bill to different pasons, he and the subsequent endorsers of each
part are liahle on each such part as if it were a separate bill.
Therefore the acceptor should onl) accept one part of the sct.
4. As between holders in due course of different parts of
the same set he who first acquired title to his parl is entitled
to the other parts and the money represented by the bill.
Documentary Bills
A documentary hill is one to which documents of title like
bills of lading are annexed. When the bill is accepted or paid,
the documents of titk are handed over. This is the usual practice
in foreign trad~ transactions.

Escrow
A bill delivered conditionally is called Escrow. A bill may
he endorsed or delivered to a person subject to the understanding
that it will be payable only if certain conditions are fulfilled.
Fxalllpies a promissory note given as collateral security for
raising capital for a partnership; an instrument left with a person
for safe custody.
In the case of an escrow, there is no liability to pay unless
the conditions agreed upon are fulfilled. But the rights of a holder
in due course are not affected.

REASONABLE TIME
The following rules arc laid down in the Act regarding the
interpretation of the term "reasonable time" which is used at
various places in the Act.
Rule: In determining what is a reasonable time for present-
ment for acceptance or payment, for giving notice of dishonour
and for noting, regard shall be had to the nature of the instrument
310 THE LAW RELATING TO NEGOTIABLE INSTRUMENTS

and the usual course of dealing with respect to similar instru-

ments; and in calculating such time, public holidays shall be
excluded.-Sec. 105.
Reasonable time of giving notice of dishonour: If the holder
and the party to whom notice of dishonour is given carry on
business or live (as the case may be) in different places, such
notice is given within a reasonable time if it is despatched by
the next post or on the day next after the day of dishonour.-
Sec. 106 (para I).
If the said parties carry on business or live in the same place,
such notice is given within a reasonable time if it is despatched
in time to reach its destination on the day next after the day
of dishonollr.-Sec.106 (Para 2)
Reasonable time for transmilting sllch notice : A party
receiving notice of dishonour, who seeks to enforce his right
against a prior party, transmits the notice within a reasonable
time if he transmits it within the same time after its receipt as
he would have had to give notice if he had becn the holder.-
Sec. 107.

EXERCISES
I. What are the essential features of a Negotiable Instrument? Define
Negotiable Instruments. Give examples. (Pages 301-303, 289)
2. Distinguish between :
(a) A promissory note and a bill of exchange. (Page 293)
(b) A bill of exchange and a cheque. (Page 298)
(c) Cheque crossed generally & cheque crossed specially.
(Pages 295-296)
(d) Holder and holder in due course. (Page 299)
(e) Cheque and Promissory Note. (Pages 294, 289)
3. Define a promissory note and give some examples of a pro-note.
(Pages 289-292)
4. (a) What is a Bill of Exchange? (b) Who can accept a Bill of
Exchange? (Pages 292-294)
5. What is a Bill of Exchange? Who is the Drawee in case of need?
(Pages 292-294)
6. (a) What is a Bill of Exchange 0 (Page 292)
(b) State the principal features of a Bill of Exchange and a
Promissory Note. (Pages 292-294)
7. State the various ways in which a cheque can be crossed.
(Pages 295-297)
 DEFINITIONS 311

8. Define a 'Negotiable Instrument'. What are its characteristic

features? What is the effect of crossing a cheque with the words
"Not negotiable" written across its face?
(Pages 289, 301-303, 296)
9. What are the rights of a 'holder in due course' of a Negotiable
Instrument? (Page 299)
10. Can a holder of a cheque cross the cheque after it is issued 0
(Pages 297-298)
II. Who can CrosS a cheque? (Page 298)
12. What is the effect of crossing a cheque ~ith the words-'Not
negotiable', or ·'Account payee only'? (Pages 296-297)
13. Write notes on : Banker's Draft; Order Instruments; Ambiguous
Instrument; Inchoate Stamped Instrument; Accommodation Bill ;
Fictitious Bill; Reasonable time. (Para 4, page 290)
14. Problem: Is the following a Promissory Note ?-"I promise to pay
B Rs. 500 and all other sums v.hich shall be due to him."
15. Objective questions. Give short answers.
(i) "A bank note is a promissory note". True or False?
(Pages 289-290)
(ii) Who is a drawee in case of need? (Page 292)
(iii) Enumerate two essential features of negotiable instruments.
(Pages 301-302)
(iv) What are bills in sets? (Pages 308-309)
 ACCEPTANCE AND
NEGOTIATION

ACCEPTANCE
. Definition
A bill of exchange is said to be accepted when the drawee
puts his signature on it, thereby acknowledging his liability under
the bill. There are certain special cases where a bill need not
be accepted. Except in these cases, the drawee is not liable on
a bill until and unless he accepts the bill.
Mode of Acceptance
The usual mode of acceptance is writing the word "accepted"
across the bill and signing under it. Writing the word "accepted"
is not essential but the signature is. The signature may be put
anY"'here, on the face of the bill or on the back of it.
Types of Acceptance
Acceptance may be either (i) General or (ii) Qualified.
Acceptance is General when it is unconditional and unquali-
fied, i.e., when the drawee accepts liability to pay the amount
mentioned in the bill in full, without any condition or limitation.
Jhe acceptor may mention the bank where payment will be made.
This does not amount to putting a condition.
Acceptance is said to be Qualified when the acceptor puts
some conditions on the acceptance. Examples : acceptance for
an amount less than that mentioned in the bill; stipulating a place
of payment other than that mentioned in the bill etc.
A qualified acceptance may be refused by the holder. He
can in such a case treat the bill as dishonoured by non-acceptance
and take legal steps to recover his dues from the parties liable.
The holder may, if he" chooses, accept qualified acceptance. The
acceptor thereupon becomes liable only to the extent, and subject
to the conditions, mentioned in the qualified acceptance. If a
qualified acceptance is accepted, all persons who were parties
to the bill prior to such acceptance are discharged from their
liabiftties under the bill, excepting those if any, who consent to
such acceptance.

312
 ACCEPTANCE AND NEGOTIATION 313

Presentment for Acceptance-by whom?

Acceptance can be demanded by the holder or his agent.
\Vhen Acceptance is not necessary
Acceptance is not necessary in the case of bills of exchange
payable on demand or at sight, unless in any such bill it is
specially mentioned that it is to be accepted before payment. All
other bills require acceptance.
The Presentment for Acceptance
The Time and Place of Presentment (Sec. 61)
A Bill which requires to be accepted must be presented for
acceptance before the drawee or his authorised agent.
Where acceptance is obligatory, it must be made within
reasonable time. It must be within business day. If a bill is
directed to the drawee at a particular place, it must be presented
at that place. When authorised by agreement or usage, a
presentment through the post office by a registered letter is
sufficient.
The document must be presented for acceptance bcfort! the
date of payment (before maturit)·) and within a reasonable time
after it is drawn.
If the drawee after a reasonable search cannot be found, the
bill can be treated as dishonoured.
If a bill, which requires acceptance, is 1/01 presented for
acceptance in accordance with rules mentioned above, the drawer
and all indorsers arc discharged from their liability to the holder.
Drawee S lime for deliberation: The drawee is not required
to accept a bill immediately on presentation. He is entitled to
have 48 hours time to think over it.-Sec. 63. After the 48 ·hours
are over he must return the bill to the holder, with, or without
acceptance as the case may be. If during his custody of the bill,
it is mutilated, lost or destroyed, he must compensate the holder.
If the holder allows the drawee more than 48 hours for
deliberation, all prior parties to the bill are discharged from their
liabilities under the bill.
Negotiable Instruments must be shown
Before acceptance and payment of a negotiable instrument,
the person liable to pay is entitled to see the instrument.-
Sec. 81.
314 LAW RELATING TO NEGOTIABLE INSTRUMENTS

When Presentment for Acceptance is not necessary

Presentment for acceptance is not necessary (i.e., excused)
in the following cases :
I. When after a reasonable search the drawee cannot be
found.-Sec. 61.
2. When the drawee is insolvent or dead.-Sec. 75.
3. When the bill is drawn on a non-existing or fictitious
person or on a person who is incapable of entering into contracts
(e.g., a minor or a lunatic).-Sec.91.

Acceptance--to Whom? Who clln acce pt a bill?

Only the following persons can accept a bill of exchange
I. The drawee of the bill.
2. The drawee in case of need.
3. The legal representative, when the drawee is dead.-Sec.75
4. The Official Assignee or Offic ial Receiver, when the
drawee has become involvement.-Sec. 75.
5. Acceptance by several drawees 110t partners: Where there
are several drawees of a bill of exchange who are not partners,
each of them can accept it for himself, but none of them can
accept it for another without his authority.-Sec. 34.
6. A bill may be accepted by a person for the honour of
the drawee. This is known as acceptance for honour. This is the
only case where a bill may be accepted by a stranger to the
instrument. (See p. 349)
Dishonour by non-acceptance
A bill of exchange is said to be dishonoured by non-
acceptance when the drawees of one of several drawees not being
partners, makes default in acceptance upon being duly required
to accept the bill, or where presentment is excused and the bill
is not accepted.
When the drawee is incompetent to contract or the accep-
tance is qualified, the bill lTIay be treated as dishonoured.-
Sec. 91.
The effect of non-presentment
Where presentment must be made (i.e., if it is compulsory)
and it is not presented, "no party thereto is liable thereon to the
person making such default."-Sec. 61.
 ACCEPTANCE AND NEGOTIATION . 315

NEGOTIATION
Definition
Negotiation of an instrument is the process by which the
ownership of the instrument is transferred from one person to
another.
When a promissory note, bill of exchange or cheq.le IS
transferred to any person, so as to constitute that person the
holder thereof, the instrument is said to be negotiated.-Sec. 14.
Delivery (Sec. 46)
The making acceptance or indorsement'of a promissory note,
bill of exchange or cheque is completed by delivery, actual or
constructive.
As between parties standing in immediate relation. delivery
ta be elTectual must be made by the party making, accepting ar
indorsing the instrument, ar by a person authorized by him in
that behalf.
As between such parties and any holder of the instrument
other than a halder in due course, it may be shown that the
instrument was delivered conditionally ar far a special purpose
anly, and not for the purpose af transferring absolutely the
property therein.
From Sec. 46 it follows that delivery may be actual or
constructive. Actual delivery means giving actual possession.
Delivery is a quest ian of fact. Canstructive delivery happens
when a negotiable instrument is delivered to an agent, clerk or
servant on his behalf.
Negotiation by Delivery (Sec. 47)
Subject to the provisions of section 58, a promissory note,
bill of exchange or cheque payable to bearer is negotiable by
delivery thereof. [Section 58 deals with instrument obtained by
unlawful means or for unlawful consideration.]
Exceplion-A promissory note, bill of exchange or cheque,
delivered on condition that it is not to take effect except in a
certain event is not negotiable (except in the hands of a holder
for value without notice of the condition) unless such event
happens.
Emmples :
(a) A. the holder of a negotiable instrument payable to bearer, delivers
it to B s agent to keep for B. The instrument has been negotiated.
316 l.AW RELATING TO NEGOTIABLE INSTRUMENTS

(b) A. the holder of a negotiable instrument payable to bearer, v,.-hich

is in the hands of A's banker, who is at the time the banker, of
E, directs the banker to transfer the instrument to B's credit in the
banker's account with B. The banker does so, and accordingly now
possesses the instrument as B"s agent. The instrument has been
nl:golialed. and B has become the holder of it.
The intention to transfer the ownership of the instrument
must he prescnt. I f an instrument is handed over to another for
safc cuslody or for a special purpose (e.g, to a solicitor for filing
a suit) the delivery does not amount to negotiation.

Negotiation by Indorsement
Subject to the provisions of section 58, a promISsory note,
hill of exchange or cheque pa\able to order, is negotiable by
the holder by indorsement and delivery thereof.-Sec. 48.

Who may Negotiate?

The sole maker, drawer. payee or endorsee and if there are
several makers, drawers. payees or endorsees, all of them jointly
can negotiate an instrulllcnt. provided its negotiability has not
heen restricted or c,eluded by a term used in the instrument.--
Sec.Sl.
The maker or drawer cannot endorse or negotiate an
instrument unless he is in lawful possession of the instrumenl
or is the holder thereof. A payee or indorsee cannot endorse or
nc~otiate lin less he is the holder thereof.

The duration of Negotiability

Imlrumelll negoliahle lill paymenl or satisfaction : A
negotiable instrument may be negotialed (except by the maker.
drawe~ or acceptor after maturity) until payment or satisfaction
thereof by the maker. drawee or acceptor at or after maturity,
but not after such payment or satis[action.-Sec.60.

Differences between Negotiation and Assignment

1. Procedure : Negotiation means transfer of a negotiable
instrument in accordance "ith the procedure laid down in the
Negotiable Instruments Act. i.e .. hy delivery in cases of bearer
instruments and by deli, cry and endorsement in cases of order
instruillents Assignment means the transfcr of a right or an action-
able claim, (chose in action) by deed or otherwise. (See p. 190)
 ACCEPTANCE AND NEGOTIATION 317

2_ TiTle : When a negotiable instrument is negotiated, the

transferee, if he takes the instrument bonafide and for value,
becomes a holder in due course_ A holder in due course is not
affected by any defect in the title of the transferor. He may
therefore have a better title than the transferor. In the case of
an assignment, the assignee gets the rights of the assignor and
nothing more_ If the title of the assignor was defective, the title
of the assignee is also defective.
J. NoTice of transfer: In the case of an assignment the
assignee must give notice to the debtor. In the case of negotiation.
no notice to the debtor is required to be given.
4. Proof of considcrariol1 : In the case of negotiation
consideration is presumed_ In an assignment. there is no presump-
tion of consideration and the party claiming has to prove
(.:onsideration.

INDORSEMENT
Definition
Endorsement or Indorsement means signature of the holder
made with the object, of transferring the document. The person
\\ ho makes the indorsement is called the Indorser.
"When the maker or holder of a negotiable instrument signs
the same, otherwise than as such rnaker, for the purpose of
negotiation, on the back or face thereof or on a slip of paper
annexed thereto, or so signs for the same purpose a stamped paper
intended to be completed as a negotiable instrument, he is said
to indorse the same. and is called the 'jndorser'_~Sec_ 15_

Effect of Indorsement
The indorsement of a negotiable instrument followed by the
delivery thereof, transfers to the indorsee the property therein
\\ ith the right of further negotiation: but the right of further
negotiation may be restricted or excluded by express words.-
Sec. 50_

T)pcs of Indorsement
There arc \\\0 kinds of indo"clIlcnt : (i) Indorsement in Full
and Iii) Indorsement in Blan"_ When the indorser mentions th~
name ('If the person to \\ hom the mnney due on an instrument
318 LAW RELAfiNG TO NEGOTIABLE INSTRUMENTS

is to be paid. it is said to be indorsed in full. Example : "Pay

to X or order". Sd/Y. Where the name of the party is not
mentioned it is said to be indorsed in blank. Example: ·'Pay..... "
SD.lY.
Conversion of indorsement in blank into indorsemellt infull :
The holder of an instrument indorsed in blank is entitled
to put in his own name or the name of any other person above
the indorsement and thereby convert the indorsement in blank
to an indorsement in full.
In such a case the amount due On the instrument cannot be
claimed from the indorser in full except by the person to whom
it has been indorsed in full or a person who derives title from
such indorser in full.-Sec.55.
Rules of Indorsement
I. Indorsement may be made on the face of the instrument
or on its back. If there is no space on the instrument. the
endorsement may be made on an attached slip of paper. Such
a slip is known as Allonge.
2. Mere signature without any words amounts to an
indorsement in blank, provided the indorsement was made with
the intention of transferring the instrument.
3. For an indorsement in full, no particular words are
necessary. Any term indicating an intention to transf~r the
document to a pa'rticular person or to his order, accompanied by
signature, is sufticient.
4. If the payee's o~ the indorsee's name is wrongly spelt,
he should (when he again indorses it) sign the name as spelt
in the instrument. and write the correct spelling within brackets
atier his indorsement.
5. A negotiable .instrument indorsed blank is payable to the
bearer thereof even although originally payable to order.-
Sec. 54. But th is ru Ie does not apply to crossed cheques.
6. The indorsement must be signed by the holder or his duly
authorised agent.
7. Usually indorsements are not accepted unless it is signed
in ink. A rubber stamp is not accepted but the designation of
the holder can be done by a rubber stamp.
8. Complimentary prefix, e.g., Sri or Sm. is usually not
written in negotiable instrlln;cllts. bill il may be done.
 ACCEPTANCE AND NEGOTIATION 319

9. An illiterate person may indorse a negotiable instrument

by putting a thumb impression of his left hand with witnesses
who must a Iso sign.
10. It is presumed that the indorsements appearing upon a
negotiable instrument were made in the order in which they
appear thereon.-Sec. I 18(e).
Instruments which are not Negotiablt
An instrument becomes non-negotiable when the indorsement
on it contains express words which.
(a) restrict or exclude the righl of further negotiation; or
(b) merely constitute the indorsee an agent to indorse the
instrument; or
(e) merely entitle the indorsee to receive the contents for
the indorser or for some other specified person.-Sec. 50.
Examples:
An instrument becomes non-negotiable if it contains the following
words in the indorsement
(i) "Pay the contents to Conly."
(ii) "Pay C for my use."
(iii) "Pay C or order for the account of B."
(iv) "The within must be credited to c."
The following indorsements do not exclude the right of further
negotiation by C : (i) "Pay C" (ii) "Pay C. value in account with
the Oriental Bank." (iii) "Pay the contents to C being part of the
consideration in a certain deed of assignment executed by C to the
indorser and other."
Cheques which are marked "not negotiable" or "account
payee" are nevertheless transferable but the transferee does not
become a holder in due course. (See p. 296)
Indorser who excludes his own Liability or makes it Conditional
The indorser of a negotiable instrument may, be express
wotds in the indorsement, exclude his own liability thereon. He
• can ,'Iso make his liability or .the right 'of the indorsee to receive
the aluount due thereoi1 depend on the happen(ng of aspecificq
event, although such event may never. happen.-Sec. 52.
An agent signing a negotiable instrument may exclude his
personal liability by using words to ii1dicale th'at he is signing
as agent only. The same rule applies to directors of a company
signing instriJinents on behalf of a company. The intention to
exclude personal liability must be clear.
320 LAW RELATfNG TO NEGOTIABI.E INSTRIIMENTS

Emmples
(i} The indorser of a negotiable instrument signs his name adding the
words, "without recourse" or "sans recourse ", Upon this
indorsement he incurs no liability.
(ii) The indorsement on an instrument is "For and on behalf of X
company. Sd/P. director," P has no personal liability.
(iii) A is the payee and holder of a negotiable instrument. He transfers
the instrument to B sans recourse. B transfers the instrument to C
and C to A. A is not only reinstated in his former rights but has
the Tights of an indorsee against Band C

Negotiation Back
When an indorser excludes his liability and afterwards
becomes the holder of the instrulllent. all intermediate indorsers
are liable to him i.e., he regains the position he occupied betore
he made the restrictive indorsement. This can be called "nego-
liulian back".-Sec. 52, 2nd para.

Hestrictive Indorsement
An indorsement is said to be restrictive when the indorser.
by express words. restricts the right of further negoliation of the
instrument or merely entitles the indorsee of the instrument to
receive the contents of the instrument for a specific purpose.
£'((Jmples :
"Pay C for my use:", "Pay C ,or order for the account ')f R .
Facultatin Indorsement
When the indorser, by express words. abandons some right
or in'creascs his liabilily under a negotiable instrument, the
indorsement is called Facultative.
Fxamp/e
An indorsement with the remark, «notice of dishonour not required",

Partial Indorsement
An 'indorsement which purports to transfer only a pari of
the amoun't due on a negotiable instrument, is invalid. But "here
an irlStrumen~ has been partly paid, it can be negotiated. for the
halance, provided' the fact of part-paymcnt is noted on the
instrument.-Sec. 56. .
f-~tumpltts .; " 0"' ,I ~ , I"
(I), l~hc_holder ,of ~ promissory nore rQc Ro;, lOGO writes on it, "Pay
f? Rs. 500,,·" and indorses the n('te. The indorsement i~ invalid for
, '
lhe purpose of negotiation.
 ACCEPTANCE AND NEGOTIATION 321

(ii) The maker of a promissory note fClr Rs. 1000 pays Rs. 500, and
the fact is noted on the in~trumenl. The holder can...negotiate the
note for the balance due on it.

"ONCE A BEARER INSTRUMENT ALWAYS A

BEARER INSTRUMENT"
If a negotiable instrument is endorsed in blank or is payable
to bearer, it is a bearer instrument. The holder of such an
instrument may negotiate it by delivery only. But suppose that
the holder indorses it specially to a person and makes it payable
to the order of such person. In such a case the indorser in full
cannot be sued by any person except the person in whose favour
he indorsed it, but as regards all parties prior to the indorser
in full, the instrument remains transferable by delivery.-Sec. 55.
Example: •
..r.the payee of a bill, indorses it in blank and delivers it to )"
Y indorses it to Z or order. Z without any indorsement transfers
it to P. P as the bearer is entitled to receive payment. In c~sc of
dishonour P is entitlod to sue the drawer and the acceptor of the
bill and also X, the indorser in blank and all indorsers prior to .\'
He cannot however sue Y or Z
Where a cheque is originally expressed to be payable to
bearer the drawee is discharged by payment in due course to
the bearer thereof notwithstanding any indorsement whether in
full or in blank appearing thereon, and notwithstanding that any
such indorsement purports to restrict or exclude further nego-
tiation.-Sec. 85(2).
EXERCISES
I. What do you understand by the "negotiability" of a Negotiable
Instrument? What is the effect of crossing a cheque with the words
"not negotiable" written across the face? (Pages 315, 207)
2. Who can accept a bill of exchange? (Pages 314, 315)
3. What are the rules regarding Indorsement? (Pages 317-318)
4. Distinguish between :
(a) General Acceptance and Qualified Acceptance. (Page 312)
(b) Negotiation and Assignment. (Page 316)
5. Discuss: "Once a bearer instrument always a bearer instrument."
(Page 321)
6. Write notes on :
(a) "Endorsement" (b) Negotiation; (e) Restrictive endorsement ;
(d) Crossed cheque; (e) Not-negotiable instrument: (f) Acceptance.
(Pages (al 317 (b) 315 (e) 320 (d) 296 (el 319 (f) 3: c)

Commercial Law - 21
 RIGHTS AND
LIABILITIES OF PARTIES

WHO CAN BE PARTIES TO A NEGOTIABLE

INSTRUMENT ?
Capacity to make etc. of Negotiable Instruments
. The capacity to make, draw, accept, negotiate and indorse
a negotiable instrument depends on the capacity to enter into
contracts.
Every person capable of contracting may bind himself and
be bound by a negotiable instrument. A person incapable of
contracting cannOt bind himself but may, under certain circum-
stances, bind others. When some of the parties to a negotiable
instrument are capable of contracting and some are not, the
capable parties are bound while the incapable parties are not.
The provisions of law regarding the different cases of incapacity,
as regards negotiable instruments are summarised below.
Minor
A minor may draw, indorse, deliver and negotiate a nego-
tiable instrument so as to bind all parties except himself.-
Sec. 26.
Thus a minor party to a negotiable instrument is not
personally liable but the adult parties are. When an instrument
is signed by a minor and an adult jointly, the minor is not liable
but the adult is. The defence of minority can be taken by the.
minor even though he might have concealed his age deliberately
or made a false representation concerning it. If a minor is the
payee under a negotiable instrument, he can enforce payment.
Lunatic, Idiot and Drunken Persons
The legal positio)1 is the same as in the case of minors. A
lunatic can, however, bind himself by a negotiable instrument
if he signs it during a lucid interval.
Insolvent
After the order of adjudication is passed, the properties of
the insolvent vest in the Official Assignee or the Official
322
 RIGHTS AND LIABILITIES OF PARTIES 323

Receiver. The insolvent therefore cannot draw, make. accept or

indorse a negotiable instrument. A bill drawn upon the insolvent
before he became insolvent may be presented to the Official
Assignee for acceptance. An instrument executed after insolvency
in favour of the insolvent, vests in the Official Assignee or the
Official Receiver.

Corporation
A corporation can incur liabilities under a negotiable
instrument if it is so empowered by its memo and articles. A
trading company has implied powers to borrow and can do so
by executing negotiable instrument. A non-trading company has
no implied powers to borrow and can executed negotiable
instruments only if specifically empowered to do so.
Agent
Every person capable of binding himself or of being bound.
by a negotiable instrument. may so bind himself or be bound
by a duly authorised agent acting in his name.-Sec.27.
The authority to execute negotiable instruments must be
given specifically. A general authority to act as agent does not
include the authority to execute negotiable instruments. An
aUlhority to draw bills of exchange does not of itself import an
authority to indorse.-Sec. 27.
The fact of agency may be indicated by using the following
words : "for and on behalf of ., or "per pro" "hich is short
for "per procurationem."
Liability of agent signing: The agent must indicate that he
is signing as agent. by using specific words to that effect:
otherwise he will be pc"onally respomible. The personal respon-
sibility cannot be eni"orccd by persom who induced the agent
to sign upon the belief that only the principal would be liable.
Except in .such cases, the agent is personally responsible if the
fact of agency is not clearly indicated.-Sec.28.
Legal Representative
The estate of a deceased person vests in his legal represen-
tative (heir, executor etc.) The legal representative can deal with
the negotiable instruments belonging to the deceased to the same
extent as the deceased could have done.
 324 LAW RELATING TO NEGOTIABLE INSTRUMENTS

The legal representative who signs his name to a negotiable

instrument must use words to indicate that he is not personally
responsible (e.g., sans recourse). If he does not use any stich
words, he becomes personally responsible.-Sec. 2.9.
If a person indorses a negotiable instrument payable to order
btlt dies before he can deliver the instrument to the indorsee his
legal representative cannot complete the transaction by delivering
the instrument to the party intended to receive it. He must
reindorse the instrument, signing it as the legal representative,
. and then deliver it.-Sec.57.
Joint Hindu Family
The Karla of a joint Mitakshara family can bind the joint
family by executing a negotiable instrument provided the trans-
action is for the benefit of the family or is for legal necessity.
The other members are bound to the extent of their shares in
the joint family properties but are not liable personally.

LIABILITY OF THE PARTIES

The liability of the parties to a negotiable instrument IS
determined by the following rules :
Maker and Acceptor
The maker of a promissory note and the acceptor of a bill
of exchange are primarily responsible for the payment due.
Section 32 of the Act states that, in the absence of a contract
to the contrary, the maker of a promissory note and acceptor of
a hi" of exchange before maturity are bound to pay the amotlnt
thereof at maturity accord ing to the apparent tenor of the note
or acceptance respectively. Tile money must be paid at or after
maturity to the holder as required. In default of such payment,
the maker and the acceptor is bound to compensate and party
to the note or bill for any loss or damage sustained by him and
caused by such default.
Drawer
The drawer of a bill of exchange or cheque is bound. in
case of dishonour by the drawee or acceptor thereof, to com-
pensate the holder, provided due notice of dishonour has been
given to, or received by the Jrawer.-Sec.30 .
Before acceptance. the drawer·s liability is primary; after
 RIGHTS AND LIABILITIES OF PARTIES 325

acceptance, the drawer's liability is secondary, i.c .. he IS liable

to pay only if the acceptor fails to pay.
Drawee of a Cheque
The drawee of a cheque having sufficient funds of the
drawer, in his hands, properly applicable to the payment of such
cheque must pay the cheque when duly required to do' so, and,
in default of such payment, musl compensate the drawer for any
loss or damage caused by such default.-Sec. 31.
Cases where the drawee of a cheque can refuse payment.-
See under "Banker and Customer", pages 355.
Indorser
The indorser of a negotiable instrument is liable to all
subsequent parties in case of dishonour of the instrument,
provided (i)" there is no contract to the contrary (ii) the indorser
had not limited or qualified his liability by using appropriate
words and expressions for the purpose and (iii) due notice of
dishonour has been given to or received by, such indorser as
hereinafter provided.-Sec. 35.
Every indorser after dishonour is liable as upon an instrument
payable on demand.
General rule regarding liability : Principle of Suretyship
Every prior party to a negotiable instrument is liable thereon
to a holder in due course until the instrument is duly satisfied.-
Sec. 36.
Maker. drawer and acceptor principals : The maker of a
promissory note or cheque, the drawer of a bill of exchange until
acceptance, and the acceptor are, in the absence of a contract
to the contrary, respectively liable thereon as principal debtors,
and the other parties thereto are liable thereon as sureties for
the maker, drawer or acceptor, as the case may be.-Sec.37.
Prior party a principal in respect of each subsequem parly :
As !:letween the pal1ies so liable as sllreties, each prior party is,
in the absence of a contract to the contrary, also liable thereon
as a principal debtor in respect of each subsequent party.-
Sec. 38.
Example:
A draws a bill payable to his own order on B. who accepts. A aftenvards
indorses the bill to C. C to D. and D 10 E As beiWeen E and B. B.
326 LAW RELATING TO NEGOTIABLE INSTRUMENTS

is the principal debtor; and A. C and D are his sureties. As beween

£ and A. A is the prinicif'al debtor, C and D are his sureties. As between
E and C. C is the principal debtor and D is his surety.
Suretyship: When the holder of an accepted bill of exchange
enters into a contract with the acceptor which, under Section 134
or 135 of the Indian Contract Act, 1872, would discharge the
other parties, the holder may expressly reserve his right to charge
the other parties, and in such case they are not discharged.-
Sec. 39.
The Extent of Liability
Rules regarding compensation (Sec. 117)
The compensation payable in case of dishonour of a nego-
tiable instrument, by any party liable on the instrument, is
determined by the following rules;
(0) the holder is entitled to the amount due upon the
instrument, together with the expenses properly incurred
in presenting, noting and protesting it;
(b) when the person charged resides at a place different from
that at which the instrument was payable, the holder is
entitled to receive such sum at the current rate of
exchange between the two places;
(c) an indors~r, who, being liable, has paid the amount due
on the same is entitled to the amount so paid with
interest at six per cent per annum from the date of
payment until tender or realization thereof; together
with all expenses caused by the dishonour and payment;
(d) when the person 'charged and such indorser resides at
different places, the indorser is entitled to receive such
sum at the current rate of exchange between the two
places;
(e) the party entitled to compensation may draw a bill upon
the party liable to compensate him, payable at sight or
on demand, for the amount due to him, together with
all expenses properly incurred by him. Such bill must
be accompanied by the instrument dishonoured and the
protest thereof (if any). If such bill is dishonoured,the
party dishonouring the same is liable to make compen-
sation thereof in the same manner as in the case of
the original bill.
The new bill given under clause (e) is known as Redraft.
 RIGHTS AND LIABILITIES OF PARTIES, 327

PRESENTMF;NT FOR PAYMENT

A negotiable instrument must be presented for payment. The
person liable to pay is entitled to see the instrument and after
payment he is entitled to have it" delivered to him. (~ec. 81).
The rules regarding presentation for payment are stated below
1. Presentment of promissorY note for sight
A promissory note, payable at a certain period after sight,
must be presented to the maker thereof for sight (if he can, after
reasonable search, be found) by a person entitled to demand
payment, within a reasonable time after it is made and in business
hours on a business day. In default of such presentment, no party
thereto is liable thereon to the person making such default.-
Sec. 62.
2. Presentment for 'payment
Promissory notes, bills of exchange and cheques must be
presenled for payment to the maker acceptor or drawee thereof
respectively, by or on behalf of the holder. In default of such
presentment, the other parties thereto arc not liable thereon to
such holder.
Where authorised by agreement or usage, a presentment
through the post office by means of a registered letter is
sufficient.-Sec. 64.
3. Presentment by or to agent, representative of deceased or
assignee of insolvent
Presentment for acceptance or payment may be made to the
duly authorised agent of the drawee, maker or acceptor, as the
case may be, or where the drawee. maker or acceptor has died,
to his legal representative, or where he has been declared an
insolvent, to his assignee.-Sec. 75.
4. The place of Presentment
(i) Presentment for payment of instrument payable at speci-
fied place and not elsewhere : A promissory note, bill of
exchange or cheque made. drawn or accepted payable at a
specified place and not elsewhere must, in order to charge any
party thereto, be presented for payment at that place.-Sec. 68.
(ii) Instrument payable at specified place: A promissory note
328 LAW RELATING TO NEGOTIABLE INSTRUMENTS

or bill of exchange made, drawn or accepted payable at a

specified place must, in order to charge the maker or drawer
thereof, be presented for payment at that place.-Sec.69.
(iii) Presentment where 110 exclusive place specified : A
promissory note or bill of exchange, not made payable as
mentioned in sections 68 and 69, mllst be presented for payment
at the place of business (if any), or at the usual residence, of
the maker, drawee or acceptor thereof, as the case may be.-
Sec. 70.
(iv) Presentment when maker, etc., has no known places of
business or residence ; If the maker, drawee or acceptor of a
negotiable instrument has no known place of business or fixed
residence, and no place is specified in the instrument for
presentment for acceptance or payment, such presentment may
be madc to him in person wherever he can be found.-Sec.71.
(\') Where a promissory note is payable on demand and is
not payable at a specified place, no presentment is necessary in
order to charge the maker thereof.-Exception to Sec. 64.
S. The Time of Presentment
(i) Hours for presentment: Presentment for payment must
be made during the usual hours of business, and, if at a banker's
within banking hours.-Sec.65.
(ii) Presentment for payment of illstrument payable after date
or sight: A promissory note or bill of exchange made payable
at a specified period after date or sight thereon, must be presented
for payment at maturity.-Sec. 66.
(iii) p" tment for payment of promissory note payable by
instrun Is: 1\ promissory note payable by instalment must be
presented f, payment on the third day after the date fixed for
payment 0 each instalment; and non-payment on such present-
ment has the same effect as non-payment of a note a maturity.-
Sec. 67. . ••
(iv) Presentment of cheque to Charge drawer: A cheque
must, in order to charge the drawer, be presented at the bank
upOn which it is drawn before the relation between the drawer
and his banker has been altered to the prejudice of the drawer.-
Sec. 72.
(v) Presentment of cheque to charge any other person: A
cheque must, in order to charge any person except the drawer,
 RIGHTS AND LIABILITIES OF PARTIES 329

be presented within a reasonable time after delivery thereof by

such person.-Sec. 73.
(vi) Presentment of instrument payable 011 demalld : A
negotiable instrument payable on demand must be presented for
payment within a reasonable time after it is received by the
holdeL-Sec. 74.
When Presentment for Payment is not neccssary. or is
excused (Sec. 76)
Presentment for payment is Ilot necessary in the following
cases. In each case the instrumellt is deemed to be dishonoured
at the due date for presentment :
(I) if the maker. drawee, or acceptor intentiollally prevents
the presentment of the instrument, or,
(2) if the instrument being payable at his place of business.
he closes such place 011 a business day during the usual
business hours, or.
(3) if the instrument being payable at some other specified
place, neither he nor any person authorized to pay it
attends at such place during the usual business hours,
or,
(4) if the instrument not being payable at any specified
place, he cannot after due search be found;
(5) as against any party sought to be charged therewith, if
he has engaged to pay notwithstanding non-presentment;
(6) as against any party if after maturity, with knowledge
that the instrument has not been presented-he makes
a part payment on account of the amount due on the
instrument;
(7) or promises to pay the amount due thereon in whole or
in part;
(8) or otherwise waives his right to take advantage of any
default in presentment for payment;
(9) as against the drawer, if the drawer could not suffer
damage from the want of such presentmellt.
Presentment for payment is excused in the following cases
also: (i) where a drawee is a fictitious person (ii) when a person
is not competent to contract (iii) when a bill is dishonoured by
nOll-acceptance and (il') when it is impossible to present the
instrument.
330 LAW RELATING TO NEGOTIABLE INSTRUMENTS

Exc'use for delay

•
Delay in presentment for acceptance of payment is excused
if the delay is caused by circumstances beyond the control of
the holder, and not imputable to his default, misconduct or
negligence. When the cause of delay ceases to operate, present-
ment must be within a reasonable 'time.-Sec. 75A.

PAYMENT OF NEGOTIABLE INSTRUMENT

Time of Payment
A promissory note or a bill of exchange may be payable
on demand or on a specific date or after a specified period of
time. The time of payment is usually mentioned in the instrument.
If no time of payment is mentioned, the instrument is payable
on demand. A cheque is always payable on demand.
In a promissory note or a bill of exchange the expressions,
"at sight" or "on presentment" means on demand. The expression
"after sight" means in a promissory note, after presentment for
sight. In a bill of exchange it means, after acceptance or noting
for non-acceptance, or protest for non-acceptance.-Sec .21.
A promissory note or a bill of exchange may be made
payable by instalments.
Maturity of a Note or Bill
The maturity of a bill or note is the date on which it falls
due. A bill or note which is payable on demand becomes due
immediately on presentation for payment. A bill or note which
is not payable on demand becomes mature on the third day after
the day on which it is expressed to be payable. The three days
are known as the Days of Grace. The date of maturity of a bill
or note is calculated in the following way. Sections 23 to 25 :
(a) If it is payable a stated number of months after date or
after sight, it becomes payable three days after the
corresponding date of the month after the stated number
of months.
(b) If the month in which the stated number of months will
terminate has no corresponding date, it becomes mature
on the last day of the month. .
(c) In calculating the maturity of a bill or note payable a
certain number of days after date or sight, the day on which
it was drawn or presented for acceptance shall be excluded.
 RIGHTS AND liABIliTIES OF PARTIES 331

(d) When the day on which a bill or note is at maturity is

a holiday, the instrument shall be deemed to be due on
the next preceding business day.
The expression "Public Holiday" includes Sundays, and any
other day declared by the Central Government, by notification
in the Official Gazette, to be a public holiday.
Examples:
(i) A negotiable instrument, dated 30th August 1978, is made payable
three months after date. The instrument is at maturity on 3rd
December 1978. .
(ii) A negotiable instrument, dated 29th January 1978, is made payable
at one month after date. The instrument is at maturity on the 3rd
day after the 28th February 1978.
(iii) A negotiable instrument dated 31 st August 1978, is made payable
three months after date. The instrument is at maturity on the 3rd
December 1978.

Payment in Due Course

"Payment in due course means payment in accordance", ith
the apparent tenor of the instrument in good faith and without
negligence to any person in possession thereof under circum-
stances which do not afford a reasonable ground for believing
that he is not entitled to receive payment of the amount therein
mentioned. "-Sec.1 O.
A negotiable instrument is "paid in due course" when the
following conditions are satisfied :
1. The payment is according to the apparent tenor of the
instrument. [Tenor means the prescribed time of payment.]
2. The payment is in good faith and without negligence.
3. The payment is to the possessor of the instrument.
4. There does not exist any ground for believing that the
possessor is not entitled to receive payment.
Payment in due course completely discharges the obligation
of the party liable to pay, even though it subsequently transpires
that payment has been made to the wrong person. (See ch. 6,
"Bankers and Customers."~
Usance
The time allowed for the payment of bills drawn in one
country and payable in another (foreign bills) is called usance.
The time varies according to the distance between the countries
and is determ ined by customary ru les.
332 LAW RElATING TO NEGOTIABLE INSTRUMENTS

INTEREST ON BILLS AND NOTES

Interest when rate specified
When a promissory note or a bill of exchange specifically
mentions the rate at which interest is payable, interest must be
paid at the rate from the date of the instrument to the date of
realisation of the money. If a suit is filed on the instrument
interest is payable up to such date as the court may decide.-
Sec. 79.
Interest when no rate specified
When no rate of interest is specified in the instrument,
interest is payable (notwithstanding any agreement between the
parties regarding interest) at 6% per annum from the date on
which the money ought to have been paid till the date of
realisation. When a suit is filed. the court is to decide the date
up to which interest is payable.~Sec. 80.
When the party charged is the indorser of an instrument
dishonoured by non-payment, he is liable to pay interest only
from the time that he receives notice of the dishonour.-Sec. 80,
Explanation.

LOST NEGOTIABLE INSTRUMENTS

The following rules are applicable in the case of lost
negotiable instruments :
1. Holder'. right to duplicate of lost bill
Where a bill of exchange has been lost before it is overdue,
the holder of it may apply to the drawer to give him another
bill of the same tenor, giving security to the drawer if required,
to indemnify him against all persons in case the bill, alleged to
have been lost, shall be found again. If the drawer on request
refuses to give a duplicate, he may be compelled to do so.-
Sec. 45A.
2. Delivery of instrument on payment or indemnity in case
of loss
Before payment of a negotiable instrument, the person liable
to pay is entitled to see the instrument and after payment he
is entitled to have it delivered to him. If the document is lost
 RIGHTS AND LiABiLiTIES OF PARTIES 333

or for any reason cannot be produced he can refuse to pay. If

he pays the holder of a lost instrument he can demand to be
indemnified against any further claim thereon against him.-
Sec. g I.

3. Title of tile Finder

The finder of a lost instrument gets no title. The rightful
holder is entitled to get it back from him.
4. Rights of holder in due course
If a negotiable instrument, payable to bearer or indorsed in
blank, is lost and the finder negotiates it to a third party who
takes it in good faith and for value, the third party becomes a
holder in due course and is entitled to receive the amount due
on the instrument from the parties liable to pay.

5. Effect of forgery
If a negotiable instrument payable to order is indorsed by
the finder with a forged signature, the indorsee gets no title even
though he might have taken it in good faith and for consideration.
Forgery can confer no title. Mercantile Bank oj India v.
A1ascarenhas. I

6. Effect of payment in due course

If the party liable on a negotiable instrument pays the amount
due on it, to the person having it in j,is possession, under
circumstances which makes the payment in due course, he is
discharged from all liabilities under the instrument. But the true
owner can recover the money from the person who obtained
payment. Burne v. Morris 2

7. Information and notice

When a negotiable instrument is lost. the holder should
inform all parties liable on it and should also give public nOlice.

INSTRUMENTS OBTAINED ILLEGALLY

Unlawful means and unlawful consideration
The rules stated above regarding lost instruments apply to
'(1932) P.L. 22. (Privy Council) '(1834) 2 Cr. &. M. 579
334 LAW RELATING TO NEGOTIABLE. INSTRUMENTS

stolen instruments. A person who steals a negotiable instruinent

can get no rights upoit it and the true owner can recover it from
him. But if the instrument is negotiated under circumstances
which make the transferee a holder in due course, he is entitled
to receive payment on the instrument. •
Any person who obtained an instrument by unlawful means
or for unlawful consideration, is not entitled to receive the
amount due thereon, unless such possessor or indorsee is, or some
person through whom he claims was, a holder thereof in due
course.-Sec. 58.
When an instrument is obtained by fraud, coercion, undue
influence or by any illegal means the title of the receiver is
defective and he cannot claim anything on the instrument. But
if the document is transferred to a holder in due course, the latter
gets a good title and is entitled to receive payment. The same
rule applies if the consideration originally paid for the instrument
was unlawful.
If an acceptance is procured by fraud, the acceptor is liable
to the holder in due course and to nobody else. Ayres v. Moore. I

FORGED INSTRUMENTS
If the signature on a negotiable instrument is forged, thc
document is invalid and cannot confer any right or create any
liability.
Acceptor bound although indorsement forged
But the acceptor of a bill of excharige, already indorsed, IS
not relieved from liability by reason that such indorsemept is
forged, if he knew or had reason to believe the indorsement to
be forged when he accepted the bill.-Sec. 41.
If in an instrument payable to order, ther\' is a forged
indorsement, the indorsee gets no title .
.If in a bearer instrument or in an instrument indorsed in
a
blank, there is a forged ill,dorsement, the holde; gets good titlc.
The reason is that· in' such instruments the holder derives title
by delivery and not. through any indorsement. The forged
indorsement is therefore immaterial.

I (1940) I. K.B: 278

 RIGHTS AND LIABILITiES OF PARTIES 335

LACK OF CONSIDERATION
Negotiable instrument made etc. witbout consideration
A negotiable instrument made, drawn, accepted, indorsed or
transferred without consideration, or for a consideration which
fails, creates no obligation of payment between the parties to
the transaction. But if the instrument " tr'lnsferred to a holder
for a consideration, such holder and all r :rsons deriving title from
him, can recover the amount due from the transferor for
consideration or any prior party thereto.-Sec.43.
Partial absence or failure of money-consideration
When the consideration for which a person signed a prom-
issory note, bill of exchange of cheque consisted of money, and
was originally absent in part or has subsequently failed in part,
the sum which a holder standing in immediate relation with such
signer is entitled to receive from him is proportionately re-
duced.-Sec. 44.
Partial failure of consideration not consisting of money
Where a part of the consideration for which a person signed
a promissory note, bill of exchange or cheque, though not
consisting of money, is ascertainable in"IDoney without collateral
enquiry, and there has been a failure of that part, the sum which
a holder standing in immediate relation with such signer is
entitled to receive from him is proportionately reduced.-Sec. 45.
When there is a partial failure of consideration, the parties
standing in immediate relation to each other cannot recover more
than the actual consideration. But this rule does not apply to a
holder in due course.
Example:
P makes a promissory note for Rs. 500 in favour of Q who pays
him Rs. 400, promising to pay Rs. 100 laler. G cannol recover from
P more than Rs. 400. BUI if Q indorse the note to R for
consideration, R can recover from P Rs. 500.

DISCHARGE OF PARTIES FROM LIABILITY

The liability of a party to a negotiable instrument may be
.' discharged or terminated in any of the following ways
/
336 LAW RELATING TO NEGOTIABLE INSTRUMENTS

1. By Payment
The liability of a party to a
negotiable instrument is
discharged by payment of the instrument done in the due course
of the amount due. Payment in due course means payment in
accordance with the apparent tenor of the instrument in good
faith and without negligence to any person in possession thereof
under circumstances which do not afford a reasonable ground
for believing that he is II".
entitled to receive payment.-Sections
10, 82(e) and 85.
2. By Release
The holder of the negotiable instrument may release the
liability of the maker, acceptor or indorser as the case may be.-
Sec. 82(b).
3. By Cancellation
If the holder strikes out the name of a person from a
negotiable instrument and indorses it, the person whose name
is cancelled is discharged from liability.-Sec. 82(a).
Where the effect of such cancellation is to impair any
indorser's remedy against a prior party, the indorser is discharged
from liability, unless the "ancellation is made with the consent
of such indorser.-Sec.40.
Example :
A is the holder of a bill of exchange made payable to the order
of B, which contains the foHawing indorsements in blank :
First indorsement-B
Second -Peter Williams
Third -Wright & Co.
Fourth -John Rozario
This bill A puts in suit against John Rozario and strikes out without
Rozario's consent, the indorsements of Peter Williams and Wright
& Co. A is not entitled to recover anything from Rozario.

4. By Default of tbe Holder

(i) Not presenting the bill for acceptance within due time.
Where a bill of exchange is required to be accepted but
the holder does not present it for acceptance within due
time, no party to the bill is liable thereon on the person
making such default.-Sec.61.
 RIGHTS AND LIABILITIES QF PARTIES 337

(ii) N.ot presenting the bill for payment within due time.
Where a negotiable instrument is required to be pre-
sented for payment and it is not so presented in proper
time by the holder the other parties to the· instrument
are not liable .thereon to such holder.-Sec. 64.
(iii) Allowing more than 48 hours for deliberation. If the
holder allows more than 48 hours time to the drawee
for deliberation, all prior parties not consenting to the
extra time, are discharged from liability.-Sec. 83.
(iv) Delay in presenting the cheque. If the holder of a cheque
does not present it for payment within reasonable time
and, a result, the drawer of the cheque suffers damage,
he is discharged from his liability to the extent of the
damages.-Sec.84.
(v) Qualified acceptance. If the holder agrees to a qualified
acceptance, all' prior parties not consenting to such
acceptance are discharged from liability.-Scc. 86.
(vi) Not sending notice of dishonour. All parties to whom
the holder docs not sent notice of dishonour, are
discharged from liability unless the circumstances are
such that no notice of dishonour is required to be sent.
5. By Material Alteration
"Any material alteration of a negotiable instrument renders
the same void as against anyone who is a party thereto at the
time of making such alteration and daes not consent thereto,
unless it was made in order to carry out the common intention
of the original parties; and any such alteration, if made by an
indorsee, discharges his indorser from itll liability to him in
respect of the consideration thereof ".-Sec. 87.
The rule, regarding material alteration, is subject to certain
limitation. (See below).

MATERIAL ALTERATION
A material alteration is one,
(a) which substantially changes the rights and liabilities of
the parties, or any of the parties, to the instruments, or,
(b) which changes the identity and the legal character of
the instrument.

Commercial Law - 22
338 LAW RELATING TO NEGOTIABLE INSTRUMENTS

Changes in the following items are considered to be material

alteration: amount of money payable; date and time of payment;
rate of interest; addition of a party; the medium of payment,
(See p. 127)
It has been held in English cases that an alteration by a
stranger, if it is material, will avoid the instrument. The Madras
High Court, however, has held. that an alteration made by a
stranger does not make the instrument invalid. Gourochandro D.
SumanlO v. Krushnacharana Padhi. 1
As regards the effect of alteration, a distinction must be made
between persons who are parties to the instrument at the time
when the alteration is made and persons who become parties
subsequently. A material alteration discharges the liabilities of
persons who are parties at the time when the alteration is made.
Persons who become parties to the instrument after the alteration,
are liable under the instrument as altered. Section 88 of the Act
lays down that an acceptor or indorser of a negotiable instrument
is bound by his acceptance or indorsement notwithstanding any
previous alteration of the instrument.
Example:
The plaintiff inserted the words 'per month t after the words, 'rate
of interest' and after the promissory note was executed by the
defendant The alteration was without knowledge of the defendant.
Held that the promissory note had been materially altered and was
therefore void and inoperative by virtue of Section 87. Verco Private
Ltd.. Pad; and others v. Newandram Naraindas and another. 2

Alteration allo"OO by Law

An alteration which is the result of an accident does not
affect the validity of an instrument. The Judicial Committee of
the Privy Council in Hongkong & Shanghai Banking Corporation
v. Lo Lee ·ShiJ held that, in order to invalidate an instrument the
alteration must be one effected by the will of the person by whom
or under whose direction it is made. Thus accidental alterations
do not render a document invalid. In Engli sh cases it has been
held that alterations in a docwnent brought about by the following
causes do not affect its validity: mutilation by the washing and
ironing of a garment in which the document was kept; ravages

I I.L.R. 0941) Mad.295 2 AIR (1974) Mad 5

3 (1928) A.C. 181
 RIGHTS AND LIABILITIES OF PARTIES 339

of white ants or rats; document tom by a child; document burnt

in part by accident.
An alteration made before the completion of the instrument
does not affect its validity. Thus if a person strikes out the word
"order" from a printed cheque form and substitutes the word
"bearer" before issuing the cheque, it is a valid bearer cheque.
Such alterations should be in itialled by the person executing the
instrument, in order to indicate that the alteration was made
before the instrument became effective.
After an instrument is executed, it may b·e altered in certain
ways without affecting the validity of the instrument. Alterations
of the following types are permitted by law :
I. An alteration made with the consent of all parties.
2. Alterations made in order to carry out the common
intention of the original parties. Such alterations include
correction of a clerical error or accidental slips.
3. Completing an inchoate stamped instrument.-Sec.20 (See
p. 306)
4. Conversion of an indorsement in blank into an indorsemenl
in fulL-Sec. 49.
•
5. The crossing of an uncrossed cheque, conversion of
general crossing to special crossing, addition of words like "nOI
negotiable" to a crossed cheque.-Sec. ·125.
6. A note on the margin of an instrument is not necessarily
a part of the instrument. If it is not a part of the instrument
it can be altered without affecting the validity of the instrument.
It has been held that the addition, in the margin of a mere
statement of fact which is nol covered' by the signature is not
a material alteration F:de v. K.."... Sha.... I

SPECIAL RULES OF EVIDENCE

Presumption as to Negotiable Instruments

The Negotiable Instruments Act lays down certain rules of
evidence regarding negotiable instruments. Section 118 provides
that in a suit upon a negotiable instrument, the court can presume
the following

I 3 Cal. 220
340 LAW RELATING TO NEGOTIABLE INSTRUMENTS

(a) that every negotiable instrument was made or drawn for

consideration, and that every such instrument, when it
has been accepted, indorsed, negotiated or transferred,
was accepted, indorsed, negotiated or transferred for
consideration;
(b) that every negotiable instrument bearing a date was made
or drawn on such date;
(e) that every accepted bill of exchanges was accepted
within a reasonable time after its date and before its
maturity ;
(d) that every transfer of a negotiable instrument was made
before its maturity;
(e) that the indorsements appearing upon a negotiable
instrument were made in the order in which they appear
thereon;
(f) that a lost promissory note, bill of exchange or cheque
was duly stamped;
(g) that the holder of a negotiable instrument is a holder
in due course: Provided that where the instrument has
been obtained from its l'lwful owner, or from any person
in lawful custody thereof, by means of an offence or
fraud, or has been obtained from the maker or acceptor
thereof by means of an offence or fraud, or for unlawful
consideration, the burden of proving that the holder is
a holder in due course lies upon him.
Presumption on Proof of Protest
Section 119 provides 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.
Burden of Proof
Any of the presumptions can be rebutted by evidence to the
contrary. The effect of Sections 118 and 119 is to throw the
burden of proof upon the party alleging anything contrary to the
allowable presumptions. Thus in a suit on a promissory note,
if the defendant alleges that there was no consideration, it is his
duty to prove it. The plaintiff need not prove consideration
because the court will, according to Section 118(a), presume that
 RIGHTS AND LIABILITIES OF PARTIES 341

consideration was paid. In an ordinary money suit, however, it

is the plaintiff's duty to prove consideration.

Estoppel
The Negotiable Instruments Act lays down the following
rules of estoppel :

1. Estoppel against denying original validity of instrument

No maker of a promissory note, and no acceptor of a bill
of exchange or cheque, and no acceptor of a bill of exchange
for the h6nour of the drawer shall, in a suit thereon by a holder
in due coorse, be permitted to deny the validity of the instrument
as originally made or drawn.-Sec. 120.

2. Estopp~1 against denying capacity of payee to indorse

No maker of a promissory note and no acceptor of a bill
of ell-change payable to order shall, in a suit thereon by a holder
in "due' course, be permitted to deny the payee's capacity, at the
date of the note or bill, to indorse the same.-Sec. 121.
3. Estoppel against denying signature or capacity of prior party
No indorser of a negotiable instrument shall, in a suit thereon
by a subsequent holder, be permitted to deny the signature Or
capacity to contract of any prior party to the instrument.-
Sec. 122.

INTERNATIONAL LAW
When a negotiable instrument is made or drawn in one
country but is payable in another country, the question arises :
by the law of which country will the instrument be governed?
The Negotiable Instruments Act contains the following rules on
the subject :

1. Liability of maker, acceptor or indorser

For a foreign bill, in the absence of a contract to the contrary
the liability is determined as follows. (Sec. 134) :
Maker or Drawer-by the law of the pl:u::e where the
instrument is made.
Acceptor and Indorser-by the law of the place where the
instrument is payable.
342 LAW RELATING TO NEGOTIABLE INSTRUMENTS

Example
A bilJ of exchange was drawn by A in California where the rate
of interest is 25 per cent, and accepted by B payable in Washington
where the rate of interest is 6 per cent. The bill is indorsed in India,
and is dishonoured. An action on the bill is brought against B in
India. He is liable to pay interest at the rate of 6 per cent only;
but if A is charged as drawer, A, is liable to pay interest at the
rate of 25 per cent.
2. Law of place of payment governs dishonour
Where a promissory note, bill of exchange or cheque is made
payable in a different place from that in which it is made or
indorsed the law of the place where it is made payable determines
what constitutes dishonour and what notice of dishonour is
sufficient.-Sec. 135.
Example:
A bill of exchange drawn and indorsed in India, but accepted payable
in France, is dishonoured. The indorsee causes it to be protested
for such dishonour and gives notice thereof in accordance with the
law of France, though not in accordance with the rules of Indian
law. The notice is sufficient.

3. Instrument made, etc. out of India but iu accordance with

its law
If a negotiable instrument is made, drawn, accepted or
indorsed out of India, but in accordance with the law of India,
the circumstance that any agreement evidenced by such instru-
ment is invalid according to the law of the country wherein it
was entered into does not invalidate any subsequent acceptance
or indorsement made thereon in India.-Sec. 136.

4. Presumption as to foreign law

The law of any foreign country regarding promissory notes,
bills of exchange and cheques shall be presumed to be the same
as that of India, unless and until the contrary is proved.-
Sec. 137.
EXERCISES
I. State the different parties to a bill of exchange. Discuss their
liabilities. (Pages 322-323, 324-325)
2. How would you distinguish between the liabilities of a Maker of
a Promissory Note and those of a Drawer of a Bill of Exchange 0
(Pages 324-325)
 RIGHTS AND lIABILITIES Of PARTIES 343

3. What is the nature and extent of the liability of a drawer, drawee

and acceptor of a Bill of Exchange? (Pages 324-326)
4. Examine to what extent a minor can be a party to a negotiable
instrument. (Page 322)
5. Examine the different modes of discharge of liability of parties to
a negotiable instrument. (Pages 335-337)
6. State the rules regarding presentment for acceptance of bill of
exchange. When can presentment for payment may be dispensed
with? (Pages 327-330)
7. What are the cases when a negotiable instrument need not be
presented for payment? When is a negotiable instrument' said to
be dishonoured? (Pages 328-330, 344)
8, What happens if a Negotiable Instrument: (a) is lost, (b) obtained
illegally, (c) by fraud and (d) is forged. (Pages 332-334)
9. What are the rules relating to the maturity of negotiable
instruments? (Pages 330-331)
10, Enumerate the presumptions which shall be made with reference
to negotiable instruments. (Pages 339-340)
II. Write notes on : Presentment for payment; Payment of Negotiable
Instrument; Maturity of a Note or Bill; Payment in Due Course;
Usance; Material Alteration. (Pges 327-330, 337-338)
12. Problems :
(a) A gets .holds of 8's cheque book and forges 8's name on a
cheque, A obtains money from 8 's bankers by presenting _the
forged cheque and then disappears_ Who bears the loss, 8 or
the banker? (Pages 334, 358)
(b) A promissory note, executed on the 31st Jan.'78, is made
payable one month after date. When does the note become
payable? (Pages 330-331)
(c) A negotiable instrument dated 29th January, 1967' is made
payable at one month after date. When will the instrument
mature? (Pages 330-331)
 DISHONOUR OF A
NEGOTIABLE INSTRUMENT

~ode of Dishonour
A negotiable instrument may be dishonoured in two ways
(i) by non-acceptance and (iz) by non-payment. Only bills of
exchange can be dishonoured by non-acceptance, since only bills
require acceptance. Promissory notes, bills of exchange and
cheques can' be dishonoured by non-payment.
Dishonour by Non-Acceptance
A bill of exchange is dishonoured by non-acceptance in the
following cases:
I. "When after due presentation, the bill is not accepted by
the drawee." When there are several drawees (who are not
partners), refusal by anyone of the drawees will amount to
dishonour.
2. In cases where presentation for acceptance is excused, the
bill is treated as dishonoured if it is not accepted without
presentation.
3. Where the drawee is incompetent to contra'ct, the bill may
be treated as dishonoured.-Sec. 91. .
4. If the acceptance is qualified, the bill may be treated as
dishonoured.
5. Drawee in case of need: Where a drawee in case of need
is named in a bill, or in any indorsement thereon, the bill is
not dishonoured until it has been dishonoured by such drawee.-
Sec. 115.
Dishonour by NOD-Payment
A promissory note, bill of exchange or Cheque is dishonoured
by non-payment when the maker of the note or the acceptor of
the bill of exchange or the drawee of the Gheque makes default
in payment upon being duly required to pay the same.-Sec. 92.
Consequence of Dishonour
Steps to be taken by the Holder : When a negotiable
instrument is dishonoured, the holder (I) becomes entitled to file
344
 DISHONOUR OF A NEGOTIABLE INSTRUMENT 345

a suit for the recovery of the amount due from the parties liable
to pay. (2) He must, subject to certain exception, give notice
of dishonour to parties against whom he intends to proceed. (3)
He mav al,o have the instrument noted and protested before a
notary public.

NOTICE OF DISHONOUR
Definition
Notice of dishonour means the notice which must be given
by the holder of a dishonoured instrument to 'all parties liable
to pay the amount due on the instrument.
By and to whom notice should be given (Sections 93, 95-97)
I. Notice is to be sent to the party liable, or his duly
authorised agent; if he is dead it is to be given to his legal
representative; if he is insolvent it is to be given to the Official
Assignee. The agent of the holder can give notice. A notice by
a stranger is a nullity.
2. A party receiving notice of dishonour should, if he wishes
to make a prior liable, send a similar notice to the prior party
or parties, unless such prior party receives' notice otherwise,
3. When the party to whom notice is sent is dead, but the
party sending notice is ignorant of the fact, the notice is sufficient
to bind the estate of the deceased.
4. It is not necessary to give notice to the maker of the
dishonoured promissory note or the drawee or acceptor of the
dishonoured bi II of exchange or cheque.
Mode in which notice may be given (Section 94)
I. The notice may be oral or written. If written it may be
sent by post. A notice duly addressed and posted is good even
though it may be miscarried,
2. The notice may be in any form; but the language used
must indicate that the instrument has been dishonoured and that
the party to whom notice is being given will be held liable hereon.
3. The notice must be sent to the place of business of the
party or parties, unless such prior party receives notice otherwise.
4. The notice must be sent within a reasonable time after
dishonour. (See p. 309-310 for the definition of reasonable time.)
346 LAW RELATING TO NEGOTIABLE INSTRUMENTS

Consequence of not sending notice of Dishonour

Any person to whom notice of dishonour is not sent is
discharged frpm his obligations under the insirument. He is not
liable to pay and no suit can be filed against him.
When notice of Dishonour need not be given
It is not necessary to' give notice of dishonour in the cases,
and to parties, mentioned below. In these cases, the parties are
liable without any notice:
I. To the maker of a dishonoured promissory note.-Sec. 93.
2. To the drawee or acceptor of a dishonoured bill of
exchange or cheque.-Sec.93.
3. When it is dispensed with by the party entitled thereto.-
Sec. 98(a). [Example: Where an endorser writes, "Notice of
dishonour waived".]
4. In order to charge the drawer when he has countermanded
payment.-Se.;:.98(b).
5. When the party charged could not suffer damage for want
of notice.-Scc. 98(c). [Example: Where the drawer does not
have any money.]
6. When the party entitled to notice cannot after due search
be found; or the party bound to give notice is, for any other
reason, unable without any fault of his own to give it.-Sec. 9(d).
[Example: Death or serious illness.]
7. To charge the drawers when the acceptor is also a
drawer.-Sec.98(e). [Example: When a firm draws a bill on its
branch.]
8. In the case of a promissory note which is not negotiable.-
Sec. 98(f).
9. When the party entitled to notice, knowing the facts,
promises unconditionally to pay the amount due on the instru-
ment.-Sec. 98(g).

NOTARY PUBLIC
The Notary Public is an officer appointed by the Government
to exercise the functions of a Notary Public as laid down in the
Negotiable Instruments Act. (Noting, Protest etc.). Formerly,
Notaries Public 'used to be appointed by the State Government.
Now, the Notaries Act of 1952 governs the profession of notaries.
 DISHONOUR OF A NeGOnABLE INSTRUMENT 347

Under Section 15 of this Act, the Central Government is

empowered to frame rules concerning the appointment, removal
and functions of notaries.
The term "Notary Public", includes the notary public of a
foreign country also. Gujrat Singh v. Jaswant Singh. I

NOTING
When a promissory note or bill of exchange has been
dishonour~d 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.
Such note must be made within a reasonable time after
dishonour, and must specify the date of dishonour, the reasons,
if any, assigned for such dishonour, or, if the instrument has not
been expressly dishonoured, the reason why the holder treats it
as dishonoured, and the notary charges.-Sec. 99.
Advantages of Noting: Noting a promissory note or bill of
exchange is a convenient method of regarding the fact of
dishonour. If a suit is subsequently filed in the instrument, the
notary public may give evidence about presentment and dishonour.
A bill of exchange may be accepted for honour and paid for
honour after it is noted.
Noting (and protest) is not compulsory. The procedure is not
applicable to cheques.

PllOTEST
Protest
When a promissory note or bill of exchange has been
dishonoured by non-acceptance or non-paym .. ~t, the holder may,
within a reasonable time, cause such dishonour to be noted and
certified by a notary public, Such certificate is called a Protest.-
Sec. 100.

Protest for Better Security

When the acceptor of a bill of exchange has become
insolvent, or his credit has been publicly impeached, before the
maturity of the bill, the holder may within a reasonable time,

I AIR (1971) Supreme Court 761

348 LAW RELATING TO NEGOTIABLE INSTRUMENTS

cause a notary public to demand better security of the acceptor,

and on its being refused may, within a reasonable time, cause
such facts to be noted and certified as aforesaid. Such certificate
is called Protest for Better Security.-Sec. 100.
Contents of Protest (Sec. 101)
A Protest must contain the following particulars :
. (a) either the instrument itself, or a literal transcript of the
instrument and of everything written or printed there-
upon;
(b) the name of the person for whom and against whom the
instrument has been protested;
(c) a statement that payment or acceptance, or better security,
as the case may be, has been demanded of such person
by the notary public: the terms of his answer, if any,
or a statement that he gave no answer, or that he could
not be found;
(d) when the note or bill has been dishonoured the place
and time of dishonour. and, when better security has
been refused, the place and time of refusal;
(e) the subscription of the notary public making the protest;
(j) in the event of an acceptance for honour or of a payment
for honour, the name of the manner in which such
acceptance or payment was offered and effected.
A notary public may make the demand mentioned in clause
(c) above either in person or by his clerk ,or, where authorized
by agreement or usage, by registered letter.
Notice of Protest
When a promissory note or bill of exchange is required by
law to be protested, notlce of such protest must be given instead
of notice of dishonour, in the same manner and subject to the
same condilions; but the notice may be given by the notary
public who makes the protesl.-Sec. 102.
Protest of Foreign Bills
Protest is compulsory in the case of a foreign bill, if it is
so provided by the law of the place where it is drawn. For inland
bills protest is optional.-Sec. 104.
 DISHONOUR OF A NEGOTIABLE INSTRUMENT 349

When noting is eq uivalent to Protest

When a bill or note is required to be protested within a
certain time or proceeding, it is sufficient if the bill or note is
noted within that time or proceeding; the fonnal protest may
be issued later.-Sec. 104A.
The difference between Noting and Protest
Noting is merely a record of the fact of dishonour. When
the notary public issues a certificate stating the particulars
regarding the dishonour, it is called a Protest.

ACCEPTANCE FOR HONOUR

Definition
When a bill of exchange has been noted or protested for
non-acceptance or for better security, any person not already
liable on the bill, may accept the bill for the honour of any party
thereto.-Sec.108. This is called Acceptance for Honour.
Rules regarding Acceptance for Honour
J. Consent: Consent of the holder is necessary before a bill
• can· be accepted for honour.-Sec. J 08.
2. How acceptance for honour must be made: The acceptor
for honour must, by writing on the bill in his own hand, declare
that he accepts under protest the protested bill for the honour
of the drawer or of a particular indorser whom he nemes, or
generally for honour.-Sec. 109. .
3. Acceptance not specifying for whose honour it is made:
Where the acceptance does not express for whose honour it is
made, it shall be deemed to be made for the honour of the
drawer.-Sec. 110.
4. Liability of acceptance for honour: An acceptor' for
honour binds himself to all parties subsequent to the party for
whose honour he accepts to pay the amount of the bill if the
drawee does not; and such party and all prior parties are liable
in their respective capacities to compensate the acceptor for
honour for all loss or damage sustained by him in consequence
of such acceptance.-Sec. III, para. I.
But an acceptor for honour is not liable to the holder of
the bill unless it is presented, (or in case the address given by
350 LAW RELATING TO NEGOTIABLE INSTRUMENTS

such acceptor on the bill is a place other than the place where
the bill is made payable), forwarded for presentment, not later
limn the day next after the day of its maturity.-Sec.lll, para 2.
5. When acceptor for honour may be charged: An acceptor
for honour cannot be charged unless the bill has at its maturity
been presented to the drawee for payment, and has been
dishonoured by him, and noted or protested for such dishonour.-
Sec. 112 ..

PAYMENT FOR HONOUR

Definition
When a bill of exchange has been noted or protested for
non-payment, any person may pay the same for the honour of
any party liable to pay the same. Such payment is called payment
for honour.
Declaration: The person paying for honour or his agent must
declare before a notary public the name of the party for whose
honour he is paying. The notary public must record the
declaration.-Sec. 113.
Righi of payer for honour: Any person paying for honour
is entitled to all the rights of the holder of the bill at the time
of the payment. He may recover from the party for whose honour
he pays,. all sums so paid, with interest thereon and with all
expenses properly incurred in making such payment.-Sec. 114.
Acceplance and paymenl wilhoul protesl : A drawee in case
of need may accept and pay the bill of exchange without previous
protest.-Sec. 116.

EXERCISES
I. What is acceptance for honour? How must acceptance for honour
be made? What are the liabilities of an acceptor for honour?
(Page 349)
2. State the cases in which notice of dishonour is not necessary.
(Page 346)
3. When is a negotiable instrument considered to be dishonoured?
What are the duties of a holder upon such dishonour?
(Page 344)
4. What is meant by'payment for honour' and what are its peculiar
features? (Page 350)
 DISHONOUR OF A NEGOTIABLE INSTRUMENT 351

5. in,what different ways maya negotiable instrument be dishonoured?

What steps should be taken by the hold·!r of a dishonoured
instrument? - '. . (Page 344)
6. When is a Bill of Exchange said to be dishonoured? When is notice
of dishonour unnecessary? (Page 344, 345-346)
7. What are the steps which a holder of a negotiable instrument may
take to protect his interest when the i strument is dishonoured?
(Page 344)
8 What is understood by protest under the Negotiable Instrument
Act? (Pages 344-345)
9. Distinguish between
(a) Dishonour by Non-Acceptance and Non-payment.(Page 344)
(b) Noting and Protest. (Page 347)
(e) ;o.cceptance for Honour and Payment for Honour.
(Pages 349-350)
10. Write Notes on : Notice of Dishonour; Notary Public; Noting;
Protest; Acceptance for Honour; Payment for Honour.
(Pages 344, 346, 347, 347, 349, 350)
 HUNDIS

DEFINITION
Indian merchants and indigenous bankers use various kinds
of negotiable instruments written in Indian langllages. Such
instruments are known as Hundis.
There is evidence !n .how that Hundis were discovered by
Hindu merchants and bani ers in ancient India. The terr1l. Hundi
comes from the Sansklit wllrd "Hund" which means "to collect".
THE LAW APPLICABLE TO HUNDI
The Negotiable Instruments Act'does not apply to Hundis.
A Hundi is governed by the custom and usages of the locality
in which it is intended to be used. In case of dispute, the court
takes evidence of local usages and applies them. If, on a certain
point, there is no customary rule the court can apply the rules
of the Negotiable Instruments Act .
. The parties may, by express writing on a Hundi, agree that
in case of dispute on that Hundi, the customary rules shall be
excluded and that the provisions of the Negotiable Instruments
Act shall apply.
TYPES OF HUNDI
By long usage various types of Hundis have been evolved.
The principal types are described below.
Shah Jog Hundi
A Shah Jog Hundi is one which is payable only to a Shah.
Shah means a respectable person, i.e., a man of money, well
known to the market. A Shah Jog Hundi may be transferred from
one person to another by delivery. No indorsement is required,
but it will not be paid to anybody other than a Shah. No
acceptance is required. A Shah Jog Hundi is similar to a crossed
cheque.
Nam Jog Hundi
A Nam Jog Hundi is one which is payable to the party named
in the Hundi or according to his order.
352
 HUNDts 353

Firman Jog Hundi

A Firman Jog Hundi is one which is payable to the order
of the holder.
Dbani Jog or Dekbander Hundi
These are Hundis payable to bearer.

Jawabee Hundi
A Jawabee Hundi is one th,,)ugh which money is remitted
from one place to another. erson receiving Ihe money has
to send an answer or 'Jawab the remitter.

Jokhmi Hundi
A Jokhmi Hundi is a combination of bill of exchange and
insurance policy. By a Jokhmi Hundi the seller 0;' goods calls
upon buyer of goods to pay the value of the goods to the holder
of the Hundi~ In form the Hundi is similar to a bill of exchange.
The buyer of goods accepts the Hundi subject to the condition
that he will pay the money mentioned in the Hundi only if he
receives the goods. The. seller of goods (i.e., the drawer of the
Hundi) discounts the Hundi with a third party. who may be called
the insurer. The third party pays to the drawer of the Hundi.
the value of the Hundi less an amount calculated to be equal
to the insurance premium payable for the risks involved in the
carriage of the goods from ttA:: seller to the buyer. If the goods
reach the buyer safely, the insurer becomes entitled to receive
the full value of the Hundi from the buyer. If the goods are lost
in transit. he gets nothing. Thus the insurer takes the risk of loss
of goods during carriage.
A Jokhmi Hundi is advantageous to the sellcr of goods
because he gets the purchase price (less insurance premium)
immediatdy. It is abo advantageous to the buyer because he
incurs no liability unless he receives goods.
General Terms
There are certain general terms appl iClible to all types of
Hundis. Hundis payable at sight are called Durshulli Hundis.
Hundis payable after a specified period are called Afiadi or
AII/(id.lli HUIU/is. A Hundi paid up and cancelkd is called
Khokha. Sometimes a Hundis is accompanied with a letter writt~n

Commercial Law - :!3

354 LAW RELATING TO NEGOTIABLE INSTRUMENTS

by the drawer or any other prior party addressed to some

respectable person requesting him to pay the amount due on the
Hundi in case the drawee fails to pay. Such a letter is known
as the Zickri Chit or the Tickri Chit. It is a procedure for
protecting the holder against non-payment. The person to whom
the letter is addressed, acts somewhat like an acceptor for honour.
But he will pay the money without prior noting or protest. The
provisions of Negotiable Instruments Act regarding noting and
protest do not apply to Hundis.
The term Peth is sometimes used to denote the duplicate
of a Hundi given when the original is lost. The duplicate of a
dupl ieate is called Perpeth.

EXERCISE
I. What is Hundi? Are Hundies governed by the Negotiable
Instruments Act? (Page 352)

•
 BANKERS' AND CUSTOMERS

Law
The law relating to banking in India is contained in the
following statutes: (I) Indian Contract Act (2) Negotiable Instruments
Act (3) Companies Act and (4) Banking Companies Act.
The first two Acts contain the rules regulating the relationship
between the banker and the customer and the last two deal with
the organisational aspects of banking, i.e., rules regarding the
structure, constitution and control of banks. As regards the
relationship between the banker and customer, the Indian statutes
are not comprehensive. The courts apply rules of English common
law to decide points not fully covered by the Indian Acts.
Definition of Banking
The Banking Companies Act of 1949 defines banking as,
"accepting, for the purpose of lending or investment, of deposits
of money from the public, repayable on demand or otherwise and
withdrawable by cheque, draft or otherwise." A banking company
is defined by the Act as a company registered under the Com·
panies Act and carrying on the business of banking. 'Industrial
enterprises accepting deposits for finance, are expressly excluded
from the definition of banking companies. The Act provides that
banking companies must take out a licence from the Reserve Bank
of India. An unlicenced company or firm cannot use the word
Bank, Banker or Banking as a part of its name.
Banker and the Customer
There are contlicting judicial decisions on the definition of
the term "customer of a bank". The prevailing opinion is that
a customer is one who has an account with the bank in question
or one who uses the services of the bank. The time period of
the relationship is not important. But a casual service, e.g..
cashing a cheque for a friend of a customer, paying life insurance
premium or to buy a draft, does not create the relationship of
banker and customer. There must be some element of regularity
or permanence.

355
356 LAW RELATING TO NEGOTIABLE INSTRUMENTS

Duties of tbe Banker

Subject to the rules laid down in the Negotiable Instruments
Act regarding the dulies and liabilities of bank, the relationship
between the banker and his customer is regulated by contract
between them. The legal 'relationship is essentially contractual.
The terms of the contract between the parties are to be found
(i) in the rules and regulations of the bank notified to the
customer at the time when an account is opened and (ii) from
the course of dealings bctween the parties where such dealings
have taken place for some time.
As regards moneys deposited by the customer, ,he banker
is the debtor and the customer is the creditor. The reverse is
the position as regards moneys lent by the bank to the customer.
A bank may, be agreement with his customer, undertake
various duties on behalf of the latter. The important duties are
the following:
I. The banker must honour cheques drawn by the customer.
2. The banker must collect cheques and drafts on behalf of
the customer.
3. A banker is bound to act according to the directions given
by the customer and in the absence of such directions according
to the usage prevailing at the place where the banker conducts
his business and applicable to the matter in hand.
4. The banker is also bound to use reasonable skill and
diligence in his work. Kesharichol1d v. Shillol1g Banking Corpn. 1
5. The banker must keep accurate records of all the
transactions of the customer.
6. The banker must not disclose the customer's account and/
or his affairs.
7. There is a general lien of the bankers. According to section
171 of the Contract Act the banker can retain the goods and
securities of the customer for all the dues of the banker.
8. The banker can claim from the customer the incidental
charges and expenses.
9. When the custpmer has two or more accounts in the bank,
the banker can set-off the debit items from the credit items when
payable.

lAIR (1965) Supreme Court 1711

 BANKERS AND CUSTOMERS 357

10. An overdraft arrangement between the Bank and its

customer is a contract. It cannot be terminated by the Bank
unilaterally, even if it is a temporary one. Indian Overseas Bank.
Madras and another v. Mis Narendraprasad Govindalal Patel.
Ahmedabad. I

PAYMENT OF CHEQUES BY BANKS

When Banker is bound to pay a Cheque
Section 31 of the Negotiable Instrllments Act provides that,
"The drawee of a cheque having sufficient funds of the drawer
in his hands, properly applicable to the payment of such cheque
must pay the cheque when duly required so to do, and in default
of such payment, must compensate the drawer for any loss or
damage caused by such default."
It follows from the above that the banker is bound to pay
a cheque drawn b~ customer provided the following conditions
are satisfied.
I. There must be sufficient funds to the credit of the drawer.
But if there is an overdrati arrangement, the cheque must be paid
even though there is no fund, provided the amount drawn comes
within the arrangement. If a bank has branches, the cheque must
be on the branch where the account is. When a customer deposits
cheques or drafts for collection, he cannot draw cheques on the
amount to be collected until after a reasonable time has been
given to the bank for collecting it.
2. The funds must be properly"applicable of the payment
of the cheque. An account for qne purpose cannot be drawn upon
for another purpose, e.g.. a trust account cannot be drawn upon
in the personal capacity of the trustee. If the account is subject
to any limits as regards drawing (e.g.. 100 cheques per annum,
10% of the balance or Rs. 1000) the cheque must be within these
limits.
3. The bank must be duly required to pay the cheque. The
cheque must be properly drawn and presented within the usual
banking hours. The signature of the drawer must be identical with •
his specimen signature kept within the bank. The cheque must
not be post-dated or stale and must not contain unsigned
alterations.

I AIR (1980) Guj 158

358 LAW RELATING TO NEGOTIABLE INSTRUMENTS

When Banker may refuse to pay a Cheque

A banker may refuse to pay a customer's cheque under the
following circumstances :
I. If there are insufficient funds of drawer and there is no
overdraft arrangement.
2. If the cheque is not properly drawn, e.g., if it is ambiguous
or illegible or contains unsigned alterations or if the signature
does not tally with the specimen signature of the drawer or if
it is undated or post-daled or stale otherwise irregular.
3. If the cheque is not presented at the branch in which the
customer has an account and within banking hours.
4. If the bank has a claim for a set off or a lien on the
funds of the customer, the bank may refuse to pay any cheque
in excess of the balance above the claim or lien.
When Banker must refnse to pay a Cheque
Under the following circumstances a banker must refuse to
pay a cheque :
I. If the customer countermands payment, i.e., instructs the
banker not to pay. The instructions countermanding payment must
be properly communicated to tlie bank. Courlice v. London City
and Midland Bank. I
2. If after the issue of a cheque the customer dies and the
bank receives notice of the death. The same rule applies in the
case of lunacy of the drawer.
3. If the bank receives notice of the insolvency of the
customer. Upon insolvency a person loses the right to deal with
his money and properties.
4. In the case of a cheque drawn by a company, if the bank
receives notice of a winding up order against the company.
5. If the bank is served with a garnishee order or if the
moneys of the customer are attached in execution of a decree
of a court. (A garnishee order is an order by the court directing
a person, having in .his custody money belonging to another, to
pay the money to some other person.)
6. If the customer has assigned his credit balance and the
bank receives notice of that fact.

'(1908) IK.B. 293

 BANKERS AND CUSTOMERS 359

7. If the drawer informs the bank that the cheque is lost.

8. If ~he banker .has reason to believe that the title of the
person pre~entii1g cheque is defective.
-~ ., :.,.
Liability of tbe Banker
A banKer is entitled to refuse to pay a customer's cheque
'only in the cases mentioned above. If the banker dishonours a
customer's cheque without justification he is liable to pay
damages to. the customer. Only the customer is entitled to sue,
not the holder or the payee. But where the banker admits to the
holder that the customer has money or contracts with him to pay
it, the holder may sue. The reason 'why the holder cannot sue
(except under special circumstances) is that the drawing of a
cheque does not operate as an assignment of money and the
holder cannot claim to sue as an assignee.
The wrongful dishonour of a cheque amounts to a breach
of contract on the part of the banker. It also injures the credit
of the customer in the market and therefore amounts to a libel.
The customer is entitled to damages on both these grounds.
Formerly heavy damages used to be awarded for wrongful
dishonour of a cheque. In recent times the tendency is to limit
damages to the actual injury suffered, except in the case of
trader's cheques where substantial injury is presumed.
When a cheque is improperly paid, the customer's account
cannot be debited with the payment and the banker will have
to bear the loss.
Example:
A cheque was drawn by a customer on the bank marking 'payee's
accounC. The cheque on face of it was tempered and converted into
• bearer cheque. The bank was negligent in making payment to
bearer instead of payee. Held, the bank is bound to reimburse the
customer. Ladies Beauty v. Siale Bank of India. I
Protection given to a paying banker
When is the Bank discharged ?
A banker is protected if a cheque is paid under circumstances
which makes the payment, "a payment in. due course" as defined
in Section 10 of the Negotiable Instruments Act. (See p. 331)
"Payment in due course means payment in accordance with
I AIR (1984) Guj 33
 360 LAW RELATING TO NEGOTIABLE INSTRUMENTS

the apparent tenor of the instrument in good faith and without

negligence to any person in possession thereof under circum-
stances which do not afford a reasonable ground for believing
that he is not entitled to receive payment of the amount therein
mentioned."-Sec.IO.
When payment is made in due course, the customer's account
can be debited with the money paid. The banker is not liable
even if it subsequently transpires that payment has been made
. to the wrong person (e.g., where the holder has obtained the
cheque dishonestly).
Where a cheque payable to order purports to be endorsed
by or on behalf of the payee the drawee is discharged by payment
in due course.-Sec. 85(1).
Where a cheque is originally expressed to be payable to
bearer, the drawee is discharged by payment in due course to
the bearer thereof, notwithstanding any endorsement whether in
full or in blank appearing thereon and notwithstanding that any
such endorsemCflt purports to restrict or exclude further nego-
tiation.-Sec. 85(2). This section lays down the rule, "once a
bearer cheque, always a bearer cheque". (See p. 321}
In the case of a crossed cheque the liability of the paying
bank is discharged by payment in due course to the bank
presenting the cheque for payment. It is not the duty of the paying
bank to see that the money reaches the true owner.-Sec. 128.

Forged Cheques
A cheque, with the drawer's signature forged, is a nullity
and if a bank pays such a cheque, the customer is not liable
and his account cannot be debited with the payment. It has been
held in several cases that a banker is expected to know his
customer's signature.

Cheques with Alterations

An alteration with is countersigned or initialled by the drawer
is immaterial. But an unsigned alteration of a material part of
a negotiable instrument makes it invalid. A banker, however, is
protected if he pays a cheque with alterations under the following
circumstances : (i) if the alteration is not apparent and (ii) if
the payment is according to the apparent tenor of the instru-
ment.-Sec.89.
 BANKERS AND CUSTOMERS 36i

Therefore, where the alteration is noticeable on reasonable

scrutiny and the banker pays the money, he is not entitled to
debit the customer's account with the payment.
Duties of Customers
In some English cases it has been held that the customer owes
a duty to his bank not to do anything which will facilitate
subsequent alterations or forgery and where the customer is guilty
of facilitating such forgery or alteration, he is estopped from
denying his liability to be debited with the payment. Examples of
negligence by customer: keeping a blank space between the name
of the payee and the expression "or order" or before and after
figures; not keeping the cheque Iiook under lock and key, etc.
COLLECTION OF CHEQUES AND DRAFTS
A customer may deposit a cheque or draft in his bank for
collection or may negotiate it to the bank. In the latter event,
the bank becomes the indorsee of the instrument and if it is
dishonoured the loss falls on the bank. If, however, a cheque
or draft is deposited for collection only, the bank becomes the
agent of the customer and in case of dishonour the loss falls
upon the customer. Whether in a particular case the bank is
indorsee or merely agent for collection, depends on the circum-
stances of the case.
When a bank acts as the agent for collection it has certain
duties to perform. It must exercise due diligence, i.e., present
the instrument for payment within reasonable time. What is
reasonable time depends upon the circumstances of the case. In
some English cases it has been held that for bankers in the same
town, one day is reasonable time; for places outside the town,
the cheque must be forwarded for collection within one day. If
for failure to present the cheque within reasonable time the
customer suffers damage, the bank is liable. If the instrument
deposited for collection is dishonoured, the banker must inform
the customer.
A bank may collect bills of exchange on behalf of a customer.
In such cases it must present the bills for acceptance and payment
within reasonable time and must give due notice of dishonour
if necessary.
If a cheque is negotiated to the bank by the customer, it
becomes the owner of the cheque and can enjoy the protection
afforded to the holder in due Course in appropriate cases.
 ,
362 LAW REl.ATING TO NEGOTIABLE INSTRUMENTS

Protection given to Collecting Bankers

Section 131 of the Negotiable Instrument Acts provides as
follows:
"A banker who has in good faith and without negligence
received payment for a customer of a cheque crossed generally
or specially to himself shall not, in case the title to the cheque
proves defective, incur any liability to the true owner of the
cheque by reason of having received such. payment.
Explanation-A banker receives payment of a crossed cheque
for a customer within the meaning of this section notwithstanding
that he credits his customer's account with the amount of the
cheque before receiving payment thereof."
The meaning of the aforesaid section is that if it turns out
that thc customer depositing a cheque had no title to the money,
the collecting bank is not liable to pay compensation to the true
owncr, provided the following conditions are satisfied :
I. The collecting bank acted in good faith and without
negligence. The existence of any suspicious circumstances puts
the bank upon enquiry and the absence of enquiry amounts to
negligence and want of good faith.
2. The collecting bank must have been acting all behalf of
a customer, i.e., a person having an account with the bank or
dealing regularly with it.
3. The cheque in question was a crossed cheque.
4. The bank was acting as agent for collecting and was not
an indorsee of the cheque.
The explanation makes it clear that a bank may credit the
cllstomer with the amount of the cheque before collection and
that such prior credit is immaterial to the question of the liability
of the bank to the true owner.

EXERCISES
I. Discuss the law relating to crossed cheques with special reference
to the liabilities of the collecting bank in respect thereof.
(Pages 358-361)
2. Enumerate the circumstances under which a banker can refuse to
honour a customer's cheque. (Pages 357-359)
3. Discuss the circumstances under which a banker receiving payment
of a cheque is protected. (Pages 359-360)
4. Under what circumstances can a banker refuse to honour his
customer's cheques? (Pages 358-359)
 BOOK V
THE LAW RELATING To
CARRIAGE

(HAPTER 1 Carriage by Land 364 -'378

Legislation rei':lting to Carriage 364 ~ Classification and
characteristics of Carriers 364 ; Difference between Common
Carriers and Private Carriers 366; Duties of a Common
Carrier 367 ; Rights of a Common Carrier 368; Liabilities
of a Common Carrier 369.; Measure of damages 370 ; Rights,
Duties and Liabilities of other Carriers 370; Carriers of
Passengers 371 ; Duties of Railways 372; Liabilities of
Railways 372; Rights of Railways 377; Disposal of
unrcmoved goods 377.

(''''.PTER 2 Carriage by Sea 379 - 390

Law relating to Sea Carriage 3 79; The Contract of
Affreightment 379; Charter·Party 379; The Bill of Lading
381 ; Is the Bill of Lading a Negotiable Instrument? 382 ;
Differences between a Charter Party and a Bill of Lading
383 ; Implied Warranties 383; Duties of a Carrier by Sea
384; Liabilities of a Carrier by Sea 384 ; Certain Tenns 385.
CHAPTER 3 Carriage by Air 391 - 397
Law relating to Air Carriage 391 ; Warsaw Convention and
the Hague Protocol 391 ; The Documents of Carriage 392 ;
Rights and Duties 393 ; International Carriage by Air 394 ;
Internal Carriage by Air 396; The Procedure for Realising
Damages 396.

363
 CARRIAGE BY LAND

LEGISLATION RELATING TO CARRIAGE

The law relating to carriage may be studied under three
heads : (i) Carriage by Land, including inland navigation,
(Ii) Carriage by Sea and (iii) Carriage by Air. This is a convenient
classification because these three branches of the law of carriage
are governed by different principles and different statutes.
Indian statutes relating to the law of carriage are mentioned
below:
I. Carriage by Land-
(i) The Com·mon Carriers Act, 1865, which deals with
Common carriers of goods over land and inland water-
ways.
(ii) The Rai Iways Act, 1890, which deals with carriage by
railways.
2. Carriage by Sea-
(i) The Indian Bills of Lading Act, 1856.
(ii) The Carriage of Goods by Sea Act, 1925.
(iii) The Merchant Shipping Act, 1958.
(iv) The Marine Insurance Act, 1963.
3. Carriage by Air-Carriage by Air Act, 1972.
The statutes mentioned above are not exhaustive. On all
points not specifically covered by them, Indian courts apply
principles of English law as rules of equity and goods conscience.
CARRIERS DEFINITION, CLASSIFICATION AND
CHARACTERISTICS
Definition
Any person or an organisation, by an express or implied
contract, with or without remuneration,· carries goods and/or
passt"ngers, is called a Carrier. G:)Vernment services can be called
carrier if it comes within the above definition, e.g., Indian
Railways, Calcutta State Transport Corporation, C. T. C. etc.
Classification
Carriers may be classified into carriers of goods and carriers

364
 CARRIAGE BY LAND 365

of passengers. The same carrier may of C0urse carry both goods

and passengers.
It is more usual to classify carriers into Common Carriers
or Public Carriers, and Private Carriers.
Common Carriers or Public Carriers
In Engl ish law a Common carrier is defined as one who
undertakes to carry for hire, from place to place, the goods of
anyone who employs him. The essential features of a common
carrier, according to English law, is that he is prepared to carry
the goods of anyone without discrimination. If a carrier reserves
to himS-elf the right to reject an offer (even if there is accom-
modation in the carriage and the offeror is prepared to pay the
usual freight) he is not a common carrier. Belfast Ropework Co ..
v. Bushell. I Example : A lorry of a Transport Company or a
Tempo.
In Indian law the term common carrier is used in a restricted
sense. The Common Carriers Act of 1865 defines a common
carrier as any individual, firm, or company (other than the
government) who transport goods, as a business, for money, over
land or inland waterways, without discrimination between
different consignors.
Is the Post-Office a Common Carrier?
The post office is not a common carrier. It is not an agent
of the sender to deliver a postal article to the addressee. It is
really a branch of the Public Service providing postal services
subject to the provisions of the Post Office Act and the rules
made thereunder.
A resident of India sent value-payable article to an addressee
in Pakistan and the Pakistan Government, though realised the
value of the article, did not hand it over to the Government of
India. Held, the Government of India is not liable. Union of India
v. Mohd. Nazim.2

Characteristics of Common Carriers

The characteristics of a common carrier 111 India are as
follows:

1(1918) K.B. 210 2 AIR (1980) Supreme Court. 431

366 LAW RELATING TO CARRIAGE

I. It may be a finn or an individual or a company. But the

government is not included in the category. The post office is
not a common carrier, although it may carry goods.
2. Only carriers of goods come within the definition. A
carrier of passengers is not a common carrier.
3. A common carrier is one who carries goods for business
and money. From this it follows that one who carries goods
occasionally is not a common carrier. Also one who carries goods
free is not a common carrier.
4. A common carrier is one who is ready to carry the goods
of any person without any discrimination.
5. The term common carrier is applied only in the case· of
carriage by land and over inland water-ways.
Private Carrier
A private carrier is one who does not do regu lar business
as a carrier but occasionally carries goods for money. Suppose
that a contractor has a ~orry which he uses mainly for transporting
his own goods but sometimes he lets it out on hire to others.
The contractor is a private carrier. From the occasional nature
of a' private carrier's job, it follows that he can discriminate
between different hirers. He is not bound to carry the goods of
any and everybody. A common carrier (subject to certain
exception) is bound to do so. Example : A private lorry.
Gratuitous Carrier
A gratuitous carrier is one who carries goods (or passengers)
without any charge. The owner of a motor car who gives a lift
to a friend is a gratuitous carrier.

DIFFERENCES BETWEEN COMMON CARRIERS AND

PRIVATE CARRIERS
I. A common carrier is one whose business is carriage of
goods for hire. A private carrier is an occasional carrier.
2. A common carrier is bound to carry the goods of any
person who is ready to pay the usual freight, provided certain
conditions (relating to space, type of goods, etc.) are fulfilled.
A private carrier is free to carry goods or not as he pleases.
3. The liabilities of a common carrier are determined by the
Common Carriers Act, 1865. A private carrier is not governed
by this Act. His position is that of a bailee.
 CARRIAGE BY LAND 367

DUTIES OF A COMMON CARRIER

The duties of a common carrier in India are determined by
the Common Carriers Act and (as regards points not covered by
this Act) by the rules of English law. The duties can be summed
up as follows:
I. Must carry good. without Diser; .•• :.. ation
A common carrier is bound to '.all)' the goods of every
person, without any distinction. But certain exceptions are
recognised. A common carrier can refuse to carry under the
following circumstances : .
(a) if the customer is not willing to pay reasonable charges
for the carriage;
(b) if there is no accommodation in the carriage;
(e) if the goods are dangerous or are of a type which the
~arrier is not accustomed to carry; and
(d) if ih" goods are to be carried over a route with which
the carrier is not familiar. (A carrier is entitled to confine
himself to the carriage of a particular type of goods and/
or over particular route. In such cases the carrier can
refuse to carry the goods over unaccustomed routes and
to carry goods wh ich he does not usually carry.)
If a carrier, without any of the reasons mentioned above,
refuses to carry the goods of a person, he can be sued and the
customer can recover damages. G. W. Rly Co. v. SUI/on.'
2. Within time and at the place
The carrier must deliver the goods at the agreed time ·or (if
no time had been agreed upon) within a reasonable time .. The
place of delivery is subject to contract. Bon/ex Kni!/ing Works
Ltd. v. SI. John's Garage. See p. 164.
3. With Safety
The .goods must be carried with reasonable precautions for
their safety and over the usual and ordinary route.
4. Must Insure
According to English Common Law a common carrier of
goods is an insurer,· i.e., he is bound to indemnify the owner
I (I869) 4 H.L. 226
368 LAW RELATING TO CARRIAGE

in full for loss or damage to the goods In course of carriage.

This liability is to subject to certain exceptions. (See next
section). This principle has been applied in a Madsas Case.
B. Chalapalhi v. Official Assignee. I There is no decision on the
subject in the Supreme Court of India yet.
5. Without Deviations
Deviations are not permitted unless rendered necessary by
exceptional circumstanct:.

RIGHTS OF A COMMON CARRIER

I. When 1101 bound to carry goods : A common carrier is
not bound to carry goods under certain circumstances. e.g. when
he has no room, when the goods are dangerous or not of a type
he is accustomed to carry, or when he is asked to carry goods
to a destination to which he does not ordinarily travel.
2. Entitled 10 reasonable charges: He is entitled to reason-
able charges for his work. He can allow concession rates to some
customers but cannot demand unreasonably high payments from
anybody. What is reasonable depends on the circumstances of
the case.
3. Has lien: He has lien on the goods for his remuneration
and can refuse to deliver the goods until his dues are paid. This
is known as the Carrier's Lien.
4. Steps for refusal of delivery: If the consignee refuses
to accept delivery of the goods, the carrier is at liberty to take
such steps as are reasonable and prudent under the circumstances.
He can recover all reasonable expenses incurred by him in this
connection from the party with whom the contract of carriage
was entered into.
5. D(lmages: The carrier is entitled to recover damages from
the consignor if the goods given for carriage are dangerous or
are loosely packed and the carrier suffers injury therefrom.
Bamfield v. Goole & Sheffield Tran;port Co2
6. Exemptions : The carrier can, subject to the provisions
of the Carriers Act, enter into special contracts exempting him
from liability under stated circumstances.

'AIR (1978) Mad. 112 2 (1910) 2 K.B. 94

 CARRIAGE BY LAND 369

THE LIABILITIES OF A COMMON CARRIER

English Law
According to English Common Law a common carrier of
goods is an insurer, i.e., he is bound to indemnify the owner
in full for any loss or damage to the goods in course of carriage.
This rule of full liability is subject to certain exceptions. The
carrier is not liable in the following cases :
(a) When damage is caused by an Act of God, by which
is meant a natural calamity like a storm or earthquake.
(b) When damage is caused by the enemies of the state, e.g.,
during wars,
(c) When damage is caused by some inherent defect in the
goods or negligence of the consignor.
(d) When there is a special agreement limiting the liability
of the carrier.
(e) There is no liability for damages caused after the goods
arrive at the~r destination.
Indian Law
The liabilities of a common carrier of goods in India are
laid down in the Common Carriers Act of 1865. This Act divides
goods into two categories: Scheduled and ,Non-schedule.
Scheduled goods are certain' articles enuinerated in' a schedule
to the Act. They are valuable articles like gold, silver, jewellery,
paintings, silk, title deeds, currency notes and coins', eic. All other'
articles are non-scheduled,
Sules : The rules regarding the liability of common carriers
in India are summarised below:
I. For Scheduled articles exceeding Rs.100 in value, the
carrier is liable for all loss and damage,'
(a) If the value and the description of the goods are
disclosed by the consignor to the carrier, or
(b) If the loss or damage is due to a criminal act of the
carrier, his agent or servant, ' " ' .,
2. The common carrier can charge extra for carrying
scheduled articles but cannot limit his statutory liability by any
spec ial agreement.
3. "The liability of a common carri'er can be limited b)
agreement under the provisions of Sections 6 and 8 (of the Act

Commercial Law - 2-l

370 LAW RELATING TO CARRIAGE

of 1965) but that there must be a limitation of the liability". MG.

Brolhers Lorry Service v. Prasad Textiles. I
4. The common carrier is responsible for loss or damage
caused by negligence of criminal acts done by himself, his agents
or servants. Bontex Knilling Works Ltd. v. St. 10hn 5 Garage. 2
(See p. 164)
5. In case of loss or damage, the claimant must notify the
carrier within six months of the date of knowledge of the loss
or damage.
6. The above rules apply only to common carriers as defined
by the Common Carriers Act of 1865. Thus, they do not apply
to carrier of passengers or to railways.
7. Measure of damages: The measure of damages for delay
for goods lost or damaged, is the difference between the value
of the goods at the time when they ought to have been delivered
and at the time when they were actually delivered. Wilson v.
Lancashire and Yorkshire Railway Co. J
··It is well settled that it is the market price at the time the
damage occlIrred which is the damage to be awarded." Union
<1 India v. Uhl Punjab Factories Lld4
See also Hadley v. Baxendale. s (See p. 132)

RIGHTS, DUTIES AND LIABILITIES OF OTHER

CARRIERS
Private Carrier
A private carrier is not governed by the Common Carriers
Act, 1865. Hence his position is that of a bailee. He has the
same rights, duties and liabilities as a bailee under the Contract
Act. Thus he is bound to take as much care ofthe goods entrusted
to him as a man of ordinary prudence wOllld take under similar
circumstances. of his own goods of the same quality, bulk and
size. (Sections 151, 152, and 161, Contract Act. See pp. 162, 1b4)
Gratuitous Carrier
A gratuitous carrier is in a position of a bailee. But if such
a carrier agrees to carry the goods, he must also do the duties
I AIR (1984) Supreme Court 15 , (1.944) 2 All E. R. 690
'C.B. (NS) 632 4 AIR (1966) Supreme Court 395
'(IR'419h341
 CARRIAGE BY LAND 371

of the carrier. If a person undertakes to perfonn a voluntary act,

he is liable if he performs it improperly. Negligence by the carrier
is actionable.
It is to be n"oted that an agreement of carriage with a
gratuitous carrier is void because of want of consideration.
Therefore no action can be taken against him for refusing to carry
the goods' even though he has undertaken to do so.

CARRIERS OF PASSENGERS
A carrier of passengers may be a common carrier or a private
carrier or a gratuitous carrier. A common carrier of passengers
is one who is ready and willing to accept anybody as a passenger,
e.g.. a bus, a tralll or a taxi. A private carrier of passengers is
one who occasionally carries passengers for hire. A gratuitous
carrier of passengers is one who takes a passenger without charge.
Carriers of passengers are not subject to the Common
Carriers Act of 1865. Some rules concerning such carriers arc
to be found in local statues like thc Motor Vehicle Acts and the
Police Acts. The important rules regarding carriage of passen'gers
are given below :
I. In the absence of any Indian statute dealing with the
matter, the general principles concerning carriage of passengers
must be deduced from the English common law.
2. A common carrier of ·passengers is bound to carry any
member of the public who is desirous of being carried, except
III the following cases :
(a) When the passenger is not willing to pay the stated fare.
(b) When the passenger is unfit, i e .. suffering from some
disease or infirmity.
(c) When there os no accommodation.
3. The common carrier of passengers is not an Insurer. lie
must, however, take due care and exercise due diligence. He is
liable for injuries caused by negligence to paid passengers and
also to passengers travelling free with his knowledge and consent.
But a passenger who, without the consent of the carrier is
travelling without payment, is a trespasser and is not entitled to
damages even though caused by negligence
4. A passenger injured by negligence is not entitled to
damages if he is himself guilty of negligence. This is known
as the principle of contributory negligence.
372 LAW RELATING TO CARRIAGE

5. The common carrier of passengers can limit his liabilities

by contract with his passenger.
6. Private and gratuitous carriers of passengers are not bound
to accept any person as passen~r. They can choose which
passenger to carry. But they are liable for loss or damage to the
passenger IR case of negligence.

DUTIES OF RAILWAYS
Under thc Railways Act, the railway administration has
certain slullllory dillies. These duties are similar to the duties
of a common carrier as provided under the Common Carriers
Act of 1865 and the rules of Engl ish common law. Section 28
of the Railways Act of 1890 provides as follows :
"A railway administration shall not make or give any undue
or unreasonable preference or advantage to, or in favour of, any
particular person of railway administration, or any particular
uescription of traffic, in any respect whatsoever, or subject to
any particular person or railway administration or any particular
description of traffic to any undue or unreasonable prejudice or
disadvantage in any respect whatsocver."
The railway administration is bound (like a common carrier)
to carry goods of every person provided the necessary freight
is paid and the regulation concerning packing etc, are observed.
The railway administration is also bound to carry every passenger
who pays the necessary fare. It cannot discriminate between
different passengers on any ground. It can therefore be said that
the railway administration is a common carrier, so far as its duties
are concerned.

LIABILITIES OF RAILWAYS
The responsibility of the railway administration as carriers
is stated in detail in Ch: VII of the Railways Act. The important
provisions are summarised below.
I. Responsibility as Bailee
A railway administration is responsible as a bailee under
sections 151. 152 and 161 of the Contract Act for the loss.
destruction, damage, deterioration of non-delivery of goods
carried by railway within a period of sevea days after the
termination of transit. This rule does not apply in the case ,,[
 CARRIAGE BY LAND 373

goods carried at owner's risk rates, certain valuable goods,

animals and dangerous goods. (See below under paras 6, 13
and 14).

2. General Responsibility
Subject to the rules stated in para 3, a raIlway administration
is rcspor,sible for the loss, destruction, damage, deterioration or
wastage in bulk or weight due to inherent defect, to the
administration to be carried by railway, arising from any cause
except the following: (a) act of God; (b) act of war; (c) act
of public enemies; (d) arrest, restraint or seizure under legal
process; (e) orders or restrictions imposed by the Central
Government or a State Government or by any officer or authorit),
subordinate to them, authorised in this behalf; (j) act or omission
or negligence' of the consignor or the consignee or their agent
or servant; (g) natural deterioration or wastage in bulk or weight
due to inherent defects, quality or vice of the gl)ods ; (hl latent
defects; (i) fire explosion or any , unfureseen risk.-Sec. 73.
3. Reasonable Foresight and Care
Even in the exceptional cases noted above, the railway
administration shall not be relieved of its responsibility unless
it proves that it has used reasonable foresight and care in the
carriage of the animals or goods.-Sec. 73.

4. When not Responsible for Damages

Notwithstanding any of the provisions stated above, the
railway administration is nol responsible for damages in the
following cases :
(a) Where goods have been despatched with a description
which is materially false, and the damages have been brought
about by such false description.
(b) Wh~re there has been fraud practised by the consignor
or the consignee or their agents.
(e) Where it is proved that damages or non-delivery is caused
by (i) improper loading or unloading by the consignor or the
consignee or their agents, or (ii) riot, civil commotion, strike,
lockout, stoppage or restraint of labour from whatever cause,
partial or general,
(eI) For any indirect or consequential damages or for loss
of particular market.-Sec. 78.
374 LAW RELATING TO CARRIAGE

5. Forwarding Note
Every consignor of goods or animals must execute a
Forwarding Note in the form prescribed by the railway admin-
istration and approvcd by the Central Government. Four types
of Forwarding Note! are in general use. Each type covers a
particular kind of goods. Each Forwarding Note contains
(a) particulars of the goods carried and (b) the terms of carriage
including a statement of the extent of the liability of the railway
administration for loss or damage.-Sec. 72.
6. Good. at Owner's Risk Rates
Goods may be carried, if the sender so requests, at what
is called owner's risk rates. The rates are low and the railway
administration is not responsible 'for any loss except in cases of
negligence and misconduct by the railway or its servants. When
go()ds are sent at owner's risk rates, a particular form of
Forwarding Note is used. If goods, carried at owner's risk rates.
are damaged, the railway administration is bound to disclose how
the consignment was dealt with during carriage. Where, from the
disclosure made, it cannot fairly be inferred that there was
ncgligence or misconduct the burden of proof that there was
negligence or misconduct is upon the consignor.-Secs.74, 76F.
7. Delay or Detention
The railway administration is responsible for damages caused
by delay or detention in transit unless it proves that the delay
or detention arose without negligence or misconduct on its part
or any of its servants.-Sec. 76.
8. Deviation
There is no breach of contract by reason only of deviation
of route, if such deviation is due to reasons beyond the control
of the administration, e.g., congestion in the yard.-Sec. 76A.
9. Forgery or defective Receipt
When delivery is given to the person who produces the
original railway receipt, the railway administration is not respon-
sible if it turns out that he was not legally entitled to delivery
or that the endorsement on the receipt was forged or otherwise
defective.-Sec. 76B.
 CARRIAGE BY LAND 375

10. Termination of Transit

The railway administration is not responsible for damage
after the wagon is placed at the siding where delivery is to be
taken and the owner has been informed in writing.-Sec. 76C.
The Railway administration is not responsible in any case
for damage etc. after the expiry of seven days after the
termination of transit.-Sec.77. (The Railway Act was amended
on 22nd December, 1972, providing that the period of termination
of transit is 7 days. Formerly it was 30 days).
11. Defective Goods
When the goods are in a defective condition or are defec-
tively packed and the fact is noted in the forwarding note, the
railway administration is not responsible for loss' or damage
except upon proof of negligence or misconduct on its part or
on the part of its servant.-Sec. 77C.
12. Open Trucks
When goods which, under ordinary circumstances, would be
carried in closed trucks are at the request of the sender carried
in open trucks, the railway administration is not responsible for
damages that may arise from such carriage in open trucks.-
Sec. 75A.
13. Animals
In the case of animals, the railway administration is not liable
for loss or damage beyond certain amounts mentioned in the 1st
Schedule to the Act. They are as follows: elephants Rs. 1500
per head; horses-Rs. 750 per head; mules, horned cattle, and
camels-Rs. 200 per head; and in all other cases-Rs. 30 per
head. The railway may accept a higher liability if the animal
is specially valuable. In such cases the value of the animal must
be mentioned in the. forwarding note and a higher freight must
be paid. The railway is in no case responsible if the loss or
damage is due to any action of the animal itself.-Sec. 77A.
14. Valuable Goods
When the parcel or package delivered for carriage contains
goods of the kind mentioned in the 2nd schedule to the Act.
the consignor is required (if the .value of the goods exceeds
376 LAW RELATING TO CARRIAGE

Rs. 500) to disclose the value and contents of. the parcel or
package. (The goods mentioned..in the schedule are valuable
goods like gold, silver, silk, coins and notes etc.) The railway
can demand additional freight for such consignments. When such
additional freight is paid and the requisit<: declaration is made.
the railway is liable to make good any loss or damage to the
article. If no declaration is made, the railway is not responsible.
The railway officials may examine the contents of the package
to be sure of the description and valuation.-Sec.77B.
15. Passengers' Luggage
The railway administration is responsible for luggage which is
booked and handed over to it for carriage in the luggage van. For
goods carried by the passenger in his charge, the railwa) is not
responsible unless it is shown that damage was caused by negli-
gence or misconduct on its part or any of its servants.-Sec. 75.
16. Injury and Death in Accidents
The railway administration is liable to pay compensation for
death and personal injury to a passenger and damages to goods
and animals (owned by the passenger and accompanying him)
caused by a railway accident. The compensation will have to be
paid even if the accident is not caused by wrongful act, neglect
or default of the railway administration. The maximum amount
for which the railway is liable is Rs. 50,000 in respect of any
one person. But according to the Indian Railways (Amendment)
Act, 1983, the amount have been raised to Rs. I lakh in respect
of any one person.~Sec. 82A.
17_ Compensation
The Government of India has framed' "eI1ain Rules under
the Railways Act for injuries in accidents which compensation
will be paid. Some examples are stated below-amputation
before shoulder-Rs. 40,000 ; loss of one eye-Rs. 20,000 ; loss
of thum~Rs .. '5,000
. ,',
etc.
Examples;
(i) Some goods were consigned on a railway at "owner's risk", At
night the goods were stolcn. There was no watchman at that time .
. Held, the loss of goods was due to negligence of the Railway
Administration . ./ugga/ Kishore v. Union of India. I .

I AIR (1965) Pat. 196

 CARRIAGE BY LAND 377

(ii) Some goods were destroyed by fire. The Railway extinguish the
fire after six hours. There was no explanation for the delay. For
negligence. damages were awarded. Union of India v. Silri
Ramesh Collon Afills Ltd. I

RIGHTS OF RAILWAYS
The Act gives certain privileges to the railway administra-
tion. Bye-laws may be framed regarding 'thc mode of carriage
of goods and passengers. No person is allowed to carry dangerous
or otTensive goods. Violation of the provision of the Railways
Act and of the bye-laws are punishable by the court (e.g..
travelling without tickets, carrying dangerous goods etc.). The
railway possesses a lien on the goods carried, for freight and
other charges, if any.

Notice of Claim
In case of loss, destruction, damage. deterioration or non-
delivery of animals or goods, there must be notice in writing
within six months of the date of delivery. The claim. must be
submitted to the railway administration (a) to whom goods were
delivered for carriage, or (b) to the station which is likely due
to arrive.

Disposal of UnrcmO\'cd Goods

The Indian Railways Act was amended in 1976 providing
that essential goods booked to certain notified starions must be
removed within seven days from the termination of transit.
Essential goods means food stutTs, sugar etc. Stations means
certain prescribed stations. If the goods are not removed within
seven days, the goods are to be confiscated and to be sold by
public auction. The sale is to be notified to local newspapers
or any other prescribed manner. The goods may he sold to co-
operatives. The sale proceeds will be given to the owners, less
the expenses of the railways.-Sec. 56 B to E.

EXERCISES
I. (a) What do you mean by a common carrier 0 (b) State the rights
and liabilities 0f a common carrier? (Pages 365, 368-370)

I AIR (1978) Supreme Coun 1491

 LAW RELATING TO CARRIAGE

2. What are the liabilities of a common· carrier? Is a common carrier

bound 10 deliver goods 10the consignee at the place of destination 0
(Page 369; Para 4, page 368)
3. State the liabilities of common carriers with reference to -leading
cases. (Page 369)
4. What arc Ihe liabilities of a private carrier in Indian Law 0
(Page 370)
5. How do you di5tinguish between common carrier and private
carrier? To what extent do Railways in India discharge the duties
of carriers? (Pages 366, 372)
6. What are the rights and liabilities of the Railway in India.
(Pages 372-377)
7. DISCUSS the rights and liabilities of common carriers. (Page 369)
8. Write notes on Common Carrier; Private Carrier; Gratuitous
Carrier; Carriers of Passengers. (Pages 365, 366, 370, 371)
9. Objective questions. Give short answers.
(1") Give one example of each of common <.:arrier and private carrier.
(Page 365)
(ii) Is the Post Office a common carrier? (Page 365)
(iii) "A common carrier has a lien in the goods carried for his
charges". True or False? (Page 361t)
 CARRIAGE BY SEA

LAW RELATING TO SEA CARRIAGE

Carriage of goods by sea from any port in India to any other
port, in or outside India, is governed by the Carriage of Goods
by Sea Act of 1925. This Act is based upon the recommendations
of the International confefeilcc on Maritime Law held in Brussels
in 1922. The conference drew up a draft convention for adoption
by the leading maritime nations of the world. The object was
to secure uniformity of laws a5 regards the rights and liabilities
of carriers by sea and the rules regarding bills of lading.
The Merchant Shipping Act of 1958 was passed with the
object of amending and consolidating the Indian law relating to
merchant shipping.

THE CONTRACT OF AFFREIGHTMENT

The contract to carry goods by sea is called the Contract
of Affreightmelll. The consignor (or his agent) and the shipowner
(or his agent), are the two parties to the contract. The consid-
eration paid for the carriage is called the Freight.
The contract of affreightment may be incorporated in a
formal document containing the terms of the agreement between
the parties. Such a document is called a Charter-Party. Some-
times, there is no formal document; the shipowner merely gives
a receipt for the goods and in the receipt (known as the Bill
of Lading) some of th/~s of the contract are written down.

~ARTER-PARTY
Definition
A Charter-party may be defined as an agreement in writing
for the purpose of hiring all entire ship or a part thereof for the
purpose of carriage of goods. The person hiring the ship or a
part of it is called the charterer.
Clsssifiution
The following types of charter-party are found

379
380 LAW RELATING TO CARRIAGE

,1. A charter-party for a particular period of time is called

a Time Charter.
2. A charter-party for a particular voyage is called a Voyage
Charter.
3. \The terms of the Charter-party may amount to a lease
or demise of the whole ship to the charter for a stated period.
[n this case, the charterer becomes for the time being the owner
of the vessel and the captain and the crew become his servants
during· the charter period) If the terms of the Charter-party do
npt amount to a lease or demise, the charterer only gets the right
to have his goods conveyed by the ship apd the captain and the
crew do not become his servants, although their services arc at
the disposal do the charterer for the purpose of carriage.

Terms of charter-party
A charter-party is deemed to contain all the tenns of the
contract between the charterer and the shipowner. The clauses
in a charter-p~rty usually deal with the following mattcrs :
I. Name of the parties and of the ship.
2. Nationality of the ship.
3. The class of charter-party, and its raling III the Lloyd's
Register.'
4. A statement on the location of the ship and the place of
loading ..
5. The shipowner's guarantee of fitness.
6. The manner in which the voyage is to be conducted.
7. The duties of the Master or the Captain.
8. The carrying capacity of the ship.
9. The liabilities of the charterer regarding freight etc.
10. The excepted perils i.e.. an enumeration of the circum-
stances under which the shipo\\ner will not be liable to pay
compensation for loss or damage to goods.
II. The terms regarding loading, unloading, lay days and
demurrage.
12. Circumstances under which the contract will be cancelled
and the penalties to which the parties may be liable for
non-fulfilment of the terms.

, See pages 349-350

 CARRIAGE BY SEA 38t

* B I L L OF LADING
Definition
A Bill of Lading is a receipt for goods delivered to a ship
for carriage. A bill of lading is used when the goods shipped
form only a part of the cargo of the ship.
Characteristics
A bill of lading has the following characteristics :
I. Signatllre : It is signed by the shipown~r or his agent.
Usually the captain of the ship, as the shipowner's agent signs
the bill of lading.
2. Evide11ce : The bill of lading is evidence of the contract
for the carriage of goods. Some of the terms may be written
down on the bill of lading. The Carriage of Goods by Sea Act
of 1925 provides that the following particulars must be incor-
porated in every bill of lading issued from an Indian port :
(i) The leading marks necessary for the identification of the
goods (such marks being stamped or otherwise shown
on the goods or on the cases .or packages)
(ii) the number of packages or pieces or the quantity or
weight as furnished by the shipper; and
(iii) the apparent order and condition of the goods.
3. Acknpwledgemel1t : The; ,bill of lading is prima facie
evidence of the receipt of the goods by the carrier.
4. Documelll of litle : The bill of lading is a document of
title to the goods covered by the bill. The ownership of the goods
can be transferred by endorsement and delivery of the bill of
lading. The shipowner is discharged from his liabilities by
delivering the goods to the person who produces the bill of
lading. But the shipowner is not bound to deliver the goods to
the holder of the bill of lading if there is any payment due for
the carriage of the ~oods or if the consignor, in exerci,e uf the
right of stoppage in transit. gives instructions not tn dcli\or. (The
Indian Bills of Lading Act. 1856)
Functions
A Bill of Lading. as explained above, has three important
functions viz., (i) it is an evidence of the contnu..:t of c,;arriage.
(ii) it is an acknowledgement of the goods from the carrier. and
(iii) it is a document of title to the goods.
382 LAW RELATING TO CARRIAGE

Examples
(i) A bill of lading was qualified by the words "weight or qualit)
unknown". Held. it was not a prima facie evidence of the quantity
shipped. New Chine.'e Antimony Co Ltd. v. Ocean Steamship Co.
Ltd.'
(ii) Orange juice in barrels was shipped. Some of the barrels were old
and defective, yet the shipowner gave a "clean bill of lading". Held,
thl;: shipowner was estopped from denying that the barrels were not.
in good order and condition. Bmwn Jenkinson and Co. Ltd. v. Percy
Dallon Ltd'
(iii) A bill of.lading contained a printed clause which stated that
"Contents" weight and value of goods unknown". There were 499
packages of Indian Polyethylene in six ply paper bags. There was
an admission by the Shipping Company thai (I) the goods shipped
were polyethylene (2) the qU!!!!!~ty and weight was mentioned in
the bill of lading, and (3) freight was charged on the bO'is of the
particulars supplied by the shipper. Held, the Company cannot
disclaim the Iiabilily and the company was liable for short delivery.
Union Carbide Lid. v. Jayami Shipping Co. 3
(iv) Where the bill of lading issued by a common carrier. owner of
vessel, stated that a certain party consigne-.d the goods to self or
to its agent at destination Calcutta, that party so referred to would
he deemed to have retained the possession and reserved the right
of disposal of the goods till the completion of the voyage. Great
India Trading Co. Pvl. Ltd. v. Angus Co, LId. and another. 4

IS THE BILL OF LADING A NEGOTIABLE

INSTRUMENT?
A bill of lading possesses some of the characteristics of a
negotiable instrument. It is a document of title and it can b~
transferred by endorsement and delivery. But it is not a true
negotiable instrument because of the following reasons :
1. It is not included in the definition of the term negotiable
instrument as given in the Negotiable Instruments Act. .
2. The transferee of a bill of lading gets only the rights of
the transferor of the instrument. If the title of the transferor is
defective, the transferee gets a defective title. But in the case
of a negotiable instrument a bonafide purchaser for value without
notice of defect, becomes a holder in due COUrse and gets a good
title in cases where the title of the transferor is defective.

'( 1917) L.R. 2 K.BD. 664 2(1957) 2 Q.B.D. 621

3 (1970\ 7~ C.W.N. 'AIR (1983) Cal 408

,.
 CARRIAGE BY SEA 383

DIFFERENCES BETWEEN A CHARTER PARTY AND

A BILL OF LADING
I. A Charter Party is a formal document by which the
charterer enters into a contract· with the shipowner for the hire
of the whole or part of the ship. A nill of Lading is only a
receipt for goods taken on board a slIp.
2. In a Charter Party the ship can oe hired for fixed period.
The captain and the crew then become the servants of the
charlera In a bill of lading the cargo-owner is not the servant
of the captain and the crew.
3. A Charter Party contains all the terms of the contract
between the Charterer and the shipowner. A 3ill of Ladini'may
or may nol contain any of the terms. But it is evident that there
- is a contract for the carriage of goods by sea. (aftreightmcnt).
4. A Bill of Lading is a document of title (the o\'I,ership
of the goods covered by the bill can be transferred by transferring
the bill). A Charter Party is not a document of title to any goods.
5. A Bill of Lading possesses some of the featllres of a
negotiable instrument. For example, it can be transferred by
endorsement and delivery. A Charter Party does not possess any
of the characteristics of a negotiable instrument.
6. The stamp to be affixed in a Bill of Lading is much lower
than in a Charter Party.

IMPLIED WARRANTIES
English Law
Under English common law there arc three implied under-
takings by the carrier in all contracts of affreightment
I. The ship is seaworthy. It is the duty of the shipowner
to make the ship fit for the contemplated voyage.
2. The ship s[,all be ready to proceed upon and complete
the voyage with reasonable despat"h.
3. The ship shall complete the voyage in the usual customary
manner and without any unnecessary deviation from the usual
route.

Indian Law
The Marine I"surance Act, passed in India in 1963, contains
provisions regardinj; the warranty of seaworthiJless, permissible ,
 384 LAW REl.ATING TO CARRIAGE

deviations etc. and ihe' effects of their ·breach. (See Book VI.
Ch. 3, pp. 429-430)

DUTIES OF A CARRIER BY SEA

The Carriage of Goods by Sea Act of 1925 imposes the
following duties on the carrier of goods by sea from an Indian
port :
I. The carrier shall be bound, before and at the beginning
of the voyage, to exen;.;_ ~ due diligence to,.
(a) make the ship se.worthy;
(b) properly man, equip and supply the ship;
(c) make the holds, refrigerating and cool chambers, and all
other parts of the ship in which goods are carried, fit and safe
for their reception, carriage and preservation.
2. The carrier shall properly and carefully load, handle, stow,
carry, keep, ~are for, and discharge the goods carried.
3. After'receiving the goods in his charge, the carrier or the
master of agent of the carrier shall, on demand of the shipper,
issue to the shipper a bill of lariing containing the prescribed
particulars.
The Merchant Shippi~g Act of 1958 provides for the
adoption of various measures for the safety of life and cargo
at sea. In 1966, the Act has been amended so as to include therein
the provisions of the International Convention for the Safety of
Life at Sea signed in London 'in June, 1960. [Examples: Provision
of radio telegraph; special rules regarding nuclear ship,. etc.}

LIABILITIES OF A CARRIER BY SEA

The Carriage of Goods by Sea Act of 192illays down the
following rules regarding the liahilities of a carfier of goods by
sea from an Indian port :
I. Any clause in the contract of affreightment by which the
carrier is relieved from lhe liability to pay c2_mJ>~nsation. forJos~
or dam~ge ari~il:g from r:egligence, fa~1t or failure to perform
• thi: duties prescribed by the Act, is void and inoperative.
"-Z:--.["c"sllipowner is nof liable for damage arising from
unseaworthiness of the ship unless such damages are due to ~
fai lure to perforo! the statutory duties of the shipowner. Thus
in India the liability to keep the ship seaworthy is not absolute.
 CARRIAGE BY SEA 385

Whenever damage is caused by unseaworthiness, the burden of

proving the exercise of due diligence is on the shipo,!"ner.
3. The carrierj~ Il()tresponsible_ f()r Joss or damage arising
from tfie following causes·: neglect or default of the servants
of thecarrier in the navigation and management of the ship:
f~nless caused by the fault or privity of the carrier; perils,
dangers and accidents of the sea or other navigable waters ;. act _
of God; 'acCor war; act of public enemies; arrest or restraint
of princes, rulers or people or seizure under legal process;
quarantine restrictions; act or omission of the shipper or his'
agents; strikes or lockouts; riots or civil commotions; saving
or anempting to· save life. or property at sell; inherent ~efect in
the goods; insufficiency in packing; insufficiency or inadequacy
in making' latent defects in the goods not discoverable by due
diligence ; ia~y 'other cause arising without the actual fault or
privity of fu,; carrier.
4.(The carrier is not responsible for any loss or damage to
goods ~xceeding £ 100 or its equivalent unless the 'nature and
value of such goods have been declared by the shipper and
inserted. in the bill of lading) . .
S. A carrier is at liberty to surrender in whole or in part
all or any of his rights, and to increase his responsibilities and
liabilities, provided such surrender or increase is embodied in
the bi]1 of lading issued to the shipper.
6.\Jhe carrier and the ship shall be discharged from all
liability for loss or damage unless suit is brought within one year
of the delivery of the goods or the date when the goods should
have been delivered) ,

CERTAIN TERMS
The Shipowner's Lien
As a carrier, the shipowner has a lien on tne goods carried
for the freight and other charges. The lien can be enforced by
not parting with the goods until his dues are paid. There is no
lien when the freight has been paid in advance or when freight
has been agreed to be, paid after delivery of the goods.
Maritime Lien
A maritime lien is a right which. specifically binds a ship,
including its machinery, furniture, cargo and freight. for the
Commercial Law - 25
386 LAW RELATING TO CARRIAGE

payment of a claim based upon maritime law. Maritime lien is

possessed by the following persons-seamen for their wages;
the holder of a bottomry bond for his dues; claim~nts for
damages in caseS of collision with the ship concerned; persons
who rescue ships or property from the sea .
. A maritime lien is not a possessory lien, e.g., it can ~e
exercised even without possession by filing suit in the appropriace
court. In cases of maritime lien the' rule is that the last in tim.,
ranks first in payment.
Mate's Receipt
When goods are delivered to a ship for carriage, a receipt
for it is sometimes given by the Mate, who is an officer of the
ship under the captain. The Mate's receipt can be subsequently
exchanged for a regular bill of lading. -
Clean Bill of LadiDg
When it is stated in the bill of lading that the goods are
in good order and condition, the bill is said to be a Clean Bill
of Lading. When a clean bill of lading has been issued, the
shipowner is estopped from claiming later on that the goods were
in a bad condition. (See cases in p. 381)
Tbrougb Bill of LadiDg
Sometimes goods have to be carried partly by sea and partly
by land. A bill of lading which covers both carriages is called
a Through Bill of Lading.
DeviatioD
Deviation means departure from the usual and customary
route or from the route agreed upon in a charter-party. Deviation
is permitted to avoid the perils of the sea. Under Indian law
deviation is permitted for the purpose of saving life and property.
Damages can be claimed for unnecessary or unauthorised devia-
tion. Charter-parties usually contain a clause regarding deviation.
(See under "Voyage" in Book VI, Ch. 3)
Perils of tbe Sea
This term includes the dangers (apart from the ordinary
actions of the wind and waves) which have to be faced in course
, CARRIAGE BY SEA 387

of a sea voyage. Examples: storms; collision with a sunken rock

or an iceberg; entry of water through a hole made by rats or
a sword fish etc. A shipowner is generally exempted from liability
when damages are caused by Perils of the Sea.
Excepted Perils
A charter-party usually specifies the circumstances under
which the shipowner is not liable for loss of, or damage to goods.
These circumstances are known as the Excepted Perils.
Examples : acts of God; action of the enemies of the State;
perils of the sea, etc.
Barratry
Barratry means wilful act of damages done by the crew in
course of a mutiny or fight with the captain and the shipowner
or among themselves.
Jett\son
To jettison means to throw out. Goods may be jettisoned
during a voyage in order to avoid the danger of the ship sinking
or heeling during storms. Goods may also be jettisoned if they
are dangerous.
Salvage
When some persons save a ship or any of its appliances or
cargo from shipwreck, capture (by enemies or pirate) or loss from
any other cause, they become entitled to a reward. The reward
is called Salvage. The Salvors, i.e., the persons saving the
property, have a maritime lien on the ship, cargo and freight for
the reward. The amount of salvage is generally determined by
the courts, but the parties may settle the amount among them-
selves. .
Primage
The charterer usually gives some extra remuneration to the
captain of the ship, calculated at a fixed percentage of the regular
freight. The extra remuneration is a reward to the captain of the
ship for his care and diligence. It is called primage.
Freight
Freight means the consideration paid to the carrier, by the
shipper for the carriage of goods. Freight is payable only if the
388 LAW RELATING TO CARRIAGE

goods are delivered in accordance with the terms of the contract.

When the goods are lost the carrier is not entitled to reco\'er
the freight, even though the loss might have occurred under
circumstances which exempt the carrier from liability for the loss.
But delivery of the goods in a damaged condition does not
prevent recovery of the freight, unless the damage is so great
that the nature of the goods is completely altered.
By agreement the freight may be payable in advance.
Advance Freight can be retained by the carrier if the .goods arc
lost by an excepted peril.
When a charterer agrees to pay a lump slim for the lise of
a ship, irrespective of the amount of cargo loaded, it is called
a Lump Sum Freight.
The shipper and the carrier may agree that if the cargo is
delivered at a place other than the place agreed upon, the amount
of freight will be charged in proportion to the distance 'actually
covered. Such a freight is called a Pro Rata Freight.
If a shipper fails to load the amount of cargo he promised,
he is liable to pay damage to the shipowner for the unfilled space.
This is known as Dead Freight.
Freight is ordinarily payable by the person with whom the
shipowner has entered into the contract of affreightment. But by
agreement, freight may be payable by some other person, e.g..
the consignee.
Dunnage
Dunnage is any light material wedged between the cargo to
keep it from rolling when stored. Grass is a kind of Dunnage .
. Union of India v. Ratilal Jaddavji. I
Lay Days
The term "lay days" means the days allowed for loading or
unloading a ship. The number of days to be allowed as lay days
is fixed by agreement and is usually mentioned in the charter-
party where there is one. Where there is no agreement as regards
lay days, a reasonable time is 'given for the purpose. Lay days
begin from the time when the ship arri\'es at the place agreed
upon and the shipper has notice of it.
1(1971) 75 C.W.N. 634
 CARRIAGE BY SEA 389

Demurrage
• • If the loading or unloading is not completed within the lay
days agreed upon, the carrier is entitled 10 damages. Such
damages are called Demurrage. Demurrage is usually calculated
upon the number of days the ship is detained beyond the agreed
lay days or reasonable time. Railways in India charge dem'urrage
if goods are not loaded or unloaded within the time mentioned
in the Railway Receipt.
Bottomry and Respondentia Bonds
The shipowner or the captain of a ship may find it necessary
to borrow money on the security of the ship or the cargo or the
freight. A bond by which the cargo only is pledged for the
repayment of the money, is called Respondentia. A bond by which
the ship alld the freight are pledged is called a Bottomry Bond.
(The term 'bottomry' comes from the word' bottom', which
means the keel of the ship and therefore stands for the whole
ship). The moneys due on a Bottomry or Respondentia Bond are
payable only if the ship reaches its destination safely. The rate
of interest is therefore very high generally. If there are more than
one Bottomry Bonds, the later bondholders get priority over the
earlier bondholders.
Particular Average Loss and General Average Loss
Goods may be lost in course of a voyage (thrown overboard
or destroyed) by accident or by deliberate intent. In some cases
the loss has to be borne by. the owner of the goods lost. In some
cases the loss of the owner has to be made up by contributions
from the owners of the remaining cargo. The first type of loss
is called a Particular Average Loss. The second type of loss is
called a General Average Loss.
Cases of Particular Average Loss: When a particular article
is lost by accident, the owner must bear the loss. For example,
if a boat belonging to the ship is lost during a storm the loss
falls on the shipowner and he cannot claim contribution from
the cargo-owners. Similarly if an article is thrown overhoard
because it is dangerous, the loss must be borne by the owner.
These are cases of particular average loss.
Cases of General Average Loss : When goods are thrown
overboard or destroyed in order to save the ship or protect the
390 LAW RELATING TO CARRIAGE

adventure undertaken, it is called a general average loss.

Example : goods thrown overboard in order to make a ship
lighter during a storm so that it will not sink. The loss of the
owner of the goods in all such cases must be compensated by
contributions from the other cargo-owners. The following
cond itions must be satisfied before a general average contribution
can be claimed :
I. There must have been a common danger. The danger must
be real and not an imagined danger.
2. The danger must not have been due to a fault of the goods
destroyed. A horse which turns mad in course of the voyage is
a common danger but if it is destroyed, its owner cann6t claim
contribution.
3. The sacrifice of the property concerned was voluntary and
responsible.
4. Owners of cargoes which are not saved, cannot be called
upon to contribute.
The fixation of the ainount to be contributed by each cargo-
owner is a complicated process. It is done by experts known as
Average Adjusters. It is usually provided in the contract of
affreightment that the adjustments of general average loss wilt
be done according to a set of rules known as the York-Antwerp
rules. These rules were drawn up in international conferences
held in York, Antwerp and certain other places. If the contract
of affreightment does not contain any such provision, the
adjustment is done according to the law of the country where
the adjustment is m a d e . · -
EXERCISES
I. What is a Charter Party? Mention the usual terms in a Charter
Party. (Pages 379-380)
2. Distinguish between a Bill of Lading and a Charter Party.
(Page 383)
3. What are t~e 'Warranties implied in a Charter Party ?(Page 38~)
4. Is the Bilt of Lading a "negotiable instrument"? (Page 382)
5. Write not~s on : General Average Loss; Particular Average Loss;
Respondentia and Bottomry Bonds; Excepted Perils; Charter
Party; Perils of the sea; Salvage; Deviation; Demurrage.
(Pages 385-390)
6. Obj ect ive Question:
(a) . What is a Charter Party? (Page 379)
 CARRIAGE BY AIR

LAW RELATING TO AIR CARRIAGE

Application
The Carriage by Air Act, (Act no. 69 of 1972) was passed
with objectives of getting power to apply the rules contained in
the Warsaw Convention as amended by the Hague Protocol also
to non-international carriages subject to exceptions, adaptations
and modifications.
Convention
This is a set of rules drafted and agreed in an assembly of
delegates or representatives of different States, for the purposes
of regulating a subject. In air carriage several rules (or the
convention) were adopted in the Treaty at Warsaw (1929) and
Hague (1955).
Warsaw Convention
The law relating to carriage by air in India was based upon
a draft convention drawn up in the international conference held
in Warsaw in 1929. The Warsaw Convention was given effect
to in India by the enactment of the Indian Carriage by Air Act,
1934. The provisions of that Act were extended 10 domestic
. carriage. subject to certain exceptions, adaptations and modifi-
cations, issued by a notification On I st March, 1964.
Hague Protocol
A diplomatic conference under the auspices of Internation..1
Civil Aviation Organisation was held at Hague in September,
1955 which adopted a protocol to amend the provisions of the
Warsaw Convention. The Hague Protocol was opened for sig-
nature on' 28th September, 1955, and came into force between
the ratifying States on 1st August, 1963.
High Contracting Party
This means those parties (that is representatives of the states)
who attended and were the signatories to the convention of

391
 392 LAW RELATING TO CARRIAGE

Warsaw Convention and the Protocol of the Hague Convention-

Rule 1(1) and' (2), 2nd Schedule, Protocol of the Hague
Convention,
Fifty-seven countries have already ratified in Hague Protocol
and passengers travelling between those countries were ensured
of the higher limit of compensation.
International Carriage by Air. (See p. 394)

THE DOCUMENTS OF CARRIAGE

The Act of 1972 provides that certain documents are to be
issued when goods and passengers are carried by air. They are
as follows :
/'

~ :9"'" Passenger Ticket .. ..

.' Whenever a passenger IS camed, he must be given a ticket
arid the ticket must contain the following particulars; the place
and date of issue; the names of the places of departure and
destination; the agreed stopping places and their changes; the
name and address of the carrier, and a statement that the carriage
is subject to the provisions of the Act of 1972 and to its
Scjedules.
ibe Luggage Ticket or Baggage Cbeck
'"'-...J
For all luggages other than personal goods in charge of the
passenger, a luggage ticket must be issued. The luggage ticket
mllst contain all the particulars necessary to be included in a
passenger ticket and in addition mU,St mention, the number and
weight of the packages and a statement that the luggage shall
be delivered to the holder of the luggage ticket
The Air Consignment Note or Air Waybill
Whenever goods are carried, the carrier can insist .upon the
consignor making out three copies of a Note or Waybill
containing the following particulars; the place and date of its
issue; the places of departure, destination and stoppages; the
names and addresses of carriers; the names and addresses of
the consignor and the consignee; the nature of the 'goods,
including a itatement of the number of packages, the method
of packing, their weight, quantity, volume and dimensions and
 CARRIAGE BY AIR 393

the apparent condition of the goods; the amount of the freight

and the persons liable to pay it; the period of the carriage and
the ro'ute ; and a statement that the carriage is subject to the rules
contained in the Act.
The Air Consignment Note or Air Waybill to be issued in
triplicate. One copy is to be kept by the carrier: one copy signed
by both the carrier and the consignor is to accompany the goods;
and the third copy is to be kept by the consignor. The consignor
is responsible for the correctness of the particulars in the Note
and is liable to pay ~ damages. if any, arising from incorrect
statements.
"The air waybill is prima facie evidence of the conclusion
of the contract. of the receipt of the cargo and of the conditions
of carriage."-Rule II( I). 2nd Schedule.
"The statements in the air waybill relating to the weight,
dimensions and packing of the cargo, as well as those relating
to the number of packages, are prima facie evidence of the facts
stated; those relating to the quantity, volume and condition of
the cargo do not constitute evidence against the carrier except
so far they both have been, and the contract of carriage, the
consignor has the right to dispose of the presence of the
consignor, or relate to the apparent condition of the cargo."-
Rule 11 (2), 2nd Schedule.
See cases on Bill of Lading, p. 381.

RIGHTS AND DUTIES

Consignor
The consignor may withdraw the goods from the cusiody
of the carrier at the place of departure or destination or at any
intermediate station. He may change the name of the consignee.
He cannot however exercise any of these rights in such a way
as to prejudice the interests of the carrier. The consignor must
also pay all necessary expenses.
Consignee
The consignee is entitled to take delivery of the goods at
the place of destination. If the goods are lost or do not arrive
at the place of destination within seven days of the date of
delivery, he can enforce his rights under the contract of carriage.
394 LAW RELATING TO CARRIAGE

INTERNATIONAL CARRIAGE BY AIR

Definition
Under the carriage by Air Act of 1972, 'International
Carriage' means, 'Carriage when the place of departure and the
place of destination of an aircraft are situated within the territory
of two high contracting parties or within the territory of a single
high contracting party if there is agreed of stopping place within
the territory subject to the sovereignty suzerainty, mandate or
authority of another power."
Other features of international carriage are stated below :
I. The rules of the Carriage by Air Act of 1972 apply to
baggage or cargo performed by aircraft for reward.
2. The rules also apply gratuitous carriage by aircraft
performed an air transport undertaking.
3. "Carriage to be performed by several successive air
carriers is deemed, for the purposes of these rules, to be one
undivided carriage if it has been regarded by the parties as a
single operation."-Rule 1(4), 2nd Schedule.
4. "These rules apply to carriage performed by the State or
by legally constituted public bodies provided it falls within the
conditions laid down in rule I, (above). These rules shall not
apply to carriage of mail and postal packagcs."-Rule 2( I) and
(2), 2nd Schedule.
When liable
The Protocol of Hague Convention provides that the carrier i
by air is, subject to certain rules mentioned below, liable to pay
damages in the following cases : .
I. Death or bodily injury suffered by a passenger, if the
accident which caused the injury occurred during' carriage or
during embarking or disembarking.
2. Destruction or loss of, or damage to, any registered
luggage or any goods during the time they are in charge of the
carrier, on the plane, in the aerodrome or elsewhere.
3. Delay in the carriage of passengers, luggage or goods.
Rules limiting the liability of the Carrier
In International carriage by Air, the carrier is not liable to
pay any damages in the following cases :
I. If he proves that he and his agents have taken all necessary
 CARRIAGE BY AIR 395

measures to avoid the damage or that it was impossible for him

or them to take such measures.
2. If he proves that there was contributory negligence on
the part of the injured persons. In this case the Court m~y, in
accordance with the provisions of its own law, exonerale the
carrier from liability either wholly or partially.

Liability in case Df de~

(Sec. 5, Carriage by Air Act, 1972). Notwithstanding any-
thing contained in the Fatal Accidents Act, 1855 or any other
enactment or rule of law in force in any parts of India. the rules
contained in the First Schedule and in the Second Schedule shall
in all cases to which those rules apply, determine the liability
'of a carrier in respect of the death of a passenger.
The liabiliry shall be enforceable for the benefit of such of
the members of the passenger's family as sustained damage by
reason of his death.
The expression "member of a family" means wife or
husband, parent, step-parent, grand-parent, brother. sister. half-
brother. half-sister, child, step-child, and grandchild)<The ~pres­
sion includes illegitimate persons and adopted persons.})
The amount recovered in any such action. after deducting
any costs not recovered from the claimant, shall be divided
between the persons entitled in such proportion as the court may
direct.
Qua~tity Df Damages
v The maximum amounts of damages payable by the carrier,
as limited by the Act, are stated below :
(i) Death or injury of a passenger-I,25,OOO francs (by the
Warsaw Convention as in the First Schedule to the Act)
and 2,50,000 francs (by the Protocol of Hague, as stated
in Second Schedule to the Act).
U,) Luggages in custody of a passenger-up to 5000 francs.
(iiI) Goods of a passenger delivered to the air carrier-250
francs per kg.
(iv) Franc means 651 milligram of gold.
(v) Where the liability of the carrier is limited to 2,50,000
francs, the court may award it in a form of periodical
payment, with equivalent capital value of the above.
396 LAW RELATING TO CARRIAGE

The ~arrier may, by a special agreement; increase his liability

but cannot reduce it.

INTERNAL CARRIAGE BY AIR

The Carriage by Air Act of 1934 is applicable to international
air carriage (summarised above) and not to internal carriage by
air. The Government of India extended the law of international
carriage by air to the internal carriage by air by notification with
the effect to I s~ March, 1964. Prior to the above date, the
liabilities of the internal air carrier are still governed by the
Common law. According to that law, the internal carrier by air
may, by special agreement, reduce or exclude his liabilities.
Before the notification of I st March, 1964, came into force,
the plaintiff had no remedy for his claim even if there was
negligence on the part of the carrier. Indian Airlines Corporation
v. Jotha/i Maniram. I Mukul Dulla Gupta v. Indian Airlines
Corporatioll. 2 When. the deceased had by a contract during his
life time excluded himself from the right to claim damages, his
heirs or personal representatives were not entitled to claim
damages even under the Fat~l Accidents Act, 1855. Indian
Airlines Corporation v. Madhuri Cho.wdhuri and others.)

THE PROCEDURE FOR REALISING DAMAGES

The person entitled to damages must complain to the carrier
within 7 days of the date of delivery in case of loss of or damage
to luggage, 14 days in a similar case regarding goods, and 21
days in cases where damages are claimed for delay in transit.
Suits may be filed in the court having jurisdiction over the
place of destination· or over the place of business or residence
of the carrier. In case of the death of a passenger, the suit. for
compensation may be filed by his legal representative.
Suits must be filed within two years of the date of arrival
of the carrier at the place of destination or the date on which
it should have arrived or the date on which the carriage stopped ..
When there are successive carriages with different carriers
covered by the same documents or carriages :

I AIR (1959) Mad. 259 1 AIR (!962) Cal. 311

3 AIR (1965) Cal. 252
 CARRIAGE BY AIR 397

(0) actions for damages to passengers arC to be brought

against the carrier at the time of the accident, unless
otherwise agreed; and
(b) in actions for damage to luggage and goods, the
consignor is to sue the first carrier; the consignee, the
last carrier; but passengers may sue all the carriers.

EXERCISES
I. Write notes on : Warsaw convention; Hague Protocol; The
Passenger Ticket; The Luggage Ticket; Baggage Check; The Air
Consignment Note; Air Waybill. (Pages 391-392)
2. State the rules regarding the liabilities of the chrrier by air under
irftcmational carriage and internal carriage. (Pages 394-397)
 BOOK VI
THE' LAW OF INSURANCE

CHAPTER I Principles of Insurance 4011 415

Advantages and The Object of Insurance 400 ; The COil''''
ofInsurance 400; Good Faith 401 ; Ir~c.;mity 403; Insur.""
Interest 404; Explanation of Certai. Tenns 406; Types ot
Insurance 407 ; The Insurance Act 407 ; Insurance and Wager
408; Obligations of the Insurer 409 ; Causa proxima 409 ;
Rights of Insurer 410 ; Contribution 410 ; Subrogation 410 ;
Duties of the Policy-Holders 411; Rights of the Policy-
Holders 412; Double Insurance 413; Reinsurance 414;
Distinction: Double Insurance and Reinsurance 414.
CHAPTER 2 Life Insurance 416 - 428
What is Life Insurance? 416; Difference between Life
Insurance and Property Insurance 416; Types of Life
Insurance Policies 417; Surrender Value 418 ; Assignment
of Life Policies 419 ; Nomination by the Policy-Holder 420 ;
Difference between Nomination and Assignment 422 ; Effects
of Suicide 423 ; The Payment of Claims 424 ; Proof of Age
425; The Life Insurance Corporation Act, 1956 425.
CI\APTE1I 3 Marine Insurance 429 - 445
Application 429; Differences between Mar-ine and Life
Insurance 429; Difference betwe<;n Marine Insurance and
Fire Insurance 430 ; Definitions 430; Features and Requisites
of a Marine Policy 431 ; Types of Marine Insurance Policies
432; Insurable Interest 434; Measure 9f Insurance Value
435 ; Disclosure and_Representations 435 ; The Policy 437 ;
Construction of Tenns in Policy 438 ; 'The Lloyd's Policy
437 ; Warranties in a Contract of Marine Insurance 440 ; The
Voyage 442 ; Assignment of Policy 443 ; Liability of Insurer
444; The Premium 444; Losses 444.
CHAPTER 4 FIre and Otber Insurance 446-450
Fire Insurance 446; Characteristics of Fire Insurance 446 ;
Types of Fire Policies 448; Miscellaneous Insurance 449 ;
Insurance 'Against Personal Accidents 449; Burglary
Insurance 450 ; Fidelity Insurance 450 ; Motor Car Insurance
450 ; Insurance for Workmen's Compensation 450 ; The All
In One Policy. 450.

399
 CD PRINCIPLES OF. INSURANCE

THE RATIONALE OF INSURANCE

The advantages and the objects of Insurance are as follows
I. Covers risk : Insurance is a method of eliminating or
reducing risk. By insurance a person can protect himself (and
his dependants) from loss arising from future uncertain events
like fire, accident or p.arl} death.
2. Small loss : Insurance converts an ·uncertain risk into a
certain and ascertained sum of money. A ship going out to sea
mayor may not be lost. If it is uninsured and is lost, the entire
loss will fall on the owner. If it is insured and is lost, the owner
will recover the value of the ship from the insurer but he has
to pay to the' insurer a certain sum of money called the premium.·
In case the ship is not lost the premium paid is a 'loss'. But
this loss is small as compared to the loss that will· be incurred
if the ship is sunk. The premium is considerably less than the
value of the ship which is insured. Thus by insurance a person
exchanges an uncertain heavy loss for a certain small loss. This
is the general principle on which insurance contracts are based.
3. Small premium: As regards the insurer, he can undertake
the risk for a small premium because all the ships going out to
sea arc not lost. The insurer knows that he will not have to pay
all shipowners who insure their ships. There are statistical
methods of calculating how many ships are likely to be lost. The
insurer fixes the amount of premium on the basis of these
calculations. Therefore in the long run he makes a profit on the
risks that he undertakes. Thus insurance is advantageous to the
insurer and also to the insured.
4. Expansion of insurance business : The great advantages
of insurance have led in recent times to an enormous expallsion
of the volume of insurance business and the evolution of many
different. types of insurance. .
THE CONTRACT OF INSURANCE
~hltieII·
A Contract of Insurance is a contract between two parties
whereby one party, called the Insurer, agrees to p~y to the other

400

......
 THE LAW OF INSURANCE 401

party a certain sum of money on the happening of a specified

contingency, or agrees to indemnify the other party from losses
arising from certain specified events. The other party to the
contract, called the Insured or Assured, pays an agreed sum of
money, called the Premium, as consideration.

Characteristics
The characteristics of a Contract of Insurance are enumerated
below;
1. Essential requirements
A contract of insurance must fulfil all the essential require-
ments of a contract as laid down in the law of contract. Thus,
there must be a proposal and acceptance, the parties must be
capable of contracting, the object must not be illegal or immoral
etc.
f:xanrples :
(i) A contract of insurance is formed as soon as the insurer accepts
the premium or in any other way shows that the proposal to insure
has been accepted. Hindus/han Co~operati\'e Insurance .)'ocie(v v.
Shyamsundar. I
(ii) A contract of insurance will be concluded only when the party to
whom an offer has been made accepts it unconditionally and
communicates his acceptance to the person making the offer. Though
in certain human relationships silence to a proposal might convey
acceptance but in the case of insurance proposal, silence does not
denote consent and no binding contract arises until the person to
whom an offer is made says or does something to signify his
acceptance. Mere delay in giving' an answer cannot be construed
as an acceptance, as, prima facie, acceptance must be communicated
to the offeror. Similarly the mere receipt and retention of premium
until after the death of the applicant or the mere preparation of the
policy document is not acceptance. Life Insurance Corpora/ion of
~ /ya v. Raja J.'clgireddy Komahn'alli Kamba and others. ~

r." t:rood faith

A contract of insurance is a contract uberrimae fidei (i.e.,
one based on good faith). It is the duty of the insured person
to disclose all material facts con~erning the subject matter of
the insurance. The disclosure must be full and fai~ If a material

'(1952) 56 C.W.N. 4t8 'AIR (t984) Supreme Court 1014

Commercial Law _. 26
402 PRINCIPLES OF INSURANCE

fact is not disclosed, or if there ~ misrepresentation or fraud,

the insurer can avoid the contrac~
Mazerial fact : What is a material fact, depends on the
circumstances of the case. Generally speaking, a material fact
is one which atTects the nature or incidence of the risk. Any
fact which the insurer will take into account when considering
whether to accept the risk or not and any fact which has a bearing
on the amount of premium which the insurer will charge, must
be considered a material fact to be disclosed. Thus, an applicant
for a fire insurance policy must disclose all facts regarding the
susceptibility of the property (to be insured) as regards fire.
The insured or assured must disclose all facts which a
reasonable man would regard as material. Joel v. Law Union
Insurance Co. I
The disclosure of facts must be substantially accurate.
Misleading statements amount to a breach of duty. But
unimportant misstatements or omissions may be excused.
Dawson s Ltd. v. Bonnin. 2
Examples
(a) The applicant for an insurance policy was asked whether he had
applied to any other company for insurance and whether such
application has been accepted. He answered that he was insured
with two companies but failed to disclose that his application was
rejected by several other companies. It was held that there was
material concealment and the policy was set aside. London Assur-
ance Co. v. ,Yansel. 3
(b) The deceased, knowing that he had suffered from a heart disease,
stated in the proposal that he did not sutTer from any heart disease.
Held, that this was a statement on a material matter and that he
had fraudulently suppressed the fact which was material to be
disclosed and the insured knew the statements to be false when he
made them. Under the above circumstanc.es the insurer is entitled
to avoid the policy. Krishna Want; Pur; v. L.1.c. 4
(e) A person, aged about fifty-six years, died of heart failure within
two years of taking the insurance policy_ He was suffering from
carbuncle and diabetes. However, he failed' to disclose about the
said disease in his proposal of the insurance policy. Held, that, this
does not amount to misrepresentMion. Therefore the policy money
must be paid. Kamala Want; v. LI.C'

r (1908) 2 K.B. 863 2 (1922) A.C. 413

, (1879) II eh. D. 363 , AIR (1975) Delhi 19
'AIR (1981) All. 366.
 THE LAW OF [NSURANCE 403

The duty of disclosure exists at the time when the contract

of insurance is entered into. Material facts coming to the
knowledge of the insured subsequent to the contract need not
be disclosed.
Section 45 of the Insurance Act provides that no policy of
life insurance can be called into question by the insurer two years
after the date it was effected on the ground of misstatement unless
the insurer shows that such statement was pn a material matter
or suppressed facts which it was material to disclose and thai
it was fraudulently made by the policy-holder and that the policy-
holder knew at the time of making it that the statement was false
or that it suppressed facts which it was material to disclose.

3. Indemnity
Life insurance is a contingent contract. The money is payable
on the happening of a contingency (viz., death) the dale of which
is uncertain.
Other forms of insurance (e.g.. fire or marine) are contracts
of indemnity. The insurer in these cases promises to indemnify
the insured person against the consequence of fire, accident or
some mischance and misfortune. "The contract of insurance
contained in a marine or 'fire policy is a contract of indcmn ity
and of indemnity only, and that this contract _means that the
assured, in case of a loss against which the policy has been made,
shall be fully indemnified but shall never be more than fully
indemnified." Castel/ain v. Prestoll. l
Suppose that a house is insured against fire for Rs. 20,000.
It is bumt down but it is found that Rs. 15,000 will restore it
to its original condition. The insurer is liable to pay only
Rs. 15,000, unless otherwise agreed under the contract c)f
II1surancc.
But if the contract of insuranoe pro\ ides for the payment
of a fixed sum of money on the happening of an event (like fire,
accident or burglary) the contract is not one of indemnity. Thus
a fire, marine or accident insurance may, in particular cases, be
a contingent contract.
In the case of life insurance, the insurer is liable to pay
whatever sum is mentioned in the policy as being payable upon
I (1883) II Q.B.D. 390
404 PRINCIPLES OF INSURANCE

the contingency specified. Thus life insurance IS always a

contingent contract.
4. Insurable Interest
In every contract of insurance the policy-holder must possess
an Insurable lilterest. Insurable interest means some proprietary
or pecuniary (mone/ary) interest. The object of insurance is /0
protect the insurabl~·nterest. If there is no insurable interest there
can be no insurance X cannot insure Y's house. But if y's house
is mortgaged to X, has an interest to protect and he may insure
the house. A man cannot insure the life of a stranger but he
can insure the life of himself and of persons in whose life he
has a pecun iary interest. It has been held that for the purposes
of life insurance insurable interest exists in the following cases;
husband in the life of his wife and wife in the life of her husband;
parent in the life of the child if there is any pecuniary benefit
derived from the life of the child; creditor in the life of the
debtor; employer in the life of his employee; surety in the life
of the principal debtor; etc.
In the case of life insurance, insurable interest must exisl
at the time when the insurance is effected. The policy remains
good even if the insurable interest ceases to exist subsequently.
The assignee of a life policy need have no insurable interest
because when the policy was effected there was an insurable
interest.
In the case of fire or marine insurance, the insurable interest
must exist at the time when the claim is made. If this condition
is satisfied the insurer must pay the claim even if the policy-
holder had no insurable interest at the time when the contract
was entered into.
A contract of insurance entered into without any insurable
interest is a wagering agreement and is void.
Persons, who havc insurable interest in different types of
properties. are enumerated bClow.
(I) Immovable properties~w"ers : mortgagors and mort-
gagees; landlords and tenants; vendors and purchasers.
(2) Movable properties-owne,,: pledgors and pledgees:
bailors and bailees; carriers: rlll lien holders.
(3) Business-a shareholder has an insurable interest in his
share; an agent in his commission; a businessman in his stock-
in-trade and in his profits.
 THE LAW OF INSURANCE 405

(4) Ships-In marine insurance contracts the following

persons have insurable interest; owners; crew of the ship for
their wages; owners of cargoes; holders of bonumry and
resp,o~ntia bonds, etc,

\~mmencement of Risk
The. risk of insurer commences after tIie contraCt of insurance
is entered into, i,e., after the proposal to insure is accepted. (See
pp·;roy408) ,
~usa Proxima . ' .
TlTe insurer is liable only for 1I10s,e losses which directly or
reasonably follow from the event -insured against. The insurer
is not liable for remole consequences and remole causes, (See
p, Jl8)
,7(Payment of Premium
The policy-holder must pai the premium accorliing to the
terms of the contract, Subject 'to certain conditions, the policy
lapses if the premium is not paid,~(See p, 407)

8. Right to Contribution " ,..,

If a property isillsured by several. ins'lrers against the same
risk, the insurers 'llUsi share the burdel~ of payment in prop.ortion
to the amount assured by each. If anr of the insurers pays the
whole loss, he is enYitled to contribution from the other insurers.
(See p, 410)
, ,
~e Principle of Subrogation _. ,
_ In marine and fire insurance oo.ntract after the polic) -holder
is indemnified in full, the'insurer becomes entitled to the remnant
of the property insured an'd alI' fights and claims which the policy-
holder may have against third pafties, The insurer is subrogated
to the position of th~ insured, (See pp, 410-411)

~itigation o,f Loss

In case of accident and mischance, it is duty of the policy-
holder to take steps fo( reducing the loss as much as possible,
For example, when fire Occurs the policy-holder must safeguard
the remaining property.
[The items 5-10 are also discussed below in pp. 409-411]
406 PRINCIPLES OF INSURANCE

EXPLANATION OF CERTAIN TERMS

Certain tel"/lls, used in connection with contracts of insurance,
are explained below.
Insurer
The party that promises to pay money to or indemnifY the
other party upon t\"le occurrence of some specified event is called
the Insurer. [n marine insurance contracts the insurer is sometimes
called the underwriter. Life Insurance Corporation for life
insurance and the CorporatiO)lS set up by the Government for
general insurance are the Insurers in India.
Insured or Assured
The person who under a contract of insurance will receive
money or indemnity upon the occurrence of some specified event
. is called the insured or assured person. Since the contract of
insurance is incorporated' in. a document called the Policy, the
insured or the assured may also be called the policy-holder. The
term policy-horder includes an assignee from a policy-holder,
where such assignment- is absolute and indefeasible.
Insurance Policy,
The terms of a contract of insurance are usually written down
in a document known as the Insurance Policy. The policy is
stamped and signed by the insurer and handed over to the insured.
The' Policy is evidence of the fact of insurance. Except in cases
of marine insurance, it is not legally compulsory to issue a policy.
The terms of a contract of insurance (except a marine insurance)
can be proved by oral evidence. [tis, however, the general
practice in India to issue a policy after a contract of insurance
is entered into.
Risk
The dale of issue of the policy is not necessarily the date
from which the risk is covered. The risk altaches from.the time
the contract of insurance is entered into, i.e" the proposal is
accepted. The policy may be issued later. The production of the
policy is not a condition precedent to the recovery of the money.
The identity of the claimant and the fact of insurance may be
proved by oral evidence.
 THE LAW OF INSURANCE 401

Premium
The consideration payable by the insured person to the
insurer is called the Premium. Usually the consideration is a sum
of money but there is nothing in insurance law which prevents
the acceptance of consideration in any other form. The premium
may be a fixed amount or it may vary (increase or decrease)
according to circumstances agreed upon. The time of payment
depends upon agreement. Payments may be made month Iy,
quarterly or annually or by a single lump sum. The premium
has to be paid by a fixed date but usually the insurer allows
a certain number of days of grace beyond the agreed date. For
premia payable quarterly one month's extra time is usually given.
Ordinarily a policy lapses if the premium due is not paid within
the due time plus the grace period. But after a policy acquires
a surrender value (see below) non-payment of premium does not
involve lapse of the policy.
The amount of premium is determined by an actuarial
calculation of the risk involved.
Cover Note
The insurer may give a written acknowledgement stating that
(i) the proposal has been accepted, (ii) the first premium has
been received, and (iii) the regular policy will be issued later
on. The risk is covered immediately with acknowledgement. The
written acknowledgement is called a Cover Note.

TYPES OF INSURANCE
The three most important type of insurance are Life, Fire
and Marine insurance. In addition to these three, there are various
miscellaneous types of insurance, e.g., accident, motor vehicles,
burglary, etc. (See Ch. 4, pp. 446-450)
Formerly all types of insurance business were used to be
carried on by private insurers and companies. From January 1956,
life insurance has been nationalised. The objects and functions
of the Life Insurance Corporation have been detailed in Chapter 2.
All other types of insurance i.e., General·lnsurance has been
nationalised from 13th May, 1911.

THE INSURANCE ACT

The Insurance Act was passed in 1938. It contains certain
provisions regarding the laws of insurance, e.g., definition of
408 PRINCIPLES OF INSURANCE

insurer and insured person, proof of age, surrender value, etc.

These provisions have been discussed in these chapters. The Act
also contained laws relating to the constitution and management
of insurance companies in India. But insurance has been
national ised for Life and also General insurance. Therefore the
Insurance Act now has no effect regarding the constitution and
management of insurance companies in India.

INSURANCE AND WAGER

A contract of insurance appears to be similar to a wagering
contract. The policy money is payable on the happening of a
future uncertain event. [n the case of whole life insurance the
date of occurrence of the event on which the money is payable,
is uncertain. [n the case of fire, marine and other forms of
insurance the happening of the event upon which the money is
payable, is itself uncertain. [n an early case on insurance it was
oBserved that, "[nsurance is a contract on speculation". [Lord
Mansfield in Carter v. Boehn. '] But the modern view is that
insurance contracts are not speculative or wagering contracts. The
.points of distinction between a contract of insurance and a
wagering contract are mainly the following:
I. Insurable Interest: In an insurance contract there always
exists an insurable interest. In a wagering contract there is none.
2. Protection of Interest: In an insurance contract the object
is to protect an interest. In a wagering cqntract the object is to
gamble for money.
3. Indemnity : A contract of insurance is based on the
principle of indemnity, (excepting life and certain other
insurances). In a wager there is no question of indemnity because
it does not cover any risk.
4. Good Faith: A contract of insurance is based upon good
faith. [n a wager there is no question of faith·.
5. Scientific Calculation : A contract of insurance is based
upon calculation of risks and the premium payable. The amount
of risk and premium is calculated on actuarial principle. In a
wager there is no scientific calculation. It is a gamble only.
6. Public Policy: Wagering contracts are void because they
are considered to be against public policy. Insurance contracts
are considered to be in the public interest and are therefore valid.
'(1765) Sm. L.C. 546
 THE LAW Of INSURANCE 409

OBLIGATIONS OF THE INSURER

The obligations of the insurer are detennined by the terms
of the contract of insurance. The most important obligation of
the insurer is to pay the money due on the policy upon the
happening of the contingency specified in it. The liability to pay
is subject to the following conditions
1. Fulfilment of essentials
rhe insurer is liable to pay only if the contract of insurance
fulfils all the essential elements of a valid contract. If there is
non-disclosure of material facts or fraud the contract is voidable.
2. Commencement of risk
The risk of insurer commences after the contract of insurance
is entered into, i.e., after the proposal to insure is accepted. Mere
submission of a proposal to the insurer is not enough. The
insurance agent usually has no authority to accept a policy.
3. Causa proxima
The insurer is liable only for those losses which directly and
reasonably follow from the event insured against. The insurer
is not liable for remote consequences and remote causes. The
principle is expressed in the maxim, ""Causa proxima non remora
speclatur ".
E:wmples :
(i) A ship was carrying meat and was delayed on account of a severe
storm. The meat was damaged and had to be thrown into sea. The
court held that the loss of meat was not due to sea perils. Taylor
v. Dlinbar.'
(ii) A ship was,insured against losses resulting from collision. There
was a collision and the ship was delayed for a few days. Owing
to the delay a cargo of oranges in the ship became unfit for human
consumption. Held, the insurer was not liable for the loss because
the proximate cause of the loss was delay and not collision. Pink
v. Fleming. 2
(iii) A ship was insured against damage by enemy action. It was injured
by passing over a torpedoed Ship. Held, no damages were recov-
erable because the damages in this case were not due directly to
enemy action but to the fact that a sunken vessel lay at a particular
place. Wilham alld Co. v. North of Eng/and etc. Ass.:-

I (1869) 4 P.c. 206 2 (1899) 25 Q.B.D. 396

3(1917) 2 K.B. 527
410 PRINCIPLES OF INSURANCE

(iv) In the above case it was also held that when the enemy had purposely
sunk a vessel at the entrance of a port with a view to damaging
ships entering that port, any damage 'actually suffered by' collision
with such a vessel must be deemed to be directly due to enemy
action and the insurer must pay cumpensation.

4. Return of premia
Under certain circumstances the insurer is bound to return
the premia received, e.g., when the contract of insurance is set
aside on the ground of fraud by the insurer. If an insurance policy
becomes ,oid"
on the ground
, of non-disclosure of material facts
or fraud b~ the insure\! person, the premia are 1T0t returnable.

RIGHTS OF INSURER
The insurer has the following right :
.L The Payment of Premium
'fhe policy-holder must pay the prcmium according to the
term of the contract. Upon non-payment the policy lapses. In life
insurance contracts, after the premia have been paid for two
consecutive years, the policy acquires a surrender value and a
certain· proportion of the amount insured for is payable to the
policy-holder. (See p. 418)
2. The ,Right to Contribution
A particular prop~rty may be insured with two or more
insurers against the same risk. In such cases the insurers must
share the btirden of payment in proportion to the amount assured
by each. If anyone of the insurers pays the whole loss, he is
entitled to contribution from the other insurers.
Example:
A house is insured against fire for Rs. 20,000 with X and for Rs.
10,000 with r A fire occurs and the damage is estimated at Rs.
6,000. X and Y share the loss in the proportion of 20,000 : 10,000
i.e. 2: I, X will pay Rs. 4,000 and Y will pay 2,000. The policy·
holder can sue both X and r together or anyone of them. Suppose
that he sues X and recovers from him Rs. 6,000. X can claim
contribution from Y to the extent of Rs. 2,000.

3. The Principle of Subrogation

SubrogatiQn is a form of substitution. In marine and fire
insurance contracts after the policy-holder is indemnified in full,
 THE LAW OF INSURANCE 411

the insurer becomes entitled to the remnants of the property

insured and all rights and claims which the policy-holder may
have against third parties. The insurer is subrogated to the
position of the insured.
The principle of subrogation is based upon equity. If the
insurer pays the indemnity in full, he ought to get whatever
remains of the damaged property. Also, the policy-holder ought
not to get more than the value of the property because that will
enable him to make a profit out of the insurance.
The principle of subrogation applies only on payment of the
whole loss. In case of partial losses the principle does not apply.
The principle also does not apply in cases where the contract
of insurance is not a contract of indemnity.
Examples:
(i) P insured his house against fire with Q. Subsequently he entered
into a contract \\lith R for the sale of the house. Before the sale
could be completed the house was burnt and Q paid the full value
of the house to P. P then obtained from R the value of the house
as per the contract of sale with him. It was held by the court that
P must refund to Q he amount the obtained from R. Castellain v.
Preston. I
(U) A ship insured against total loss is sunk. The insurer pays the value
in full. If the ship is subsequently salvaged. the insurer is entitled
to the sale proceeds of the remnant, if any. The same rule applies
to goods.

4. No return of premiums paid

Tile Supreme Court has held that in case of fraud, the policy-
holder cannot claim the refund of the premiums paid. Milhoolal
Nayak v. L.l.C. 2, Sparenbory v. Edinburgh Life Insurance Co.:;

DUTIES OF THE POLICY-HOLDER

1. Disclosure
The policy-holder must disclose all material facts. The
statement of facts made by him in the proposal form must be
correct.
2. Premium
The policy-holder must pay the premiulll on the due dates.

1(1883) 11 Q.B.D. 380 , AIR (196:n Supreme Court 814

'(1912) I K.B. 195
412 . PRINCIPLES OF INSURANCE

3. Protection ~.

In the case of fire, marine, burglary and other forms of

insurance of property, the policy-holder must take reasonable
measures for the protection of the property. The duties of the
policy-holder in cases of such insurance are usually written down
in the policy and form part of the term and conditions of the
contract of insurance.
4. '\1iligation of loss
III case of accidents or mischance it is duty of the policy-
holder to take steps for reducing the loss as much as possible.
For example when fire occurs the policy-holder must safeguard
the burnt properties.
5. No commission
Under Section 41 of the Insurance Act of 1938, the policy-
holder is not allowed to receive any part of the commission
payable on the policy or any rebate on the premium. If he accepts
any such payment he may be punished with a fine which may
extend to Rs. 500.

RIGHTS OF THE POLICY-HOLDER

1. Payment
In case of life insurance, policy-holders or their heirs,
nom inees and assignees are entitled to receive the money
stipulated for in the policy on the happening of the specified
contingency. In the case of other forms of insurance, the policy-
holder is entitled to be indemnified for all losses sustained from
the peril insured against.
2. Assignment
The policy-holder is entitled to assign the policy, whereupon
the assignee becomes entitled to all the benefits of the policy.
(See eh. 2).
3. Bar to questions
After the lapse of two ye~rs from the date of contract, an
insurance policy cannot be questioned on the ground of any
misstatement unless such misstatement was fraudulent.-Sec.45.
Insurance Act.
 THE LAW OF INSURANCE 413

4. Documents
Under the Insurance Act of 1938, policy-holders are entitled
to get the following documents--<opies of the proposal and the
medical report; notice regarding default of premium; written
acknowledgement from the insurer of transfer, assignment and
nomination etc.
5. Surrender value
A life insurance policy does not lapse for non-payment of
premium after it acquires a surrender value.-Sec.113. (See p. 418)

~~ DOUBLE INSURANCE
~tion
frWhen the same risk and the same subject-1IIuller is insured
will\. more than one insurer, there is said to be double insuranc,.}
P. the owner of a house, insures it against fire for Rs. 30,00'0
. with X and Rs. 10,000 with Y. This is double insurance.)
Rules /
The following ru les apply in cases of douhle insurance:
I. Life-llo limit: In case of life insurance there may be
ony number of policies for any amounts. A man is entitled to
place any value he likes upon his life and therefore upon death,
all the policies are payable whatever the total amount may be.
2. Property--not more than actual loss: A person is free
to insure his property with any number of insurers. But in case
of loss occurring he will not be allowed to recover more than
the actual loss from all the insurers together. Thus if in the above
example the actual value of the house is found to be Rs. 20,000,
the insurers will pay, in case of total loss by fire, only Rs. 20,000.
This amount will be shared between the insurers in proportion
to the value of each insurer's policy. If anyone of the several
insurers pays the whole loss, he is entitled to contribution from
the other insurers.
3. No profit: The insured is never allowed to make a profit
out of a fire or any other mischance.
4. Trust: According to the Marine Insurance Act of 1963,
where the assured receives any sum in excess of the indemnity
allowed hy the Act he is deemed to hold such sum in trust for
the insurers, according to their right of contribution among
themselves.
 PRINCIPLES OF INSURANCE
414 /
j
~iOD
Reinsurance means the trallsfer of a part of the risk by the
insurer. lsuppose that a ship has been insured for Rs. 10 lakhsj
The insurer may feel that the risk is too heavy to be borne by
him alone. If so, he can transfer a part of the risk to another
insurer. '

Rights of reinsurers
I. Reinsurer is entitled to get a proportionate part of the
premlUllj,
2. Reinsurer gets the benefits of the conditions and terms
of the original policy.
3. Reinsurer is entitled to subrogation.
4. If for any reason the original policy lapses, the reinsurance
comes to an end.
Liabilities of the reinsurer
I. Reinsurer is liable to pay the portion of the risk transferred
to him.
2. Reinsurer is liable only to the first insurer because there
is no privity to contract between the insurer and the originally
insured person.

DISTINCTION,: DOUBLE ,INS.PRANCE ANIJ

REINSURANCE
I. If the same risk and the same subject is insured by the
policy-holder, it is called Double Insurance. ReinsuranCe means
the transfer of the part of the risk by the insurer.
2. In insurance of properties, if there are double insurances,
the loss will be shared by all the insurers. In case of life insurance
all the insurers are liable. In reinsurance, the reinsurer is entitled
to get a propurtionate part of the premium, and will be liable
for a proportion of part of the loss.
3. The reinsurer is liable only to the first insurer. In double
insurance each insurer 'IS ~iablc directly to the policy-holder.
4. Double insurance' is a method of assuring the benefit of
insurance. In case of Life insurance the insured may have any
number of policies and for any amount. Reinsurance is a method
of reducing of the risk of the insurer.
•
 ...
.. G
•
v."tJ '"",:ttldo
- THE LAW OF INSURANCE 415

EXERCISES
I. (a) Define a contract of insurance_ (b) Briefly describe different
kinds of contract of insurance. (Pages 400, 407, 408)
2. Is an insurance a contract? Give reasons for your answer.
(Pages 400-405)
3. "Insurance is a contract on speculation." Discuss.
(Pages 408-409)
4. What is meant by insurable interest? (Page 404)
5. Is a contract of insurance a wager? (Page 408)
6. A contract of insurance is not merely a gamble on an uncertain
future event. Explain. (Page 408)
7. Explain with illustrations : (tI) Insurable interest. (b) General
Average Loss. (e) Reinsurance. (Pages 404-405, 414)
8. (a) "Insurance is indemnity and indemnity only." Commrnt.
(Pages 403-404)
(b) "A contract of insurance is a contract uberrimae fidei". Explain.
(Pages 401-402)
9. Write short notes on (i) Double-Insurance, (i/) Reinsurance.
(iii) Subrogation. (Pages 413, 414, 410)
10. (a) What do you understand by 'insurable interest' in connection
with Life, Fire and Marine Insurance? (Page 404)
(b) Is a contract of insurance a wager? (Page 408)
11. Objective Question
(a) State whether the contract of life insurance is a contract of
indemnity. (Page 403)
(b) In what cases can a person effect an insurance on another's life?
(Page 404)
(e) What is re-insurance? (Page 414)
(iI) Define 'Fire Insurance'. (Page 446)
(e) Define 'Floating Policy'. (Page 433)
 LIFE INSURANCE

WHAT IS LIFE INSURANCE

~
J--'
. Definition,
"Life insurance busiress" means the business of effecting
contracts of insurance up, 'n human life. It includes,
(i) any contract wherety the payment of money is assured
'upon death (except death by accident only); or the
'happening of any contingency dependent on human life;
(ii) any contract which is subject to the payment of premiums
for a term dependent on human life;
(iii) any contract which includes' the granting of disability and
double or triple indemnity accident benefits; the granting
of annuities upon human life, and the guaranteeing of
'superannuation allowances.-Sec. 2( II), Insurance Act.

inl.ranee and property insul"ance,

Insurance differs fundamentally from other forms of

insurance. The points of difference can be summed up as
follows :
I. Life insurance is a contract depending upon human life.'
Most of the other forms of insurance relate to property.
2. In the insurance the liability of the insurer to pay the sum
assured arises upon death of the person concerned or the
attainment by him of a certain age. 'The event upon which the
money is payable is certain 10 occur but the date of occurrence
is uncertain. In other forms of insurance the peril insured against
mayor may not occur.
3. Life insurance is a contingent contract. The full amount
mentioned in the policy must be paid on the happening of the
contingency stipUlated in the policy. Other forms of insurance
arc usually contracts of indemnity and the insurer is only liable
to make good the actual loss suffered.
4. In life insurance. there must be insurable interest at the
time the contract of insurance is entered into. In fire and marine
insurance, insurable interest must exist at the time the loss occurs.

416
 LIFE INSURANCE 417

5. Life insurance contracts are long term contracts. Fire.

marine, accident and other forms of insurance are generally
entered into for one year subject to renewal at the end of the year.

TYPES OF LIFE INSURANCE POLICIES

There are various types of life insurance. The principal types
are described below.
Tbe Wbole Life Policy
A whole life policy is one under which a lump sum ofmone),
is payable upon the death of the assured to his heirs or nominees.
Tbe Endowment Policy
An endowment pel icy is one under which" lump sum of
money is payable to the a,sured upon his attaining a certain age,
or in the event of his dying earlier, to his heirs or nominees
upon his death. •
Policies, ,witb profit or witbout profit
In profit policies, the policy-holder gets the bonuses declared
from the profit of the insurer. The bonuses are paid on the
maturity of the policies.
The Joint Life Policy
. A Joint Life Policy involves the insurance of two lives
simultaneously. The policy money is payable upon the death of
anyone of the lives insured. If there is a joint life policy of
A and B, ihe money is payable upon the death of either A or
B. A and B may be husband and wife or partners in a firm.
Partners very often enter into this form of insurance. The
premium is paid by the firm. and money is payable 10 the firm.
Upon the death of any partner Ihe insurance money is used to
buyout the heirs of the deceased partner and the fiml goes on
with the remaining partners. If there were no insurance the heirs
of the deceased partner would have had to be paid out of the
partnership assets anit this might have Icd to the dissolution of
the firm.
Annuities
A~ annuity policy is one under whiCh the policy money is
payable iothe assured by monthly or annual instalments alier

Commercial Law - 27
418 THE LAW OF INSURANCE

he attains a. certain age. The assured pays premium up to a certain

age or (sometimes) a lump sum of money. The. insurer pays a
certain sum monthly or annually to the assured after he attains
a certain age. The usual object of annuities is to provide for
one's old age.
Limited Payment Policies
In some life policies Ihe obligation to pay premium ceases
after the assured attains a certain age. Such policies are called
Limited Payment Policies.
Miscellaneous Types
Insurance Policies may be effected for the purpose of the
education of children or the marriage expenses of daughters. The
insurer agrees to pay a certain sum for the purpose when the
children attain a certain age. Premiums are payable by the person
entering into the contract of insurance. If he dies before the
maturity of the policy no further premium is payable. Policies
of this type help the education and marriage of children in cases
of premature death of parents.

SURRENDER VALUE
Prior to the passing of the Insurance Act of 1938 non-
payment of premium at any time involved canc~lIation of the
contract of insurance and forfeiture of the premia paid. As this
involved considerable hardships, the section 1.13 of the Act
provides that a life insurance policy will not lapse for non-
payment of premiums if certain conditions are fulfilled. Policies
issued by the Life Insurance Corporation of India 'provide that
surrender value will be acquired if premiums have been paid for
at least two years or to the extent of one-tenth of the total number
stipulated for in the policy, provided such"one-tenth exceeds one
full year's premium. .
After premiums have been paid for the requisite period, the
policy acquires what is called a Surrender Value. The surrender
value is obtained by multiplying the sum assured by a fraction.
The premia actually paid is the numerator of the fraclion and
the premia payable is the denominator. Thus the surre~der value
~cars to the sum assured the same proportion as the premia paid
 LIFE INSURANCE 419

bears to the premia payable. The surrender value of bonuses.

declared before default. are to be added.
Example:
Suppose that X takes out an endowment policy for 15 years for
Rs. 15,000 and the premium payable is Rs. 1,200 per annum. He pays
premium for three years and then stops. The premium paid is
3x Rs. 1.,200 = Rs. 3,600. The premium payable is 15 x Rs. 1,200 =
Rs.18,000. The ratio between the two is Rs. 3,600"'" Rs. 18,000 =
115. The surrender value of the policy is 115 x Rs. I 5,000 = Rs. 3,000.
Surrender value of bonuses, already accrued, are to be added to this
figure.
If the conditions laid down for the acquisition of surrender
value are fulfilled the policy does not lapse. It becomes what
is known as a paid up policy. The insurer will pay, upon the
happening of the contingency mentioned in the policy, to the
assured or his heirs or nominee. the surrender value of the policy.

ASSIGNMENT OF LIFE POLICIES' -'r

In an old English case. A5hely v. Ashley. I it was observed
that life insurance policies are marketable eommoditieswhich can
be validly assigned. with Or without consideration, to persons who /
have no interest in the life insured. The principle, viz .. the (
assignability of life insurance policies, is accepted in modern
times and permitted by law.
The Insurance Act of 1938 contains the following rules
regarding assignment of life policies.-Sec. 38:

\. P roced u re
A transfer or assignment "f a polic) of life inslll"ancc.
\\hether \"ith or witlll'lut consideration, may be made only by an
endorsement upon the policy itself 01 by a separate instrum~llt.
,igned in either case by the transferor or by the assignor or 1)15
duly authorised agent and anested by at least one witness,
specifically setting forth the fact of transfer or assignment.

2. Notice
The transfer or assignment shall be biniling upon the insurer
after a notice in writing and endorsement on the instrument or
a certified copY,thereof is delivered to him.
I 11829) 3 Sim 149
420 THE LAW OF INSURANCE

J. Priority
In case of more than one assignment the priority of the claims
of the assigness shall be governed by the order in which the
notice to the insurer is delivered ..

4. Written acknowledgement
Upon the receipt of the notice, the insurer shall record the
fact of transfer together with the date and the name of the
as·signee. The insurer is also bound t.o give a written
acknowledgement of the receipt of the notice if the person giving
the notice or the assignee demands such acknowledgement and
pays a fee not exceeding Rupee one.
S. Recognition
From the date of the notice the insurer shall recognise the
assignee named in the notice as the only person entitled to benefit
under the policy. The assignee can, if necessary, sue without the
consent of the assignor.

6. Conditional assignment
Conditional assignments are valid. There may be an assign-
ment in favour of a person subject to the condition that it shall
be inoperative or that the interest shall pass to some other person
on the happening of a specified event during the lifetime of the
person whose life is insured.

7. Sun'i\'orships
There may be an assignment in favour of the survivors of
a number of persons. Bai Lakshmi v. Jas\I'anflal T Das. I

NOMINATION BY THE POLICY-HOLDER

Definition
The holder of a policy of life insurance on his own life may,
when effecting the policy or at any time before the policy matures
for payment, nominate the person or persons to whom the money
secured by the policy shall be paid in .the event of his death.
This is ,known as Nomination by the Policy-holder. The person
named is called the Nominee.

1(1947) Bom. 369

 LIfE INSURANCE 421

Rules
The Insurance Act contains the following rules regarding
nomination.-Sec. 39;

1. Procedure
The nomination may be incorporated in the text of the policy
or be made by an endorsement on the policy. In the latter case
the fact of nomination must be communicated to the insurer. A
written acknowledgement of such communication shall be made
by the insurer upon payment of a fee exceeding Rupee one.

2. Discharge from liabilities

The insurer is discharged from his liabilities under the policy
by paying to the recorded nominee or nominees. But if the policy
matures for payment during the life time of the insured the insurer
shall pay the money to the policy-holder. If the nominee or all the
nominees die before the policy matures the insurer shall pay the
money to the policy-holder or his heirs or legal representatives or
the holder of a succession certificate as the case may be.

3. Cancellation and change

A nomination can be cancelled or changed by a further
endorsement on the policy or by a will. The insurer will be bound
in such cases only after notice is given to him of the cancellation
or change.

4. Automatic cancellation
A transfer or assignment of a policy automatically cancels a
nomination (except an assignment to the insurer to secure'a loan).

Case Laws
A nominee is only an agent to T.eceive the policy money.
The money remains a part of the estate of the assured and is
distributable among his heirs. Rut if it appears from the language
used in the nomination that the assured intended to benefit the
nominee or to create tru<t in his favour, he is entitled to the
money not the heirs. Cleaver v. MUlUal Reserve Fund Lif..
Association. I

1(\892) 1 Q.B. 147

422 THE LAW OF INSURANCE

The law relating to nomination of life insurance has been

clarified and summarised by the Supreme Court of India in the
case of Sarbati Devi anli another vs. Usha Devi. I The judgement
is quoted below :
A mere nomination made under Section 39 does not have
the effect of conferring on the nominee any beneficial interest
in the amount payable under the life insurance policy on the death
of the assured: The nomination only indicates the hand which
is authorised to receive the amount, on the payment of which
the insurer gets a valid discharge of its liability under the policy.
The amount, however, can be claimed by the heirs of the assured
in accordance 'with the law of succession governing them.
The summary of the relevant provisions of Section 39
establishes clearly that the policy-holder continues to hold
interest in the policy during his lifetime and the nominee acquires
on sort of interest in the policy during the lifetime of the policy
holder. If that is so, on the death of the policy holder the amount
payable under the policy becolnes part of his estate which is
governed by the law of succession applicable to him. Such
succession may be testamentary or interstate. There is no warrant
for the position that Section 39 of the Act operates as a third
kind of succession which is styled as a 'statutory testament'. The
provision in sub-section (6) of Section 39 which says that the
amount shall be payable to the nominee or nominees does not
mean that the amount shall belong to the nominee or nominees.
The language of Section 39 is not capable of altering the course
of succession under law.

DIFFERENCE BETWEEN NOMINATION AND

ASSIGNMENT
1. Transferability
The assignment of life policy involves the transfer of all its
rights of the policy-holder to the assignee. Nomination does not
involve the transfer of the policy-hold(!r's rights.
2. Right of action
The assignee is entitled to all benefits of the policy and can
sue in his own name. The nominee can sue by his own name
I AIR (1984) Supreme Court 346
 LIFE INSURANCE 423

but he gets the money only by the constructive trustee on the

behalf of the beneficiaries of the policy.
3. Canctllation and cbange
A nomination can be cancelled or changed. An as, ignment
cannot be changed. although there can be a re·assignme.lt under
certain circumstances.
4. Object
Assignment is done with the purposes of giving a benefit
to the intended beneficiaries. The nomination is made to provide
the insurer with a convenient method of discharging has
obligations. The insurer can pay to the nominee without waiting
for a succession certificate.
5. Consideration
Assignment of a policy may be with or without consideration.
Nomination is done without consideration.
6. Proced u re
Assignment can be made on the policy or by a separate deed.
Nomination is done by indorsement on the policy with notice
to the insurer.
7. Automatic cancellation
Nomination is automatically cancelled if the policy·holder
is alive at the time and is able to get the policy money.
Assignment does not depend upon the life of the policy-holder.
In conditional assignment e.g.. for mortgaging the policy. it is
cancelled when the money is paid to the creditor.

EFFECTS OF SUICIDE
A life insurance policy may contain a clause providing that
no payment will be made in case the assured commits suicide.
Such a clause is binding and where there is such a clause. the
policy is avoided in case of suicide. The onus of providing suicide
is upon the insurer.
Where there is no clause in the policy relating to suicide.
it has been held in English cases that the policy becomes bad
upon suicide and no money is payable. Horn ~ case. I The contract

1(1861) L.l. eh. 511

424 THE LAW OF INSURANCE

of insurance is avoided even though the policy may have excepted

suicide for a limited period only. Beresford v. Royal Insurance
Co. I The English decisions arc based upon the fact that suicide
by a person of sound understanding is regarded as self-murder,
which is a felony under common law. A contract by which money
is payable upon the commission of a felony is against public
policy and is therefore bad in law. Even if a policy expressly
prO\ ides for payment in case of suicide, it is unenforceable.
In India suicide is not a crime. Only the attempt to commit
suicide is a crime. Therefore it has been held in a' case that a
policy cannot be avoided on the ground of suicide unless there
is a clause in the policy to that effect. NOr/hem India Assurance
Co. v. Kanhayalal. 2
A policy issued by the Life Insurance Corporation of India
contains a clause regarding suicide. If the policy-holder commits
suicide the Corporation is not liable for the policy money,
whether the policy-holder was insane or not. If the policy-holder
had assigned the policy to some person for valuable consider-
ation, it is valid. But the assignee will have to prove that he
had accepted the policy bonafide and that the assignee has given
notice to the Corporation of the assignment in due time.

THE PAYMENT OF CLAIMS

Claims are payable according to the terms of the contract
of insurance. In case of an endowment policy. the money must
be paid to the assured or, if the policy was assigned, to the
assignee. In case of whole life insurance. the money is payable
to the assignee or the nominee or, in the absence of assignment
or nomination, to the legal representatives of the assured.
The death of the assured must be proved. Proof of death
may be given by oral testimony or by a death certificate or by
presumptive evidence. viz.. -absence for a period of seven years
or more. The insurer may claim the production of a succession
certi ficate.
Section 47 of the Insurance Act provides that where an
insurer is of opinion that. by reason of conflicting claims to or
insufficiency of proof of title or any other reason, it is impossible
for the insurer to obtain a satisfactory discharge for the payment
I (1938) A.C. 586 '(1938) Lah 561
 LIFE ·.NSURANCE 425

of the money insured for, the insurer may apply to pay the money
in the court having jurisdiction over the place where the money
is payable. The application of the insurer must contain all
particulars regarding the policy and must be filed at least six
months after the maturity of the policy or the notice of death.
The court shall give notice of the deposit of money to all the
claimants and decide all questions relating to the disposal of the
claims. Pending payment to the successful claimant the money
may be invcsted in government securities.

PROOF OF AGE
The age of assured is a material fact. It is particularly
important in endowment policies under which the money is
payable on the assured attaining a certain age. Age may be proved
by any eviden~e which is satisfactory e.g. the production of
horoscope or a birth certificate (where available) or any family
record or document. The age is recorded in the policy. After
satisfactory evidence is given of the age the insurer generally
wriTes on the policy, "age admitted" or similar words. Once the
age is admitted in this manner it cannot be challenged. except
in cases of fraud. Section 45 of the ·Insurance Act provides that
a statement made in the policy cannot by questioned after two
years unless there is fraud or a fraudulent concealment.

THE LIFE INSURANCE CORPORATION ACT, 1956

Life Insurance business in India has been brought under
State-ownership and State-management by the Life Insurance
Corporation Act of 1956.
Objects
The object of the Act is to nationalise the business of life
insurance in India with a view (i) to ensure absolute security
to the policy-holder, (ii) to spread insurance much more widely
and in particular to the rural areas, and (iii) to secure a more
effective mobilisation of public savings and the investment of
such savings under the five year plans.
The Act creates a Life Insurance Corporation with is
responsible for all life insurance in India. Section 30 of the Act
provides that the Corporation shall have the exclusive pri"ilege
of carrying on life insurance business in India.
426 THE LAW OF INSURANCE

Constitution of the Life Insurance Corporation

The Corporation consists of not more than 16 persons
appointed by the Central Government, one of whom shall be
appointed Chairman. Only those petsons shall be appointed
members who have no financial or other interest of such a nature
as to affect prejudicially the exercise of their functions as
members of the Corporation.-Sec. 4.
Capital
The original capital of the Corporation was Rs. 5 crores to
be provided by the Central Government. The Government may,
on the recommendation of the Corporation, reduce the capital
to the extent and in such manner as the Government may
determine.-Sec.5.
Functions of the Corporation
Subject to the rules, if any, made by the Central Government,
it shall be the duty of the Corporation to carry on life insurance
business whether in or outside India, and the corporation shall
so exercise its powers under the Act as to secure that life
insurance business is developed to the best advantage of the
community.-Sec. 6.
[n the discharge of any of its functions the Corporation shall
act so far as may be on b'lsincss principles.-Sec.6.
Direction
[n the discharge of its functions under the Act, the Corpo-
ration shall be guided by such direction in matters of policy
involving public interest as the Central Government may give
to it in writing; and if '!-ny question arises whether a direction
relates to a matter of polity involving public interest, the decision
of the Central Government thereon shall be final.
Powen
Without prejudice to the generality of the provisions men-
tioned above, the Corporation shall have power :
(a) to carry on capital redemption, annuity and reinsurance
business;
(b) to take such steps as are expedient for the protection or
realisation of its investments, including the taking over and
administering any property offered as security;
 UFE INSURANCE 427

(c) to acquire, hold and dispose of any property for the purpose
of its business;
(d) to transfer the whole or any part of the life insurance
business carried on outside India to any other person or
persons if it is expedient to do so;
(e) to advance or lend money UPOIl the security of movable
or immovable property or otherwise;
(f) to borrow or raise money in such manner and upon such
security as the Corporation may think fit;
(g) to carry on either by itself or throug~ any subsidiary any
other business in any case where such business was being
carried on by a subsidiary of an insurer whose controlled
business has been transferred to and vested in the Cor-
poration under the Act;
(h) to carry on any other business which may seem to the
Corporation to be capable of being conveniently carried
on in connection with its business and calculated directly
or indirectly to render profitable the business of the
Corporation;
(i) to do such things as may be incidental or conductive to
the proper exercise of any of the powers of the Corporation.
In the act a new section was inserted in the Public Financial
Institutions Laws (Amendment) Act, 1975.
Sec.6A.-In entering into any arrangement, under section 6
with any concern, the Corporation may impose such conditions
as it may think fit, necessary or expedient for protecting the
interest of the Corporation, and for securing that the accommo-
dation granted by it is put to the best use by the concern. The
Corporation can appoint any director of the concern, holding
office during the pleasure of the Corporation without any
obligation of liability of the person.

Administration
The central office of the Corporation shall be at a place to
be decided by the Central Government. There shall be zonal
offices at Mumbai, Kolkata, Delhi, Kanpur, Chennai, and such
other places as the Corporation may decide. There may be
divisional offices and branches within each zone.-Sec. 18.
The Corporation may entrust the general superintendence and
direction of its affairs to an executive committee consisting of
 428 THE LAW OF INSURANCE

not more than five of its members. There may be other

committees e.g., an investment committee. The Corporation may
appoint one or more Managing Directors and Zonal Managers.
The Corporation shall have its own funds and its accounts shall
be aud ited by chartered accountants. A copy of the audit report
and annual report must be sent to the Central Government and
laid be (ore Parliament.
. AceouRts and Audit
The Corporation shall, once at least in two years, cause an
investigation to be made by actuaries into the financial condition
of the business of the Corporation, including a valuation of the
liabilities of the Corporation. The actuarial report shall be sent
to the Central Government.

EXERCISES
I. What is life insurance? (Page 416)
2. What are the differences between the following :
(a) Life Insurance and Property Insurance. (Page 416)
(6) Nomination and Assignment of a life insurance policy.
(Page 422)
3. Discuss the liability of insurers on a life insurance policy in case
of suicide of the assured. (Pages 423·425)
4. Write Notes on : Whole Life Policy; Endowment Policy; Annu-
ities; Surrender value; Payment of claims; Proof of Age: The
Life Insurance Corporation Act, 1956.
(Pages 417; 417; 417; 418; 424; 425; 425)
5. Objective Question.
(a) "Suicide is no crime". True or False? (Page 423)
 MARINE, INSURANCE

APPLICATION
Marine insurance is an important branch of insurance. In
Great Britain the law relating to marine insurance is covered by
statutes (e.g., the British Marine Insurance Act of 1906). In India,
until recently, there was no statute relating specifically to marine
insurance. The subject was governed by the provisions of the
British Act mentioned above, the Contract Act and certain
provisions of the Insurance Act. In 1963, an Act was passed
known as the Marine Insurance Act (Act II of 1963). It came
into force from 1st Allgust, 1963. By this Act, the rules relating
to marine insurance in India have been codified. The provisions
of the Act arc summarised below.

DIFFERENCES. BETWEE~J~JARINE INSU'RANCE AND

LIFE INSURANCE
I. A marine insurance policy covers risks arising from a
marine adventure. Life insurance is a contrac-t-depending upon
human life.
2. Marine II1surance contracts are usually c~ntracts of
indemnity. Life insurance is a contingent contract.
3. In life insurance, details of the subject matter have to
be given (usually by answering a seiof printed questions). This
is generally not required in marine insurance where the insurer
relies on the policy-holder's duty of disclosure.
4. There are certain express and implied warranties in all
marine insurance contracts.
5. Marine insurance contracts are usually subject to average.
(See Average Policy under Fire Insurance, p. 448)
6. Marine insurance policies may, under certain circum-
stances, be assigned even after loss has occurred.
7. A marine policy may be obtained w'ithout disclosing the
name of the ship. (See Floating Policy, below). In non-marine
insurance the subject matter of the risk has to be disclosed.
8. Marine insurance contracts can be avoided on many grounds
(like deviation) not available in cases of non-marine insurance.
429
430

~qJ4
_...,.
THE LAW OF INSURNACE

.",INE INSlJRA_ AIm.

I. A marine insurance policy covers risks arising from a

marine adventure. A fire insurance covers risks of fire on
properties:
2. A fire insurance is usually done for <?ne Y!:!lr only. Marine
insurance is done for a fixed period or for a fixed voya$.
3. In fire insurance details of the subject matter have to be
given (usually by answering a set of printed questions). This is
generally not required in marine insurance where the insurer
relies on the policy holder's duty of discloser.
4. Marine insurance policies may, under certain circllfTl-
stances. be assigned even after loss has .occurred. This cannot
be done in fire insurance.
5. A marine policy may be obtained without disclosin.g. the
namc of the ship (See Floating Policy, below). In fire insurance,
the subject matter of the ri~k has to be disclosed.
6. Marine insurance· contracts can be avoided oli many
grounds (like deviation) not available in cases of fire insurajlce.

~rINIT.ONS

~arine Insurance
A contract of marine insurance is an agreement whereby the
insurer undertakes to indemnify the assured, in the manner and
to the extent thereby agreed, against marine losses, that is to
say, losscs incidental to marine adventure.-Sec. 3.
A contract of marine insurance may, by its express terms.
or by usage of trade, be extended so as to protect the assured
against losses on inland waters or any land risk which may be
incidental to any sea voyage.-Sec.4(1).
A marine insurance policy may cover a ship in course of
building, or the launch of a ship, or any adventure analogous
to a marine adventure.
Insurable Property
. For the purposes of the Marine Insurance Act, insu.rable
property means any ship, goods or other movables which are
exposed to marinc perils. Sec.2(c). .
 MARINE INSURANCE 431

Marine Adventure
According to Section 2(d), marine adventure includes any
adventure where-
(i) any insurable property is exposed to marine perils;
(ii) the earnings or ~cquisition of any freight, passage money,
commission, profit or any pecuniary benefit, or the security
for any advances, loans or disburs :ments is endangered by
the exposure of insurable prope, ty ~o marine perils;
(iii) any liability to a third party that may be incurred by the
owner, or other person interested in or responsible for
insurable property by reason of maritime perils.
Maritime Per~
This term means'the perils consequent on, or incidental to,
the navigation of the sea, that is to say, perils of the seas, fire,
war perils, pirates, rovers, thieves, captures, seizures, restraints
and detainments of princes and peoples, jettisons, barratry and
other perils which are of the like kind or may be designated by
the policy.-Sec. 2(e). "Perils of the seas" refer only to fortuitous
accidents or casualties on the seas. It does not include the
ordinary action of the .wind and waves.
Other Terms See p. 335.

lEATl1UIP.«ND REQU1S..ITES OF A MARINE POLICY

A marine insurance policy to be valid must fulfil the
following requirements.
1. Essential elements
A contract of marine insurance must fulfil all the essential
elements of a valid contract, for example, the marine adventure
which is the subject matter of insurance. must be .lawful.
2. Time of contract
A contract of marine insurance is deemed to be concluded
when the. proposal of the assured is accepted by the insurer,
whether the policy is then issued or not; arid for the purpose
of showing ~vhen the proposal was accepted, reference may be
made to the slip, covering note or other customary memorandum
of the contract although it be u·nstamped.-Sec.23.
432 TIlE LAW OF INSURNAC'E

3. The Policy
The contract must be written in a document called a sea
policy or a marine policy. Sections 24 to 33 of the Act lay down
the rules regarding the policy. The document must bQ. stamped
in accordance with the provisions of the Stamp Act.
4. Insurable interest
A marine policy is e'lforceable only if the policy-holder has
an insurable interest at lIe time when the claim is made.
S. Good faith
The contract of marine insurance is a contract uberrimae
fidei and the insured must disclose all material facts.-Sec. 19.
6. Not to be a wagering contract
The contract must not be a wagering contract. A contract
of marine insurance is deemed to be a wagering contract
(a) where the assured has not an insurable interest as defined
by the Act, and the contract is entered into with no expectation
of acquiring such an interest; or (b) wher-e the policy is made
with terms like, "interest or no interest", "without further proof
of interest than the policy itself', or "without benefit of salvage
to the insurer" etc. (But where there is no possibility of salvage,
a policy may be effected without benefit of salvage to the
insurer. )--Sec. 6.
TYPES OF MARINE INSURANCE POLICIES
There are certain standard forms of marine insurance
policies. As early as 1779, members of the Lloyd's started using
printed forms of marine policies of different kinds. The Marine
Insurance Act of 1963 mentions certain types of policies.
1. Voyage Policy
Where the contract is to insure the subject matter, "at and
from" a place, or from one place to another or others, the policy
is called a Voyage Policy. .
2. Time Policy
Where the contract is to insure the subject matter rdr a define
period of time, the policy is called a Time Policy. A Time Policy
made for any time exceeding tivelve inoilths is invalid.-Sec. 27.
A contract for both voyage and ·time may be illc1uded' In
the same policy.
 . MARINE INSURANCE 433

3. Valued Policy
A Valued Policy is a policy which specifies the agreed value
of the subject matter insured, As between the insurer and the
assured, the valuation is conclusive, unless there is fraud.-Sec.
29.
Unless the policy otherwise provides, the value fixed by the
policy is not conclusive for the purpose of determining whether
there has been a constructive total loss.
4. Unvalued Policy
An Unvalued Policy or an Open Policy is a policy which
does not specify the value of the subject" matter insured, but
subject to the limit of the sum insured, leaves the insurable value
to be subsequently ascertained, in the manner laid down III the
Act-Sec. 30.
5. Floating Policy by .ship or ships
(I) A Floating Polic'y is a policy which describes the
insurance in generat terInS and leaves the name or names of the
ship or ships and other particulars to be defined by subsequent
declaration.
(2) The subsequent declaration or declarations may be made
by endorsement on the policy, or in· other customary manner.
(3) Unless the policy otherwise provid~s, the declarations
must be made in the order of despatch or shipment. They must,
in the case of goods, comprise all consignments within the terms
of the policy, and the value of the goods or other property. must
b~ honestly stated, but an omission or an erroneous' declaration
may be rectified even after loss or arrival, prO\!ided the omission
Or declaration was made in good faith.
(4) Unless the policy otherwise provides, when a declaration
of value is not inade until after notice oCloss or arrival, the pol icy
must be treated as all unvalued policy as regards the subject
matter of that declaration.-Sec, 31. . .,. .
6. Wagering Policies
. Sometimes marine insurance contracts are entered into with
persons who have no insurable. interest Such pOlicies are void
according to law but the insurer may fulfil. I)isobligations out
of considerations of honour. One. typicaJ tor-m of a wagering
policy is known as the P.P.\. Policy (I,olicy proof of interest).

Commercial Law - 28
434 THE LAW OF INSURNACE

INSURABLE INTEREST
Who can insure an interest?
Section 7 of the Act defines insurable interest as follows
I. Subject to the provisions of the Act, every person has
an insurable interest who is interested in a marine adventure.
2. In particular a person is 'interested in a marine adventure
where he stands in any legal or equitable relation to the adventure
or to any insurable property at risk therein, in consequence of
which he may benefit by the safety or due arrival of insurable
property, or may be prejudiced by its loss, or by damage thereto,
or by detention thereof, or may incur liability in respect thereof.
Types of interest
Apart from the general provis,ions stated above, the Act lays
down that the following types of interest are insurable;
I. A defeasible or a contingent interest. A buyer of goods
has an insurable interest notwithstanding that he might have
rejected the goods under certain circumstances.
2. A partial interest of any nature.
3. The insurer has an insurable interest in his risk and may
reinsure in respect of it.
4. The lender of money on bottomry or respondentia bond
has an insurable {nterest in respect of the loan.
S. The master and the crew have insurable interest as
regards their wages.
6. The person advancing freight has an insurable interest
in so far as such freight is not repayable in case of loss.
7. The assured has an insurable interest in the charges of
the insurance. .
8. The owner of insurable propetty has insurable interest
in respect of its full value. So also has the mortgagor. The
mortgagee has interest up to the amount of his dues. Persons
having an insurable interest may insure on behalf of other persons
having an interest.
When interest must attach
Section 8 of the Act provides as follows :
The assured must be interested in the subject matter insured
at the lime af loss, though he need not be interested when the
insurance is effected.
 MARINE INSURANCE 435

Where the subject matter is insured "lost or not lost", the

assured may recover even though he may have acquired his
interest after the loss; unless at the time of effecting the contract
of insurance the assured , was aware of the loss, and the insurer
was not.
Where the assured has no interest at the time of the loss,
he cannot acquire any interest by any act or election after he
IS aware of the loss. .

MEASURE OF INSURANCE VALUE

Section 18 of the Act provides that, subject to any express
provision of valuation in the policy, the insurable value of the
subject matter insUl'l:d must be ascertained as follows :
1. Ship
In insurance on ship--the value, at the commencement of
the risk, of the ship, including all outfits, provisions, stores,
money advanced for wages and other disbursements, plus the-
charges for insurance. In case of steamships, the value of boilen,
machinery, coal etc. and other special requisites, if any, must also
be included.
2. Freight
In insurance on freight-the gross freight plus insurance
charges.
3. Goods
In insurance on goods-prime cost of the property insured
plus expenses of shipping and the insurance charges.
4. Olber subjects
In insurance on ani' other subject matter-the amount at the
risk of the assured when the poLcy attaches plus insurance
charges.

DISCLOSURE AND REPRESENTATIONS

A contract of marine insurance is a contract based upon the
utmost good faith and if the utmost good faith is not observed
by either party, the contract may be avoided by the other party.-
Sec. 19. Thus a contract of marine insurance is • contract
uberrimae fidei.
436 THE LAW OF INSURNACE

Duty of Disclosure
Section 20 provides that the assured must disclose to the
insurer every material circumstance which is known to the
assured. The assured is deemed to know every circumstance
which in the ordinary course of business ought to be known to
him. The term "circumstance" includes any communication made
to or information received by the assured. If the assured fails
to make such disclosure the insurer may avoid the contract.
What is a material circumstance?
Every circumstance is material which would influence the
judgment of a prudent insurer in fixing the premium, or
determining whether he will take the risk.
In the absence or enquiry the following circumstances need
not be disclosed :
(a) any circumstance which diminishes the risk:
(b) any circumstance which is known or presumed to be
known 'to the insurer (the insurer is presumed to know mailers
of common notoriety or knowledge, and matters which an insurer
in the ordinary course of his business as such, ought to know) ;
(c) any circumstance as to which information is waived by
the insurer;
, (d) any ~ircumstance which is, superfluous to disclose by
reason of any' express or implied warranty.
Agent's duty of disclosure
The agent effecting insurance must also disclose all material
circumstances known to him, He need not disclose circumstances
which the assured is not bound to disclose.-Sec.21.
Representations
Section 22 provides that every material representation made
by the assured or his agent to the insurer during the negotiations
for the contract, and before the contract, is concluded, must be
true. If it be' u'ntriJe, tM 'inslJrermay avoid the contract.
A representation is material ,which would, influence the
judgement of a prudent insurer in fixing the premium, or
determining whether he will take the risk.
A representa,tion may be ,either as to a matter of fact or as
to a matter of expectation or belief.
 MARINE INSURANCE 437

A representation as to a matter of fact is true, if it be

substantially correct, that is to say, if the difference between what
is represented and what is actually correct would not b., consid-
ered material by a prudent insurer. A representat ion as to a matter
of expectation or belief is true if it be made in good faith.
A representation may be withdrawn or corrected before the
contract is concluded. Whether a particular representation be
material or not IS, In each case a question of fact.

THE POLICY
A contract of marine insurance shall not be admitted in
evidence unless it is embodied in a marine policy in accordance
with this Act. The policy must be executed and issued either
at the time when the contract is concluded or afterwards.-
Sec. 24.
A marine policy ml/st specify---( I) the name of the assured,
or of sorlie person who effects the insurance on his behalf; (2)
the subject matter insured and the risk insured against; (3) the
voyage, or period of time, or both, as the case may be, covered
by the insurance; (4) the sum or sums insured; (5) the name
or names of the insurer or insurers.-Sec.25.
A marine policy must be signed by or on behalf of the
insurer. Where a policy is subscribed by or on behalf of two
or more insurers, each subscription, unless the contrary be
expressed, constitutes a distinct contract with the assured.-
Sec. 26.
The subject matter insured must be designated in a marine
policy with reasonable certainty. The nature and extent of the
interest of the assured in the subject matter insured need not be
specified in the poliey.-Sec.28 . .
Where an insurance is effected at a premium or additional
premium to be arranged and no arrangement is made, a reasonable
premium Or additional premium is payable.-Sec.33.

CONSTRUCTION OF TERMS IN POLICY

In a Schedule to the Act a model form of marine policy
is given. The Schedule also contains explanations of various
terms generally used in a marine policy. The explanations are
given.
438 THE LAW OF INSURNACE

"Lost or not Lost"

A marine insurance policy may contain a clause providing
that the policy will be valid even if the goods are (unknown
to the parties) already lost or have already reached their
destination. Such a clause is called the "lost or not lost" clause.
The Act provides that if i,l such a case the loss has occurred
before the contract is concluded, the risk attaches unless at such
time the assured was aware of the loss and the insurer was not.
The Duration of the Risk
The time from which the liability of the insurer commences
and the period during which the insurer remains liable depends
on the language of the policy. Where the subject matter is insured
"from" a particular place the risk does not attach until the ship
starts on the voyage insured.
Where a ship is insured "at and from" a particular place,
and she is at that place in good safety when the contract is
concluded, the risk attaches immediately. If she be not at that
place when the contract is concluded, the risk attaches as soon
as she arrives in good safety (even if she is insured under another
policy). The same rules apply when chartered freight is insured.
Where goods or other movables are insured "from the loading
thereof", the risk does not attach until such goods or movables
arc actually on board and the insurer is not liable for losses in
transit from shore to ship.
Where the risk on goods or other movables continue "until
they are safely landed", they must be landed in the customary
manner and within a reasonable time after arrival at the port of
discharge, and if they are not so landed, the risk ceases.

THE LLOYD'S POLICY

During the 18th and the 19th century marine insurance
business in Great Britain was mostly done by an association of
underwriters known as the Lloyd's of London. From 1779 the
members of the Lloyd's started using printed policy forms in
which the terms of the contract of insurance were incorporated.
At present marine insurance is undertaken not only by the Lloyd's
underwriters but also by many insurance companies. The policy
forms used are mostly based upon the forms used by the Lloyd's.
 MARINE INSURANCE 439

A Lloyd's Policy contains clauses dealing with all essential

matters concerning the contract of insurance. Thus it includes
the name of the insured or his agent; the name of the ship;
the subject-matter of insurance; the extent and the duration of
the risk; the express warranties; and, various conditions which
limit and modiry the liability of the insurer. Some special clauses
usually found in a Lloyd's policy are explained below.
The "Inchmaree" clause
Ordinarily the insurer under a marine insurance policy is
liable only for loss or damage caused by a sea-peril.
Example:
The ship "Inchmaree" was lying at anchor at pon and her donkey
engine was pumping water into the boilers. The engineer in charge
was negligent and kept a valve of the engine closed whereas it
should have been kept open. As a result water forced into the engine
and the pump was broken. The shipowner claimed compensation
from the insurer. It was held that the loss was not due to a sea-
peril and so the insurer was not liable. Thames and A-fersey Marine
Insurance Co. v. Hamilton Fraser& Co. 1
Since the decision in the above case it has become customary
to include a clause in all marine insurance policies by which
the insurer agrees to pay compensation for loss or damage arising
from causes which are not sea-perils or similar to sea-perils. Such
a clause is called the Inchmaree clause.
The "Sue, Labour and Travel for" clause
This. is a clause in a marine insurance policy which permits
ihe captain to stop the ship. lower boats and engage mariners
to sue, labour and travel in order to recover goods fallen
overboard accidentally.
The F. C. & S. clause
A clause in a marine insurance policy may exempt the insurer
from liability in case the ship is captured by enemies during war.
Such a clause is called the F. C. & S. clause ("Free of Capture
and Seizure").

1(1887) 12 A.C. 484

440 THE LAW OF INSURNACE

The F. P. A and the F. A. A. clause

A policy may exempt the insurer from liability from particular
or general average contribution. F. P. A. stands for. "Free from
particular average" contribution and F. A. A for "Free from all
average" contribution.
The Memorandum or the N. B. clause
The memorandum or the N. B. (nota bene) clause ex~pts
insurer from liability for partial losses in the case of perisl'oable
goods. In a Lloyd's policy it is usually stated that the insurer
will not be liable for losses to goods like sugar, hemp, tobacco
etc. unless the loss is 5% or more of the value of the goods.
The N.B. clause may limit the liability in any other way.
The Running Down clause
.'
A clause in the policy may make the insurer liable for
negligent actions of the captain and crew of the insured ship.
For example if by.negligence a collision occurs the insurer may
agree to indemnify the insured. Such a clause is called "Running
Down" clause.

W ARRANTlES IN A CONTRACT OF MARINF

INSURANCE
In marine insurance contracts, the term Warranty is lIsed to
denote certain conditions which are considered to be essential
to the contract of insurance.
According to section 35(1) of the Marine Insurance Act,
Warranty, "ml!ans a promissory warranty, that is to say a warranty
by which the assured undertakes that some particular things shall
or shall not be done, or that some condition ~hall be fulfilled,-
or whereby he affirms or negatives the existence of a particular
state of facts."
A warranty in a marine insurance contract may be Express
or. Implied. Express Warranties are those which are expressly
mentioned in the policy of insurance or incorporated in some
document referred to in the policy. Implied Warranties are
stipulations which are by law, custom or general agreement
assumed to be included in the insurance contract although not
mentioned in the policy.
 MARINE INSURANCE 441

Express Warranties
The following conditions are generally included In manne
insurance policies as express warranties.
I. The ship is fii and seaworthy.
2. The ship will sail on a specified day and will proceed to
the destination without unnecessary deviation.
3. The ship is a neutral vessel and the cargo is neutral and
will remains so during the voyage.
. There may be other stipulations expressly mentioned.

Implied Warranties
In a contract of marine insurance, the following warranties
are 4!oplied.
I. When a ship is expressly warranted neutral, there is an
implied warranty that she shall carry the documents needed to
prove it.-Sec.38.
2. In a voyage policy there is an implied warranty that the
ship is seaworthy at the time of commencement of the voyage
and that while at port the ship is fit to encounter the ordinary
perils of the port where she is. As regards the goods carried,
there is ail implied warranty that the ship is fit to carry the goods
to the agreed destination.-~Secs. 41, 42(2).
3. There is an implied warranty that the voyage is lawful-
Sec.43.
4. Where the subject matter is insured by a voyage policy
"at and from" or "from" i particular place, there ·is an implied
condition that the adventure shall be commenced within a
reasonable time. This condition does not apply if the delay was
caused by circumstances known to the insurer before the contract
was concluded or if he had waived the condition.-Sec.44.
There is no implied warranty about the nationality of the
ship or any undertaking that the nationality will not be changed
during the subsistence of the policy.-Sec. 39.
l In a policy on goods or other movables there is no implied
warranty that the goods or movables are seaworthy.-Sec. 42(1).

Effects of a Breach of Warranty

A warranty is a condition which must be exactly complied
with, whether it is material to the risk or not. If it be not so
complied with, then, subject to any express provision in the
442 THE LAW OF lNSURNACE

policy, the insurer is discharged from liability as from the date

of the breach of warranty, but without prejudice to any liability
incurred by him before that date.-Sec.35(3).
When Breach of Warranty is Excused
Section 36 provides that in the following cases breach of
warranty is excused :
I. When by reason of change of circu!J1stances, the warranty
ceases to be applicable.
2. When compliance with the warranty is rendered unlawful by
any subsequent change of law.
3. When the insurer waives the breach.
When a warranty is broken, the assured cannot avail himself
of the defence that the breach has been remedied, and the
warranty complied with before loss.

THE VOYAGE
Rules regarding the voyage, as laid down in sections 44 to
51 of the Marine Insurance Act are summarised below.
I. If the ship sails from a place other than the place
specified in the policy, no risk attaches.--Sec.45.
2. If the ship sails for a destination other than the one
specified in the policy, no risk attaches ..-Sec.46.
3. Where after the commencement orthe risk the destination
of the ship is voluntarily changed, .there is said to be change
of voyage. Unless the policy otherwise provides, where there is
change of voyage, the insurer is discharged from liability as from
the time of change.-Sec. 47.
4 .If there is unreasonable delay in the prosecution of the
voyage, the insurer is discharged from liability.-Sec.50.
5. Deviation: (Sections 48, 49,51), Deviation occurs under
the following circumstances :
(a) where the course of the voyage is specifically designated .J
by the policy, and that course is departed from;
(b) where the course is not specifically designated, but the
usual and customary course is departed from;
(c) where there are several ports of discharge, the ship must
proceed to them in the order designated by the policy; if
she does not (without sufficient reason) there is deviation;
 MARIN" INSURANCE 443

(<I) where the policy only specifies ports of discharge within

a given area, the ports must be visited in the geographical
order; if the ship does not do so (without sufficient reason)
there is deviation.
Consequences of deviation: Where a ship, without la"ful
excuse deviates from the voyage contemplated by the policy, the
insurer is, discharged from liability as from the time of deviation.
The intention to deviate is immaterial; there must be deviation
in fact.
Excuse for deviation or delay: Deviation or delay is excused
under the following circumstances :
(a) where authorised by any special term in the policy;
(b) where caused by circumstances beyond the control of
the master and his employer;
(c) where reasonably necessary in order to comply with an
express or implied warranty;
(<I) where reasonably necessary for the safety of the ship
or subject matter insured;
(e) for the purpose of saving human life or aiding a ship
in distress where human life may be in danger;
(j) where reasonably necessary for the purpose of obtaining
medical or surgical aid for any person on board the ship;
(g) where caused by the barratrous conduct of the master
or crew, if barratry be one of the perils insured against.
When the cause excusing deviation or delay ceases to
operate, the ship must resume her course and prosecute her
voyage with reasonable despatch.

ASSIGNMENT OF POLICY
A marine policy may be transferred by assignment, unless,
such transfer is prohibited by the policy. Assignment may be
either before or after loss. The assignee of a marine policy can
sue in his own name and can defend an action on any ground
available to the transferor. The policy may be transferred by
endorsement thereon or in other customary manner. The transfer
of the policy holder's interest in the subject matter does not
automatically transfer the policy. Such a transfer Olust be made
specifically. Where the assured loses his interest in the subject
matter by transfer or other"ise, he cannot subsequently assign
the policy.-Secs. 17, 52, 53.
444 THE LAW OF INSURNACE

LIABILITY OF INSURER
Unless the policy otherwise provides, the insurer is not liable
for the followil)g :
(a) losses not caused proximately by' the peril insured
against;
(b) loss attributable to the wilful misconduct of the assured;
(the insurer is liable for losses caused by misconduct
or negligence of the master and the crew);
(c) loss caused proximately by delay, although delay is
caused by the peril insured against;
Cd) losses due to ordinary wear and tear, ordinary leakage
and breakage, inherent vice or the subject matter insured
or for any loss caused by rats or vermin, or for any injury
to machinery not proximately caused by maritime perils.
-Sec. 55.
The Act contains rules, by which the extent of liability
of the insurer for total loss and partial loss can be calculated.
(See p. 389)
Rights of the insurer on pay#tent : Upon payment, the insurer
becomes entitled to subrogation and contribution. (See pp. 410-411)

THE PREMIUM
Unless otherwise agreed, the duty of the assured or his agent
to pay the premium, and the duty of the insurer to issue the policy
to the assured or his agent, arc concurrent conditions, and the
insurer is not bound to issue the policy until payment or tender
of the premium.-Sec. 54.
Under certain circumstances the premia pilid are returnable.
(e.g., for failure of consideration.)--Sections 82-84.

LOSSES
The liability of the insurer arises when there is loss. Loss
may be of two kinds : Total or Partial.
Total loss is 'again of two kinds : Actual Total Loss and
Constructive Total Loss. Actual Total Loss occurs when the
subject matter of the insurance is totally destroyed or is so
damaged that it ceases to be the thing which .• was insured.
Constructive Total Loss occurs when the thing insured has to
 MARINE I\iSURANCE 445

be abandoned or where it ca\,,~ot hi; ret~illed wit~o~tunreasonable

expense. ~ r .. ' . , - . -

Partial Loss 'occurs \vhen 'the subject-matter 'of insurance is

partially 10sL Partial Loss may be either a particular average loss
or a general average Joss, (See p, 389)
•
EXERCISES
I, What are the points of difference between marine and life
insurance?· (Page 429)
2, Discuss the leg~1 nature of a marine insurance, (Pages 430·431)
3. Distinguish between marine insuranc,c and fire insurance. Enumer-
ate the various classes of marine i'nsurance policy, (Page 430)
4. \Vnat do you understand by "Insurable interest" in connection with
Marine Insurance? ' (Page 434)
5. \Vrite notes on any two of the following: Floating Policy of Marine
Insurance.; Implied warranties in a voyage policy: General
Average Loss and Particular Average Loss.
(Pages 413: 440: 389)
(4) FIRE AND OTHER INSURANCE

FIRE INSURANCE
Definition •
Fire insurance means insurance against any loss caused by
fire. Section 2( 6A) of the Insurance Act defines fire insurance
as follows : "Fire insurance business means tho business of
effecting, otherwise than incidentally to some other class of
business, contracts of insurance against loss by or incidental to
fire or other occurrence customarily included among the risks
insured against in fire insurance policies."
What is 'Fire'?
The term fire in a Fire Insurance Policy is interpreted in
the literal and popular sense. There is fire when something bums.
In English cases it has been held that there is no fire unless
there is ignition. Stanley v. Western Insurance Co.' Fire produces
heat and light but either of them alone is not fire. Lightning is
not fire. But if lightning ignites something, the damage may be
covered by a fire-policy. The same is the case with electricity.
CHARACTERISTICS OF FIRE INSURANCE
I. Fire insurance is a contract of indemnity. The insurer is
liable only to the extent of the actual loss suffered. If there is
no loss there is no liability even if there is a fire.
2. A fire insurance is a contract of good faith (uberrimae
fidei). The policy-holder and the insurer must disclose all the
material facts known to them.
3. A fire insurance policy is usually made for one year only.
The policy can be renewed according to the terms of the policy.
4. The contract of insurance is embodied in a policy called
the fire pOlicy. Such policies usually cover specific properties
for a specified period.
5. Insurable Interest: A fire policy is valid only if the
policy-holder has an insurable interest in the property covered.
'(1868) L.R. 3 Ex 71

446
 FJ RE AND OTHER INSURANCE 447

Such interest must exist at the time when the loss occurs. In
English cases it has been held that the following persons have
insurable interest for the purposes of fire insurance--owner;
tenants, bailees, including carriers; mortgages and charge-holders.
6. In case of several policies for the same property, each
insurer is entitled to contribution froIT. the others. After a loss
occurs and payment is made, the ins •. rer is subrogated to the
rights and interests of the policy-hold~r. An insurer can reinsure
a part of the risk.
7. Fire policies cover losses caused proximately by fire. The
term loss by fire is interpreted liberally.
Example:
A woman hid her jewellery under the coal in her fireplace. Later
on she forgot about the jewellery and lit the fire. The jewellery
was damaged. Held, she could recover under the fire policy. Harris
v. Poland'
8. Nothing can be recovered under a fire policy if the fire
is caused by a deliberate act of the policy-holder. In such cases
the policy-holder is liable to criminal prosecution.
9. Fire policies generally contain a condition that the insurer
will not be Iiable if the fire is caused by riot, civil disturbances,
war and explosions. In the absence of any specific exception the
insurer is liable for all losses caused by fire, whatever may be
the cause of the fire.
10. Assignment: According to English law a policy of fire
insurance can be assigned only with the consent of the insurer.
In India such consent is not necessary and the policy can be
assigned as a chose-in-action under the Transfer of Property Act.
The insurer is bound when notice is given to him. But the
assignee cannot recover damages unless he has an insurable
interest in the property at the time when the loss occurs. A
stranger cannot sue on a fire policy.
11. Payment of Claims : Fire policies generally contain a
clause providing that upon the occurrence of fire the insurer shall
be immediately notified so that the insurer can take steps to
salvage the remainder of the property and can also determine
the extent of the loss. Insurance companies keep experts on their
staff 10 value the loss. If in a policy there is an intentional over-
I (1941) I K.B. 462
448 THE LAW OF INSURANCE

valuation of the property by the policy-holder, the policy may

be avoided on the ground of fraud.
,
TYPES OF FIRE POLICIES
There may be various types of fire policies. The principal
types are described below.
Specific Policy
A specific policy i, one under which the liability of the
insurer is limited to a spel ified sum which is less than the value
of property. .
Valued Policy
A valued policy is one under which the insurer agrees to
pay a specific sum irrespective of the actual loss suffered. A
valued policy is not a contract of indemnity'-
Average Policy
Where a property is insured for a sum \vhich is less than
its value, the policy may contain a clause that the insurer shall
not be Iiable to pay the full loss but only that proportion of the
loss which the amount insured for, bears to the full value of the
property. Such a chiuse is called the average clause and policies
containing an average clause are called average policies. The
phrase "subject to average" is equivalent to the insertion of an
average clause. Lloyd's Fire Policies are usually expressed to be
"subject to average".
Reinstateme~tor Replacement Policy
. In &uch .. p.oli~ies the insurer undertakes to pay not the value
of the property Ipst, but the.cost of replacement. of the propertY
destroyed Or damaged. The insurer may retain an option to
replace the property instead of paying cash.
Floating Policy i,

When One policy covers property situated'in different places

it is called a floating policy. Floating policies are always subject
to' an average c l a u s e . ' .
Combined. Policies
A single policy may cover losses due to a variety of cases,
e.g.. fire together with burglary, third party losses,' etc. A fire
 FIRE AND OTHER INSURANCE 449

policy may include loss of profits, i.e., the insurer may undertake
to indemnify the polic/-holder not only for the los~ caused by
fire but also for the loss of profits for the period during which
the establishment concerned is kept closed owing to the fire.

MISCELLANEOUS INSURANCE
Insurance ~galDst Personal Accidents
A contract of personal accident insurance is a contract by
which the insurer promises to pay a certain sum of money to
the insured in case of injury by accident and to the dependants
of the insured in case of death by accident. A personal accident
insurance is not a contract of indemnity because the insurer has
to pay a fixed sum of money. He is not required to indemnify
the assured. The contract of insurance is made in. the same
manner as other forms of insurance, i.e., by the payment of
premium and taking out a policy. The contract must satisfy aU
the essential requirements of an insurance contract e.g., there
must be' no concealment of any material fact. In U.K. accident
insurance policies for a specified journey can be effected easily
by filling out a form and paying the premium. For railway
journeys a coupon. for accident can be purchased along with the
purchase of the ticket. In India insurance against railway
accidents is almost unkriown but insurance against accidents
during air joumeys is very popular.
Accident insurance policies generally contain various con-
ditions Safeguarding the interests of the insurer. For example, the
policy may provide that the insurer will not be liable for accidents
if the assured engages in any unusual trade or occupation
involving more than ordinary dangers or if the assured incurs
accident while under the influence of drink.
The insurer in lin accident policy is liable only if the injury
or death is due to an accident and not due to natural causes.
It is difficult to define what is an accident. Lord Macnaughten
has defined an accident as an "unlooked for mishap, or an
untoward event which is not expected or designed." Fenlon v.
Thorley. I If a man deliberately jumps down from the roof of a
ho,:,se and 4ies, it is not an accident; but if he slips and falls
from the roof without intending to do so, it is an accident.
'(1903) A.C. 448

Commercial Law - 29
450 THE LAW OF INSURANCE

Insurance against personal accid~nt may be llnd;.usually is,.

a part of motor car insurance. .
Burglary InsuraDce'
Goods may be insured against theft or'robbery. Thepblicy
in such cases lays down what risks are covered. The policy-holder
is usually required to take 1Il1rellsonable' precautions against loss
by theft or robbery. In burglary and accidellt insurance there is
usually a provision that notice of toss or acCident must be gi~en
to the insurer immediately or' as soon as possible.
Fidelity InsuraDce
A contract of Fidelity Insurance promises to indemnifY. the
employer against loss .caused by misappropriation of funds or
damage to property committed by an employee. Such insurance
may be effected by the employee or by the employer with the
insurance company. There may be a collective policy covering
all employees.
Motor Car IDsurance
A policy of motor car insurance may cover three different
types. of risks, viz, (i) loss of or damage to the car by Becident
(ii) injuries to or death of' any passenger by accident and
(iii) damages payable to third 'parties by the owner of the car
for accidents. The same policy may cover all three risks. The
last item mentioned above is called insurance against third party
risks. According to the Motor Vehicles. Act of 1939 every owner
of a motor vehicle must take out a policy <lovering third party
risks. Insurance against the other two forms of risk is optional. .
Where an insurance policy covers third party risks, the third
party who has suffered damage can slie the insurer even though
he was not a party to the contraet of insurance.
IDsurBDee Policy for Workmea's CompensatioD
~ , " "

This tYpe .of policies cov~r the compensation w,hich has to be

paid for injuries or death qf employe,es according to the Workmen's
Compensation Act and the. Employee~' State, Ill$ul1ll)~e Act.
Tbe AH iD One Policy
An insurance policy m'lIy 'cover 'different types of risks
simultaneously. Thus there may be a p6licy combining insurance
against fire, accident. burglary., third party lOSSeS. etc.
 BOOK VII
THE LAW OF INSOLVENCY

CHAPTER I Proceedings Preliminary To Adjudication 452 - 461

What i. Insolvency? 452 ; Insolvency Legislation 452 ; The
Object of Insolvency Legislation 452; Insolvency Courts
453 ; When can a Person be Declared Insolvent? 454; Act
of Insolvency 454 ; Procedure of Adjudication 457 ; Who can
be Declared Insolvent? 458.

CI"\PTER 2 Proceedings After Order of Adjudication 462 - 479

Legal Effects of the Order of Adjudication 462 ; Voluntary.
Transfer 463; Fraudulent Prefences 464; Quties of the
Debtor 465 ; Public Examination 465 ; Private Examination
466 ; Property of the Insolvent 466 ; The Doctrine of Reputed
Ownership 468: The Doctrine of Relation Back 469;
Protected!Antecedtnt Transactions 469 ; Position of Secured
Creditors 470; Powers of Official AssigneelReceiver 470 ;
Duties of the Official AssigneelReceiver 472; Meeting of
Creditors 472; The Committee of Inspection 473;
"Composition" and "Schemes of Arrangement" 473 ; Proof
of Debts 474 ; Distribution of the Insolvent's Property 475 ;
Annulment of the Order of Adjudication 477; Small
Insolvencics 477. .

CHAPTER 3 Discharge of the Insolvent 480 - 484

The Ordcr of Discharge 480; Refusal of Discharge or
Conditional Discharge 481 ; Effects of the Order of Discharge
483.

451
 PROCEEDINGS PRELIMINARY
CD TO ADJUDICATION

WHAT IS INSOLVENCY?
According to popular usage an insolvent is one who is unable
to pay his debts. But no man can be called "insolvent" unless
a competent court declares him an insolvent. The statutes ~elating
to insolvency lay down the procedure by which a person can
be declared insolvent and the rules to be followed in distributing
the properties of such a person among his creditors.
INSOLVENCY LEGISLATION
The law relating to insolvency in India is contained in two
statutes: The Presidency Towns Insolvency Act of 1909 and the
Provincial Insolvency Act of 1920. The former applies to the
presidency towns, i. e., to Calcutta, Bombay and Madras. The
latter applies to all areas other than the three towns mentioned
above. Th~ two Acts are based on the same principles.
Differences. Mulla I said that the differences between the two
Acts relate mostly to matters of procedure. The points of
differences are summed up below:
I. The procedure from the date of presentation of the
petition to .the date of adjudication.
2. The duties of the debtor, including his examination.
3. The person in whom the debtor's property is to be vested.
4. The doctrine of Relation Back.
S. The constitution of the courts.
• Bankrup/ and Insolvenl. The Indian Acts relating to insol:
veney are based upon the English statutes on the subject. In
English law the terms "bankrupt" and "bankruptcy" are used in
the same sense as the terms insolvent and insolvency in India.
THE OBJECT OF INSOLVENCY LEGISLATION
Insolvency legislation has a two-fold objective: (i) protection
of debtors and (ii) safeguarding, as far as possible, the interests
of creditors. These objects are sought to be achieved in the
following way :
"Mulla. Lall' of Insolvency.

~52
 PROCEEDINGS PRELIMINARY TO AD1C[)IC ATION 453

I. Distribution of insolvent'. property

After a person is declared insolvent by the court, his
properties are taken over by an officer of the court (known as
the Official Assignee or the Clfficial Receiver). The properties
are converted into cash and distributed among his creditors in
proportion to the claim of each.
2. Cancellation of debts and removal of disqualifications
After the distribution is complete, the unpaid debts (except
certain specified debts) are cancelled and the insolvent is allowed
to engage in trade or service withou, any of his former
obligations. The creditors lose a part of their claims, the debtor
gets a fresh start in life.
3. Benefits to creditors
Insolvency legislation is also beneficial to the creditors. It
ensures the equitable distribution of the debtor's remaining
properties among all the creditors. If there were no insolvency
laws the debtor would have been free to dispose of his properties
in any way he liked. He might have wasted the properties or
might have paid one creditor proportionately more than the other
creditors. Because the court distributes the properties ratably each
creditor is sure of getting at least something.
4. Fresh start in life by debtors
Prior to the passing of insolvency legislation, a debtor who
was unable to pay debts was regarded as a sort of criminal and
was ver)! often sent to jail.)t was realised in course of time
that inability to pay debts is more often due to misfortune than
to misconduct and sending the debtor to jail is oppressive and
unprofitable. Insolvency legislation provides a method by which
the debtor can free himself from his past obligations and get a
fresh start in life.

INSOLVENCY COURTS

Bombay) Insolvency matters .Waft

In the Presidency towJ15.>'(i1e., in Calcutta, Madras and
with by the Hi8fr Courts.
In other areas, such matters are dealt with by the District Courts.
But courts subordinate to the district courts may deal with
454 THE LAW OF INSOLVENCY

insolvency matters if they are so empowered by the State

Government concerned. Insolvency courts have power to decide
all questions relating to tile realisation and distribution of the
debtor's properties and the determination of all questions relating
to priority of claims as be' veen different creditors.

WHEN CAN A PERSON BE DECLARED INSOLVENT?

Two conditions must be satisfied before a person can be
adjudicated insolvent: (i) he must be a debtor, i.e., he must owe,
money to others and his assets must be insufficient to meet all
th~ claims upon them; and (ii) the debtor has committed an 'act
of insolvency'. '
Act of Insolvency
An 'act of insolvency' is some act of the debtor which shows
that he is financially embarrassed. Both the Presidency Towns
Insolvency Act and the Provincial Insolvency Act contain a list
of acts which are to be considered acts of insolvency when
committed by a debtor. Only those acts which are listed as such
by the statutes mentioned above are considered to be acts of
insolvency.
Acts of Insolvency By An Agent
The principal can be adjudged insolvent for the act of an
agent, provided the following conditions are fulfilled: (I) the
act of the agent was expressly or impliedly authorised to do the
act, or (2) if the nature of the principal's business is such that
it may be considered the act of the principal.
List of Acts of Insolvency
Each of the following acts committed by the debtor IS an
act of insolvency:
I. If in India or elsewhere, he makes a transfer of all or
substantially all his property to a third person for the benefit
of his creditors generally.
Explanation: The transfer of the bulk of a person's property
for the benefit of creditors is clearly evidence of financial
embarrassment and is therefore an act of insolvency. Any creditor,
who is not a party to the transfer can apply for adjudication on
this ground. The intention of the debtor does not mailer because
 PROCEEDINGS PRELIMINARY TO ADJUDICATION 455

the fact of transfer gives jurisdiction to the court. The transfer

. becomes void if the debtor is adjudged insolvent within three
months' of 'the transfer. .
2. If in India or elsewhere, he makes a transfer of his property
or any part thereof, with the intent to defraud or delay his
creditors.
Explanation: In such cases it must be proved that the debtor
had a dishonest intention-to defeat or delay creditors. Upon
proof of such fact die court wilt issue an adjudication order. The
transfer becomes void upon the passing of the order of adju-
dication. . .
3. Ifin India or elsewhere, he makes any transfer of his property
or any part thereof it would under this (insolvency) or any other
enactment for the time being in force, be void as a fraudulent
preference if he were adjudged an insolvent. (See p. 463)
Explanation : Fraudulent preference occurs when an insol-
vent debtor prefers one creditor to another, i.e.; pays one creditor
more than what he would have received had the properties been
ratably distributed. Fraudulent preference amounts to an act of
insolvency. Upon. adjudication the creditor so preferred must
refund the money obtained.
4. If, with intent to defeat or delay his creditors-
(i) he departs from or remains out of India;
(ii) he departs from his dwelling house or usual place of
business or otherwise absents himself;
(iii) he secludes himself so as to deprive his creditors of the
means of communicating with him.
Explanation: The intention of the debtor-to defeat or delay
his creditors-<an be gathered from the circumstances.
5. If any of his property has been sold or attached for a
period of not less than 21 days in execution of the decree of
any court for the payment of money.
Explanation : Under the Provincial Insolvency Act only a
sale in execution is an act of insolvency, not attachment in
execution.
6. If he petitions to be adjudged an insolvent.
7. If he gives notice to any of his creditors that he has
suspended, or that he is about to suspend, payment of his debt.
8. If he is imprisoned in execution of the decree of any court
for the payment of money.
456 THE LAW Of INSOLVENCY

9. If a creditor has served an "Insolvency Notice" in respect

(Of any decree or order for payment of money (being a decree
or order wh ich has become final and the execution whereQf ha~
not been stayed), and if the debtor has not paid the money within
the period specified in notice.
Explanation: Non-payrlent of money in terms of the notice
amounts to an "act of insolvency". The rules regarding notice
are 5tated below :
(a) The notice must be given according to the prescribed
form and prescribed manner.
(b) It must specify the amount due. If the sum specified in
the notice exceeds the actual amount, the insolvency notice does
not become invalid, unless the debtor gives notice to the cre4itor
in this regard.
• (e) It must specify the period for its compliance, i.e., not
less than one month and in the case of a debtor residing outside
India whether permanently or temporarily, such period as may
be specified by the order of the Court granting leave for the
service of such notice.
(d) It must specify the consequences of non-compliance.
The notice does not amount to an "act of insolvency" in
the following cases :
(i) If the debtor makes an application against the notice and
if it 'is allowed by the Court.
(ii) If the debtor resides, whether permanently or tempo-
rarily, outside India, unless the creditor obtains the leave
of the Court.
(iii) If the debtor has a counter-claim, right of set-off or is
entitled to have the decree or order set aside for the
relief of indebtedness or made an application for the
• setting aside of the decree or order, or the time allowed
for application has not expired or the d~cree or order
is not executable under the existing law. .
Comment : The provision of Insolvency Notice (stated in
para 9) was enacted in Maharashtra in 1939. In 1978, it w,s
applied to the whole of India under the Insolvency Laws
(Amendment) Act 1978. This rule is under the Presidency Towns
Insolvency Act, 1909 and also under the Provincial Insolvency
Act, 1920.
 PROCEEDINGS PRElIMINARY TO ADJUDICATION 457

PROCEDURE OF ADJUDICATION
Order of Adjudication
The order of court by which a person is declared. to be
insolvept is called the Order of Adjudicatio~
Before the court can pass an order of adjudication there must
be a petition presented to it either by a creditor or by the debtor.
The petitioning creditor or debtor must fulfil certain conditions.
Conditions of a creditor's petition
The following conditions must be fulfilled before a creditor
can present a petition for the adjudication of a person as
insolvent :
I. The amount owned must be Rs. 500 or more. Two or
more creditors may present a joint petition, in which case it is
sufficient if the total claim of the creditors amounts to at least
Rs. 500 in all.
2. The debt is a liquidated sum payable either immediately
or at some certain future time.
3. The debtor must have committed an ael insolvency within
three months before the presentation of the petition.
4. A sect/red creditor i.e., one who holds some movable or
immovable property of the debtor out of which he can realise
his claims, is not ordinarily interested in insolvency proceedings
because his dues are safe. But a secured creditor can present
:ill insolvency petition if the following conditions are satisfied:
(i) he abandons his security in favour of all the creditors,
or
(iI) the security is insufficient to meet his claims and the
insufficiency amounts to at least R~. 500. (In the latter
£ase he must in his petition mention the valuation of
the security and show that he satisfies the conditions
mentioned above regarding a creditor's petition.)
CODditions of debtor's petition
A debtor is entitled to present a petition for the adjudication
of himself as an insolvent if anyone of the following conditions
are fulfilled :
(I) his debts amount to Rs. 500, or
(2) he has been arrested and imprisoned in execution of the
decree of any court for the payment of money, or
4S8 THE LAW OF'INSOLVENCY

(3) an order of atnicbment in execution of a money decree

has been made and is subsistin'g agaill~t his propj:)1y.
Tbe Procedure of Insolvency
Under both the Acts, insolvency' is done' through the
following successive·stages : (I) presentation of:the insolvency
petition and the evidence of it (2) the appointment of an i'nterim
Assignee or Receiver (3) passing the oreier of adjudication and
(4) the discharge of the insolvent.
"
Procedure after tbe filing of an Inso'venc:y PI'titlon
A creditor's petition must be verified by an affidavit of the
creditor or of some person having knowledge of the facts .. At
the hearing the. court .shall require proof of the debt of the
petitioning creditor and of the debtor's act of. insolvency, Notice
of the petition must be given to the debtor. If all the necessary
facts arc proved the c9urt will issue the orde~ of adjudication,
If the debtor appears and proves 'that he is not indebted or if
he pays the amount due to the petitioning creditor no order of
adjudication will be passed,
The court may at the time of presentation of the petition
appoint an interim receiver to take charge of the properties of
the debtor,
In the case of a debtor's petition, the debtor must prove that
he is entitled to present the petition and upon such proof ·the
court will issue an order of adjudication,

WHO CAN BE DECLARED INSOLVENT?

Any ,person, man or woman, who has attained majority can
be declared insolvent if the conditions [aid down' in the [nsol-
veney Acts are fulfilled, (See above under creditor's and debtor's
petition.) Certain special cases are 'discussed below.
Minor
In India .1 minor is not .personally responslb[e for' his debts
and is not capable of entering into contracts. Therefore a minor
cannot be. adjudicated an insolvent. If by error a minor is
adjudicated insolvent, the order must be annulled, i.e.• cancelled.
Lunatic:
A lunatic can be adjudged insolvent for debts im,urred by
him while he was sane. The other conditions necessary for
 PROCEEDINGS PRELIMINARY TO ADJUDICATION 459

passing an Order of Adjudication must be satisfied, e.g., there

must be an act of insolvency. It must be noted that a lunatic
cannot commit those acts of insolvency which involve conscious
volition, i.e., acts which involve intent. Thus a lunatic cannot
stay away from his place of business "with intent to defeat and
delay his creditors."
\Vomen
[n India a married or an unmarried woman does not suffer
from any contractual incapacity. She can o;.vn property and
contract' debts. Therefore she can be declared insolvent under
appropriate circumstances.
Foreigner
A foreigner can be adjudicated insolvent if he commits an
act of insolvency in India while resident here.
Joint Debtors
When money is borrowed by two or more persons jointly,
all of them can be declared insolvent on a single petition provided
some act of insolvency is committed by each of them or jointly
by all.
Partners
Since every partner is responsible for all the debts of the
firm, the creditor of a firm can file an insolvency petition against
any partner or all the partners for any debt due and owed by
the firm. But it must be proved that the partner concerned has
committed an act of insolvency. A minor partner cannot be
declared insolvent for a partnership debt.
Under English law an adjudication order cannot be passed
against a firm in the firm name. In India under both the
Presidency Towns [nsolvency Act and the Provincial Insolvency
Act an adjudication order can be passed againS; a firm in the
firm name. Such an order is equivalent to the adjudication of
all the partners (except a minor partner, if any), as insolvent.
Joint Hindu Family
A creditor of a joint Hindu Family can present a petition
for the adjudication of all the members of the family as insolvent
460 THE LAW OF INSOLVENCY

provided the debt is one for which all the members are respon-
sible and an act of insolvency has becm committed by all the
members jointly. Minor members will not be declared insolvent.
In the case of a joint Hindu family firm managed by the
Karta, members who partie ipate in the management and the Karta
can be declared insolvent for debts due from the firm. If the
man:lgement is solely in the hands of the Karta, only the Karta
can be declared insolvent because the other members are not
personally responsible for the debts-they are responsible only
to the extent of their share in the joint family properties.
Deceased Person
A dead man cannot be declared insolvent. His debts will be
paid pro rala in course of the administration of his estate. If
a debtor dies after the presentation of the insolvency petition,
his estate will be administered by the Official Assignee as IIpon
insolvency, unless the court otherwise directs.
Legal Representative
The legal representati ve of a deceased debtor cam.ot be
declared insolvent for a decree obtained against him as legal
representative, because he is not personally responsible for such
debts.
Companies
A company cannot be declared insolvent. In case of insolvent
companies the proper procedure is winding up.
Convict
A prisoner in the jail can be declared insolvent.

EXERCISES
I. What are the objects of insolvency law? How are l~ey sought to
be achieted? (Pages 452-453)
2. What are the main ditTerences between Presidency Towns Insolvency
Act and Provincial Insolvency Act? (Page 453)
3. Can lhe following persons be adjudicated as insolvent-a foreigner,
a minor, a lunatic, one of the partners' (Pages 458-459)
4. State the stages of Insolvency viz.-{I) a person becomes insolvent,
(2) the order of adjudication, (3) the administration of the insolvent
properties and (4) the discharge. (Page 458)
 PROCEEDINGS PRELIMINARY TO ADJUDICATION 461
. I

S. When can a creditor file an application for the adjudication of his

debtor as an insolvent? (Page 457)
6. When can a debtor file an application for his~adjudication as an
insolvent? (Page 457)
7. Define the following tenns : (a) Act of insolvency (b) Order of
Adjudication. ' . (Pages 454, 457)
8. Objective questions. Give short answers.
(i) State whether a minor and a lunatic can be adjudged insolvent.
(Page 458)
(ii) State whether a man with unsound mind can be adjudged an
insolvent. . (Page 458)
(iii) Who can be declared an insolvent? (Page 458)
9. Stale whether Ihe following persons can be adjudged Insolvenl.
(I) Deceased person,
(ii) Married women,
(iii) Legal Representative,
(iv) Minor. (Pages 458-460)
 PROCEEDINGS AFTER ORDER
OF ADJUDICATION

LEGAL EFFECTS OF THE ORDER OF ADJUDICATION

The order of the court by which a person is declared
insolvent is called the Order of Adjudication. Upon such an order
being passed the following consequences ensue
. I. Vesting of the Properties of the insolvent
The properties of the debtor (except properties held by him
in trust for others and tools of trade, wearing apparel and similar
items) vest in WI officer of the court who is called the Official
Assignee (under the Presidency Towns Insolvency Act) and the
Official Receiver (under the Provincial Insolvency Act).
All the properties of the debtor in India (except the items
mentioned above) automatically veJt in the Official Assignee or
the Official Receiver and the insolvent no longer possesses any
power to deal with such properties in any way. Official Assignee
of Bombay v. Registrar. SmalfCulises. 1 As regards properties of
the insolvent outside India, it has been held that movable
properties vest in the same way as properties in India but
immovable properties do not, unless the law of the country in
which they are situated allows such vesting. Yokohama Specie
Bank v. Curlenders & Co2
2. Management
The Court may appoint a manager to assist the Official
Assignee or the Official Receiver to manage the properties of
the insolvent.
3. Administration
The Official Assignee or the Official Receiver takes posses-
sion of the properties, sells them and distributes the money among
the creditors according to rules contained in the insolvency Acts.
4. Relation Back
The insolvency of a person commences, not from the date
I 37-I.A 86 '43 Cal L.1. 436

462
 PROCEEDINGS AFTER ORDER OF ADJUDICATION 463

when "'e order of adjudication is' passed, but from an earlier

d~. (See. p. 469)

5. Suits against Insolvent

, After the Order of Adjudication is passed no creditor can
commence any suit or legal proceedings against the insolvent
except with the leave of the insolvency c ",,.f and subje~i to such
terms and conditions as the insolvent": court' may impose.
6. Stay of Suits
A suit and proceeding already filed, may be stayed but may
be continued with the leave of the' insolvency court.

.
7. Proof of Debts '

After insolvency proceedings commence, all unsecured credi-

tors have the right to prove their claims before the Official
Assignee or the Official Receiver and thereafter get a share of
the remaining assets of the insolvent. The position of secured
creditors is different.
8. Personal Disqualifications
Upon adjudication as an insolvent the debtor loses certain
civic rights, viz.,' he cannot hold the post of a magistrate, or any
office under a local authority, or be a member of a local authority,
These disqualifications' are removed only if the order of adju-
dication is annuHed (i.e., cancelled), or if the insolvent is
discharged with a' certificate from the court stating that his
insolvency was caused by misfortune and not by misconduct: In
addition to the d'isqualifications laid down under the insolvency
Acts, there are others imposed by different statutes: For example,
under,the Companies Act of 1956', an undischarged insolvent
cannot act as director of a company.
9. Duties of the Insolvent
The. insolvent must produce his books .of account to the
Court, file.1i schedule of assets and liabilities and perform all
the duties of the debtor, enumerated in the Insolvency Acts.
(See p. 46))·
10. A~oidance of Voluntary Transfers
A voluntary transfer is a transfer without consideration e.g..
a gift. Under the Presidency Towns Insolvency Act all voluntary
464 VfE LAW OF INSOLVENcy

transfers (except transfers made by the insolvent to his wife on

the occasion of his marriage) become void and Inoperative if an
order of adjudication is passed against, the ,traAsfe~ within ,two
years of the date of transfer. Under the Provin!?ial Insolvency
Act all such transfers made within two years of the date of
presentation of the peti~ion for adjudication become void if an
order of adjud.ication is passed on the petition. The properties
involved in the transfer . 'est in the Official Assignee or the
Official Receiver as the c .se may be,
11. Avoidanee of Fraudaleat Prefereaees
Fraudulent Preference means any act of the debtor by which
one creditor is preferred to another in the matter of payment of
h is dues. Such preference can be shown by transfer of property,
payment of money or otherwise. Suppose that a person . is
indebted to X for Rs. 5,000, to Y fot Rs. 4,000 and Z for Rs.
2,000, His total assets amount to Rs. 3,000 and he transfers them
to Y with the deliberate intention of giving an advantage to Y
as against X and Z. This is fraudulent preference.
Effects : (i) A fraudulent preference is an aq of insolvency.
When a debtor does an act wh ich amounts to a fraudu lent
preference any of his creditors can, within three months of ttie
act, file a petition for declaring him insolvent. . '
(ii) The Insolvency Acts provide that a ft:audulent preference
is void and inoperative if the foHowing cp~itions are satisfied ,
(a) the debtor was in insolvent circumstances at the time
the transfer· was made; i.e,. was unable to pay his debts'
as they fell due; . - .
(b) the transfer was made in favour of a creditor and had
the effect of preferring that creditor over others;
(e) the transfer was made by the debtor with a view to'giving
preference to that creditor; and
(d) the debtor was adjudicated insolvent on Ii petition
presented within three months after the date of the
transfer. . '
(iii) The money and property, received by the cn:cIitor, who
was fraudulently preferred, must be retlV'led to the Official
Assignee or Official Receiver if the debtOr is 'adjudicated
insolvent within three months of the date when the fraudulent
preference occurred. But if the creditor liad transferred' any of
 PROCEEDI~GS AFTER ORDER Of ADJljDICATlO~ 465

the properties received by him to a hOllafide purchaser for valu~,

the transfer is valid and the rights of the transferee are not
affected.

12. Tbe Protection Order

Protection Order means an order by the court prohibiting the
arrest of an insolvent debtor in execution of a decree for the
payment of money. Under the Presidency Towns Insolvency Act
such an order may be passed after the order of adjudication is
passed and after the insolvent has filed a schedule of his assets.
But the court may. at its discretion, issue a protection order before
the filing of the schedule. if necessary. Under the Provincial
[nsolvency Act a protection order may be passed any time after
the admission of the petition for adjudication. [f an insol\ ent .s
already under arrest the court may order his releasc.

DUTIES OF TilE DEBTOR

1. As soon as the petition for adjudication is admitted. the
debtor must produce his books of account before the court.
2. Within 30 days of the date of the adjudication order (if
rhe order is passed on the application of the debtor) and within
30 days of the service of the order of adjudication (if the order
is passed on the application of a creditor) the insolvent must
file a schedule of his asscts and liabilities. The schedule must
be verified by an affidavit and must contain an inventory of his
properties and a list of his debts together with the names of the
c;.reditors. [f without any reasonable excuse the insolvent fails to
file a correct and proper schedule he may be committed to prison
by the court.
3. Public Examination of the Insolvent : Under the
Presidency Towns [nsolvency Act the court fixes a date tor
holding a public examination of the insolvent. The insolvent
must, on the appointed date. attend court·and answer all questions
put to him by the court. the Official Assignee and any creditor
The object of the examination is to determine the causes which
led to insolvency. The COLIn may dispense" ith the holding of
the public examination if the insolvcnt is a IUllatic or a
pardanashin woman or if he or she is st.tTering from sonie disease
or disablement.

Commerdal Law - 30
466 THE LAW OF INSOLVENCY

Under the Provincial Insolvency Act the court must examine

the debtor while the petition for adjudication is being heard. by
the court. During such examination the creditors present may put
questions to the debtor.
4. The insolvent must attend any meeting of the creditors
which the Official Assignee may require him to attend and must
disclose before the meeting such information as may be required.
5. The insolvent must execute such powers of attorney,
transfers and instruments as may be required by the Official
Assignee or the Official Receiver and must do all such acts and
things in relation to his properties as may be required by the
Official Assignee or the Receiver. Failure to perform any of these
duties amount to contempt or court and the insolvent may be
punished for it.
6. The insolvent must assist the Official Assignee, to the
best of his ability, in the realisation of his property and the
distribution of the propertY among the creditors.
7. Private Examination: The.court may, on the application
of the Official Assignee or the Official Receiver or any creditor
who has proved his debt, summon before it the insolvent or any
other person who is suspected or known to be in possession of
property belonging to the debtor or is indebted to him or is
capable of giving information regarding the insolvent's property
or the causes of insolvency. When such persons attend, questions
are asked by the court.
If the person summoned does not attend he may be arrested
upon 8 warrant issued by the court.
If the person summoned admits that he is indebted to the
insolvent, the court may issue an order for the payment of the
money to the Official Assignee. Similar orders may be issued
as regards any property of the insolvent held by the person
examined. The orders of the court regarding payment of money
or the delivery of property can be executed like decree of a court.

PROPERTY OF THE INSOLVENT

The term property has been defined in the Insolvency Act
so as to include properties of which the insolvent is the owner
and alsQ properties over which he has a disposing power. Some
of these properties are available for distribution among the
creditors. some arc not.
 PROCEEDINGS AFTER ORDER OF ADJUDICATION 467

Properties available for distribution among creditors

The following types of properties can be distributed amon~
the creditors:
I. All properties, movable or immovable, of which the
insolvent was the owner at the dale. of commencement of
insolvency (except trust properties, tools ot trade and certain other
items). The following types of properties are available for
distribution among creditors: immovable properties; cash in
hand, jewellery and other movables; life insurance policies:
patents and copyrights belonging to the insolvent; partnership
assets, including goodwill in case of insolvency of a firm:
leasehold interests; occupancy rights; actionable claims etc.
2. Properties which may be acquired by the insolvent or
which may devolve upon him after the commencement of
insolvency but before the date of discharge e.g., a legacy As
regards properties coming within this category it has been held.
,in several cases under the Presidency Towns Insolvency Act, that
they do not vest automatically in the Official Assignee. The
Official Assignee must intervene and claim the property, These
decisions are based On the rule laid down in the English case.
Cohell v. Milchell. 1 Under the Provincial Insolvency Act.
however, such properties vest automatically in the Official
Receiver.
Salary earned by the insolvent after the commencement of
insolvpncy must be handed Over to the Official Assignee or
Receiver except such portion of it as may be allowed to the
insolvent for his maintenance.
3, If the ins,)lvent has any power of disposal over some other
person's property, whi.::h he can use for his won benefit, such
power vests in the Omcial Assignee Example: The power of
the father in a Mitakshara joint family to dispose of the undi\ idcd
interest of the s,)n.
4. Goods of which the insolvent is the reputed o",ner vcst
in the Official Assignee, (See pages 372-373)
Property not divisible among creditors
Properties of the following types can be retained by the
inSOlvent. They are not available for distribution among the
creditors
4(,8 THE LAW OF INSOLVENCY

I. Properties held by the insolvent in trust or on behalf of

<,ther persons.
2. Under the Presidency Towns Insolvency Act, the insolvent
can retain his 100is oftrade. wearing apparel and cooking utensils.
The total value of all these things must not exceed Rs. 300.
3. Under the Provincial Insolvency Act. the insolvent is
allowed to retain all those properties which are exempted from
attachment and sale execution of a decree, according to provi-
sions of the Civil Procedure Code. Such properties include
wearing apparel. cooking utensils. tools of trade and certain other
items.
,I. The right to sue a third party for personal injuries does
not vest in the Official Assignee or the Receiver. Similarly a
.\j){'S successiunals. i.e., a mere chance of getting SOI1l~ property

upon the death of another does not pass upon insolvency.

5. Moneys in a recognised provident fund. gratuities and
pensions (subject to certain limits) are not available for distri-
bution among creditors.

~ THE DOCTRINE OF REPt:TEO OWNERSHIP

. Goods len with the insolvent by others can be taken
possession of b) the Official Assignee or Receiver on behalf of
the creditors under the circumstances mentioned helm\,. This is
lnclwn as the Doctrine of Reputed Ownership.
I. The) must be movable goods.
, Tiley must be ill the possession of the insolvent.
~. There must be 110 mark or other indication showing that
the goods belong to some person other til an the insol-
YCIlt.
4. The circumstances are such that people dealing with the
ins"lvent are likely to believe that tile goods belong to
the insolvent.
The sale proceeds of such goods arc available for distribution
31llClllg the creditors of the insolvent. The true owner of the goods
can claim as il creditor of the insolvent for the value of tile g<'ods.
His po~ition i~ thai of an unsecured creditor.
The D,'ctrinc of Reputed O .... nership docs not apply ill the
fol!lwl.il1g ca . . cs : (j) JI11Tll0\'abk pr()pertit.:s. (;/) (j0ud~ taJ...cn on
hire-purchase. (iii) Goods which \\erC in the possession of the
 PROCEEDINGS AFTER ORDER OF ADJeDIC AfJO:> 469

insolvent as repairer or carrier or commission agent or as pa\vnec.

(iv) Goods in the possession of the insolvent as trustee or
administrator or executor or any similar capacity.

THE DOCTRINE OF RELATION BACK

The insolvency of a person commences, not from the date
when the order of adjudication is passed, hut from an earlier
date. The order of adjudication relates back and operates from
an earlier date. This is known as the Doctrine of Relation Back
Under the Presidency Towns Insolvency Act the insolvency
of a debtor commences from the date when the first act of
insolvency was committed by the debtor within three months
before the date of presentation of the insoh'cncy petition.
Under the Provincial Insolvency Act, the insolvency of the
debtor commences from the date of presentation of the petition
on which the order of adjudication was passed.
Example:
The insolvent performed the A~t of Insolvency 'on 1st April. The
petition for Order of Adjudication \\a5 filed on 29th Junt:'. The Ordcr
of Adjudication \vas issued on 1st August.
Under the Presidency Towns Insolvency Act, the inso!vency of th~
debtor commences on I sl April. Under the Provincial Insolvenc)
Act, the insolvency commences from 29th Junc.

PROTECTED ANTECEDENT TRANSACTIONS

The term Protected Transaction is used tn denote the
transactions of the insolvent, in relation to his prnp~rty. \\'-hich
arc not invalidated by the insolvency proceedings. Such trans-
actions can be classified as follows :
1. TnmsGlctions entered into he/ore the commend?mcnl of the
inso/vcnc.\/ proceedings : A II stich transactions are ~nod except.
(i) transfers of property made without consideration "ithin t\\O
years Defore the commencement of insolvency. Such transfers are
called Voluntary Transfers and they can be set aside by the
Official Assignee or the Receiver. But a voluntary transfer to
the wife of the insolvent on the occasion of his marriage is not
deemed to be a voluntary transaction and is protected. (Ii) A
trallsfer of property to a creditor under circumstances \\ hieh
amount to a fraudulent preference is not protected. Such a transfer
can be avoided by the Official Assignee or the Receiver.
470 THE LAW OF INSOLVENCY

2. Transactions entered into between the date of the filing

of the insolvency petition ond the Order of Adjudication : AllY
such transaction is protected if (i) it is not a voluntary transfer
or a transaction amounting to fraudulent preference, and (ii) the
other party to the transaction had nO knowledge of the presen-
tation of the insolvency petition.
3. Transactions entered into afier the Order of Adjudication :
Such transactions are not protected. They are invalid and can
be set aside by the Official Assignee or the Official Receiver.
POSITION OF SECURED CREDITORS
A secured creditor is one who has lent money to the insolvent
on the security of some movable or immovable property. A
secured creditor has the right to realise his dues in full out of
the security given to him and this right is not affected by the
insolvency proceedings. It is therefore said that secured creditor
stands outside the insolvency. But he can participate ill the
insolvency pr"ceedings if he so desires. When a debtor is
declared insolvent, secured creditor has the following options
before him.
I. He can have the security sold. If the sale proceeds are
greater than his dues, he must refund the excess to the Official
Assignee or Receiver. If the sale proceeds are less than his dues,
he can prove for the balance before the Official Assignee or
Receiver. For this balance his position is like that of an unsecured
cred itor and he wi i I get payment at the same rate as other
cred itors do.
2. He can surrender his security to the Official Assignee or
Receiver and prove for his whole claim like an unsecured
creditor. He will receive payment at the same rate as other
unsecured creditors.
3. He can value his security and submit to the Official
Assignee a claim for the balance, if any, together with a statement
of the particulars of the security and the assessed value. In this
case the Official Assignee can redeem the security by paying
the assessed value.

POWERS OF OFFICIAL ASSIGNEEIRECEIVER

The Presidency Towns Insolvency Act provides that it is the
duty of the Official Assignee to realise the properties of the

,
 PROCEEDINGS AFTER ORDER OF ADJUDICATION 471

insolvent and distribute the same among the creditors with all
convenient speed. For this purpose he can exercise the following
powers without leave of court:
(a) He can.sell all or any part of the property of the insolvent.
(b) He can give receipts for any mOlley received by him.
The Official Assignee can, with the Iccn'c of the Court, do
all or any of the. following things :
(I) carry on the business of the insolvent so far as may be
necessary for the beneficial winding up of the same;
(2) institute, defend or continue any suit or other legal
proceedings relating to the property of the insolvent;
(3) employ a legal practitioner or other agent to take any
proceedings or do any business which may be sanctioned by the
Court ;
(4) accept as the consideration for the sale of any property
of the insolvent a sum of money payable at a future time or
fully paid shares, debentures or debenture stock in any limited
company subject to such stipulations as to security and otherwise
as the Court thinks fit:
(5) mortgage or pledge any part of. the property of the
insolvent for the purpose of raising money for the payment of
his debts or for the purpose of carrying on the business :
(6) refer any dispute to arbitration, and compromise all debts.
claims and liabiliiies, on such terms as may be agreed upon ;
(7) divide in its existing form amongst the creditors. accord-
ing to its estimated value. and property which, from its peculiar
nature or other special circumstances, cannot readily or advan-
tageously be sold.
Duties: The Official Assignee shall account to the Court
and pay over all moneys and deal with all securities in suel,
manner as is prescribed or as the Court directs.
The powers and duties of the Official Receiver under the
Provincial Insolvency Act are similar to those given to the
Official Assignee.

Disclaimer of Onerous Property

"Onerous Property" means property which is subject to an
obligation or liability. Examples: land the ownership of which
is subject to restricti"e covenants or obliges the owner to some
personal service: shares on which there are unpaid calls;'
472 THE LAW OF INSOLVENCY

property which is not readily salable. Unprofitable contracts,

entered into by the insolvent, also come within the category.
Under the Presidency Towns Insolvency Act, the Official
Assignee is given power to disclaim such property, i.e., refuse
to accept it. Such disclaimer must be made by notice in writing
signed by the Official Assignee within 12 months of the date
of the Order of Adjudication or within 12 months of the date
on which the Official Assignee came to know the existence of
such property.
Disclaimer of onerOus property is essential to prevent the
Official Assignee from being burdened with the obligations
connected with the onerous property. Whenever the liabilities
relating to a property are larger than its value, disclaimer is made.
Upon disclaimer the rights, interests and obligations of the
insolvent relating to the disclaimed property come to an end. A
person who is affected by the exercise of the right of disclaimer
is treated as a creditor of the insolvent to the extent of the damage
suffered by him and can prove for the same as a debt under
i nsol vency.
The Official Assignee cannot disclaim a leasehold interest
without the leave of the Court.

DUTIES OF THE OFFICIAL ASSIGNEEfRECEIVER

I. The Official Assignee or the Official Receiver must realise
the property of the insolvent with all convenient speed.
-:t. Money received by him must be kept and accounted for
according to the rules made by the court.
3. He must distribute the moneys received by him among
the creditors without showing any partiality to any particular
creditor.
4. He must pay due regard to the wishes of the creditors
as indicated in meetings of creditors and must submit schemes
of arrangement and composition, if any, before the creditors.
5. He must obey orders of the Court.

MEETING OF CREDITORS
The Presidency Towns Insolvency Act provides that the
Court may, any time after passing the Order of Adjudication,
and upon the application of the Official Assignee or any creditor,
 PROCEEDINGS AfTER ORDER OF ADJUDICATION 473

direct that a meeting of the creditors be convened for the purpose

of considering the causes and circumstances that led to the
insolvency, the insolvent's schedule and the mode of dealing with
the insolvent's estate. Subject to the provisions of the Act and
the directions of the Court, tlte Official Assignee must have
regard to the wishes of the creditors as expressed in the
resolutions passed in the creditor's meetings.

THE COMMITTEE OF INSPECTION

It is provided by both the Insolvenc\ Acts that the COllrt
may authorise the creditors who have proved their debts to
appoint from among themselves a committee to be known as the
Committee of Inspection. The duties of the Committee of
Inspection are as follo"s :
(I) to convey to the Official Assignee or Rcceiver the wishes
of the creditors; and
(2) to keep watch over the administration of the estate of
the insolvent.
Details regarding the powers of the Committee of Inspection
are prescribed in the insolvency rules framed by the High Court.

"COMPOSITION" AND "SCHEMES OF

ARRANGEMENT"
After insolvency proceedings commence. the debtor can
come to an understanding with the creditors regarding the
payment of the debts. Such understanding 0/ settlement may be
of two types : (i) it may be a "composition" of the debts or
(ii) it may be a "scheme of arrangement". When the debtor pays
immediately, or by agreed instalments, some money to the
creditors less than what is due to them and the latter agree to
accept such lesser amoLint in full satisfaction of their claims, there
is said to be a composition of the debtS. On the other hand when
the debtor and the creditors agree to a scheme by which the debts
are gradually liquidated (perhaps without selling all the debtor's
assets) there is said to be a "scheme of arrangement".
A proposal for composition or arrangement must be submit-
ted to the Official Assi~ne" or Receiver after the Order of
Adjudication is passed. The Official Assigne, or Receive- must
Ihereupon submit the proposal before a meeting of the creditors.
If in such creditors' meeting a majority in number and three-
474 THE LAW OF INSOLVENCY

fourths in value of the creditors who have proved their claims,

agree to accept the proposal it is put up before the Court for
approval. Before giving approval the Court shall consider the
conduct of the insolvent and the objections of dissentient
creditors, if any. If after hearing the Official Assignee and the
creditors, the Court is of opinion that the proposal is reasonable
and beneficial to the general body of creditors, it will give irs
sanction. The Court will not sanction any composition or scheme
of arrangement in the following cases :
I. If it considers the proposal to be unreasonable and not
beneficial to the creditors.
2. In cases coming under the Presidency Towns Insolvency
Act, if the circumstances are such that the Court must refuse,
suspend or attach conditions to the debtor's discharge, the Court
will not sanction a scheme of arrangement or composition unless
it provides reasonable security for the payment of at least four
annas in the rupee on all unsecured debts proved against the
insolvent.
3. In cases coming under the Provincial Insolvency Act under
circumstances similar to those mentioned above, the Court will
not sanction any composition or scheme of arrangement unless
there is reasonable security for the payment of at least six annas
in the rupee.
Comments
When the Court sanctions a compOSitIon or scheme of
arrangement, its terms shall be recorded in the order of the Court,
the insolvency proceedings shall be terminated and the Order of
Adjudication shall be annulled.
If the insolvent defaults in carrying out the terms of the
composition or arrangement, or if the Court is of opinion that
it cannot be carried on without unnecessary delay, or if the Court
finds that the approval of the Court was obtained by fraud, the
composition or scheme of arrangement will be annulled and the
debtor will be readjudged insolvent.

PROOF OF DEBTS
The following debts can be proved In insolvency
proceedings :
I. Debts incurred by the insolvent for a fixed or ascertained
sum of money.
 PROCEEDINGS AFTEP ORDER OF ADJUDICATION 475

2. Claims for which a decree has been passed by a court

of law.
3. Unascertained claims for damages arising from breach of
contract or breach of trust.
The following debts cannot be proved in insolvency
proceedings:
I. Unascertained claims, except those arising from breach
of contract or breach of trust.
2. Debts the value of which cannot be estimated and debts
which are illegal, immoral or against public policy.
3. Under the Presidency Towns Insolvency Act, debts
contracted from a person who has knowledge of the
presentation of the insolvency petition cannot be proved.
Mode of Proof of Debts
Debts arc provable according to the method laid down by
the. rules of the High Court concerned. Under the Presidency
Towns Insolvency Act the usual procedure is that the creditor
has to send a registered letter to the Official Assignee with an
affidavit containing particulars of the clailll. The Official Assignee
may ask for the production of vouchers or other evidence of the
claim. Under the Provincial Insolvenc), Act the claim has to be
submitted to the Court.

DISTRIBUTION OF INSOLVENT'S PROPERTY

Out of the assets realised by the sale of the insolvent's
properties, the Official Assignee or Receiver Illust retain such
sums as are necessary for meeting the costs, charges and expenses
of administering the estate of the insolvent. The balance is to
be distributed among the creditors in the following order:
I. Payment must be made firsl to meet th~ following c1aims-
I. Debts due to the Government or any local authority.
2. Wages of any clerk, servant or labour employed by the
insolvent for services rendered during four months
previous to the presentation of the insolvency petition,
subject to the following limits : (i) under the Presidency
Towns Insolvency Act--Rs. 300 for a clerk and Rs. 100
for each servant or labour (ii) under the Provincial
Insolvency Act.-Rs. 20 for each.
3. Under the Presidency Towns Insolvency Act arrears of
rent of the landlord for one month.
476 THE LAW OF INSOl.VENCY

4. Arrears of compensation payable to a workman under

the Workmen's Compensation Act.
The debts mentioned above rank equally and must be paid
in full before any payment can be made for other debts. If the
assets are not sufficient, to pay all these debts in full, they abate
in the same proportion (i.c .. they are reduced in equal proportion).
II. If any assets are left after paying the preferential claims
mentioned above, the balance is distrihuted among the unsecurt'd
creditors ratahly. In case of insufficiency all claims abate
proportionately.

Interest
No interest runs after the· Order of Adj udication is passed.
Cred,tors can claim interest on their debts up to the date of the
order of adjudication to the extent interest is allowahle under
the law for the debt in question.
If, however, it is found that the assets are sufficient to pay
all creditors in full and a surplus exists in the hands of the
Official Assignee or Receiver, interest will be paid to the
creditors for the period after the Order of Adjudication at the
rate of 6% per annum.

Mutual Dealing and Set-off

When there are mutual dealings hetween the insolvent and
a creditor, an account is taken and the creditor is allowed to
claim for the balance due, if any. In such accounting: the sum:;
paid by one pal1y to the other are' set off against sums received
by him. But if a creditor who has given credit to the insolvent
did so with the knowlcdgeof the presentation of an insolvency
petition, he cannot claim the benefit of any set-off.

Dividends
The Official Assignee or Receil cr is required to complete
the distribution of the insolvent's property with all convenient
speed. The insolvency rules therefore provide that some amount
shall be distributed within one year of the adjudication order
unless the Court is satisfied that there is good reason for
postponing payment. The first instalment of payment is called
the first dividend. Subsequent dividends are required to be
declared and distributed at inte"als of six months until the whole
 PROCEEDINGS AFTER ORDER OF ADJUOICATIO" 477

estate is administered. The amount of each dividend depends on

the amount collected and the amounts which the Official
Assignee or Receiver must keep in his hands for disputed claims
and his costs. charges and expenses.

ANNULMENT OF THE ORDER OF ADJUDICATION

The Ordcr of Adjudication will be annulled. i.e .. cancelled
in the following cases :
I. Where the Order of Adjudication was wrongly passcd <'.g.
when it is found that thc person adjudicated is a minor or lunatic
or otherwise outside the jurisdiction of the court, or where it
is found that the order was passed on the petition of a person
\\ho "as not entitled to present the pel ition.
2. Where it is proved to the satisfaction of the Court thaI
the debts have been paid in full.
3. Where it is found that the same person has been
adjudicated insolvent by more than one court. the insolvencv
proceedings will continue in one court only and the orders of
the other courts must be annulled.
4. When a composition or scheme of arrangement is sanc-
tioned by the court, the Order of Adjudication must be annulled.
5. The adjudication may be annuUed if the insolvent dc)es
not appear on the date fixed for the hearing of his application
for his discharge or does not apply for discharge within the period
specified by the Court.
Effects : The effects of annulment vary according to the
circumstances under which the annulment is made. But all acts
done by the Official Assignee or the Receiver prior to the
annulment remain good. After the Order of Adjudication is
annulled the properties of the insolvent remaining undi'poscd of.
again vest in him and all processes and remedial measurcs in
force against him on the date of the adjudication order again
rcvi\"e.

SMALL I:O>;SOLVr:O>;C1F:S
The Insol\ency Acts pro\ ide for a summary procedure" hell
tl1..:= ('state nf the il1snl\l'lJl i~ 'Ina!!. l"tldcl' tile Prl..'sidl'J)(: Ll\\JI:-,
Insoht.'!lC) Act :111 ins()I\"enc:-. is Cf)l1~idt'rcd ':'Illall \\hcn tl1(' \~11I~
\Jf the illsnln:'Ilt's ('qate IS nul lik.el~ In 1..·\'~L't.'d R" 3.00!) ;lt1d
11l1Lit:'r the Prcn illcial 111::;'1)I\L'I1('\ ,I\..:t. R". ~()(). In . .::bL' 1'1" .... ,,1:111
478 THE LAW OF INSOLVENCY

insolvencies the insolvency rules are modified in the manner

stated below.
Under Ihe Presidency Towns Insolvency Acl :
(a) no appeal shall lie from any order of the Court, except
by leave of the Court;
(b) no examination of the insolvent shall be held except on
the application of a creditor or the official assignee;
(c) the estate shall, where practicable, be distributed in a
single dividend;
(d) such other modification as may be prescribed with the
view of saving expense and simplifying procedure.
Commel/ls : There can be no modification of the provisions
of the Act relating to the discharge of the insolvent.
The Court may at any time, if it thinks fit, revoke an order
for the summary administration of an insolvent's estate.
Under the Provincial Insolvency Act :
(a) unless the Court otherwise directs, no notice required
under this Act shall be published in the Official Gazette;
(b) on the admission of a petition by a debtor, the property
of the debtor shall vest in the Court as receiver;
(c) at the hearing of the petition, the Court shall enquire
into the debts aOO assets of the debtor and determine
the same, by order in writing, and it shall not be
necessary to frame a schedule under the provisions of
Section 33;
(d) the property of the debtor shall be realised with all
reasonable despatch and thereafter, when practicable,
distributed in a single dividend;
(e) the debtor shall apply for his discharge within six months
from the date of adjudication; and
(j) such other modifications as may be prescribed with the
view of saving expense and simplifying procedure.
Provided that the Court may at any time direct that the
ordinary procedure provided for in this Act -shall be followcd
in regard to the dehtor's estate and thereafter the Act shall have
ctT~ct accordingly.
 PROCEEDINGS AfTER ORDER OF ADJUDICATION 479

EXERCISES
I. What are the consequences of the Order of Adjudication '86, '89 ?
(Pages 462-464)
2. Enumerate the ditTerenl types of debts which are entitled to priority
is the distribution of the property of an insolvent.
(Pages 465-468)
3. Explain briefly the doctrin~ of Repu ed Ownership. Relatio.n Back
and fraudulent Preferenc, as under the Insolvency Law.
(Pages 468, 463-464)
4. At what point of time does the insolvency of a debtor commence?
What is the etTect of· insolvency on property which the insolvent
gets after the adjudication order? (Pages 468-470)
5. State the duties of an insolvent after adjudication. When can the
Court annul an order of adjudication? What are the etTects of such
an annulment? (Pages 465-466, 477)
6. What is a "Protection Order" in insolvency? Who passes it? When
and what is the etTect of such an order? (Pages 465)
7. State the ditTerent types of properties which vest in the Official
Receiver or the Official Assignee on the adjudication of the debtor.
(Pages 466-468)
8. What are the disqualifications of a debtor when he is adjudged
as insolvent? How can these disqualifications be removed?
(Page 463)
9. Discuss the circumstances under which the order of adjudication
can be annulled. (Page 477)
10. Write notes on : Official Assignee; Official Receiver; Protection
Order; Public Examination; Private Examination; Secured
Creditor; Committee of Inspection: Annulment; Small
Insolvencies. (Pages 462; 462; 465; 470; 473; 477 ; 477)
II. Objective Question :
(aJ What is the doctrine of reputed ownership? (Page 468)
 DISCHARGE OF THE
INSOLVENT

The Order of Discharge

The Order of Discharge is an order of the court by which
the insolvent is released from the burden of his pre-existing debts
(except certain special types of debts) and is relieved of the
personal disqualificati,,'1 c which follow from insolvency. From
the date of the order of \djudication to the date from which
the Order of Discharg' operates, the debtor is an "undischarged
insolvent". After the Order of Discharge, the term "insolvent"
can no longer be applied to him.
Application and Date
Both the insolvency Acts provide that the insolvent can apply
for discharge any time after the passing' of the Order or
Adjudication. Under the Presidency Towns Insolvency Act this
application will not be heard until after the public examination
of the insolvent, unless such public examination has been
dispensed with. Uiider the Provincial Insolvency Act the Court
is required to fix a date within which the insolvent must apply
for discharge.

Powers of the Court

When the application for disCharge has been received the
Court fixes a date for hearing it. Before passing any order the
Court must hear the report of the Official Assignee of the
Receiver regarding the conduct of the insolvent and his dealings
with his properties. The Court also hears the representations of
the creditors if any. After hearing all these parties the Court may,
( I) grant an absolute order of discharge:
(2) refuse to pass any order of discharge:
(3) pa<s an order of discharge but suspend the operatic'H of
.the order for a specified period: or
(-1) grant an order of discharge subjcq to any conditions with
rc"pect to an) earning') or income \\ hich may afterwards become
-dut' ti) Ihl' insolvent. or \\ ith resptxt to his after-acquired property.

480
 DlSCIIARGE OF TIlE INSOLVENT 481

Refusal or circumstances under which the Court must refuse

an order of discharge
Under the Presidency Towns Insolvcncy Act. Ihe COlIrt mllst
refuse to pass the order of discharge if the insolvent has
committed an offence punishable IInder the Insolvency Act or
under Sections 421 to 424 of the Indian Penal Code. The offences
punishable under the Insolvency Act arc: fraudulent concealment
of the insolvent's state of affairs by destruction of documents;
keeping false books; failure to attend public examination without
sufficient reasons, etc. The offences punishable under the Indian
Penal Code are fraudulent removal, concealment: or disposal of
property to prevent its distribution among his creditors: fraudu-
lently preventing debts from being realised by creditors: false'
and fraudulent recitals regarding consideration or interest of the
transferee in documents by which property is tran,fcrred by the
insolvent.

Refusal of d!scharge. or Conditional discharge

It is provided by the Presidency Towns Insolvency Act that
under the circumstances mentioned below, the coun can either
refuse discharge or issue a condilional order uf tii.,c!wrge :
I. The insolvent's assets are not of a value equal to four
annas in the rupee on the amount of his unsecured liabilitics.
unlcss he satisfies the court that 'the insufficiency of ussels has
arisen from circumstances for which he cannot be held respon-
sible. (Under the Provincial Insolvency Act the insolvents's assets
must amount to at least eight annas in the rupe~.)
2. The insolvent has omilled 10 keep such books of account
as are usual and proper in the business carried on by him and
as sufficiently disclose his business transactions and financial
position within the three years immediately proceeding l',is
insolvency.
3. The insolvent has COnlin lied 10 Irode after knowing himself
to be insolvent.
.t. The insolvent has contracted any debt pro"able under the
Act without having'at the time of contracting it (lny rC(JstJIHl"ll!
or prul>uble grolll/d of expectation (the burden of proving which
lies on him) that he will be able to pay ·it.
5. The insolvent has failed to account satist:1ctorily for any
loss of 3ssets or any tiejicicllcF of (issclS to meet his liabilities.

Commercial Law - 31
482 THE LAW OF INSOLVENCY

6. The insolvent has brought on or contributed to his

insolvency by rash or hazardous speculations or by unjustifiable
extravagance in living, Or by gambling, or by culpable neglect
of his business affairs.
7. The insolvent has put any of his creditors to unnecessary
expense by a frivolous or vexatious defence to any suit properly
brought against him.'
8. The insolvent has. within three months preceding the time
of presentation of the petition, incurred unjustifiable expense by
bringing a frivolous or vexatious suit.
9. The insolvent has within three months preceding the date
of the presentation of the petition; when unable to pay his debts
as they become due. given an undue preference to any of his
creditors.
10. The insolvent has concealed or removed his books or
his property or any part, thereof has been guilty of any other
fraud or fraudulent breach of trust.
II. When the insolvent has already beell adjudged insolvent
on a previous occasion or has made compos it/all or arrangemenl
with his creditors.
Commel/ls : The power of suspending and of attaching
conditions to an insolvent's discharge may be exercised
conCtlrrentIy.
On any application for discharge. the report of the Official
Assignee shall be prima facie evidence and the Court may
presume the correctness of any statement contained therein.
The provisions of the Provincial Insolvency Act are more
or less similar to those mentioned above.
Conditions that might be imposed
When a conditional order of discharge is issued, the Court
can impose anyone or more of the following conditions :.
I. Payment by the insolvent to the official Assignee or the
Receiver of the whole or any part of his future earnings or after-
acquired property.
2. Keep the order of discharge suspended until a dividend
ul" at least four annas in the rupee has been paid to the creditors.
3. Require the in,olvent to consent to a decree being passed
ill favour "f the l)fficial Assignee for any 'unsatisfied balance
ur part thereof of his debts pro\ able in insolvency, to be executed
latci nn.
 DISCHARGE OF THE INSOLVENT 483

EFFECTS OF THE ORDER OF DISCHARGE

Subject to certain exceptions, an absolute order of discharge
(i) releases the insolvent from all debts which were provable in
insolvency and (iJ) removes the personal disqualifications from
which an undischarged insolvent suffers, e.g.. inability to hold
certain posts. The exceptions are stated below :
I. The Order of Discharges does not release the insolvent
from the following debts-
(0) A debt due to the Government (e.g., unpaid taxes or
money due for purchasing goods from a Government-
owned establishment).
(b) Any debt or liability incurred by means of fraud or
fraudulent breach of trust (e.g., a promoter's liability for
making secret profits is not terminated by his insol-
vency).
(G') Any debt or liability in respect of which the insolvent
has obtained forbearance by means of fraud.
(eI) Any order for maintenance in favour of the wife or
children of the insolvent issued under the Criminal
Procedure Code.
Debts and liabiloties of the aforesaid type cO(ltinue after the
order of discharge. The insolvent is bound to meet these
obligations from his after-acquired property or earnings.
2. Debts incurred by the insolvent after the order of
adjudication but before discharge remai" binding upon him.
because such debts are not provable in insolvency.
3. An order of discharge does not release any person who.
at the date of the presentation of the petition, was a partner or
co-trustee with the insolvent or was jointly bound or had jomtly
made a contract with him, or any person who was a surety. or
in the nature of a surety, for him.
4. Th~ insolvent is not exempted from punishment for
violations of the pena I provisions of the Insolvency Acts merely
because of the fact that he has obtained his discharge (or that
a composition or scheme of arrangement regarding his affairs has
been sanctioned by the Court).
5. The order of discharge does not really terminate the
insolvency proceedings. The Court retains power to direct the
distribution of the properties remaining in the hands of the
Official Assignee or Receiver and in case there was an error in
484 THE LAW OF rNSOLVENCY

their distribution the Court has power to direct a redistribution.

A creditor who failed to prove his claim before discharge can
prove his claim after discharge provided there arc assets in the
hands of the Official Assignee or the Receiver and provided he
can be paid without disturbing the previous distribution.

EXERCISES
I. What is meant by "discharge" of an insolvent? State the exact
effects of an order of discharge. (Pages 480. 483-48~)
2. Explain what is meant by discharge of an insolvent. What are the
grounds on which absolute discharge may not be granted?
(Pages 480-481)
3. Under what circumsta'nccs is an insolvent discharged? What is the
effect of such discharge? What debts, if any, continue after
discharge? (Pages 480, 481-484)
4. State the cases in which a court (a) is bound to refuse an absolute
discharge to an insolvent; (b) may refuse an order of discharge
to all insolvent. (Pages 480-481)
 BOOK VIII
ARBITRATION

CIIAPTER I General Pro"isions ~86 - ~91

What is Arbitration? 486: The Arbitration Agreement ~S6 :
Effects of an Arbitration Agreement 487; Who can reter
disputes to Arbitration: 488 : Matter> which can be referred
to Arbitration 489: Different Types or Methods of Arbitration
48,}'; Statutory Arbitration 490; Foreign Awards 49 L

CIl""TER 2 Arbitration Without The Intervention

of The Court 492 - 504
Provisions Implied in an Arbitration Agreement 492: The
Appointrnent of Arbitrators 493; Revocation of the
Arbitrator's Authority 495 ; Removal of Arbitrator or Umpire
~96 : Duties of the Arbitrator and the Umpire 496 : Powers
of Arbitrator and Umpire ..197; The Arbitrator's Relllunt:ration
498 : Award 498 ; "The Award is an Instrument of Offence
and Defence" 499; PO\\~rs of the Coun 500: 'A'h~n an
Award can be Modified or Corrected 501 : When an A"ard
can be Remitted for Reconsideration 50 I : When the Court
can set aside an Award 502 ; Misconduct 503 : Appeals 504.

485
CD GENERAL PROVISIONS
;

WHAT IS ARBITRATION?
Arbitration means the settlement of a dispute by referring
the dispute to a third party and abiding by his decision.
Arbitration is less costly than a suit in a court of law. It is also
more expeditious. Therefore, commercial contracts frequently
contain a clause providing for a reference to arbitratiQll in case
a dispute breaks out concerning any matter relating to the
contract. The policy of the legislature in India has always been
to encourage settlement of disputes by arbitration. Also, in India,
reference of disputes to the Pallch or the Panchayet is a
traditional and widely used method of settling disputes.
The law relating to arbitration in India is contained in the
Arbitration Act of 1940.

THE ARBITRATION AGREEMENT

Definition
An arbitration agreement means "a written agreement to
submit present or future differences to arbitration, whether an
~rbitrator is named therein or not".-Sec.2(a).
The arbitration agreement or the arbitration clause in an
agreement is sometimes called "Submission". This latter tern was
used in the acts relating to arbitration in India prior to the Act
of 1940. In the corresponding English Act the term "Submission"
is used.
Essentials
I. An arbitration agreement, to be valid and binding, must
be ill ,,·riling. Such an agreement must satisfy all the eJ'selllial
e/emellls of a valid contract.
2. Signatures of the parties are not necessary but it must
be shown that they agreed to the sell/emel/t of disputes by
arbitration. It is not necessary that the agreement should be
contained in a formal document. The record of such an agreement
in a elause in the contract or in a leller or memorandum is
enough.

4&6
 GENERAL PROVISIOr-;S 487

3. It is not necessary that thl! name of the person who will

act as the arbitrator should be mentioned in the agreement.
4. The agreement may be to refer present differo!nces or
possible future differences to arbitration.
S. When there is an arbitration clause in a contract and the
contract comes to an end owing to frustration (see p. 123) or
is avoided on the ground of fraud or misrepresentation,. the
arbitration clause may continue to be binding. Slate of Bombay
v. Adamjee.' But if the parties were not ad idem. i.e., if there
was no contract at all, the arbitration clause is not binding.
Tolaram v. Birfa JlI/e ManufacllIring C02
6. The agreement to refer disputes to arbitration is not valid
if it lacks '''e essen/ial elemen/s of a cOlltract. e.g.. if it was
brought about by fraud or coercion.
7. The construction of an arbitration agreement is not to be
Ihwarted by narrow pedantic interpretation Ulliot/ of i",lia v.
MS D. N. Revri & Co. at/d 0,"ers3

EFFECTS OF AN ARBITRATION AGREEMENT

BlIr of Suits
When some persons have entered inlo an agreement to refer
disputes relating to a matter to arbitration they may be prevented
fwm agitating the same matter in a ceurt of law. Thus an
arbitration agreement is a bar /0 a civil slIlI relating to matters
covered by the arbitration agreement. I f any of the parties to the
agreement disregards the agreement and files a suit, the other
p3rty to the agreement may file an application for staying the
suit.
Section 34 of thll Act empowers Ihe court to stay the suit
if the following conditions are satisfied
I. The suit or proceedings relate 10 Ihe same matter as that
covered by the arbitration agreement. Nt) stay \\ill he granled
if the suit relates to matters outside the scope of the arbitration
agreement. If the suit relates partially to matters included in the
agreement, the court Inay stay the suit or nol according to its
discretion.

I AIR (1951) Cal. 147 '(1948) 2 Cal. 171

'AIR (1976) Supreme Court 2257
488 ARBITRATION

2. It must be shown that the party desiring stay was and

is ready and willing to proceed with the arbitration and does
everything necessary for the purpose.
3. The party desiring stay must not have filed his written
statement ·(i.e.. his defence to the suit) or taken any step in
connection with the defclle'> against the suit (e.g. an application
for extension of time to file the ,\[itten statement).
4. The arbitration agreement must not have been the result
of fraud and there must not exist any other sufficient reason why
the dispute should not be decided by arbitration.
The grallf of slay is discreliVlwry. But unless there is a strong
reason to the contrary the coun will, by staying the suit, force
the pal1ies to abide by thc arbitration agreement. The burden of
proof is upon the party ,'pposing stay to con\ince the coun that
there are reasons for ~()ntilllling the suit or proceedings and not
granling the stay. Am/crsull IIh;thl Ltd. v. A10rgall & Co. I
WUO CAN REFER J))SPUTES TO ARBITRATION?
The arbitration agreement is a contract. "I herefore. only those
pL'rs.ons. who arc capahle of entering into contracts. can refer
disputes to arbitration.
The persons who can refcr to arbitration arc enumerated
below:
1. A minor or a lunatic cannot refer disputes ,to arbitration
but thc guardian of a minor or of a lunatic can do so on his
behalf.
2. In 3 suit or procceding, the lIexl friend or guardiun ad
lilem cannot enter into any compromise on behalf of a minor
without the Ica\c of thc courl.
3. A parlller can refer disputes relating to the firm to
arbitration provided such power is given to him by the partnership
agreement.
4. An agenl cannot refer disputes to arbitration unless
especially authorised.
5. The manager of a joint Hindu family can submit
arbitration for the petition of the joint family propeny.
6. A Iruslee may refer disputes of arbitration.
7. Solicitors and lId1"ocales have no implied authority to
submit arbitration all behalf of the clients.

1(\9551 S.C.A. 165 tSupreme ("oun)

 GENERAL PROVISIONS 489

8. An insolvenl cannot submit to arbitration but the Official

Receiver or Assignee may submit with the leave of the court.

MATTERS WHICH CAN BE REFERRED TO

ARBITRATION
Subject to the exceptions noted below. all disputes which
can be decided by a civjl suit can also be decided by arbitration.
Examples: Disputes about property Or money: amounts of dam-
ages payable for breach of contract; maintenance payable to
wife; terms of separation between husband and wife; question
of law; etc.
Matters of personal right (e.g .. the right to hold the office
of fujari in temple) and disputes regarding compliment or
dignity. which cannot be decided by civil courts. can nevertheless
be decided by arbitration.
The following mallers cannot be referred to arbitration :
1. Matrimonial matters like di\orce or restitution of conjugal
rights.
2. Testamentary matters like the validity of a will.
3. Insolvency mailers e.g. the adjudication of a person as
insolvent.
4. Matters relating tll the guardianship of a minor or llf a
lunatic or declaring a person insane.
5. Criminal matters. Whether· a person is guilty of an offence
or not, cannot be decided by arbitration.
6. Questions relating to charities or charitable trust cannot
be referred to arbitration except with the consent of the Advocate-
General in Presidency Towns and of the Collector of the place
in other areas.

DIFFERENT TYPES OR METltODS OF ARBITRATION

The Arbitration Act includes within its scope three types or
methods of arbitration:
I. Arbitration without the inlerHntion of the court
Sections 3 to 25 of the Act relate to this type of arbitration.
In this case the arbitration proceedings take place outside the
court. There is no suit pending but the award of the arbitrator
can be tiled in court and executed through the court as if it was
a decree of the court (Rules discussed in ch. 2).
490 ARBITRATION

II. Arbitration through court when no suit il pending

Where there is an arbitration agreement, the parties may
proceed witl] the arbitratiof\ indepenQently of any cpurt, in the
manner described in the ~nll ch!lpter. Section 20 of the Act,
however, lays down an alternative procedure which the parties
may follow.
Where there is an arbitration agreement, but no suit is
pending, any of the parties may apply to the court for filing the
arbilraliolJ agreemenl. The court thereupoll issues notice to the
other part'ies requiring them to show cause why the agreement
should not be filed. Where no sufficient cause is shown the court
shall order the agreement to be filed and shall make an order
of reference to the arbitrators appointed in the manner laid down
in the agreement, or where the parties cannot agree upon an
arbitrator, to an arbitrator appointed by the court. Thereafter the
arbitration proceeds in the same manner as outlined in eh. 2.
III. Arbitration a Suits
After a suit is filed. the parties may decide to settle the matter
by arbitration. The procedure for doing so is laid down in
Sections 21 to 25.
Where in any suit all the parties interested agree that any
matter in ditference between them in the suit shall be referred
to arbitration, they may at any time before judgment is pro-
nounced apply in writing to the court for an order of reference.
The arbitrator shall be appointed in such manner as the
parties agree. (The parties may make the judge the arbitrator,
in which case his judgment becomes an award and is not
appealable). There may be a reference of a part of the matter
in issue in the suit, provided such part can be c!ClIlt with
separately.
After an order of reference is made, the arbitration tailes
place in the same manner as an arbitration without the interven-
!ion of court.

STATUTORY ARBITRATION
Some statutes provide for compulsory arbitration in disputes
arising out of matters ~overed by them, e.g.. the Co-operative
Societies Act, 1912; The Industrial Relalions Act, Maharashtra.
 GENERAl PROVISIONS 491

This is called Statutory Arbitration. The Statute concerned

generally provides for the procedure according to which the
. compulsory arbitration will be conducted. If it does not, or if
a question of procedure arises which is not covered by its
provisions, the rules laid down in the Arbitration Act wi II apply
[except Sections 6 (I), 7, 12, 36 and 37].-Sec. 46.

FOREIGN AWARDS
The Arbitration (Protocol and Convention) Act. 1937 and
the Foreign Awards (Recognition and Enforcement) Act, 1961,
provides that an award made in a foreign country will be
enforceable in India, in the same manner as an award made in
india, provided the following comijtions are fulfifled.
I. The award relates to a matter considered as commercia!
under the law in force in India.
2. The award is made in a country with which India has
a reciprocal agreement for the enforcement of awards and is one
in which one of the parties is subject to the jurisdiction of a
power with which there is such reciprocal arrangement.
3. The award is final, i.e., on proceedings are pending in
the foreign country concerned for contesting the validity of the
award.
The Act mentioned above was passed as a result of an
international agreement for the enforcement of foreign awards.
India was a signatory to the Protocol drawn in an international
conference on the subject.

EXERCISES
1. State the essentials of M arbitration agreement.
(Pages 486.487)
2. Explain a "submission to arbitration". What matters may by referred
to arbilration? (Pages 486. 489-490)
3. What is meant by an arbitration agreement and what is its efieet?
(Pages 486·487)
4. What matters cannot be referred to arbitration?
(~ages 489-490)
5. Slate the modes or types of submission to arbitration.
(Pages 489·490)
(2) ARBITRATION WITHOUT THE
L INTERVENTION OF THE COURT

PROVISIONS IMPLIED IN AN ARBITRATION

AGREEMENT
Section 3 and the First Schedule to the Arbitration Act
provides that an arbitration agreement, unless a different intention
is e"pressed therein, shall be deemed to include the following
terms: ,
I. Unless otherwise expressly provided, the reference shall
be to a sole arbitrator.
2. If the reference is to an even number of arbitrators, the
arbitrators shall appoint an )Wlpire not latcr than one month from
the btest date of their respective appointment.
3. The arbitrators shall made their award within four months
after entering 011 the reference or after having been called upon
to act by notice in writing by any party to the arbitration
agreement or within sucl\. extended time as the court may allow.
4. If the arbitrators do not make an award within the time
mentioned above or if they notify any of the parties or the umpire
that they cannot agree, the umpire must forthwith enter on the
reference in lieu of the arbitrators.
5. The umpire shall make his award within two months of
entering on the reference or such extended time as the court may
allow.
6: The parties to the reference and all persons claiming under
them must, if so required by the arbitrators or the umpire. submit
to be examined by them upon oath or affirmation and must
produce before them all necessary books, papers and documents
and do all other things which, during the reference. the arbitrators
or umpire may require.
7. The award shall be final and binding on the parties and
persons claiming under them respectively.
8. COSIS : The costs of the reference and award shall be
in thc discretion of the arbitrators or umpire who may direct to
and by whom, and ill what manner. such costs or any part thereof
shall be paid. Thc arbitrators or the umpire may tax or settle
the amollnt of costs to be paid Or any part thereof and may award
coSh to be pnid as bd\\cen legal practitioner and client.
492
 ARIlITRATION WITHOUT THE INTERVENTIOI\ OF THE COURT 493

THE APPOINTMENT Of ARBITRATORS

The general rule is that the parties to the dispute select the
arbitrator or arbitrators by mutual consent. They can select any
person or body of persons, whatever his or their qual ifications
may be. Sometimes it is arranged that each party to the dispute
shall nominate one or more arbitrators and all such persons shall
jointly act as arbitrators.
The parties to an arbitration agreement may agree that any
reference thereunder shall be to an arbitrator or arbitrators to
be appointed by a person designated in the agreement either by
name or as the holder for the time being of any office or
appointment-Sec. 4. Thus the parties may agree that the arbi-
trator shall be appointed by the Bengal Chamber of Commerce
or by the Sil1wI/ch of a village.
It is an implied term of the arbitration agreement that if there
is an even number of arbitrators and they do not agree on the
award, they shall appoint another person to decide the matter.
SUcl1 a person is called the Umpire. The Umpire's decision is
final.
When there are more than two arbitrators, the decision of
the majority is final, unless a contrary intention appears from
the agreement. If they are equally divided, they must appoint an
umpire.
Ihree arbilralOrs: Section 10 of the Act provides that where
the agreement provides for a reference to three arbitrators, one
to be appointed by each party and the third by the arbitrators.
the agreement shall have effect as if it provided for the
appointment of an umpire by the two arbitrators and not a third
arbitrator.

Disqualifications of arbitrators
A person cannot act as an arbitrator if he had an interest
in the subject matter or if he is a l1ecessar) witness of Ihe
disputed matter.

Power of a party to a I'point a new arbitrator or a sole

arbitrator
Section 'I of the Act 13) s down that whcre an arbitration
ag.reement pro\, ides that 3 reference shall be to two arbitrawi·s.
')11" to be appointed b) each part). the following rlllc., ,hall
appl\
494 ARBITRATION

(I) If either of the appointed arbitrators neglects or refuses

to work, or is incapable of acting, or dies, the party who
appointed him may .appoint a new arbitrator in his place.
(2) If one party fails to appoint an arbitrator, either originally
or by way of substitution as aforesaid, for 15 clear days after
the service by the other party,of a notice in writing to make
the appointment (such other party having already appointed his
arbitrator) the other party may appoint his arbitrator to act as
the sole arbitrator in the reference, and his award shall.be binding
on both parties.
But the court may set aside any appointment as sole arbitrator
under rule (2) above and may. on sufficient cause shown, allow
further time to the defaulting party to appoint an arbitrator or
pass such other order as it th inks fit.
Power of the Court to appoint arbitrator or umpire
The need for appointing an arbitrator or umpire by the court
may arise in the following cases : (Sec. 8)
(a) Where the agreement provides that the arbitrator or
arbitrators shall be appointed by consent of all the parties and
all parties do not concur in the appointments.
(b) If any appointed arbitrator or umpire neglects or refuses
to work. or is incapable of acting, or dies, and the arbitration
agreement does not show that it was intended that the vacancy
should not be supplied, and the parties or the arbitrators as the
case may be, do not supply the vacancy.
(c) Where the parties or the arbitrators are required to appoint
an umpire and do not appoint him.
CIS. Law:
The court has no power to supply a vacancy under Section 8 (I)
(b) only if the arbitration agreement shows that the panies did not
intend to supply the vacancy. If no such intention could be culled
out from the arbitration clause, the court could supply the vacancy.
When. there was a named Arbitrator, even though he was named
by office. it was open to the court to supply the vacancy in his
place under Section 8 ( I) l b). Union oj India v. MIS Raghunarh
Singh and Co. I
Procedure : Section 8 of the Act provides that under any
of the aforesaid circumstances any party may serve the other

I AIR (1980) Supreme Court 103

 ARBITRATION WITHOlJT THE INTERVENTION OF TIlE COURT 495

parties or the arbitrators, as the Case may be, with a wrillen notice
to concur in the appointment or appointments or in supplying
the vacancy.
If the appointment is not made within 15 clear days after
the service of the said notice, th" court may on the application
of the party who gave the notice and after hearing the other
parties appoint the arbitrator or arbitrators or umpire as the case
may be. The person or persons appoi .,eU by the court shall have
po\\er to act in the reference in the ·.ame manner as if appointed
~y the consent of all parties.
Section 12 (I) of the Act pre>, iJcs that where the court
removes an umpire or one or more of the arbitrators for
misconduct or any other reason, it can appoint persons to fill
up the vacancy.

REVOCATION OJ-' TilE ARI31TRATOR'S AUTHORITY

After the umpirc and arbitrat,)" are properly appointed, their
authority can be revoked (i.e .. cullcclled) only under the follow-
ing c irclIJl1::,tances :
I. Thc arbitration agreement may pro\ ide for the revocation
of the authority of the umpire or arbilrators. In this case, any
of the parties may submit an application to the Court for leave
for revocation. The application must be made before the award
is complete. The Court should give notice to the arbitrator. The
Court's decision depends on the facts and circumstances of the
case.
2. The court can, under Section 5 of the Act, grant leave
for such rc""eation. The court gellerally does it only if a just
al1J sufficiellt cause is shown. EX<illi/ih' : (el) Arbitratot not acting
according to the rules of natural justice (b) arbitratot acting in
coliusion \\ ith a part) (c) partiality Or bias (d) frustration
(e) unreasollable delay (f) excess UI !'efusal of jurisdiction by
the arhitrator, etc.

Effects of death of a party

The alll;;ori!}, of an arbitrator is not revoked by the death
of the part\' \\110 appointed him. The death of a party does not
discharge the ::ubitratlon agrcemt:nt In stich cases the award is
enforceabk agaillst th:.: legal rcprcsentati, \,.'5 ~)f the deceased.-
Sec.6.
496 ARBITRATION

Effect of Insolvency
An arbitration clause in a contract entered into by a person
who subsequently becomes insolvent, is binding on the Official
Assignee or Receiver unless the contract is disclaimed as onerous
property. If the contract is accepted. the arbitration clause must
be accepted. The Official Assignee or Receiver can also enforce
the arbitration claus.. - -Sec. 7.

REMOVAL OF ARBITRATOR OR UMPIRE

The court may on the application of a party, remove an
arbitrator or umpire in the following cases :
I. Delay : If the arbitrator or umpire fails to use all
reasonable despatch in entering on and proceeding with the
reference and making an award.
2. JoJiscullduct: If the arbitrator or umpire has misconducted
himself or the proceedings.-Sec. II.
[For the meaning of Misconduct-See p.S03]
When an arbitrator or umpire is removed according to the
above rules, he is not entitled to any remuneration.
New appointment: When the court removes an umpire who
has not entered into the reference, or one or more arbitrators
(but not all the arbitrators) the court can appoint persons to fill
the vacancy.
Where the authority of an arbitrator or arbitrat.ors or of the
umpire is revoked with leave of the court or where the court
removes an umpire who entered into the reference or a sole
arbitrator or all the arbitrators, the court may on the application
of any party-
(a) appoint a person to act as the sole arbitrator in place
of the persons removed, or
(b) order that the arbitration agreement shall cease to have
effect with respect to the difference refem:d.-Sec. 12.

DlTIES OF TIlE ARBITRATOR Al'OD THE UMPIRE

I. Reasulloble despmch : The arbitrator and the umpire must.
",(th all reasonable despatch enter into the reference and make
an a"ard.
2. Quasi-judicitt! position: The arbitrator and t,he umpire
hold a quasi-judicial p<hition. The\ nlU;t decide the dispute
 ARBITRATION WITHOUT THE INTERVENTION OF THE COURT 497

impartially. An arbitrator is not the agent of the party appointing

him. After the appointment is made he must not secretly
communicate with him and must not accept any gift or payment
from him. He must act judicially.
3. Rules of natural justice: The arbitrator or umpire is not
required to follow the procedure of civil courts but they must
observe the rules of natural justice (for example, both parties
must be given a hearing in all matters).
4: Misconduct : The arbitrator and the umpire must not
misconduct themselves in any way (e.g., accept bribes).
5. Within the arbitration agreement: The arbitrator and the
umpire must act within the scope of the arbitration agreements.
They should sign and file the award within due time.
Duties of an umpire
The duties of the umpire are the same as. those of an
arbitrator. But he may commence the proceedings anew. He may
not decide the award on the basis of evidence already given.

POWERS OF ARBITRATOR AND UMPIRE

Section 13 of the Act lays down that the arbitrator or umpire
shall (unless a contrary intention is expressed in the agreement)
have Ihe following powers:
(I) to administer oath to the parties and witnesses appearing :
(2) to state a special case for' the opinion of the court on
any question of law involved or state the award, wholly or in
part, in the form of a special case of such question for the opinion
of the court;
(3) make the award conditional or in the alternative;
(4) correct in an award any clerical mistake or error arising
from any accidental slip or omission;
(5) administer any party to the arbitration such interrogato-
ries (questions in writing) as may, in the opinion of Ihe arbitrators
or umpire, be necessary.
The following powers are usually given to the arbitrator in
the arbitration agreement: .
(6) He may decide by and to whom the cost of the reference
IS to be met.
(7) He may award interest.

. Commercial Law - 32
 498 ARBITRATION

(8) When an award of money is given, the arbitrator can fix

the instalment thereof and their amount and time.
(9) Under certain circumstances the arbitrator can order the
specific performance of the terms of the contract.
(10) He may make interim awards to be followed by a final
award.
Case La.. :
(;) Where there is arbitration through the intervention of the Court, the
arbitrator cannot enlarge the scope of the reference and entertain
fresh claims without a further order of reference from the Court.
Orissa Mining Corpora/ion Lid. v. MIS PrannDlh l'ishwonath
Raw/ley.'
(ii) Under Section 13 of this Act the arbitrator can grant future interest
on the amount awarded up to the date of realisation. State 0/ Pllnjab
v. Ajit Singh and others. 2

THE ARBITRATOR'S REMUNERATION

The arbitrator's remuneration is determined by agreement
between the parties and the arbitrator before arbitration proceed-
ings commence. If there is no such agreement the arbitrator can
fix his own remuneration. But if an unreasonably high charge
is made, any of the parties can apply to the court under Section
38 of the Act whereupon the court determines what is reasonable
remuneration for its arbitrator.

AWARD
1\
UelinitioD
~ The "Award" means the decision of the arbitrator or the
umpire.
Essentials
I. Writing: The award must be in writing in such form and
in such language as the umpire and the arbitrators may think fit.
2. Date and Signature: The award must be signed and dated.
3. Notice : The arbitrators shall give llotice in writing of
making the award to all the parties.
4. Fees and Charges: The arbitrators shall state the amount
of fees and charges payable in respect of the arbitration and tht;
award.
I AIR (1977) Supreme Court 2014
2 AIR (1979) Full Bench, P & H 179
 ARBITRATION WITHOUT THE INTERVENTION OF TIlE COURT 499

5. Legality : The award must be in conformity with the

submission. It must be certain and final and give a decision on
all matters referred. It must not say anything outside the
reference.

Procedure
At the request of any party (after the cost and charges have
been paid) or if the court so directs, the arbitrator or umpire
shall file the award or a signed copy of it in court together with
all depositions and documents which have been taken and proved
before them. After they are filed the court gives notice to the
parties.-Sec. R
Where the court sees no cause to remit, modify or set aside
the award, it shall pass judgment in terms' of the award and a
decree shall follow. Such a decree is not appealable, except in
so far as it is in excess of or not in accordance with the award.-
Sec. 17.
Legal Decision. :
I. Arbitrator's award on both tact and law is final and there is no
appeal from his verdict. The court cannot review his award and
correct any mistake in his adjudication unless objection to the
legality of award is apparent on face of it. Firm Madanlal Roshanlal
Mahajan v. Hukumchand Mills Ltd., Indore.'
2. If the award is silent on a particular item of dispute, the claim in
respect thereof should be taken as rejected by the arbitrator. SonIa
Sila Devi v. Dhirendra Nalh Sen. 2

"The award is an instrument of offence and defence"

The award of arbitrators and the umpire amounts to a final
judgment as regards the matters referred to them. There can be
no appeal against an award. An award can be modified, remitted
or set aside only in certain cases provided in the Act. Apart from
these cases, an award is final.
. Any of the parties to the arbitration proceedings can have
the award, executed as a decree of the courl. The award can
therefore be called an instrument of offence.
Any matter decided by the award of arbitrators or an umpire
validly made, cannot be reopened by a suit. If a suit is filed
on such a matter, it will be dismissed. The award therefore is
an instrument of defence_

'AIR (1967) Supreme Co uri In;1 '.\IR(1963)SupremeCourt 1677

500 ARBITRATION

POWERS OF· THE COURT

The Act gives various powers to the court in relation to
arbitration proceedings. A list of these powers is given below.
The circumstances under which these powers are exercisable are
laid down in the Act.
1. The court can give leave to a party to revoke the authority
of the arbitrator appointed by him.-Sec.s.
2. The court can appoint an arbitrator or umpire.-Sec.8.
3. The court can remove arbitrators or the umpire and
appoint other persons in their place or appoint some persons as
the sole arbitrator.-Secs. II and 12.
4. The court can modify an award.-Sec.IS.
5. The court can remit an award for reconsideration.-
Sec.16.
6. The court can pass judgment in term of the award and
thereupon a decree is issued which is capable of execution.-
Sec.17.
7. The court can pass interim orders, wherever necessary
(eg. appoint receivers and Issue injunction).-Sections 18, 41
and the Second Schedule.
8. The court can supersede the arbitration agreement.--
Sec. 19. Where an award has become void or has been set aside,
the court may by order supersede the reference and shall
thereupon order that the arbitration agreement shall cease to have
effect \\ itb respect to the difference referred.
9. The Court may order the arbitration agreement to be filed
in Ihe court on the application of the parties or any of them.-
Sec. 20.
10. The Court may by order refer to arbitration, any pending
suit at the request of the parties.-Secs.21 and 23.
11. The court can enlarge the time for making an award.-
Sec.28 .
. 12. When the award is for money. the court can in its decree
order the payment of interest (at such rate as the court may
consider reasonable) from the date of the decree.
13. The court can set aside an award.-Sec.30.
14. The court can stay any suit or legal proceeding relating
to a matter which is covered by a valid arbitration.-Sec.34.
15. The court can decide disputes as to arbitrator's remunera-
tion and costs.-Sec.38.
 ARBITRATION WITHOUT THE INTERVENTION OF THE COURT 50 I

16. The court can issue processes for the appearance of

witnesses before arbitrators.-Sec. 43.
17. The court can appoint receiver or any other official for the
detention, preservation or inspection of any property or thing which
is the subject of the reference.-Schedule II, Arbitration Act.

WHEN AN AWARD CAN BE MODIFIED OR

CORRECTED
The court can, by order, modify or correct an award in the
following cases.-Sec. 15 :
(a) Where the award has left undetermined any of the matters
not referred to arbitration and such part can be separated from
the other part and does not affect the decision on the matter
referred: or
(b) where the award is imperfect in form, or contains any
obvious error which can be amended without affecting such
decision; or
(c) where the award contains a clerical mistake or an error
arising from an accidental slip or omission.
Correction By 11,e Arbilralor or Umpire: After an award
has been filed the umpire and arbitrators cease their function.
They may, however, correct or modify an award in the following
cases :
I. When there is a clerical mistake in the award.-Sec. l3(d).
2. When an award is remitted to them.-Sec. 16.

WHEN AN AWARD CAN BE REMITTED FOR

RECONSIDERATION
The court may from time to time remit the award or an)
mailer referred to arbitration to the same arbitrators or umpire
for reconsideration upon such terms as it thinks fit, in the
following cases.-Sec. 16 :
(a) Where the award has left undetermined any of the mailers
referred to arbitration, or where it determines any mailer not
referred to arbitration and such mailer cannot be separated
without affecting the ddermination of the mailers referred; or
(b) where the award is so indetinite as to be incapable of
execution: or
(c) where an objection to th~3lity of the award is apparent
on the face of it.
502 ARBITRATION

Where an award is remitted for reconsideration, the court

shall fix a time within which the arbitrators and umpire shall
file the fresh award. Such time may be extended. If no award
is filed within the time allowed, the original award becomes void.
Legal Decision
The Courts have decided that the following grounds are good
for remitting an award:
(a) where there was misconduct of the arbitrators or umpire.
(b) where new evidence has been found, and
(c) where the arbitrator admits his mistake and he asks that
the award should be remitted.
WHEN THE COURT CAN SET ASIDE AN AWARD
Section 30 of the Act provides that the court can set aside
an award only in the following cases :
I. If an award is made after the issue of an order by the
court superseding the arbitration or after arbitration proceedings
have become invalid under Section 35.
The court can supersede arbitration proceedings when an
award becomes void or has been set aside. Arbitration proceed-
ings become invalid when a suit or legal proceedings have been
commenced relating to the subject-niatte~ of the reference, notice
of the same has been given to the arbitrator or umpire and none
of the parties have asked for stay of the suit or legal proceedings.
An award made under the aforesaid circumstances can be set
aside by the court.
2. When an award has been improperly procured or is
otherwise invalid. An award may becorrie "otherwise invalid" for
a variety of reasons. Some examples are given below : when
the existence of the arbitration agreement cannot be proved :
when the consent of a party to an arbitration agreement has been
procured by fraud; when the arbitrators or the umpire has been
appointed in improper manner; etc. Chhognal RalWalmal v.
Sanka! Chad Shah & others. I
3. Error of Law: The umpire as sole arbitrator is not bound
to give a reasoned award and if in passing the award he makes
a mistake of law or of fact, there is no ground for challenging
the validity of the award. It is only when an erroneous proposition
of law is stated in the award and which is the basis of the award,
I 53 ("W.N. 828
 ARBITRATION WITHOUT THE INTERVENTION OF THE COURT 503

can the award be set aside or remitted on the ground of error

of law apparent on the face of the record. Champasen Bhara
& Co. v. Jivraj Balloe Co. Ltd I Union of India v. Bungo Steel
Furniture (P) Ltd. 2
4. Where an arbitrator or umpire has misconducted himself
or the proceedings.
MISCONDUCT
Misconduct means improper conduct. The term covers moral
turpitude and also failure on the part of the umpire or arbitrator
to act according to the duties and responsibilities of his office.
Any action or behaviour on the part of the arbitrator or umpire
which shows the existence of partiality or a lack of judicial spirit
amounts to misconduct. If the arbitrator or umpire is guilty of
misconduct, the court will set aside the award. Amir Begam v.
Badrllddin. 3
The following acts have been held to be misconduct under
this section: bribery: undue partiality in favour of one party :
arbitrator secretly acquiring an interest in the subject-matter of
the arbitration: wrongfully refusing to hear a witness or a party. :
etc. Mosely v. Simpson'
5. Moral lapse: "Misconduct under Section 30(a) has not
a connotation of moral lapse. It comprises legal misconduct which
is complete if the Arbitrator on the face of the award arrives
at an inconsistent conclusion even on his own finding or arrives
at a decision by ignoring very material documents which throw
abundant light on the controversy to help ajust and fair decision."
K. P POlilose v. Slale of Kerala and anolher. s
6. The arbitrator or umpire must conform to any directions
contained in the agreement of reference.
The arbitration agreement lays down a particular methc,j by
which the disputes are to be decided. In this case, the arbitrators
have not complied with that method. Held, the arbitrators have
misconducted themselves and the award has to be set aside.
Ramnalh Agarwalla v. MIS Goenka & C0 6
Arbitrator awarding damages without specifying the rate.
Held, no misconduct. Slale of West Bengal v. L. M Das. 7
I AIR (1923) Privy Council 66 'AIR (1967) Supreme Court 1032
3 36 All 336 Privy Council • (1873) L.R. 16 Eq. 226
, AIR (1975) Supreme Court 1259 6 (1973) 77 C.W.N. 317 (Full Bench)
'AIR (1976) Cal 406 •
504 ARBITRATION

Procedure
To set aside an award there must be an application to the
court under Section 30 or by a notice of motion.

APPEALS
An appeal shall lie from the following orders passed under
this Act (and from no others) to the Court authorised by law
to hear appeals from original decrees of the Court passing the
order: An order--{i) superseding an arbitration; (ii) on an award
stated in the fonn of a special case; '(iii) modifying and correcting
an award; (iv) filing or refusing to file an arbitration agreement;
(v) staying o~ refusing to stay legal proceedings where there is
arbitration agreement; (vi) setting aside or refusing to set aside
an award; provided that the provisions of this Section shall not
apply to any order passed by a Small Causes Court.-Sec. 39( I).
No second appeal shall lie from an order passed in appeal
under this Section but nothing in this Section shall affect or take
away any right to appeal to the Supreme Court.-Sec. 39 (2).

EXERCISES
I. What is Arbitration and how is it effected? Briefly state the powers
of the court in respect of awards. (Pages 486-487, 500)
2. What are the provisions implied in an arbitration agreement without
the intervention of the court? (Page 492)
3. Define "Legal misconduct" by an arbitrator. What "re the conse-
quences of misconduct? (Page 503)
4. Examine the circumstances when the court may mOdity or correct
an award. (Page 50 I)
5. What are the grounds for sening aside an award under the
Arbitration Act? (Pages 502-503)
6. State under what circumstances the Court can remove an arbitrator
validly appointed by the parties. (Page 496)
7. When the Court may appoint an Arbitrator or Arbitrators or an
Umpire? (Page 494)
8. When can a party to an arbitration agreement appoint a new
... rbitrator or a sole arbitrator? (Pages 493-494)
9. Write note on power of arbitrator. (Page 497)
10. If one of three arbitrator dies, what action may be taken for filling
the vacancy? (Page 494)
II. When can the CllUrt remit an award to the arbitrators or umpire
for re-consideration? (Pages 501-502)
 BOOK IX
SECURITIES

Securities 506 - 514

Mortgage 506; Classification of Mortgages 507 ; Rights and
Liabilities of Partners 509; Charge 511; Mortgage and
Pledge 512; Hypothecation 512; Lien 513.

505
CD SECURITIES

MORTGAGE

Definition
When a specific immovable property is made the security
for the payment of money or the performance of an obligation, •
the transaction is called a Mortgage.
Section 58(a) of the Transfer "f Property Act defines
mortgage as, "transfer of an interest in specific immovable
property for the purpose of securing tlie payment of money
advanced or to be advanced by way of loan, an existing or future
debt or the performance of an engagement which may give rise
to a pecuniary liability."
The person transferring the interest (the debtor) is called the
/IIortgage. The person to whom the interest is transferred (the
cred itor) is called the Mortgagee. The amount secured is called
the Mor/gage Money. The document in which the transaction is
recorded and by which the transfer of interest is made is I'alled
Mor/gage Deed.
Characteristics
The characteristics of a mortgage are described below :
I. In a mortgage there is a transfer of an interest in some
specific immovable property.
2. The interest is transferred by way of security.
3. The security is for the due repayment of a loan or a debt,
incurred or to be incurred for any purpose, or the performance
of an engagement which may create a pecuniary liability.
4. If the money due or the pecuniary liability is not met
within the agreed time, the interest transferred (i.e., the security)
can be sold thcough the court and the dues recovered.
5. A valid mortgage can be effected only by a written
document, signed by the mortgagor and two attesting witnesses,
and registered. To this rule there are two exception : (i) In
Calcutta, Bombay, Madras and certain other towns a mortgage
can be made by handing over the title deeds of the property
concerned, without any written and registered document (this is
506
 SFCURITIES S07

known as Equitable Mortgage). (ii) If the sum secured is less

than Rs. 100. mortgage can be made by delivery of possession
of the property.
6. A mortgage is a contract. Therefore it must satisfY all
th~ essential elements of a contract, e.g.. capacity of parties, free
consent etc.

CLASSIFICATION OF MORTGAGES
The terms and conditions incorporated in a mortgage deed
may differ in different cases and accordingly there are different
types of mortgage. The Transfer of Property Act classifies
mortgages into the following six types :
1. Sim pIe Mortgage
A simple mortgage has the following characteristics :
(i) The mortgagor retains possession of the property.
(ii) The mortgagee is given the right. in case of non-payment
of the mortgage-money. to have the property sold
through the court and realise his dues from the sale
proceeds.
(iii) The mortgagor undertakes that if the sale proceeds of
the property are insufficient to repay the money due, the
mortgagor will remain personally li~ble for the payment
of the debt.
2. Mortgage by way of Conditional Sale
In this case the mortgage transaction is entered into in the
form of a sale. The characteristics are as follows :
(i) The mortgagor ostensibly 'sells the property to the
mortgagee.
(ii) The mortgagee undertakes that if ,he mortgage-money
is repaid on a certain date he will resell the property
to the mortgagor or that the sale shall be void.
(iii) The mortgagor agrees that if the mortgage-money is not
repaid on the fixed date. the sale shall be absolute.
(iv) The conditions regarding resale etc. are incorporated in
the mortgage deed.
3. English Mortgage
An English mortgage is very similar to a mortgage by the
conditional sale. The characteristics are as follows :
508 SECURITIES

(i) The mortgagor sells the property absolutely to the

mortgagee.
(ii) The mortgagee agrees to reconvey the property to the
mortgagor if the mortgage-money is paid up by a certain
date.
An English mortgage differs from a mortgage by conditional
sale in two respects, viz., (a) in the former there is an undertaking
by the mortgagor to repay the debt; in the latter there is none; •
(b) in the latter, the mortgagee cannot sue for the mortgage-
money or for the sale of the property; in the former he can.
4. Usufructuary Mortgage
The characteristics of an usufructuary· mortgage are as
follows
(i) The mortgagor delivers possession of the property to the
mortgagee.
(ii) The mortgagee takes the rents and profits of the property
and appropriates the same to the interest and the
principal sum due.
(iii) When the full amount due has been recovered in the
manner aforesaid, the mortgagee gives up possession of
the property to the mortgagor.
(iv) The mort agee cannot sue for the mortgage-money or
for the sa of the property; has only remedy is to
continue in ossession till he gets back the money lent,
together wit interest.
S. Equitable Mortga e or Mortgage by Deposit of Title-deeds
In Calcutta, Born ay, Madras and other towns notified by the
Government a mortgage may be created by depositing the title-
deeds of a property with the mortgagee. No writing or registration
is required, but the deposit must be made with the intention of
creating a security and not for any other purpose. The transaction
may be recorded in a letter or memorandum. A mortgage by
deposit of title deeds is also called Equitable Mortgage.
6. Anomalous Mortgage
A mortgage which does not come within any of the above
classes is called an Anomalous Mortgage. A mortgage containing
a mixture of the characteristics of the different types mentioned
above, comes within the category of anomalous mortgage.
 SECURITIES 509

Sub mortgage
The mortgagee can mortgage the interest transferred to him
by way of security. Such a mortgage is called a submortgage.
Subsequent Mortgages by the Mortgagor
After a property is mortgaged to a person, the owner can
mortgage it again to other persons. The person to whom the
property is mortgaged at first is called the first mortgagee. The
next mortgagee is called second mortgagee and sO on. There may
• be any number of mortgagees over the same property. For
purposes of payment the different mortgagees rank in order of
time. The first mortgagee is paid in full first, then the second
mortgagee and so on.
RIGHTS AND LIABILITIES OF PARTNERS
Apart from the provisions of the mortgage deed, the mort-
gagor and the mortgagee have certain statutory rights and liabili-
ties. The important right and liabilities are mentioned below.
Rights of Mortgagor
1. Redemption
Any time after the principal amount secured by the mortgage
becomes due; the mortgagor can get back the property by paying
off the claims of the mortgagee. This right is called the Right
of Redemption or the Equity of Redemption. This right is
extinguished when the court so orders or when the court passes
a decree for the sale of the mortgaged property. A decree of the
court by which the mortgagor is prevented from exercising the
right of redemption is called a Decree for Foreclosure. Such a
decree may be passed in English mortgages.
The mortgage deed cannot impose any condition which
prevents or restrict~ the right of redemption. Any clause in the
deed which purports to do so is called a. "clog on the right of
redemption" and is void. When a transaction is in substance a
mortgage, the court will not allow it to be converted into a sale
or any other transaction. This principle is expressed in the maxim,
"Once a mortgage, always a mortgage".
2. Accessions
If there is any accession (addition) to the property when the
mortgagee is in possession. it goes to the mortgagor after the
510 SECURITIES

property is redeemed. The same rule applies to improvements

made upon the property by the mOJ1gage, if any.
3. Inspection and Copies
The mortgagor is entitled to inspect and take copies of the
title deeds of the property while they are in the possession of
the mortgagee.
4. Deposit and Suit
The mortgagor can file a suit for redemption after the •
mortgage money becomes due. He can also deposit the money
due in court. Interest ceases to run after the mortgagee receive
notice of the deposit.
5. Instalments
Where the transaction comes under the Money-lenders Act
or any other similar statute, the court can direct the payment
of money by instalments.
6. Lease
If the mortgagor is in possession, he can under certain
circumstances grant a lease of the property.-Sec.65A.
Rights of the Mortgagee
I. He is entitled to incur expenditure for the protection and
preservation of the property and is entitled to and such expen-
diture to the mortgage money. He has an insurable interest in
the property.
2. He is entitled to receive the principal amount together
with interest at the agreed rate, subject to the statutory provisions
regarding the maximum payable rates of interest.
3. He can file a suit for the remedy appropriate to the type
of mortgage entereC! into. The usual remedies are a suit for sale
of the property and a suit for foreclosure.
4. Under certain circumstances the mortgagee can sell the
mortgaged property without intervention of the court, e.g., where
such a right is &iven by the mortgage deed.
5. Section 65 of the Transfer of Property Act provides that
in the absence of a contract to the contrary, the mortgagor shall
be deemed to have agreed to the following covenants :
(a) the mongagor has title to the property and has the right
to transfer the same;
•
•
 · SECURITIES 511

(b) there is right to quiet enjoyment of property ;

(c) the mortgagor will pay the public chalges, rates and taxes
due on the property;
(d) if the mortgaged property is a lease, the rent due on it
will be paid; and
(e) the interest and principal due on prior encumbrances will
be paid.

CHARGE
A charge on an immovable property is created when it is
made liable for the payment of money to another, but the
transaction does not amount to a mortgage.
Section 100 of the Transfer of Property Act defines a Charge
as follows: "Where an immovable property of one person is, by
an act of the parties or by operation of law, made security for
the payment of money to another, and the transaction does not
amount to a mortgage, the latter person is said to have a charge
on the property."
"No particular form of words is necessary to create a charge
and all that is necessary is that there must be clear intention
to make a property security for payment of money in praesenti.
In each case the question which the court would have to decide
would be whether the agreement in question creates a charge in
praesenti. Where there is no transfer in the interest of property,
there is no mortgage." J. K. Private Ltd. v. Kaiser-I-Hind Sp. &
Wvg. Co. I
Distinction between a charge and a mortgage
I. In a mortgage, there is transfer of an interest in some
immovable property. In a charge, there is no transfer of any
interest to any person.
2. In some types to mortgage there is a personal convenant
to pay by the mortgagor. There is no such covenant in a charge.
3. If a mortgaged property is transferred, the transferee takes
the property subject to the mortgage, whether he was aware of
the mortgage or not. But if a property subject to a charge is
transferred to a bona fide transferee for value without notice,
the transferee is not bound by the charge.

I AIR (1970) Supreme Court 1941

512 SECURITIES

4. A mortgage can be created only by an act of parties. But

a charge can be created by act of parties or by operation of law.

MORTGAGE AND PLEDGE

The difference between a mortgage and a pledge or pawn
can be summed up as follows :
I. Mortgage relates to immovable property; pledge or pawn
to movable property.
2. In a mortgage there is transfer of an interest in some'
property; in a pawn or ,Jledge there is only an obligation to repay
money.
3. Properties pawned or pledged remain with the creditor;
in a mortgage possession of the -property may be with the
mortgagor or with the mortgagee.
4. The same property may be mortgaged several times; there
cannot be several pledges of the same goods.

HYPOTHECATION
The term Hypothecation is used to describe a transaction
whereby money is lent on the security of movable property but
the property remains in the custody of the owner of the property.
Hypothecation is also called mortgage of movables. Such trans-
actions have been held to be valid in India although they are
not dealt with in the Transfer of Property Act.
The owner of the goods which are hypothecated is called
the Hypothecator. The person to whom the goods are hypoth-
ecated is called the Hypothecatee.
Hypothecation differs from mortgage on the _following
points : (i) Mortgage relates to immovable property; hypotheca-
tion to movable property. (ii) In a mortgage there is transfer of
some interest in the property to the creditor; in hypothecation
there is on ly an obI igation to repay money, there is no transfer
of any interest.
Hypothecation is similar to pawn or pledge, because both
deal with movable property. In a pawn or pledge, however, the
creditor has possession of the property; while in hypothecation
possession remains with the- debtor.
The rights of the hypothecatee depend on the 'tenns of the
contract between the parties. He can file a suit to realise his
dues by sale of the goods hypothecated. He may be given, by
 SECURmES 513

the terms of the contract, the right to sell the goods himself (on
default of payment by the due date) and to realise his dues from
the sale proceeds.
The hypothecatee may lose his rights, over the goods
hypothecated, under the following circumstances :
I. If·the hypothecator, in possession of the goods, sells them
to a bona fide purchaser for value without notice of the
hypothecation, the purchaser gets a good title to the goods and
the hypothecatee cannot proceed against them. Sreeman Narasiah
v. Bansi Reddy Venkataramiah.'
2. If the hypothecator, in possession of the goods, makes_
a valid pledge of the goods and the pledgee has no notice of
the hypothecation, the claims of the hypothecatee will be
postponed to those of the pledgee. Co-operative Hindusthan Balik
v. Surendra. 2
LIEN
Lien may be defined as the right to retain goods belonging·
to another, till some claim is satisfied. There are ihree kinds of
lien; (i) Possessory Lien, (ii) Maritime Lien and (ii,) Equitable
Lien.
Possessory Lien
A possessory lien is one which can be exercised only b)
a person in possession of goods. A possessory lien may be a
General Lien or a Particular Lien.
General Lien means the right to retain all the goods of
another in the possession of a person until all Hle claims of the
possession are satisfied. General lien may be conferred by an
agreement to that effect or by custom and usage or by the
provisions of any statute. General lien exists in the case of
solicitors, bankers, factors etc. (See p. 166-167).
Particular Lien means the right to retain goods till some claim
concerning those goods is paid. Examples: Common carriers can
retain goods carried by them till the charge payable in respect of
those goods are paid. Other bailees have similar rights.
A possessory lien can be enforced by retaining possession.
The lien-holder cannot sell the property ·except under certain
special circumstances.

'42 Mad. 59 1 AIR (1932) Cal 524

Commercial Law - 33
514 SEC!lRITlES

A possessory lien is extinguished in the following cases :

(i) when possession is lost, (it) when the money due is paid,
(iii) when the claimant takes some other security and thereby,
by implication, abandons the right of lien and (iv) when the right
of lien is waived.
Maritime Lien
Maritime Lien is a right conferred by maritime law, specially
binding a ship and her cargo, fittings and furniture, and freight
for the payment of some claim. Examples: seamen for their
wages; salvors for their reward; holders of a bottomry bond for
the money lent, etc.
A maritime lien does not depend on possession. It can be
exercised by persons not in possessiol) by taking proceedings
against the property concerned.
A maritime lien come to an end by payment, release, waiver
and by the destruction of the subject-matter of the lien.
Eq ulta ble Lien
An equitable lien means a lien which is conferred by law
to enable a person to satisfy some claim over some other person's
property. Example : an unpaid vendor of immovable property has
a lien on the property for the unpaid purchase money.
An equitable lien is binding on all persons who take the
property with notice of the lien. An equitable lien is enforced.
by a suit for the sale of the property. It is extinguished by
payment of the claim and by transfer of the property to a bona
fide purchaser for value without notice.

EXERCISES
I. Describe Simple Mortgage' and Equitable Mortgage. What are the
requirements of an Equitable Mongage? (Pages 507, 508)
2. Define Mongage. Distinguish between a m6'itgage and a charge
on immovable property. (Pages 506, 5 II)
3. Write notes 9n Equitable Mongage. (Page 508)
4. How is an Equitable Mongage effected? Distinguish between a
mortgage and a charge, (Pages 508, 5 II)
5. What is hypothecation? When does the hypothecation lose his
rights? (Pages 512-513)
6. Distinguish between Possessory Lien, Maritime Lien and Equitable
Lien, (Pages 513-514)
 BOOK X
CONSUMER PROTECTION ACT,
1986
Consumer Protection Act, 1986 SIS -531
Historical Background 516; Statement of Objects 517;
Sal ient Features of the Consumer Protection Act, 1986 5 18 ;
Definition of Consumer 519; Consumer Disputes 519;
Consumer Protection Councils 520; Composition and
Functions of the Councils 521 ; Redressal Agencies Provided
under the Consumer Protection Act 522; District Forum
522; Jurisdiction and Powers of the District Forum 523 ;
State Commission 524 ; Jurisdiction and Power of the State
Commission 524; The National Commission '526 ;
Jurisdiction and Powers of the National Commission 527 ;
Complaint 528 ; Findings of the District Forum 530 ; Penalty
under the Consumer Protection Act Act 531.
 CONSUMER PROTECTION ACT,
1986

HISTORICAL BACKGROUND
Consumer is the pivot of all production and progress of a
nation. Unfortunately, Indian consumers are mostly illiterate and
unorganised. They have little capacity to purchase goods or
services on fair rates and terms. They are generally bluffed and
befooled by the traders who are organised and commit frauds
in open market. For the industrial development of the country.
Sri .lawharlal Nehru initiated the restricted import policy to offer
facilities to Indian industrialists in the interest of rapid devel-
opment of Indian industries. But the Indian industrialists rather
committed frauds with the Indian consumers by producing sub-
standard products. Now as the central government has opened
the gates of world market to Indian traders. Indian traders are
making hue and cry. as they are unable to compete with the
foreign industr.ialists and traders. To protect the interests of Indian
consumers, the former Prime Minister, Rajiv Gandhi initiated the
Consumer Protection Act, 1986.
It was at the initiative of Rajiv Gandhi, a seminar was
organized in New Delhi in January, 1986. The representatives
of state governments, voluntary organizations of consumers and
central ministers of different departments took part in the seminar
and expressed their opinions on the issue of consumers, protec-
tion. Those suggestions were discussed and debated in a number
of inter-ministerial meetings to prepare a draft bill on consumers'
protection. In order to design the framework of proposed
legislation on consumer protection, the existing laws of different
countries. V,=., U.S.A .. U.K .. Australia, in respect of consumers'
protection, were taken .into account. The prevailing socio-
economic condition of India also shape the paradigms of bill on
consumers' protection. The bill was finally placed before [ok
Sabha on 9th December. 1986 by Sri H. K. L. Bhagat. [n mtra-
ducing the bill he stated that the bill represented a land-mark
in the field of socio-economic legislation of the cOllntry TIllS
comprehensive bill would supplement and not replace an) other
law pertaining to consumer protection. The bill enshrines the
516
 CONSUMER PROTECTION ACT. 1986 517

rights of the consumers to be protected by the consumer

protection councils in the centre and states and the redressal
machinery at the national, state and district levels. The legislation.
intends to provide prompt and meaningful remedy for consumers'
grievances. But its success will depend on effective implemen-
tation of its provisions by the central and state government. There
is no hesitation in saying that strong and broad-based voluntary
consumer movement from the grass-root level holds the key to
success. The Minister declared that, "I also take this opportunity
to request my brethren in the trade and industry to rise to the
occasion, set up consumers' redressal cells within their organi-
zations which and would minimise consumers' complaints and
improve their image. Trade and industry should not only envolvc
a code of Ethics for fair business practices but also implement
them in letter and spirit."
STATEMENT OF OBJECTS
I. The Consumer Protection Bill, 1986 seeks to provide
better protection of interests of the consumers and for that
purpose to make provisions for establishment of consumer
councils and other authorities for the settlement of consumers'
disputes and for matters connected therewith.
2. It seeks to promote and protect the rights of consumers,
such as :
(a) The right to be protected against marketing of goods
which are hazardous to life and property.
(b) The right to be informed about the quality, quantity,
potency, purity, standard and price of goods to protect
the consumer against unfair ·trade practices.
(c) The right to be assured, wherever possible, access of
variety of goods at competitive prices.
(d) The right to be heard and to be assured that consumers
interests will receive due consideration at appropriate
forums.
(e) The right to seek redressal against unfair trade practices
or unscrupulous exploitation of consumers, and
(f) The right to consumer education.
3. To provide steady and simple redressal to consumers'
disputes, a quasi-judicial machinery is sought to be set up at the
district, state and central levels. The quasi-judicial bodies will
SI8 CONSUMSER PROTECTION ACT, 1986

observe the principles of natural justices and have been empow-

ered to give reliefs of a specific nature and to award wherever
appropriate compensation to consumers. Penalties for non-com-
pliance of the orders given by the quasi-judicial bodies have also
been provided.
SALIENT FEATURES OF THE CONSUMER
PROTECTION ACT, 1986
The sal ienf features of the Act are as follows :
I. The Act provides speedy redressal to consumer complain-
ants. The Bill provides for setting up of a Consumer Redressal
Forum in every district, a commission at the state level and the
National Commission at the Centre. The Forum in the District
will have original jurisdiction to redress complaints up to claim
of Rs. I lakh (after amendment up to 10 lakhs). The State
Commission will have original jurisdiction to settle claims up
to the amount Rs. 10 lakhs after amendment 20 lakhs). The
National Commission can entertain any claim for damages above
Rs. 10 lakhs (after amendment above 20 lakhs). The State
Commission will be vested with appropriate Appellate and
Revisional powers. .
2. To promote voluntary consumer movement and to ensure
involvement of consumers. The Bill provides for the establish-
ment of Consumer Protection Councils in centre and the states.
These Councils will have both non-official and official members.
The objects of the Councils will be to promote and protect the
rights of the consumers.
3. It shall apply to all goods and classes of goods or all
services or classes of services except those which are specially
exempted by notification by the central government.
4. The provisions of the Bill shall be in addition to and not
in derogation of any other law for the time being in force.
5. Necessary penal and punitive provisions have been
corporated to ensure that the proposed legislation is effective in
protecting consumers.
6. The complaint can be filed by a consumer or an
organization being a society registered under the Societies
Registration Act, or a company registered under the Companies
Act, representing consumers or by the central or state govern-
ment.
 CONSUMER PROTECTION ACT. 1986 519
•
7. The complaint can be filed on accou'nt of any u/lfair trade
practices resulting in loss or damage, defect in ~he goods,
deficiency in the services, prices charged in excess o~he prices
fixed by or under any law or displayed on the goodS/packets,

DEFINITION OF CONSUMERS
Consumer, under section 2( 1Xd) of the Consumer Protection
Act, 1986, means one who pays money for goods or services,
In other words, a consumer is a specific person who pays money
either for purchase of some goods or some service of other
person, individual or corporate body. The definition under section
2(1 )(d)(i) does not include a person who obtains 9tIch goods for
resale or for any commercial purposes. But "Commercial pur-
pose" under sub-diuse (i) above does not include use by a
consumer of goods bought and used by him exclusively for the
purpose of earning his livelihood, by means of self-employment.
In Mrs. S Anusuya v. Mis Methodax Systems'(Pj Ltd" (1991),
it was observed that "Parliament intended to restrict the benefits
of the Act to ordinary consumers purchasing goods either for
their own consumption or even for use in small ventures which
they have embarked upon in order to make living as district from
a larger scale manufacturing or private activity carried on for
profit in order that exclusive clauses should apply. It is, however,
necessary that there should be a close nexus between the
transaction ofthe purchase of goods and the large-scale activities
carried on for earning deposits,"
Service means service of any description which is made
available to potential users and includes the provisions of
facilities in connection with banking, financing, insurance, tra'1S-
port, processing supply of electrical or other energy, boarding
or lodging or both, housing construction, entertainments, amuse-
ment or the news or other information, but does not include the
rendering of any service free of charge, Or under a contract of
personal service.

CONSUMER DISPUTES
Consumer dispute is a dispute which arises out of a denial
of allegation complained in a complaint by the person against
- whom such complaint has been made. For definition of the term
•
520 CONSUM..sER PROTECTION ACT. 1986

'Complain\', it is an allegation in writing made by a consumer

or a voluntary consumer association duly registered or by the
central government or the state government. Disputes means a
claim made by one party and denied by the other. In Dacca
Cooperative Industrial Union Ltd. v. Dacca Cooperative S. S.
Samity, it was ~eld that a proceeding to recover money arising
out of a claim asserted by one party and denied by other party
is a dispute. The allegation to give rise to a consumer dispute
within, the meaning of the definition given in Consumer Protection
Act includes allegation in respect of 4nfair trade practices, defects
in goods, deficiency in service and charging of excessive price .

. CONSUMER PROTECTION COUNCILS

Celltral Council and State Councils
The Consumer Protection Act, 1986 sought to provide beller
protection to the interests of 'the consumers and for that purpose
made provisions for the establishment of Consumer Protection
Councils and other authorities for resolving consumers' disputes.
The Consumer Protection Councils would be set up at national
and state levels (Section 6 of Consumer Protection Act)
The objects of the Central Consumers Protection Council and
State Consumers Protection Councils are to promote and protect
the rights of the' consumers, such as :
(a) The right to be protected against marketing of goods and
services which are hazardous to life and property.
(b) The right to be informed about the qualitY, quantity,
potency, purity, standard and price of goods or services
as the case may be so as to protect the consumer against
unfair trade practices.
(c) The right to be assured whet'ever possible, access to a
variety of goods and services at competitive prices.
(d) The right to be heard and to be assured that consumers'
interest will receive due consideration at appropriate
forum.
'(e) The right to seek redressal against unfair trade practices
or restrictive trade practices or unscrupulous exploitation
of consumers, and
(j) The right to consumer education.
The objects "f a State Consumer Protection Council are to
 CONSUMER PROTECTION ACT. 1986 521

promote and protect within the state the rights of the consumers.
The objects of the "Central Consumer Protection Council are
to promote and protect the rights of the Indian consumers in
general within the territory of India. The Central Council is the
highest body to lay down and decide the policy of consumer
protection. Consumers' interests mainly concern with
(i) good quality of goods and services.
(ii) regular and uninterrupted supply of products; and
(iii) reasonable prices of the products.

COMPOSITION AND FUNCTIONS OF THE COUNCILS

Central Council (Sec. 4)

The Central Council will be composed of following
members:
L The Minister in charge of Consumer Affairs of the union
government will be the chairperson of the Council."
2. Such members--official and non-official-representing
such interests a, may be prescribed.
The Central Council meets as and when necessary. At least
one meeting shall be held every year. The time and place of the
meeting will be fixed by the Chairman. The procedure in regard
to the transactions of the business shall also be determined by
the Chairman. (Sec 5).
State Council (Sec. 7)
A State Council shall be composed of the following mem-
bers, namely, "
I. The Minister in charge of Consumer Affairs of the state
government will act as Chairman.
2. Such members-official and non·official-representing
such interests as may be prescribed by the state govern-
ment.
The State Council shall meet as and when necessary. The
time and place of the meeting shaH be fixed by the Chairman.
The Council shall observe such procedure in regard to the
transactions of its business as may be prescribed by the state
government. At least two meetings shall be held every year.
522 CONSUMSER PROTECTION ACT. 1986

REDRESSAL AGENCIES PROVIDED UNDER THE

CONSUMER PROTECTION ACT
To provide steady and sifllple redressal to consumer disputes
a quasi-judicial machinery has been set up at the district, state
and central levels. The quasi-judicial bodies observe the principle
of natural justice and have been empowered to give reliefs of
a specific nature and to award wherever appropriate, compen-
sation to consumers. Penalties for non-compliance of the orders
given by the quasi-judicial bodies have also been provided.
(Sec. 9)
The Consumer Protection Act provides for the following
redressal agencies
(a) A Consumer Dispute Redressal Forum known as District
Forum has to be set up by the state government by
notification in each district.
(b) A Consumer Disputes Redressal Commission to be
known as the State Commission would be established
by the state governl1lent with the approval of the central
goverml'lent.
(c) A Consumer Redressal Commission to be known as the
National Commission has been established by the Cen-
tral Government.

DISTRICT FORUM

Composition (Sec. 10)

Each District Forum consists of
(.a) A person who is or has been, or is qualified to be a
District Judge to be nominated by the state government
as its President. .
(b) a person of eminence in the field of education, trade
or commerce,
(c) a lady social worker.
However, every appointment shall be made by the state
government on the recommendation of Selection Committee
consisting of the following :
I. President of the State Commission who acts as Chairman,
2. Secretary, Law Department of the state government as a
Member.
 CONSUMER PROTECTION ACT. 1986 523

3. Secretary in charge of the Department dealing with

consumer affairs in the state as a member.
The salary or honorarium and other allowances payable to
and the other terms and conditions of service of the members
shall be such as may be prescribed by the state governmen'. Every
member of the District Forum shall hold office for a term of
5 years Or upto age of 65 years, whichever is earlier shall not
be eligible for re-appointment.
Jurisdiction of the District Forum (Sec. 11)
By jurisdiction is meant the authority which is vested in a
court. In other words, jurisdiction means
I. the power, right or authority to take cognizance and decide
any matter according to law and,
2. the limits or territory within which authority may be
exercised.
The District Forum has the jurisdiction to entertain complaints
where the value of the goods or services and the compensation
of any does not exceed Rs. 10 lakhs.
A complaint shall be instituted in a District Forum within
the local limits of whose jurisdiction.
(a) the opposite party or each of the opposite parties resides
or carries on business.
(b) the cause of action arises.

Powers of the District Forum

The District Forum shall have the same powers as vested
in Civil Court under the Code of Civil Procedure, 1908, while
trying to suit in respect of the following matters :
(i) summoning and enforcing attendance of any defendant
or witness and examining the witness or oath;
(ii) the discovery and production of any document or other
material object predictable as evidence;
(iii) the reception of evidence on affidavits;
(il') the requisitioning ofthe report of the concerned analysis
or from the appropriate laboratory or from any other
relevant source;
(v) issuing of any commission for the examination of any-
witness and;
(vi) any other matter which may be prescribed.
524 CONSUMSERPROTECTION ACT, t9R6

Every proceeding before the District Forum shall be deemed

to be judicial proceeding within the meaning of sections 193 and
228 of the Indian Penal Code, 1860 and the District Forum shall
be deemed to be Civil Court for the purpose of Section 195 and
Chapter XXVI of the Code of Criminal Procedure,1973 for
launching inquiry regarding giving false evidence in the Forum,

STATE COMMISSION

Composition (Sec. 16)

Under Section 16 of the CP Act, 1986 a State Commission
is to be composed of:
1, A president who is appointed by the staie government in
consultation with the Chief Justice of High Court. The person
so appointed is or has been a judge of High Court.
2. Two other members, who shall be persons of ability.
integrity and standing and have adequate knowledge or experi- •
ence, or have shown capacity in dealing with problems relating
to economies, law, commerce, accountancy. industry, public
affairs or administration, one of whom shall be a woman,
But every appointment must be made by the state government
on the recommendation of the Selection Com", itt"e, The Selec-
tion Committee shall consist of :
(i) President of the State Commission as Chairman.
(ii) Secretary of the Law Department of the state as one
member.
(iii) Secretary in charge of the Department dealing with
consumer affairs in the state as other member.
The salary or honorarium and other allowances payable to
and the other terms and conditions of service of the members
of the State Commission will be such as Illay be prescribed by
the state government, Every member of the State Commissitlll
shall hold office for a term of 5 years or upto age of 6 7 )cars.
whichever is earlier and shall not be eligible for re-appointment
Jurisdiction and Powers of the State Commission
Pecuniary Jurisdiction
The State Commission shall have jurisdiction to elltertain
appeals againsi the order of District Forum within the state "here
 CONSUMER PROTECTION ACT, 1986 525

the value of the goods or services and compensation, if any,

excludes Rs. 5 lakhs but does not exceed Rs. 20 lakhs.
Terminal Jurisdiction of the State Commission
The State Commission has been entrusted with territorial
jurisdiction over the whole territory of the concerned state. It
may entertain the cases, the valuation of which is more than
Rupees 5 lakhs and less than 20 lakhs. It shall have jurisdiction
to entertain appeals against the orders of any District Forum
within the State, and to call for the records and pass appropriate
orders in any consumer dispute which is pending before or has
been decided by any District Forum within the state, where it
appears to the State Commission that such District Forum has
exercised a jurisdiction so vested or has acted in exercise of its
jurisdiction illegally or with material irregularity. In other words,
the State Commission has appellate as well as revisional juris-
diction over the whole territory of the state concerned.
Original ,Jurisdiction
Any person aggrieved, regarding the valuation of more than
rupees 5 lakhs and less than 20 lakhs, may file a complaint before
the State Commission in whose territory the cause of action arose
or the opposite party resides or works for gain.
The procedure for entertaining and disposal of complaints
to be followed before the State Commission shall be the same
as provided for complaints before District Forum in sections 12,
13 and 14 and the rules made thereunder. by the concerned State
Commission with such modifications as may be necessary as per
Section 18,
Appellate Jurisdiction
Any person aggrieved by an order made by the District
Forum may prefer an appeal against such order to the State
Commission. An appeal to the State Commission Can be filed
within a period of 30 days from the date of the orders. in such
a form and manner as may be prescribed under Section 15 of
the Act. The State Commission may, however. entertain an appeal
after the expiry of the period of 30 days if it is satisfied that
there was sufficicill cause for not tiling it within Ihal period .
• In it was observed Rajasthan Housing Board Ys. Smt. Shashi
Sinwal that it is incumbent on appellant who has to explains each
526 CONSUMSER PROTECTION ACT. 1986

day of default beyond the terminus line of the prescribed period

of limitation.
Revisional Jurisdiction
Even when an appeal is tim.e bound, the State Commission
can exercise powers of revision to set aside order appealed
against if there was an error of jurisdiction committed by the
District Forum. The State Commission may call for' the records
and pass appropriate orders in any consumer dispute which is
pending before or has been decided by any District Forum within
the state. where it appears to the State Commission that such
District Forum has exercised a jurisdiction so vested or has acted
in exercise of its jurisdiction illegally or wilh material irregu-
larity.
The grounds Ibr the revision application are the same as are
provided for a civil revision in the Code of Civil Procedure. On
presentation of such appl ication, the Comm ission may either
dispose it of summarily or order to send for record of the District
Forum in the matter and decide the revision application after
giving opportunity to the opposite party to be heard.

THE NATIONAL COMMISSION

Under Section 20 of the C. P. Act 1986 The National
Commission is composed of following members :
I. A person who is or has been a judge of Supreme Court
appointed by the Central Government in consultation with the
Chief Justice of India, who shall be its President.
2. Four other members who shall be persons of ability,
integrity and standing and have adequate knowledge or ex.peri-
ence of or have shown capacity in dealing with problems relating
to economics, law, commerce, accountancy, industry, public
affairs or administration. One of them shall. be a woman.
Appointment of these four members shall be made by the
Central Government on the recommendation of a Selection
Committee composed of the folloWing, namely.
(a) Chairman who happens to be judge of Supreme Court
and nominated by the Chief Justice.
(h) Two other members-one of them happens to be
Secretary in the Department of Legal Affairs, the Government
of India anll the other member happens to be the Secretary of
 CONSUMER PROTECTION ACT. 1986 527

the Department dealing with Consumer Affairs; Government of

India.
Every member of the National Commission shall hold office
for a term of five years or upto the age of seventy years,
whichever is earlier and shall not be eligible for reappointment.
Jurisdiction (Sec. 21)
The National Commission will I ave the jurisdiction to
entertain any complaint directly where the value of the goods
exceeds Rupees 20 lakhs. It also 'entertains appeals against the
'- orders of any State Commission. Besides, it has the jurisdiction
to call for records and pass appropriate order, in any consumer
dispute which is pending or decided by the State Commission
in a wrong way or with material irregularity.
Power and Procedure
The National Commission will have the powers of a Civil
Court as specified in sub-se~tions (4), (5) and (6) of section 13,
such as, summoning and enforcing attendance of the defendant,
exam ination of witness, urging production of documents, requi-
sitioning of the report of the concerned analysis or test from the
appropriate laboratory, order issuing of any commissiOil for
examination!lf any witness. Every proceeding before the National
Commission will be deemed to be judicial proceeding within the
meaning of sections 193 and 228 of the Indian Penal Code, and
the National Commission will be deemed to be a Civil Court
for the purpose of Section .195 and Chapter XXVI of the Code
of Criminal Procedure, 1973.
Moreover, the National C6mmission has the power the direct
the defendant to remove the defects of the goods as detected
by the appropriate laboratory, to replace the 'goods, to return the
price, to remove the defects or deficiencies of the services in
question, to discontinue the unfair or restricted trade practices
and so on as referred in clauses (a) to (f) of sub-section (I) of
section 14.

Appeal
Any person. aggrieved by an o~der of National Commission
may prefer 'an appeal against such order to the Supreme Court
within a period of 30 days from the date of the order. If no appeal
528 CQNSUMSER PROTECTION ACT. 1986

has been preferred against such order. the order passed by the
National Commission will be final.
Administrative Control
The National Commission will have administrative control
over all the Stale Commission, such as, calling for periodical
return regarding the institution, disposal, pending of the cases.
National Commissi0~ ,Iso issues instruction regarding adoption
of unifonn procedure e c. It also watches the functioning of the
State Commission .>r of the District Forums to ensure that the
objects and purposes of the Act are best served without in an)'
way interfering with their quasi-Judicial freedom.
Enforcement of Order
Every order made by the National Commission will be
enforced by the Commission in the same manner as if it were
decree or order made by a Court.

COMPLAINT
What it is?
Complaint means any allegation made III writing by the
complainant that-
I. As a result of any unfair trade practice adopted by any
trade, he has suffered loss or damage.
2. The goods mentioned in the complaint suffer from one
or more defects.
3. The services mentioned in the complaint suffer from
deficien,fy in any respect, and
4. Price in excess of-price . fixed by or under any law for
the time in forCe or displayed on the goods or any package
containing such goods has been charged by a trader. The purpose
of the complaint is to seek certain relief
Procedure on receipt of Complaint
It has been provided in Section I3 of the Act that the District
Forum shall on receipt of a complaint, if it relates to any goods,
refer a copy of the complaint to ths! opposite party mentioned
in the complaint directing him to give his version of case within
a period of 30 days or such extended period not exceeding 15
days as may be granted by the District Forum. Where the opposite
 CONSUMER PROTECTION ACT. 1986 '529

party denies or disputes allegation or omits or fails to take any

action within the time given, the District Forum shall proceed
to settle the dispute.
Where the complaint alleges a defect in the goods whic~
cannot be detennined without proper analysis or test of the goods,
the District Forum shall obtain a sample of the goods from the
complainant seal it and authenticate it in the manner prescribed
and refer the sample so sealed to the appropriate labOratory along
with a direction that such laboratory make analysis or test,
whichever may be necessary with a view to finding out whether
such goods suffer from any defect alleged in the complaint or
sutTer from any defect and ~o report its finding thereon to the
District Forum 'withina time' period of 45 'days of the receipt
of the reference or within such extended period as may be granted
by the District Forum.
Before any sample of the goods is referred to any appropriate
laboratory, the District Forum may require the complainant to
deposit to the credit of the Forum such fees as may be specified,
for payment to the laboratory for carrying out the necessary
analysis or test in relation to the goods in question.
The District Forum shall remit the amount so deposited to
its ~redit to the appropriate laboratory' to enable it to carry out
the analysis or test mentioned above and on receipt of the report
from the appropriate laboratory, the District Forum shall forward
a copy of the. receipt along with the remarks as the District Forum
may feel appropriate to the opposite party.·
It any of the parties disputes the correctness of the findings
of the appropriate laboratory or disputes the correctness of the
methods of analysis or test adopted by the laboratory, the District
Forum shall require the opposite party or the complainant to
submit in writing his objectives in regard to the report made by
the appropriate laboratory;· The District Forum thereafter shall
give a reasonable opportunity-to both the parties of being heard
on the ·point. of correctness''Or otherwise of the. report and also
as to the objection made in relation thereto and issue an
appropriate order. ,'. ,
If the complaint received by it relates' to goods in respect
ofwbich the pl"OCledure ,specified above cannot be followed~ or
i£thu' complaint relates to, any services, the District I'orum shall
refer·a copy_. of' SUChico,"plaintto the opposite party· directing
e. - L...., - :)01
530 CONSUMSER PROTECTION ACT. 1986

him to give the version of the case within a period of 30 days

or such extended period not exceeding 15 days as may be granted
by the District Forum.
Where the opposite party denies or disputes the allegation
or omits or (ails to take any action to represent his case within
the time given by the District Forum, the District Forum shall
proceed to settle the dispu~es on the basis of the evidence brought
to the notice by the complaimant and the opposite party. No
proceeding complying with the procedure mentioned above shall
be called in question on the ground that the principles of natural
justice have not be complied with.
FINDINGS OF THE DISTRICT FORUM
If, after the proceeding conducted under section 13, the
District Forum is satisfied that the goods complained against
suffer from any of the defects specified in the complaint or that
any of the allegations contained in the complaint about the
services are proved, it shall issue an order to the opposite party
directing him to take one or more of the followings :
(a) to remove the defects pointed out by the laboratory from
the goods in question;
(b) to replace the goods with new goods of similar descrip-
tion which shall be free from any defect;
(c) to return to the complainant the price, or, as the case
may be the charges paid by the complainant;
(d) to pay such amount as may be awarded by it as
compensation to the consumer due to negligence .of the
oppOsite party;
(e) to remove the defects or deficiencies in the services in
question ;-
(f) to discontinue the unfair trade practice or the restricted
tJ'adp. practice or not to repeat them; .
(g) not to offer the hazardous goods for sale;
(h) to withdraw the hazardous goods from being offered for
sale;
(i) to provide for .adequate costs to parties.
Every order made by the District Forum shall be signed by
all the members constituting it. Procedure relating to the conduct
of the meetings of the District Forum, its sitting and other matter
shall, be such as may be prescribed by the suite government.
 CONSUMER PROTECTION ACT. 1986 531

PENALTY UNDER THE C. P. ACT.

Section 27 of Consumer Protection Act. 1986 provides for
penalties that, where a trader or a person against whom a
complaint is made or the complainant fails or omits to comply
with any order made by the District Forum, the State Commission
or the National Commission, as the case may be, such trader
or person or complainant shall be punishable with imprisonment
for a term which shall not be less than one month but which
may extend to three years, or with fine which shall not be less
than Rs. 2000/- but v.hich may extend to Rs. 10000/- or with both.
But the District Forum. the State Commission or the National
Commission, as the case may be, if it is satisfied that the
circumstances of the case so require, impose a sentence of
imprisonment or fine, or both for a term lesser than the minimum
term and the amount lesser than the minimum. amount, specified
in this section.

EXERCISES
I. Define the topics listed below as stated under the Consumer
Protection Act. (a) Consumer (b) Servic.e (e) Complaint (eI) Consu-
mer Dispute. [Pages (a) 519 (b) 519 (e) 528 (eI) 519 J
2. State the composition and objective of Central Consumer Protection
Council. (Page 5c I)
3. State the composition and objective of State Consumer Protection
Council. (Page 5c4)
4. Discuss the principles laid down under the Consumer Protection
Act, regarding composition and jurisdiction of District Forum.
(Page 522)
5. Discuss the process regarding compiaim under the Consumer
Protection Act. (Page 528)
6. Discuss the procedure" on settlement of disputes on receipt of
complaint. (Page 528)
7. Write short notes
(a) Complainant (b) Defect (e) Trader (eI) Dispute (e) Lnfair trade
practice. [Pages (a) 528 (6) 518 (e) 519 (eI) 519 (~) 519]
8. Discuss about the penaities under the Consumer Protection Act
(Page 531)
 BOOK XI
COMPANY LAW

CHAPTER I Introduction S37 - 564

Genesis of the Companies Act, 1956 537; Objects and
Purposes of Company legislation 537; Extent and
Application 538; What is a Company? 538; One-man
Company or Family Company 539 ; Statutory Company 539 ;
Chartered Company 540; Registered Company 540:
Unregistered Company 540; Essential Features of a Company
540; Company and Partnership 543 ; Types of Companies
544 ; Body Corporate or Corporation 546 ; Existing Company
546; Group 547 ; Public Financial Institutions 547; Holding
Company and Subsidiary Company 548 ; Differences between
a Private Company and a Public Company 549; Privileges
of Private Companies 551 ; Private Company into a Public
Company 551 ; Public Company into a Private Company
554; Results of Conversion 555 ; Falling below the Minimum
Membership 555 ; Company and an Illegal Association 556 :
Government Company 557; Foreign Companies 559;
Jurisdiction of Courts 561; Company law Board 562;
Advisory Committee 563.
CHAPTER 2 The Memorandum and Articles of Association S65 - 586
Definitions and Differences 565 : The Form and Contents of
the Memorandum 567; Rules Regarding the Name of the
Company 568 ; Rules regarding the Registered Office 569 ;
Form and Contents of the Articles 570; Alteration of the
Memorandum 571; Alteration of Share Capital 575;
Reduction of Share Capital 576 ; Variation of Shareholders'
Rights 578 ; Reserve Capital 578 ; Alteration of the Articles
of Association 578 ; The legal EfTects of the Memorandum
580; legal Effects of the Articles 582; The Doctrine of
Indoor Management 584. .

C'W'l'ER 3 The Formation of A Company 587 - 612

Essential Steps 587; Procedure of Registration and
Incorporation 588; The Certificate of Incorporation 588;
Promoters 589; Promoters and Pre incorporation Contracts
591; Prospectus 593; The legal Requirements of Prospee, us

533
534 COMPANY LAW

595 ; Misstatements in the Prospectus 598 ; Statement in Lieu

of Prospectus 603 ;'Prospectus by Implication 603 ; Minimum
Subscription 604 ; Allotment. of Shares 605 ; The Return as
to Allotment 609; Commencement of Business 610.

CHAPTER 4 Capital, Shares and Shareholders 613 - 651

Share Capital 6 I 3 ; Shares 613 ; Voting Right of Shreholders
616; Rights of Shareholders 617; Liabilities and Duties of
Shareholders 618; Redeemable Preference Shares 619:
Increase of Capital: Rights Shares 620; Conversion of
Government Loans into Shares 621 ; Share Cenificate 622 :
Share Warrant 623 ; Differences between Share Warrant and
Share Cenificate 624 ; Stock 624 ; Schemes of Arrangement,
Reconstruction and Amalgamation 626; Issue of Shares at
a Premium 630; Issue of Shares at a Discount 630:
Commission and Brokerage 6} 1 ; Purchase of the Company's
own Share 632 ; The Register and Index of Members 633 :
The Foreign Register 634 ; Trust of Shares and Debentures
634; Membership of'a Company 635 ; Transfer of Shares
638 ; Restrictions on Acquisition and Transfer of Shares 641 ;
Case Law Concerning Transfer of Shares 644 ; Lodging the
Certificate 646 ; Blank Transfers 646 ; Calls 647 ; Lien 648 ;
Forfeiture of Shares 649; Surrender of Share 650.

CHAPTER 5 Meetings and Resolutions 652 - 665

Objects 652 ; Meetings 652 ; Statutory Meeting 652 ; Statutory
Repon 653 ; Annual General Meeting 654; Other General
Meeting 655 : Rules of Procedure Regarding Meetings 656 :
Resolutions 660 ; Resolution by Special Notice 662 ; Minutes
of Proceedings 662; Annual Return 663.

CHAPTER 6 Directors 666 - 701

Definition 666; Number of Directors 666; Mode of
Appointment of Directors 667 ; Retirement of Directors 672 :
Resignation of a Director 673; Vacation of Office by
Directors 674; Removal of Directors 675; Managing Director
677 ; Loans to a Director, lIis Relatives Etc. 680 ; Contracts
in which a Director is Interested 681 ; Register of Directors
Etc. 683 ; Remunerations of Directors 683 ; Meetings of the
Board of Directors 686; Legal Position of Directors 687 ;
Powers of Directors 689 ; Contribution for Political Purposes.
692; Rights of Directors, 693; Duties of Directors 694:
Disabilities of Directors 695 ; Liabilities of Directors 697.
 COMPANY LAW 535

CHAPTER 7 Company Management 702 -71S

Modes of Management of a Company 702 ; Managing Agent
702; Relative 702; The Secretary 702; Manager 704;
Officer 705; Contracts ~nd Deeds of a Company 706;
Service of Documents 706; General Provisions regarding
Registers and Returns 707 ; Managerial Remuneration 708 ;
Management by Undesirable Persons 709; Appointment of
a Body Corporate 709 ; Payment of Interest out of Capital
709; Where a Company is Undisclosed Principal 710;
Employee's Securities and Provident Funds 711 ; Dividend
711 ; Rules regarding Dividend 712.

CHAPTER 8 Accounts and Audit 716 -731

Account Books 716 ; Other Books 717 ; Annual Accounts
and Balanco Sheet 719; Profit and Loss Account 720;
Authentication 720; Shareholders' rights in ,espect of
accounts 721; Board's Report 722; The Auditors of a
Company 723; Appointment of Auditor 723; Number of
Auditors 725 ; Removal of Auditors 725 ; Qualification and
Disqualifications of Auditors 725; Rights, Powers,
Remuneration and Statutory Duties of Auditors 726; Audit
Report 726; Special Audit 728; Legal Decisions 729.

CHAPTER 9 Borrowing Powers, Debentures 732 -744

Borrowing Powers of a Company 732; Debentures 733;
Floating Charge and Fixed Charge 734; Classification of
Debentures 735 ; Convertible Debentures 736 ; Rules relating
to Debentures 736; Rights and Remedies of Debenture
Holders 738; Differences between Shareholders and
Debenture Holders 738 ; Loans to Companies under the same
Management 739; Investments in the ;ame Group of
Companies 740 ; Registration of Mortgages and Charges 741.

CHAPTER 10 Control Over Companies 745 -760

The Administration of Company Law 745; Registrar of
Companies 745; Investigation of the Affairs of a Company
746; Inspectors 749 ; Government action on the report 750 ;
Certain General Provisions Regarding Investigations. 750;
Mismanagement and Oppression by the Majority 751;
"Lifting the Veil" of the Company 758; Miscellaneous
Provisions 759.
, 536 COMPANY LAW

CHAFfER II Winding Up 761 - 790

Definition 761 ; Modes of Winding Up 761 ; Compulsory
Winding Up 761; Powers of the Court 765;' Official
Liquidators 767 ; Powers of the Liquidator 769; Disclaimer
of Onerous Property by Liquidator 771; Committee of
Inspection 772 ; Contributories 772 ; Voluntary Winding Up
775; Types of Voluntary Winding Up 775; Differences
between Members' Voluntary and Creditors' Voluntary
Winding Up 776; Procedure of a Voluntary Winding Up
.776 ; Rules Applicable to a Members' Voluntary Winding Up
777 ; Rules Applicable to a Creditors' Voluntary Winding Up
778 ; Rules Applicable to both Types of Voluntary Winding
Up 779; Winding Up. Subject to the Supervision of Court
780 ; Compulsory Winding Up Pending Voluntary Winding
Up 781; Consequences of Winding Up 782; Mode cf
Distribution of Assets 785 ; Miscellaneous Provisions 787.
 INTRODUCTION

GENESIS OF THE COMPANIES ACT, 1956

The first Indian Act, regarding companies, was the Joint
Stock Companies Act of 1850. This was based upon the English
Act of 1844. The Act of 1850 was replaced by a new Act bearing
the same name in 1857. In this Act the principle of limited
liability was introduced for the first time in India. With the
growing popularity of the corporate form of business organisation,
need was felt for more comprehensive company legislation, Acts
relating to companies were passed in 1860, 1866, 1882, 1895,
19\0 and 1913. The act of 1913 remained in force up to 1956,
though it was extensively amended in 1936, 1951, 1984 and 1988.
The Government appointed in 1950, an expert committee
under the chairmanship of Sri C. H. Shaba to suggest how the
Company Law can be reformed. The Companies Act of 1956
(Act I of 1956) is based mainly on the recommendations of the
committee. The Act of 1956 has been amended in 1960, 1963,
1965, 1969, 1971, 1974, 1984 and 1988.

OBJECTS AND PURPOSES OF COMPANY

LEGISLATION
The Company is a form of business organisation in which
the funds of a large number of investors are managed by a few
persons for the purpose of earning profits which are shared by
all the investors. The main objects and purposes of statutes
relating to companies are as follows :
I. Encourage investments in cbmpanies by providing certain
facilities, e.g., limitation of liability, transferability of shares etc.
2. Ensure due and proper administration of the funds and
assets of companies in the interest of the investing public.
3. Present malpractices by directors and managers.
4. Arrange for investigation into the affairs of companies ami
provide for effective audit in dealing with cases of dishonesty
and fraud in the corporate sector. •

537
538 COMPANY LAW

EXTENT AND APPLICATION

The Companies Act extends to the whole of India: Provided
that it shall apply to the state of Nagaland subject to such
modifications. if any. as the Central Government may. by ~
notification in the official Gazette specilY.-Sec.I(3).
The Central Government can modilY the Act in its application
to Nidhis or a Mutual Benefit Society. subject to issuing
notification on this subject.-Sec. 620A.
Subject to issuing a notification. the Central Government can
modilY and provide special provisions as to companies in Goa,
Daman and Diu.-Sec. 620B.
The same provisions have been applied to Jammu and
Kashmir.-Sec. 620C.
The Act applies to all classes of companies including public
·companies. private companies and associations not trading for
profit. It also includes provisions in respect of companies
incorporated outside India, but which have an established place
of business in India.

WHAT IS A COMPANY?
Definition
The term Company is used to describe an association of a
number of persons, formed for some common purpose and
registered according to the law relating to companies. Section
,3(1 lei) of tjle Companies Act~ 1956 states that a company means,
"acomJ)I!.I1Y formed.and regi~e.red. under this Act or an existing
_c~ny." -
[ILord .J.u~tij:e__Lind.ley_defines a company as follows :/"By '.
a company is meant an .association of many persons who
contribute money or money's worth to a common stock and
employ it for a common purpose. The common stock so
contributed is denoted in money and is the capital of the company.
The persons who contribute it or to whom it belongs are
members. The proportion of capital to which each member is
entitled is his share."»
Explanation
A company, formed and registered under the Companies Act,
is regarded by law as a single person. having specifred rights
 INTR0DUCTION 539

and obligations. The law confers on a company a distjru:J~

.Ilersoftality, with perpetual succession and a common seal.
Therefore a company is different from its members and the
individuals composing it. Suppose that, A, B, C and 50 other
persons form a company called XY & Co. The Company, XY
& Co. is a legal person quite separate from A. B. C and others.
Therefore, A. B. C etc. can enter into contracts with XY & Co.

Illustration
This principle is illu-strated in the case Salomon v. SalOllloll
& Cu. Ltd. I Salomon had a business in boot manufacture. He
formed a company called Salomon & Co. (with himself, his wife,
daughter and 4 sons as shareholders) and transferred to it his
business. As consideration for the transfer he received the major
portion of the shares of the company and debentures for £ 10,000.
Later on, the company went into liquidation. Salomon, as a
debenture holder, claimed to be a secured creditor and demanded
priority in the payment of £ 10,000, out of the assets of the
company. The unsecured creditors of the company objected on
the ground that the business really belonged to Salomon and he
should not be allowed to claim as a secured creditor. It \vas held
that Salomon as an individual, was quite distinct from Salomon
& Co.' and he could therefore be a secured creditor of the
company, even though he happened to hold the majority of the
shares.

One-man Company or Family Company •

Even when a single person holds most of the shares of a
I
company, the company has a legal personality separate and
distinct from the owner of the majority of tile shares. A person
can form a company by getting a few nominees or dummies,
get registration and commence business. Salomoll v. Salomon &
Co. Ltd. (See above). E. B. M & Co. Ltd. v. Domillion &mk2
Such a company, can be called a one-man company or individual
ownership of a company.

Statutory Company
A company or corporation, formed by an Act of the
Legislature, is called Statutory Corpor3tion. Examples are Reserve
,
, AIR (1937) Pri¥)' Council 279
540 COMPANY LAW

Bank of India, Industrial Finance Corporation, Life Insurance;

Corporation etc. The constitution and functions·of such companies
are laid down by the Act of Parliament or any State Legislature
of India. Statut~ry companies are created and organised for
specific public undertakings.
Chartered Company
Formerly in Great Britain, companies were fomled by Royal
Charter for specific purpose, e.g., East India Company. A
Chartered Company is regulated by the terms of its Charter. In
India such companies are foreign companies.
Registered Company
A company must be registered under the Companies Act.
After registration, the Registrar of the companies issues a
Certificate of Incorporation. After that the company becomes a
Registered Company. (See ch. 3).
Unregistered Company
If an association .or company is not registered it should be
called unregistered company. (See 'illegal Association', p.-556).
The Companies Act provides, under section 582, for the winding
up of unregistered company. (See at the end of chapter II).
GovernmenfCompaDY aDd Foreign Company See pp. 557-559

~ESS~IA4 Ff;~T1.1ru:S QF ~AN...-Y

The principal characteristics of an incorporated company can
be summarised as follows:
,
-../f Registration: A company comes into existence only after
registration under the Companies Act. But a Statutory Corporation
is formed and commence business as notified or ~tated in the
Act and as passed in the Legislature. In case of partnership,
registration is not compulsory.
2. Voluntary Association: A company is an association of
many persons on a vol untary basis. Therefore a company· is
formed by the choice and consent of the members.
3. I egal personality: A company is regarded by law as a
single person. It has a legal personality. This rule applies even
in the case of "One-man Company." Salomon v. Salomon & Co.
(ibid.). .
 INTRODUCTION 541

4. Contractual capacity: A shareholder of a company, in its

individual capacity, cannot bind the company in any way. The
shareholder of a company can' enter into contract with the
company and can be an employee of the company.
5. Management: A company is managed by the Board of
Directors, whole time Directors, Managing Director or Manager.
These persons are se lected in the manner provided by the Act
and the Articles of Association of the company. A shareholder,
as such, cannot participate in the management.
6. Capital: A company must have 8 capital, otherwise it
cannot work.
7. Permanent. existence: The company has Perpetual
Succession. The de'ath or insolvency of a shareholder docs not
affect its existence. A company comes into end only when it
is liquidated according to provisions of the Companies Act.
8. Registered Office: A company must have a registered
office.
9. Common Seal: A company must have a Common Seal.
~O. Limited Liability: The liabilities of shareholder of a
company are usually limited. The creditors of a company are
not creditors of individual shareholders and a decree obtained
again,,;! a com(l3llY cannot be executed against any shareholders.
It can only be executed against the assets of the company.
II. Transferability:. The shareholder of a company can
transfer its share and ordinarily the transferee becomes a member
of the company.
12. Statutory Obligatiolls: A company is required to comply
with various statutory obligations regarding management, e.g.,
filing balance sheets" maintaining proper account books and
registers etc.
13. Not a citizen: A company is an artificial person, not
a natural person. Therefore a company is not a Citizen, although
it may have a Domicile. State Trading Corporation of India v.
C. T. 0. 1 Divisional Forest Officer v. Bishwanath Tea Co. Ltd. 2
14. Residence: Acompany has a residence (for taxation and
other purpose). A company does not possess any fundamental
rights. Tata E. & L. Co. Lid. v. SIdle of ·Bihar. l

I AIR (1953) Supreme Court 1811 2 AIR (1981) Supreme Court 1368
'AIR (1965) Supreme Court 40
542 COMPANY LAW

J 15. No fundamental rights: Though a company has" no

fundamental rights, it can challenge a law as void if the law
happens to violate fundamental rights of citizens. In order to
succeed the company must prove that the impugned law is
expropriatory of a citizen's property. Prithvi Collon Mills v.
Broach Borough Municipalityl
"It is true that the Statesman newspaper being a Company
has no fundamental rights. But the fundamental rights of the
shareholders of the Company as citizens are not lost when they
associate to form a company. The shareholders' rights are equally
and necessarily affected if the rights of the Company are
affected." Statesman Ltd. and others v. Fact Finding Commi/lee
alld others. 2
VI6. Social Objective: The present view as regard the legal
nature of Company Law is that the Company is a social institution
having duties and responsibilities toward the community, its
workers, the national economy and progress. (See next topic).
VI 7. Centrally Administrated: The administration of Company
Law is entrusted to the Central Government. (See chapter 10).
Js. "Lifting the veil" of the company: See ch. 10.
Is a Company a Property of the Shareholders ?
The new Concept o/Company. There has been a considerable
debate as to whether a Company is the property of the shareh()!d·ers.
In the case, National Textile Workers' Union v. P. R. Ramakrishnan)
the views of Supreme Court are quoted below :
It is now accepted on all hands, even in predominantly
capitalist countries, that a company is not property. The traditional
view that the company is the property of the shareholders is now
an exploded myth. A company according to the new socio-
economic thinking, is a social institution having duties and
responsibilities towards the community in which it functions.
Maximisation of social welfare should be. the legitimate goal of
a company and shareholders should be regarded not as proprietors
of the company, but merely as suppliers of capital entitled to
no more than reasonable return and the company should be
responsible not only to shareholders but also to workers,
consumers and the other members of the community and should
be guided by considerations of national economy and progress.
I AIR (1968) Guj. 124 ' AIR (1975) Cal 14
J AIR (1933) Supreme Court 75
 INTRODucnON 543

COMPANY AND PAIITNERSIDP

The points of difference between a Partnership arid' a
Company can be summed up as follows.
A company is regulated in accordance with the Companies
Act, 1956 and its subsequent amendmt:nts, while a partnership
is regulated by the Indian Partnership Act, 1932..
I. Registration: A company comes ;~'() existence only after
registration under the Companies Act. Ir the case of a partnership,
registration is not compulsory.
2. Minimum number of members: The minimum number of
persons required to form a company is 2 in the case of private
companies and 7 in the case of public companies. The minimum
number of persons required to form a partnership is 2.
3. Maximum nllmber of members: A public company may
have any number of members. A private company cannot have
more than 50 members A partnership carrying on banking
business cannot have more than 10 memhers and partnership
carrying on other types of business cannot have more than 20
members.
4. Legal status: A company is regarded by law as a single
person. It has a legal personality. A partnership is a collection
of individuars. It is not considered to be a single persoll.
5. Authority of members: The property of a partnership is
the joint property of the partners. Each partner has authority to
bind the firm by his acts. The property of the company belongs
to the company. A shareholder in his individual capacity cannot
bind the company in any way.
6. Contractual capacity: The shareholder of a company can
entt:r into contracts with the company and can be an employee
of the company. Partners can contract with other partners but
not with the firm as a whole.
7. Management: A partnership firm is managed by the
partners themselves. The work of management can be distributed
among them in any manager they like.
A company is managed by the Board of Directors or Whole
Time .Directors or Managing Directors or Manager who are
selected in the manner provided by the Act. A shareholder, as
such. cannot participate in the maQagement .
• 8. Length of existence: A company has perpetual succession.
The death or insolvency of a member does not affect its existence.
 '~
S44 COMPANY lAW

It comes to an end only when 'liquidated according to the

provisions <If the Companif.)s Act. A partnership, in the absence
of a contract to the contrary, comes to an end .when a partner
dies or becomes insolvent.
, 9. Liability of memb~rs: The liability ·of the members of a
partnership for, the debts of the firm is unlimited. The liability
of the members of a company i& limited. .
10. Liability ~ffi".~: and. company: The cre9itors ofatinn
are creditors of the indi' -idual partners, and. a decree C/btained
against a firm ,can be execlJted against the indi~id.,lI!lI partners.
The, credito.rs of a company ,are not creditors of the individual
shareholders and a decree obtained against a company cannot
be' executed against any sha~ehoider. It can only be executed,
against the.l!ssets of the c o m p a n y . .
, " I L TrDIJsferability: A partner of a firm cannot transf!lr. h,is
interest in the, finn to an outsider, and make the transfer,.e a
partner without the. consent of all the .oliler partllers. The;
shareholder of acQmpany.canordinarily lr.msfer his share'l!Dd j

the transferee, becomes a member of the company. .

12. Statutory obligaJions: A company is required to comply
with, various statutory obligatiQns regarding management, e.g.,
til ing balance sheets, maintaining proper account books and
registers. III the case of. partnership there are no suc,h statutory
obligations., '

TYPES OF COMPANlE!)
There are two types of companies-Public and PriYate. '
l.Priv~tej:~ompany .
1\ pn.vate company .is one,which,. by * articles, (a) .restricts
the right of the members to transfer their shares, if any; (b) limits
the number of its mem~ers (not cO!J,Oting its employees) to 50 ;
and. (e) pro~ibits any ,invitation to the public !O,5ubscribe for
any shares In, or deben~.res oJ. the cOf11pBl,ly.~ec, )( I )(iii)..
. .Whc;re ,!wo Or more persons. hol~,yDe,or ",ore"slia\"es in a
compalJy,joiptly; theX, ,sliall" for the pu~ses of this definitip,!.
~ 'tre81e(!,1!!i '~'singl~. mem'-!er.
2. Public Company
'All cdlnpaniri OtheHhanptivatl companies are called' obbli.9,
cOnijtlinief...c..t.:See:)(I)(ivY. , ,
 INTRODUCTION S4S

Public companies may be classified into three types :

(i) companies limited by shares, (it) companies limited by
guarantee, and (iiI) unlimited companies.
Private companies may be limited by shares or limited by
guarantee. There cannot be a private company with unlimited
liability.
/Company Umited by Silares
In these companies there is a share-capital, and each share
has a fixed nominal value which the shareholder pays at a time
or by instalments. The member is not liable to pay anything more
than the fixed value of the share, whatever may be the liabilities
of the company. Most of the companies in India belong to this
class.
/Company Limited by Guarantee
In these companies, each member promises to pay a fixed
sum of money in the event of liquidation of the company. This
amount is called· the Guarantee. Sometimes the members are
required to buy a share of a fixed value and also give a guarantee
for a further sum in the ev.ent of liquidation. There is no liability
to pay anything more than the value of the share (where there
is a share) and the guarantee.
IUnlimited Company
In these companies the liability of the shareholder is
unlimited, as in partnership firms. Such companies are permitted
under the Con:tpanies Act but are not known.
Statutory Public Company See p. 552
Non-Profit Associations
The Central Government may by licence, permit the omission
of the words Limited Or Private Limited in the case of companies
which are formed for promoting commerce, art, science, religion,
charity or any other useful object, and which are non·profit and
non-dividend-paying organisations (e.g., Chambers of Commerce).
The licence given may be withdrawn if the company ceases to
fulfil the conditions mentioned above.-Sec. 25.
At the time of granting the registralion of such an !lSsociation.
the Central Government can provide restrictions on their working.
Commercial Law - 35
 , COMPANY LAW
546

The Government can direct the inclusion of the 1'estrictions in

the memo and the articles of association of the institution. After
registration its members can get all the benefits of the CQmpanies
Act, including limited liability. The Central Government can
exempt any of the restrictions by a general or a special
notifiClj.lion.

BODY CORPORATE OR CORPORATION

"Body Corporate" or "Corporation" includes a company
incorporated outside India but does not include-{a) a corporation
sole; (b) as co-operative society registered under any low relating
to co-operative societies; and (c) any other body corporate (not
being a company as defined in this Act) which the Central
. Government may, by notification in the official Gazette, specify
in this behalf.-Sec.2(7).
The term Body Corporate or Corporation is us'ed in a special
sense. It includes companies incorporated outside India. It does
not include a co-operative society under any law relating to such
societies. It does not include a corporation sole.
Corporations are of tWo types viz., Corporation Aggregate
and Corporation Sole. The former 1s forined by a group of persons
for the performance of a common object e.g.. an incorporated
company. The latter, i.e., a corporation sole is formed by one
member at a time. A Kingship in England or President of I~dia
is a Corporation Sole. Examples : When a king dies another
person becomes king and when the President of India dies or
retires, another Pres.ident is elected. Thus in a Corporation Sole
one person SUCQet!ds another person.

EXISTING 'COMPANY
Existing Compaoy Rleans a company formed and registered
under any of the previous company law specified below-
(a) Any ~tt or· Acts relating to companies in force before
the Indian Companies Act, 1866 and repealed by that Act:
(b) The Indian Companies Act, 1866;
(c) The Indian Companies i\ct, 1882;
(d) The Indian Companies Act, 1913; .
. . (t!) The Re.gistration of Transferred Companies Ordinance,
1942'; and . .
 iNTRODUCTION 547

(f) Any law corresponding to any of the Acts or the

Ordinance aforesaid an<l in force-
(ll in the merged territories or in a Part B State (other than
the State of Jammu and Kashmir), or any part thereof,
before the extension thereto of the Indian Companies
Act, 1913; or
(2) in the State of Jammu and Kashmir, or any part thereof,
before the commencement of the Jammu and Kashmir
(Extension of Laws) Act. 1956.-;-Sec. 3(1 )(ii).

GROUP
"Group" means a group of Iwo or more individuals,
associations, firms or bodies corporate. or any combination
thereof. which exercises or is in a position. to exercise. or has
the object of exercising, control over any body corporate. firm
or trusl.-Sec. 2( 18A).
Explanation-The Company Law Board will decide whether
he term 'group' comes within the above definition or not. The
30ard must give a reasonable opportunit} of being heard to the
ndividuals, associations, firms. bodies corporate or any
ombination thereof.
The above provision was inserted in. the Companies
"'mendment) Act, 1974.

PUBLIC FINANCIAL INSTITUTIONS

"4A. (I }-Each of the financial institutions specified in this
ubsection shall be regarded, for the purposes of this Act, as
public financial institution, namely-
(i) The Industrial Credit and Investment Corporation of India
Limited, a company formed and registered under the Indian
Companies Act, 19 \3 ;
(ii) the Industrial Finance Corporation of India, established
under section 3 of the Industrial Finance Corporation Aci.
1948 ;
(iii) the Industrial Development Bank of India established under
section 3 of the Industrial De,e1opment Bank of India Act.
1964 ;
(iv) the Life Insurance Corporation of India, established under
section 3 of the l.ife Insurance Corporation Act. 1956:
 COMPANY LAW

(v) the Unit Trust of India, established under section 3 of the

Unit Trust of India Act, 1963.
(2) Subject to the provisions of sub-section (I), the Central
Government may, by notification in the official Gazette, specify
such other institution as it may think fit to be a public financial
institution.
Provided that no institution shall be so specified unless-
(i) it has been established or constituted by or under any
Central Act, or
(ii) not less than fifty-one per cent of the paid-up share capital
of such institution is held or controlled by the Central
Government. "
The above section was added by the Companies (Amendment)
Act, 1974.
Classification on the Basis of Control : In accordance with
the basis of Control, Companies may be classified into--
(I) Hold ing Company;
(2) Subsidiary Company.

HOLDING COMPANY AND SUBSIDIARY COMPANY

If a company can control the policies of another company
(i) through the ownership of its shares or (ii) through control
over the composition of its Board of Directors, the former (i.e.,
the con/roiling company) is called a Holding Company and the
latter (I.e .. the con/rolled company) is called its Subsidiary.
Sec. 4 of the Act lays down that a company shall be deemed
to be a subsidiary of another company only if anyone or more
of the following conditions are satisfied :
(a) If the composition of its Board of Directors is controlled
uy the other company.
(h) (I) If it is an existing company in which the holders
of preference shares (issued before the commence-
ment of the Act of 1956) have the same voting rights
as the holders of equity shares, and the other
company exercises or controls more than half of the
total voting power of such company; Or
(2) in any other case, if the other company holds more
than half in nominal value of its equity share capital.
 INTRODUCTION 54,?-

(e) If it is the subsidiary of a company which is itself the

subsidiary of another company. [See example (3) below.)
The following points are to be noted :
I. The composition of a Company's Board of Directors shall
be deemed to be controlled by another company if that other
company can appoint or remove the holders of all or a majority
of the directorship.-Sec. 4(2).
2. In determining whether one company is a subsidiary of
another, the shares held in a fiduciary capacity or as security
for a loan or by virtue of any provision in any debentures, shall
not be counted. But shares held as a nominee shall he counted,
except in the three cases mentioned above (in a fiduciary capacity
etc.).-Sec.4(3).
3, A foreign company may be treated as a subsidiary under
certain circumstances.-Sec. 4(6) and 4(7).
Examples:
(I) X Co. holds 55 shares of r Co. The subscribed shares of Y Co.
consist of 100 shares. X Co. is a holding company and Y Co. is
its subsidiary.
(2) P Co. holds 20 shares of Q Co. The subscribed share capital of
Q Co. consists of 50 shares. By an agreement between the companies
P Co. has the power to appoint 3 directorS in Q Co. The anicles
of Q. CO. provides that there shall be only 4 directors. P Co is
a holding company and Q Co. is its subsidiary.
(3) If company A has a subsidiary Band B has a subsidiary C. C will
be regarded a subsidiary of A. If Company D is a subsidiary of
Company C, Company D will be a subsidiary of Company Band
consequently also of Company A.
(4) A holding company and its subsidiaries are separate companies, each
being a distinct legal entity. The holding company need not inlervene
in a suit filed by a subsidiary company against another subsidiary
company. Turner Morrison & Co. v. Hungerford Investment Trust
Lrd'

DIFFERENCES BETWEEN A PRIVATE COMPANY

AND A PUBLIC COMPANY
The main points of difference between the two types of
companies are enumerated below.
I. Number of members: The number of members in a private
company cannot be less than two and cannot be more than fifty.
J AIR (1969) Cal. 238.
550 COMPANY LAW

In a public company, the number of members cannot be less than

seven but no maximum has been fixed. There may be any number
of members.
2. Restrictions on transfer of shares: In a private company
there must be regulations .restricting the transfer of shares. In
a public company there need not be any. By restricting transfer,
a private company can prevent the membership of persons or
classes of persons who are considered to be unde.sirable.-.
Sec. 3(1 )(iii)(a).
3. Restriction on invitation to public: A private company
cannot invite the public to purchase its shares or debentures. A
public company may do so.-Sec. 3(1 Xiii)(c).
4. Restriction on name: A private company must add the
words, "Private Limited" at the end of its name~Sec. 13.
5. Prospectus: A private company need not fil.! a' prospectus
"Or a statement in Iieu of prospectus.-Sec. 70(3). ".
6. Issue of rights "hares: When a public company proposes
to increase its subscribed capitai by the issue of new shares, it
must be offered first to the existing equity shareholders pro rata,
unless the members in a general meeting decide otherwise. This
provision does not apply to private companies.-Sec.81(3).
7. Commencement of business: A private company can
commence business immediately on incorporation, whereas a
public company has to wait until it obtains a certificate for the
Commencement of Business.-Sec. 149(7).
8. StatutOlY Meeting alld Statutory Report: A private
company need not hold the Statutory Meeting or file the Statutory
Report.-Sec. 165(10).
9. Managerial Remuneration: In the case of public
companies there are certain limits to managerial remuneration.
This rule does not apply to a private company which is not a
subsidiary of a public company.-Sec. 189.
10. Number of directors:· The Act provides that a private
company must have at least 2 directors and a public company
at least 3 directors.-Sec. 232.
11. Rules regarding directors: The rules regarding directors
are less stringent in the case of private companies which are not
subsidiaries of public cumpanies. Following examples are given:
 INTRODUCTION 551

It is not necessary to file with the Registrar the consent of

a director to act as -suc~; amendment of articles regarding
appointment of whole-time Or non-rotational' directors do not
require the previous sanction of the Government; pnvisions
regarding the share qualifications of directors laid down in
Sections 270-272, do not apply; a private company may provide
additional grounds for. disqualification of directors and their
vacation from office; private companies can' give loans to
directors; directors of a private company may participate in the
discussions,of the Board of Directors where contracts in which
they are personally interested are being dealt with; the restrictions
regarding the appointment of managing directors laid down in
Sections 316 and 317 do not apply to private companies; etc.
12. Company s own share: In a private company any person
can get financial assistance for purchasing the company's own
share.
13. Procedure of meeting : The law relating to the procedure
of Meeting is J"elaxed in a private company.
14. Appeal against transfer : Under certain circumstances,
shareholders have no' right to appeal against the Board of
Directors, if it refuses to register their transfer of shares.
15. Memo of Contract: In the case of a public company,
, if al\ agent 'enters into an agreement in which the company is
the undisclosed principal, he m,ust make a memorandum of the
contract and keep it with the company, otherwise the agreement
is not binding on the company, The rule is not appliqble to a
private company, unless it is a subsidiary of a public company,-
Sec, 416.
Privileges of private companies
The main privileges given to private companies, under the
Companies Act of 1956. are enume'rated in paras,5-15 stated
above.

PRIVATE COMPANY INTO A PUBLIC COMPANY

Convenion
A private company can be converted into a public company
by procedure stated as follows :
552 COMPANY LAW

I. By resolution
Section 44 provides the method by which a private company
call be converted into a public company, viz..
\a) by passing a special resolution altering its articles so
as to eliminate the three resirictions on private companies
(viz.. limitation of the number of members to 50;
restrictions on the transfer of shares; prohibition of
invitation to the public to buy shares or debentures), and
(b) filing with the Registrar, within 50 days, a prospectus
or statement in lieu of prospectus.
II. By default
A private company may become a public company by default.
as provi4ed in Section 43.
If II - private company fails to comply with the essential
requireme!l,ls of a private company (viz .. restrictions on transfer
of shares; limitation of the number of members to 50; and,
prohibition of invitation to the public to buy shares or debenture)
it shalt cease to enjoy the privileges of private companies and
. the company will be treated as if it were a public company.-
Sec. '43.
The court may relieve the company from the consequences
of non-compliance of the aforesaid restrictions, if it is of opinion
that the non-compl iance was accidental or was due to
inadvertence.
III. By Creating a Statutory Public Company
Where not less than 25% of the paid-up share capital OUI
private company (having a share capital) is held by one or more.
bodies corporate.; the private company shall become a public
company on and from the date on which the aforesaid percentage
is first held.-Sec. 43A. A company of this type has been called,
"Statutory Public Company" or "Companies deemed io be
public."
Th" following further provisions of Section 43A a~e to 'be
noted. . . ~
I. Privileges: Even after a private company has become a
public company by virtue of Sec. 43A, its articles of association
may continue to have the three restrictions characteristic of
(.
 INTRODUC1l0N 553

private companies (viz., limitation of members to 50, restrictions

on the transfer of shares and prohibition of invitation to the public
to buy 5hares). The number of members of such a 'public'
company. may also be reduced to below 7. It may continue to
have only two directors.
'" 2. Computation: In computing the aforesaid percentage, no
account shall be taken of the shares of the company held by
a Banking Company on trllst or as executors, etc.
3. Notice: A private company must inform the Registrar
within 3. mont!)s of its becoming a public 'company under this
section. The Registrar shall delete the word 'private' from the
nll{lle; of the company and shall also make the necessary
jlltera.tiofts in the Certificate or Incorporation and the
Memorandum of Association ofther company.
4. 'Approval ~ A private company becoming a public
company under this section shaH i£mtinue as such until it has,
with the approval of the Regiortal. Director of the Company Law
Board and in accordance wi.lh the provisions of the Act, again
become a private company. .
5. ExcepliQ!ls: Section 'iJ.:\ does not apply to the following
cases: ,. \h....".
(a) . tQ, a' pri~atc- comp'u"y of "'hich the entire paid-up share
, ~pit~!i~,her~ by;l'l~~er single private company or by one
. , tl'r ~r,A:;bodles corllPrate. IOcorpor4lted outsIde IndIa; or,
(5) to" any.: Qiller private company which satisfies all the
foiloWl'ng .con~itions, viz., (i) the shareholding companies
all
are ptivat~ companies, (ii) no share of a shareholding
company 'is held: bY' a body corporate, and (iii) the total
• number of sharehold~rs 'of the shareholding company or
the number of shareholding companies together with the
individual shareholders does not exc~ed f>fty; or.
(c) to a private company in which shares are held by one or
more bodies corporate incorporated outside India which (or
each of which) if incorporated in India, would be a private
company, In this case an order of the Central Government
is necessary. This exception was added in 1965.
IV. Automatic Conversion
Where the average annual turnover of a private company,
in existence at the commencement of the Companies
'ndment) Act, 1974, or incorporated thereafter, is not, during
554 COMPANY LAW

the relev!lnt period, less than rupees one crore, the private company
shall, irrespective of its paid-up share capital, become, on and from
the expiry of a period of three months from the last day of the
relevant period during which the private company had the. said
average aimual turnover, a public company by virtue of this
subsection.-43A(IA), Companies (Amendment) Act, 1974.
Section 43A of the Companies Act has also been amended
in 1988. Previously, a private Company whose average annual
turnover was not less than rupees one crore was considered a
public company. In sub-Section (IA) for the words "less than
rupees one crore", the words "less than such amount as may be
prescribed" shall be substituted.
After the commencement of the Companies (Amendment)
Act, 1988 a private company accepting deposits from the public
will become a Public Company and thereupon all the provisions
of this section shall apply thereto.
The following points are to be noted :
I. The above provisions were enforced from I st February,
1975.
2. A private company which was converted to a public
company (untler the above rules) may be or may at any time
be, reduced to below seven.
3. "Relevant period" means a period· of three consecutive
financial years- -
(i) immediately preceding the commencement of the
Companies (Amendment) Act, 1974 or
(ii) a part of which immediately preceded such commencement
and the other part of which immediately followed such
commencement, or
(iiI) immediately following such commencement or at any
thereafter.
4. "Turnover", of a company means the aggregate value of
the realisation made from the sale, supply or distribution of goods
Of on account of services rendered, or both, by the company
during a financial year.

P_YBLIC COMPANY INTO A PRIVATE COMPANY

CODvenioQ
If a Public Company wants to convert itself into a
Company, it must adopt the following procedure.
 INTRODUCTION 555

I. There must be. a Special Resolution altering the articles

which (0) restricts ihe right of the members to transfer their
shares, if any; (b) limits the. number of its members (not counting
its enrployees) to 50; (c) prohibits any invitation to the public
to subscribe for any shares in, or debentures of the company.-
Sec. 31(1).
2. After the resolution is passed by the company, it must
be approved b): the Central GovemmeJlI.
3. The company must file a printed copy· of the articles as
ahered, to the Registrar, within one month" of the approval of'
the Central Government.-Sec. 3 I (2A).
4. Confirmation by. the Court is not necessary.

RESliLTS OF CONVERSION.. .
I. A private company loses its privileges when a private
company becomes a public company by the methods stated above.
2. The conversion of a public company into a private
compariy, and vice-versa, does not change the incorporation of
the company. . ,.
It also does not affect the '\egality of the ·old company or
its legal personality of the company. Hinduslan Lever LId. v.
Bombay Soda Factory.'
3. Sec. 43A of the Companies Amendment Act, 1~60, has
created a mixture betw'een a .private company and' a public
company. A private cOI11Pimy, formed by holding bodies corporate
(see under Ill, p. 723) is private in name only but it is actually
public. A company of this type has beer( called, "Statutory Public
Company" or "Companies deemed to be' Public'.'. . . .
4. The amendment of Companies A~t 'in 19.74 also heated
a mixture between private company and a public company. If a
private company has a turnover of Rs. one crore or more, it will
be deemed to be a public company. Even under a mixed company,
the Government has the power to· change the composition of the
board of directors, fix the remuneration of the directors, give
directions regarding the activity of the companies etc.

FALLING BELOW THE MINIMUr.i MEMBERSHIP

If the number of members of a public company is reduced
to below 7 and that of a private company to below 2 and the
I AIR (1964) Mys. 173
556 COMPANY LAW

company carries on business for more than six months while the
number is so reduced, every person who remains a member after
six months and is aware of the fact of shortage of memilers,
shall be personally liable for all the debts of the company
contracted during that time.-Sec. 45.
The company can also be wound up by order of court.
Examples:
(I) In a public limited company there were seven members. The shares
of one member were sold by Court auction and were purchased by
another member of the same company. The minimum number of
membership is reduced to six.
(2) A private company was formed with two persons. the father and
his son. The son was the only heir of the father. The father died
and all his shares devolved to his son. The minimum number of
membership is reduced to one.

COMPANY AND AN ILLEGAL ASSOCIATION

An association of more than 10 persons carrying on business
in banking or an association of more than 20 persons carrying
on any other type of business must be registered under the
Companies Act. If it is not so registered it is deemed to be an
illegal association. Such an association suffers from many
disabilities. (i) It has no legal existence. (ii) It cannot enter into
contracts. (iii) It cannot sue its members or outsiders for money.
(iv) Every member of such an association is personally responsible
for all debts incurred by the association. (v) Each such member
is liable to be prosecuted in the criminal courts and fined up
to Rs. 1,000.
The effect of the aforesaid provisions (which are contained
in Sec. II of the Companies Act) is to make illegal, a partnership
business consisting of more than 10 partners is the case' of
..
banking companies and more than 20 partners in other cases.
But these rules do not apply to the case of a Joint Hindu Family
Firm.
The Act contains provisions for the winding up of
unregistered associations.
Classification on the Basis of Ownership:
In accordance with the basis of ownership, a company may
be classified into :
(I) government company. (2) non-government company.
 INTRODUCTION 557

GOVERNMENT COMPANY
Definition
A Government Company is one in which not less than 51 %
of the paid up share capital is held by the Central Government
andlor any State Government or Governments or by any two or
more of them together. The subsidiary of such a company is also
a Government Company.-Sec. 617.
Rules regarding Government Companies
The Act of 1956 contains the following rules regarding
Government Companies; '.
I. Auditors of Government Compan.ies are to be appointed
by the Central Government on the advice of the Comptroller and
Auditor General of Ind ia.-Sec. 619(2).
2. The Comptroller and Auditor General can direct the
manner in which the Company's accounts shall be audited. He
can conduct a supplementary test audit of the Company's
accounts by officers appointed by him. The auditor must submit
a copy of the audit report to him and his comments thereon are
to be placed before the annual general meeting of the Company.-
Sec. 619(3) to (5).
3. Where the Central Government is' a member of a
Government company, an annual report on its working and affairs
(together with the audit reports and comments thereon) must be
submitted to the Parliament. Where any State Government is a
member of a Government Company, such documents must also
be placed before the State legislature or legislaturcs.-Sec. 619A.
4. The Central Government may by notification, direct that
any of the provisions of the Companies Act shall not apply to
any Government Company or apply (other than the provisions
noted under I to 3 above) with such exceptions, modifications
and adaptations as may be specified in the notification.-Sec.
620( I).
A copy of every notification, proposed to be issued, must
be laid in draft before -both Houses of Parliament for a total
period of thirty days ~hich may be comprised in one session
or in two or more successive sessions and if, before the expiry
of the session immediately following the session or the successive
sessions aforesaid, either House disapproves of the issue of the
558 COMPANY LAW

notification, it. shall not be issued. If either House approves the

issue of the notification subject only to modifications, it shall
be issued only with such modifications as may be agreed upon
by both the Houses.-Sec. 620(2).
5. Section 619(2) of the Companies (Amendment) Act, 1974,
provides that Sec. 224( I B) and (I C) shall apply to the appointment
and re-appointment 'of auditors.
6. The provisions of section 619 shall ilpply to a company
in which not less than fifty-one per cent of the paid-up share
capital is held by one or more of the follO\ying or any
combination thereof, as if it were a Government company,
namely-
(a) the Central Government and one or more Government
companies;
(b) any State Government or Governments and one or more
Government compan ies ;
(e) the Central Government, one or more State Governments
and one or more Government companies:
(d) the Central Government and one or more corporations
owned or controlled by the Central Government;
(e) the Central Government, one or more State Governments
and one or more corporations owned or controlled by the
Central Government:
if) one or more corporations owned or controlled by the
Central Government or the State Government:
(g) more than one Government company.-Scc.6198.
Companies (Amendment) Act, 1974.
7. On 7th June, 1976 it was notified that a Government
company can hold vacant land in excess of statutory ceiling.
Case Law:
( 1) Application: A Government Company may in proper cases be
wound up_ A scheme about it may also be .sancti9ncd by the court.
But a company cannot at once be a Government Company and also
a Foreign Company within the Companies Act. In I"i:? Ril,t:r Steam
Xaviguriofl Co, Ltd 1
(2) Juristic personality of gOl'ernmJ!nt COnrpa11Y: A company registered
under the Companies Act has a legal entity of its own separate from
that of its sharellOld,ers. ",hoever they may be eg .. the Central
Government and/or the State Go\,emments, and !hcir nominees. Slate

t 71 C.W.N. 854
 INTRODUCTION 559

Trading Corporation v. Commercial Tax OfJicer. 1 The Company and

the shareholders are distinct entities. This fact does not make the
o company an alent either of the President or the Central Government.
lIeavy Engineering Afa=door Union v. Stale of Bihar. 2 Government
tompanies registered under the Act are non-statutory companies and
• . have a juristic personality of their own like any other company
registered under the A~t or any other previous companies Act. Praga
Tools Corporation v. C r ImanuaP"
(3) Posilion of eDlp/oyee : A Government company is not identified
with ihe State and its employe.es are not holc;ers of civil posts under
the State. Ran);' Kumar Challel'jee v. Union of India. 4
(4) Orders by 'he Go\'ernmenl : Certain directives were issued by the
. President of India from time to time. \,!Iith- regard to the conduct
of the business of the Company's Directors. The Directors are botlnd
to give immediate effect to the directives so issued. Fertili=er Corpn
of India v The Workmen. S

FOREIGN COMPANIES
Definition
Companies falling under the following two classes are called
Foreign Companics.-Sec. 591. :
(a) Companies incorporated outside India which, after the
commencement of the Act of 1956, established a place of
business within India.
(b) Companies incorporated outside India which have, before
the commencement of the Act of 1956, established a place of
business within India and continue to have the same at the
commencement of the Act.
Rules regarding Foreign Companies
The Companies Act contains the following provIsIons
regarding Foreign Companies.
1. Documents
A foreign company shall "ithin 30 days of the establishment
of a place of business in India. deliver to the Registrar for
registration-a certified copy of its memo, articles, chalter and/
or statutes by which it is incorporated: particulars regarding its
Directors and Secretary; addresses of its registered office and
I AIR 11%3)·Supreme Court 1811 , AIR (1970) Supreme Court 82
.' AIR (1969) Supreme Court 1306 'AIR (1969) Cal. 95
'AIR (19701 Supreme Court 867
560 COMPANY LAW

principal place of business; and name and address of person or

persons resident in India authorised to accepl service of notices
and processes on behalf of the company.-Sec. 592.
Alterations in any of the documents or particulars mentioned
above must be immediately notified to the Registrar.-Sec. 593.
2. Accounts
A foreign compa~~' must prepare a balance sheet and profit
and loss account in the same manner as companies under the
Act of 1956 and sub,nit three copies of the same to the Registrar.
The Central Government may modify or cancel the application
of this rule for any company.-Sec. 594.
3. Name
The name of a foreign company together with the name of
the country where it is incorporated, must be conspicuously
exhibited (on the outside of every office or plaee where it carries
on business in India) in English and in one of the' local
languages.-Sec. 595(b).
Its name and the name of the country where it is incorporated
must also be stated in English in all business letters, bill heads
and letter paper and in all notices and other official publications
of the company.-Sec. 595(c).
If the liability of the members of the company is limited,
the fact must be stated in English and one of the local languages,
on the outside of every office or place where it carries on business
In India, and on its letter paper, bill heads etc.-Sec. 595(d).

4. Registers etc.
Provisions of the Act relating to registration of charges,
appointment of receivers and the keeping of registers, documents
and books of accounts, apply to foreign companies.-Sec. 600.
5. Prospectus
A prospectus inviting subscriptions for shares or debentures
issued by a foreign company must state the following particulars-
name of the Company in English; name of the country in which
it is incorporated; whether the liability of the members is
limited; particulars regarding its constitution, date of
incorporation, addresses of its registered office and principal
place of business; and matters reqtlired to be included in a
 INTRODUCTION 561

prospectus issued by an Indian Company. Before it is issued,

the prospectus must be registered with the Registrar. If there are
untrue statements in the prospectus, the persons responsible for
its issue are liable to the same extent and in the same manner
as in the case of Indian Companies.-Sections 595(a), 603-8.
6. If one or more citizens of India (or by one or more bodies
corporated incorporated in India) whether ~ingly or together of
them, hold not less than 50% of the paid up share capital (whether
equity or preference or of them together) of a company
incorporated outside India and having an established place of
business in India such company shall comply with the provision
of the Act as if it were a company incorporated in India.-
Sec. 591, Companies (Amendment) Act, 1974.
7. On and from the commencement of Companies
(Amendment) Act, 1974, the provisions of the following subjects
apply to foreign companies, so far as possible-Anrrual Return
(Sec. 159), Books of Accounts (Sec. 209. 209A), Special Audit
(Sec. 233 A and B) and the power of the Registrar to call for
information. (Secs. 234 to 246).-Sec. 600.
8. Penalties
. If the rules mentioned above arc not complied with. the
cOlllpany and every officer or agent of the company who is in
default may be punished.-Sec.598.
9. Winding up
Where a body corporate incorporated outside India. "hich
has been carrying on business in India, ceases to carryon
business in India it Illay be wound up as unregistered company
according to the provisions of Part X of the Act. (Sec. Ch. II).
A foreign company's business in India can be wound up even
in cases where it has been dissolved or ceases to exist by virtue
of the laws of the country where it was incorporated.-Sec. 584.

JURISDICTION OF COURTS
Suits relating to the constitution of a company and its
winding up 'are ordinarily dealt with in the High Court of the
area in which the registered office of the company is situated.
But the Central Government may, by notification, confer power
on a District Court to try certain matters relating to companies.-
Sec. 10.

Commercial Law - 36
562 COMPANY LAW

Suits of other types (e.g.. money suits) by or against the

company, may be tried by all Courts. Which court will try the
suit is determined by the rules regarding jurisdiction of courts
as laid down in the Civil Procedure Code.
COMPANY LAW BOARD
The Company Law Board is a Board, appointed by the
Central Government with not more than nine members. It
exerci.ses certain functions .. relating to Company Law, delegated
to it by the Central Government. There are fOllr regional directors
of the Company Law Board stationed at Mumbai, Kolkata,
Kanpur and Chennai. Certain powers of the Board have been
delegated to them.-Sec. JOE.
"Under the Companies (Amendment) .4.ct of 1974, the Board
was empowered to form two more Benches (among the members),
exercising the Board's power. Every Bench has powers which are
vested IInder a court under the Code of Civil Procedure, namely,
discovery, attendance witnesses production of document etc.
The Company Law Board has been vested with some powers.
The important powers are enumerated below :
I. Alteration of memorandum e.g.. change of the Object
Clause and the change of registered office from one state to
another-Sections 17, 18 and 19. (See p.572).
2. Sanction for issue of shares at a discount.-Sec. 79.
3. Rectification of register of charges.-Sec. 141.
4. Calling extraordinary general meeting.-Sec. 186.
Section 10E of the principal Act has been amended and the
amending provision states that the Company Law Board shall
exercise and discharge sllch power and functions as may be
conferred on it by this Act of 1988.
The Company Law Board shall in the exercise of its pO\\h
IInder this Act, shall be guided by the principles of natural justice
and shall act in its discretion.
Subject to the provision of this section the Company Law
Board shall have power to regulate its own procedure.
Section 10F of the Company Act has heen amended and the
amending provision states that any person aggrieved by any
decision or order of the Company Law Board may file an appeal
to the High Court within sixty days froin the date of communica-
tion of the decision or order of the Company Law 130ard relating
to -any question of law emerging from slich order.
 INTRoltl'CTln" 563

ADVISORY COMMITTEE
For the purpose of advising the Central Governm~nt and the
Company Law Board on such matters arising out of the
administration of the Companies Act as may be referred to it
by the Government or Board. the Central GO\crIlment mn~
constitute an Advisory Committee consisting of not more than
five persons. with suitable qualifications.-Sec. 410. as amended
in 1965. Formerly this body was known as the Ad\isor~
Commission.
EXERCISES
I. An incorporated company is a .. tot'llly difti.:rellt pl.:l"son or thing
or entity from its membcrs---thc individuals comprising it." Explain
and illustrate. (Pa~es 5~O-5~~)
2. Distinguish bet\\'een the following
(I) Partnership and a Company. (Pages 5~3·5H)
(2) A Public Company and a Private Company. (Page 549
(3) A Holding Company and a SubsidiaJ! Compall) (Pa~e 5~8)
(4) Company and Illegal Association. (Page 556)
(5) Registered Company and LJnrcgi,tcred Compan'. (Page 5~O)
3. Writl' notes on the following Statutory Company: Chartered
Company: Body Corporate; E.\isting. 'Company : Group: Puhlic
Financial Institution: Advisory COlTlmittee
(Page' 53<); 540; 546; 547; 563)
4. Stale the rules relating to comcrsiun of a private company into
<'I public company <1nd l"ice \·c'rsa (Pages 551-555)
5. State the procedure for the t.:om crsion of a public company inlO
a private company. (Pagl?s 554-555)
6 State th~ circumstaTlc~s in which a PrivatI;;' Cumpany \\·ill
<lulomatit.:ally become il Public Company. (Pages ~53-55-.l)
- What is the" effect of th~ failure P; a pri\,~ltl;;' compan: to observe
th~ limitations and re-,trictlons placed upnn it by the Companit!s
,\ct? (Pages 554-555)
8 VdlJ! is the- liilbdit.y of the mC111b:.:r (If a pri\~Ht:' company \\hich
l"olltil~tl~'" to do business \\'her~ the number of mcmbt:'r is reduced
to. belm\ t\\o'? (Page 555)
9. Comment un A compan) is a ]eg;:tI person and it has identit"~
separate from members comprising it. (P~ge 538)
10 Define a "Government Company". St~lte the rules of the Company
Act relating to Government COO1PJni~s (Page 557)
II What arc the provisions relating to rorc:ign Companies in India '.1
I~. Point Out the ditTere-nce between a pri\'::tte compall::- and J public
company. (Pag~ 5-l9)
 564
,
COMPANY LAW

13. Objective Questions.

(a) When all members have unlimited liabilities in a limited
company? (Page 556)
(b) What is illegal association? (Page 556)
(e) What is meant by a company? (Page 558)
14. Problem: A public limited company has only seven shareholders.
All the shares are fully paid up. The shares of One of the
shareholders were sold in a coun auction and were purchased by
another shareholder of the company to the knowledge of all the
COher shareholders. The company continued to carry on the business
thereafter. \\'hat are the legal consequences of this transaction?
(Page 556)

l
 THE MEMORANDUM AND
ARTICLES OF ASSOCIATION

DEFINITIONS AND DIFFERENCES

Definition of Memo
The Memorandum of Associatioll iLJL Jloc\!men.t \Y_llkh
contai'ns the fundamental ruTe~~egarding the constitution and
activities of a company. It is the basic document which lay> down
how the company is to be constituted and what wo(k it shall
undertake. The purpose of the memorandum is to enable the
members of the company, its creditors, and the public to know
what its powers are and what is the range of its activities. The
memorandum contains rules regarding the capital structure, the
liability of the members, the objects of the company, and all other
important matters relating to the company. The memorandum 's
altered only after certain formalities are observed.
The Importance of the Memo
The Memorandum shows the range of the enterprise. The
memorandum is the foundation on which the superstructure of
the company has been built up. It enables the shareholders,
creditors and outsiders to show the permitted activities of the
company. Egyptian Salt and Soda Co. Ltd. v. POri Salid Salt
Association Ltd.' (See p. 574 and p. 580).
Definition of Articles
The Articles of Association is a document which contains
rules, regulations and bye-laws regarding the internal management
of the company. Articles must not violate any provision of the
memorandum or any provision of the Companies Act. The rules
laid down in the articles must always be read subject to the rules
c' t'tained in the memorandum.
Relat ..lDship
Lord Cairns in Ashbury Railway Carriage & 1ro17 Co. v.
Riche ,2 described the relationsh ip between the memorandum and
the articles in this language : ':The memorandum is as it were,

'(1931) A.C 677 '(1875) 7 H. L. 653

565
d
 566 COMPANY LAW

the area beyond which the actions of the company cannot go ;

inside the area, the 'shareholders may make such regulations for
their own government as they think fit."
I. The Articles are subordinate to Memorandum.
2. Thc Memorandum must be read in conjunction with the
Articles.
3. The terms of the Mcmorandum cannot be modified or
controlled by the Articles.
Pu blie Documents
The Memo and Articles are public dvcl/men/s. which may
be inspected by anybody at thc office of the Registrar of
Companies. Any person dealing with a company is prcsumed to
havc constructive notice of their contcnts. The members of a
company arc entitled to have copies of the memo and the articles,
on payment of a small fee.
)Jiffercnces
J The distinction between the memorandum and the articles
of association can be sumllled up as follows:
I. The memorandum is the fundamental charter. of the
company determining its constitution and objectives; the articles
are rules 'regarding internal management.
2. Any rule in the articles contrary to the memorandum is
in\alid.
3. Articles can be altercd easily, the memorandum can be
altered only after the adoption of certain formalities.
4. Certain clauses of memo cannot be altered without the
sanction of the Central Go\'ernment and of the Courll e.g., the
object clause and the liability clause. Other clauses can be altered
easily e.g., the name clause. [Articles can be altered by paSSi!lg
a special r~solution.)The approval of the Central Government is
required in special cases e.g., the remuneration of directors of
public companies. For change of articles, Court sanction is
generally not required.
5. The memo defines the powers of the company and the
relationship bet,,;een the company and the members and also non-
members. Articles define and regl!late the relationship between
the company and the members and the relationship between the
members i11ler se.

. .
 TIlE MEMORANDUM AND ARTICLES OF ASSOCIATION 567

6. Acts beyond the powers of memo (1Illra vires) are void.

Such an act cannot be ratified by the members even by a
unanimous resolution. But acts done by a company beyond the
articles can be ratified by the shareholders provided they are
within (il1lra vires) the powers of Memo.
7. If an act is within the powers given by the memo (ill/ra
vires the memo) but contr\lry to some provision of the articles
(ullrll vires the articles) the members can change the articles and
rat ify the act.

~E FORM AND CONTENTS OF THE

MEMORANDUM
Seclion 11: The Act lays down that the memorandum of
a association of every company shall contain the following
particulars :
1. N arne Clause
The name of the company \\ ith Ihe word "limited" at the
.elid of the name of a public company and the words "private
~imited" at the end of the name of a private company.

2. Situation Clause
.. 'The n~ of the State in which the registered office of the
cornpa"h¥ is "'to.l1e situated.
3. Objects Clause
The objects of the company. The Compalnes (Amendment)
Act. 1956. provides that in the case of a com pail)' formed after
the said amending Act. the Memo IRust state sepatately (i) the
main objects and objects incidental and ancillary to the main
objects. and (ii) other objects not included in (I).
4. Area of Operation Clause
Except in the case of trading corporations. the State eli States
to whose territories the objects extend. '
5. Liability Clause
The nature of the liability of the members. i.e .. whether'
limited by shares or by guarantee or unlimited.
6. Capital Clause
In the case of a company having share capital-unless the
company is an unlimited company. the memorandum shall state
568 COMPANY LAW

the amount of share capital and the division thereof into shares
of a fixed amount.
7. The Association and Subscription Clause
No subscriber to the memorandum shall take less than one
shire; and each subscriber to the memorandum shall write
opposite to his name the number of shares he takes.
Section 14 : The Act lays down that the memorandum shall
be according to the prescribed form or as near to it as
circumstances admit. The memo must be drafted, as described,
to suit the needs of the company concerned, but the particulars
mentioned above must be included, and, there must be nothing
contrary to the provisions of the Act.
In Schedule I to the Act four model forms are given. They
relate to the following four types of companies :
Table B. Company Limited by Shares.
" C. ,. Guarantee and not having a
share-capital.
D. Guarantee and having a
share-capital
E. Unlimited Company.
Section 15 : The Act provides that the memorandum must
be printed; divided into paragraphs numbered consecutively; and
signed by each subscribed (who shall add address, description
and occupation, if any). The signature of the subscriber shall be
a,ttested by at least one witness who shall likewise add his
address, description and occupation, if any. In the case of public
companies the Memo must be signed by at least 7 persons; in
the case of private companies by at least 2 persons.

RULES REGARDING THE NAME OF COMPANY

A company cannot adopt a name by which another company
is registered. If by inadvertence, mistake or otherwise, a name
is selected which is the same as that of an existing company
or closely resembles it, the name must be changed.
If the name of company closely resembles the name of a
previous company, the public may be misled and may be
defrauded. In such a case the Court will direct the change of
the name of the company. Tussaud & Sons v. Tussaud. 1

I (1890) 44 Ch. D. 673

 ••
THE MEMORANDUM AND ARTICLES OF ASSOCIATION 569

A company cannot use a name which is considered

undesirable by the Central Government (Sec. 20). Under the
Emblems and Names (Prevention of Improper Use) Act of 1950
the Government has power to declare what names and emblems
are not to be used by companies and in trade marks. and patents.
The use of the following has been prohibited under the above
Act-name and emblems of the U.N.O and W.H.O. ; the Indian
National Flag; the official seal and emblems of the Central
Government and the State Governments; name and pictorial
representations of Mahatma Gandhi and the Prime Minister of
India; the 'Interpol'. The Central Government can declare any
other name as undesirable and prohibit the use of the same by
a company.
Subject to the above rules, a company can adopt any name
it likes.
The name and the address of the registered offiCe of every
company must be painted or affixed on the outside of its business
premises in a conspicuous position and in letters easily legible
in one Or more of the language used in the locality (Sec. 147).
The words "Limited·' and "Private Limited" are parts of the
names of public and private companies respectively and must be
added at the end of the name of the company.
The name and the address of the registered office· of the
company must be engraven in legible characters on the company's
seal and mentioned in all business letters, bill heads, notices and
other documents (Sec. 147). But they need not be mentioned in
advertisements. Failure to publish the name and the address of
the registered office in the manner laid down in Section 147,
is punishable with a fine.
[Procedure for changing the name-See below under
"Alteration of Memorandum".]
Non-Profit Association See pp. 544-545.

RULES REGARDING THE REGISTERED OFFICE

A company shall from the day on which it commence
bLsiness or within 30 days after incorporation, whichever is
earlier, have a registered office to which all communications and
notices may be addressed. Notice of the situation of the registered
office. and of every change therein, shall be given within 30 days
570 COMPI\.NY LAW

after the date of the incorporation of the company or after the

date of the change, as the case may be, to the Registrar who
shall record the same.-Sec. 146.
If the situation of the registered office is changed from one
place to another within the same town or village, no amendment
of the Memo is required but notice must be given to the Registrar.
[f the registered office is changed from one city, town, or
village to another (within the same State) a special resolution
must be passed, and notice must be given to the Registrar.
Failure to comply with the above rules may be punished with
fine which may extend to Rs. 50 for every day during which
the offence continues.
To change the registered office from one State to another,
it is necessary to amend the Memorandum. (See below, under
"Alteration of Memorandum".)

FORM AND CONTENTS OF THE ARTICLES

Rules
The Articles of Association contain rules, regulations and
bye-laws regarding the intemal management of companies. An
unlimited company, a company limited by guarantee and a private
company limited by shares must file their articles of association
at the' time of registration of the company.-Sec. 26.
A public company mayor may not file articles. If it does
not, the regulations contained in Table A will apply to it. (Table
A is a set of model articles printed in Schedule I to the Companies
Act).
The articles of a private company must contain the restrictive
features peculiar to private companies (viz .. limitation of the
number of members to 50 ; restrictions on the transfer of shares;
prohibition of invitation to the public for the purchase of shares
and debentures). -Sec. 27 (3).
[n the case of a company limited by guarantee, the articles
shall state the number of members with which the company is ~
to be registered.-Sec.27(2).
[n the case of an unlimited company, the articles shall state
the number of members. with which the company is to be
registered and, if the company has a share capital, the amount
of such share capita I.-Sec. 27( I).
 THE MEMORANDUM NID ARTICLES OF ASSOCIATiON 571

Form of Articles
Model fomls of articles, for use in the case of companies
not limited by shares, are given in Schedule I to the Act.
The Articles shall :.
(a) be printed:
(b) be divided into paragraphs numbered consecutively; and
(c) be signed by each subscriber of the memorandum of
association (who shall add his address, description and
occupation, if any), in the presence of at least one
witness who shall attest the signature and shall likewise
add his address, description and occupation, if any.-
Sec. 30.
Contents of Articles \
Articles usually contain provisions in respect of the following
matters : (1) share capital. rights of shareholders. payment of
commissions, share certificates; (2) lien on shares: (3) calls on
shares: (4) transfer of shares: (5)' transmission of shares:
(6) forfeiture of shares; (7) conversion of shares into stock:
(8) share warrants; (9) alteration. of capital: (l0) general
meetings and voting rights of members: (II) appointment and
remuneration of directors, board of directors, managers and
secretary; (12) di\'idends and reserves: (13) accounts and audit
and borrowing powers: (14) capitalisation of profits; and
(15) winding up.
Interpretation
The Articles of Association are commercial documents and they
should not be interpreted very strictly. Re Hartley Baird Ltd. I
The Articles should be construed so as to give the company a
reasonable business efficacy and make them workable. Ifolmes
v. Keyes 2 •
Companies which must possess their own Articles. The
following companies must have their own articles, namely,
(a) unlimited companies. (b) companies limited by guarantee,
(e) private companies limited by shares.

ALTERATION OF THE MEMORANDUM

The Memorandum of Association of a company can be
altered by following the procedure laid down in the Compailies
Act. The procedure is different for different clauses of the memo.
1 (1955) eh 143. '(1958) 2 W.l.R. 771.
572 COMPANY LAW

For the purpose of alteration, the provisions of the memo

can be divided into two classes: (i) provisions the inclusion of
which is made compulsory by the Act (e.g., the name, objects,
place of registered office etc.) (ii) other provisions which the
organisers of the ·company have thought it desirable to include.
Provisions coming under the second category can be altered
in the same way as provisions of the Articles of Association,
(i.e., by special resolution) unless otherwise provided in the Act.
Provisions coming under the first category are called
"Conditions contained in the Memorandum". The "conditions"
can be altered in the manner stated below :
1. Change of name
A company may change its name by special resolution
provided the Company Law Board approves of the change.-Sec.
21. No such approval is necessary in cases of addition or deletion
of the word "Private", when a Public Company is converted into
a private Company and vice-versa.
If by inadvertence a company is registered with a name which
is identical with or closely resembles the name of an existing
company the name may be changed by an ordinary resolution,
with the previous approval of the Company Law Board. If the
company takes no steps in the matter, the Board may direct it
to change its name within a prescribed period.-Sec. 22.
When the' name is validly changed, the Registrar shall enter
the new name in the Register of companies and shall issue a
fresh Certificate of Incorporation. The Registrar shall also make
the necessary alteration in the memorandum of association of the
company.-Sec. 23(1) and (2).
Change of name does not affect the rights and obligations
of the company and pending suits by or against the company.-
Sec. 23(3).
1. Change of Object
(Sections 17·19). The object clause of the memo can be
changed for the purpose of enabling the company :
(a) to carry on its business more economically or more
efficiently;
(b) to attain its main purpose by new or improved means;
(c) to enlarge or change the local area of its operation:
 ,
THE MEMORANDUM AND ARTICLES OF ASSOCIATION S73

(d) to carryon some business which under existing

circumstances may conveniently or advantageously be
combined with the objects specified in the memorandum;
(e) to restrict or abandon any of the objects specified in
the memorandum;
(f) to sell or dispose of the whole, or any part of the
undertaking, of the company; or
(g) to amalgamate with any other company or body of
persons.
The following procedure must be adopted for changing the
object clause :
(i) A special resolution must be passed.
(ii) A petition must be filed to the Company Law Board
for confirmation of the change.
(iii) Notice must be given to all persons whose interests will
be affected by the change (unless the Board otherwise
directs).
(iv) The consent of the creditors of the Company must be
obtained or other claims paid off or secured.
(v) Notice mllst be given to Registrar of Companies, so that
he can appear before the Board and state his objections
and suggestions, if any.
(vi) After the Board has confirmed the alterations, a certified
copy of the Board's Order, together with a printed copy
of the Memo as altered shall be filed with the Registrar
within 3 months of the date of the order.
The certificate of the Registrar of Companies is conclusive
evidence of the alteration and its validity.-Sec. 18.
When the alteration is given effect to. The alteration takes
effect after it is registered. If no registration is made within 3
months (or such further time as may be allowed by the Board)
the alteration and the entire proceedings connected therewith
become void. The Board, may, on sufficient cause shown, revive
the order of alteration on an application made within one month.
Powers of the Company Law Board
Formerly the Court dealt with all cases regarding sections
17. 18 and 19 of the Companies Act. After the amendment of
this Act in 1974, they are decided by the Company Law Board.
The Board has a wide discretion in allowing changes in the
objects clause. The Board must take into consideration the rights
 574 COMPANY LAW

and interests of the members of the Company and those of its

creditors. The Board may allow the change partially or wholly.
or may disallow the change. The Board may adjourn the
proceedings in order that the Company may purchase the interests
of the dissentient members. Orders may be passed for facilitating
such arrangements (but no part of the capital of the Company
can be spent in any such purchase).
In several Court cases it has been held that if the proposed
changes will radically alter the original objects of the Compan)".
the change will not be allowed. The proposed chAnges must be
for any of the 7 purposes, (a) to (g). mentioned above.
E:camplt!s :
(i) The main business of a Company was mining. It applied for
permission to alter the object clause of the memo so as to enable
it to start hotels and selt goods on hire.purchase. The alteration \\,as
not granted. In re 8harat Alining Corporation LId. I
(ii) A company was carrying on business in jute and it had power to
undertake such business under the objects clause of its memo. In
a meeting, the members unanimously passed a special resolution to
stan business in rubber. The alteration of the object clause was not.
granted. /" re Bhuloria 8,'os. (P) Lid. 2
(iii) An incorporated Cyclists Club wanted to alter its memorandum so
that motorists can become members. The Court refused to allo\\
the alteration because it wi!.! change its objects completely. RI!
()'c/iSfS TOl/ring Club Ltd.).
(i\') Out the Court may allow a company to start a completely nc\\, kind
of bus.iness if this can he conveniently or advantageously carried
on with its old business, and in general. the company is the best·
judg¢ to decide whether it would be able to combine new business
conveniently. Re Pareml Tyre Co.~

3. Change in the location of the registered office from one

State to another
The procedure to be adopted is the same as in the case of
alteration of object. See (i) to (vi) above; p.573.
The alteration must be registered with the Registrar of
C')lllpanies of the State in which the registered office of the
C,'mpliny was originally situated and also th., Registrar of the
Stat~ to which the office is being transferred. The records of
th,' Company will be transferred to the latter place.
, , I C.WN. 359 1 (t 957) Cal 593
3, :907) I Ch. 26q '( 1923) 2 Ch. 222

l
 THt' MEMORANDl!M AND ARTICLES OF ASSOCIATION 575

E'tamples :
(i) The transfcr of a regislen:d office of a compuny outside Orissa wa~
opposed by Orissa Go\-ernmcnt on the ground of Joss of revenue
and reduction of employment opportunities. It was argued that in
a federal constitution eYcr)' stale has the right to protect its revenue.
The Coun agreed and the transfer was not allo\\ed. Orient Paper
Mills Ltd v. The Stale. J
(ii) i"'e transfer of a registered office ....,. itself does not affect, or
appreciahly affect. the scope of cn.ploymcnt of the people of the
State. It was therefore useless to efuse to confirm the alteration
011 the ground of Joss of prospect of employment in the State. The

High Court sanctioned the resolution aI/owing transfer ~f the

company's registered office from Calcutta to Bombay. Rank Film
Distributors v. The Registrar 0/ Companit·s. 2 )

4. Alteration of the Capital Clause

Alteration of the capital clause can be done in the following
methods (i) Alteration. including Increase of Capital (ii) Reduction
of Capital (iii) Variation of Shareholders' Rights and (il') Creation
of Reserve Capital. These topics arc discussed below.

ALTERATION OF SHARE CAPITAL

Section 94 of the Act provides that a company may, if so
authorised by the anieles, alter its sharc capital in anyone of
the following ways :
(a) increase its share capital by such amount as it thinks
expedient by issuing ne"" shares;
(b) consolidate and divide all or any of its share capital into
shares of larger amount than its existing shares;
(e) conven all or any of its fully paid up shares, into stock.
and reconven stock into fully paid up shares of any denomination;
(d) sub-divide its shares or any of them, into shares of
smaller amount than is fixed by the memorandum, so howe\'er,
that in the sub-division the prot'onion between the amount paid
and the amount, if any, unpaid on each reduced share shall be
the same as it was in the case of the share from which the reduced
share is derived;
(e) cancel shares which. at the date of the passing of t)le
" resolution in that behalf; have nllt heen taken or agreed to he

I ~IR 11957) Orissa 232 , AIR I I 969) Cal. 32

576 COMPANY LAW

taken by any person, and diminish the amount of its share capital
by the amount of the shares so cancelled.
Alterations coming within aforesaid categories, can be made
by a company by resolution passed in a general meeting.
Confirmation by the court is not necessary. Cancellation of shares
under this section [item (e) above] is not deemed to be a reduction
of share capital. Notice of any alteration made under this Section
must be given to the Ke~ 'strar within 30 days of the alteration.

Increase of Capital
Increase of Capiial can be done by the issues of new shares,
within the limits of the Authorised Capital as registered and as
stated in the memo and articles. Such shares are called Rights
Shares. For the issue of such shares a special procedure must
be adopted. (See ch. 4)
The Company can increase its Registered Share Capital. The
procedure of increase is by passing an ordinary resolution. The
consent of the Central Government is necessary in certain special
cases. Notice of the alteration must be given to the Registrar
within 30 days of the date of resolution.
,r

Case Law:
It is not true to say, as a statement of law, that Directors have..JlO
power to issue shares at par, if [heir market price is above par. 'Such
discretionary powers in company administration are in the nature
of fiduciary powers and must, for that reason, be exercised in good
faith. Mala fides vitiate the exercise of such discretion. Needle
Industries (India) Ltd.. and others v . .~':~edle industries Newey
(India) Holdings LId. and o/hers.'

REDUCTION OF SHARE CAPITAL.

Reduction of share-capital may be made for anyone or more
of the following purposes: (a) t'1 extinguish or reduce the liability
of the shareholders as regards the uncalled capital i (b) to cancel
any paid up share capital which is lost or is. unrepresented by
available assets; (e) to payoff any paid up share capital which
is in excess of the wants of the company; and (d) by any other
method approved by the court.

, AIR (1981) Supreme COllrt 1298

 TilE MEMORANDUM AND ARTICLES OF ASSOCIATION 577

Procedure for reducing Share Capital

A company can reduce its share capital, provided the
following requirements are complied with.-Sections 100-105.
I. Reduction of capital must be authorised by the articles.
If the existing articles do not give that power, they may be
amended.
2. A special resolution must be passed. The resolution for
reduction must be just and equitable.
3. Sanction of the court must be obtained.
The Court, may, before giving sanction to the reduction,
direct the issue of notices to all creditors of the company whose
claims are of such a nature that they are provable upon winding
up. The court is to settle the list of creditors for this purpose.
After hearing the objections of the creditors, if any, the coul1
may direct that before reduction of capital is allowed, the claims
of the creditors must be either paid up or secured. The Court
protccts the interest of the creditors and of the minority groups
of shareholders.
The court may order that for a specified period after the
reduction, the company shall add the words "and reduced" at
the end of its name.
The court may also order the publication of the reasons
which led the company to reduce its capital. so that the public
may be informed.
4. A certffied copy of the Court's order and a minute
approved by the Court showing what has been done, must be
filed with the Registrar for registration. The redu.ction takes effect
from the date of registration.
After reduction, the liability of the shareholders becomes as
ordered by the court and as recorded in the minute of .eduction.
But if there is a creditor who was ignorant of the proceedings
for reduction and if the company is unable to pay his claim, all
shareholders whose liabilities were reduced will be bound to
contribute towards the ciaim of the creditor to the same extent
as they would have had to, had there been no reduction. '
Officers of the company, who conceal the name of any
creditor entitled to object, are punishable with imprisonment up
to one year or with fine.

Commercial Lavi - 37
578 COMPANY LAW

VARIATION OF SHAREHOLDERS' RIGHTS

The rights given by the memorandum and the articles to the
different classes of shareholders may be varied if the following
requirements are fulfilled.-Sections 106, 107.
I. There must be provision in the memorandum or the articles
for such variation, or (in the absence of any such provision in
the memorandum or articles) if such variation is not prohibited
by the terms of issue of the shares of that class.
2. The variation must be agreed to by the holders of any
specified proportion, not less than 3/4th, of the issued shares of
that class. Specified means specified in the memo or the articles.
The consent may be given by a resolution passed in a meeting
of the holders of that class of shareholders or otherwise.
The variation may be challenged in court by an application
made by at least 10% of the aggregate number of holders of
that class of shares. They mllst be persons who did not vote for
the resolution for variation. The application must"be made within
21 days of the resolution or consent. If the court is of opinion
that the variation is of such a nature as would unfairly prejudice
the rights of that class of shareholders. the court may disallow
the variation. The decision of the court is final. The order of
the court must be communicated to the Registrar by the company.
within 30 days of receiving it.

RESERVE CAPITAL
A limited company may by special resolutioll determine that
any portion of its share capital "hich has not been called up,
shall not be called up. except in the event of the company being
would up.-Scc. 99.
The uncalled capital, freed from call in the manner aforesaid,
is called the Reserve Capital of the company. The company
cannot charge the reserve capital for raising a loan, nor can it
be dealt with in any way except on liquidation.

ALTERATION OF THE ARTICLES OF ASSOCIATION

,. Section 3 I of the Act gives to all Companies a statutory
right to alter articles and this right cannot be taken away by any
provision in the existing articles ... r the memorandum. A provision.
prohibiting change of articles. is not binding on the members.
 TIlE MEMQRANDVM AND ARTICLES OF ASSOCIATION 579

Although alteration of articles is permitted. there are certain

restrictions on the nature and extent of the alterations that can
be made.
I. Articles can be altered by special resolution only. If the
-articles of the company prescribed a different procedure, c.g..
an ordinary resolution, it will not be followed. Confirmation by
the Court is not necessary.
2. No change is permitted which will violate the provisions
of the Companies Act.
3. No change is permitted which is contrary to the conditions
contained in the Memorandum of Association of the Company.
4. The alterations must not contain anything illegal.
5. The liability of the members or any class of members.
cannot be increased without their consent. Example: a member
cannot, by altering articles, be made to take more shares or to
pay more for the shares already taken. unless he agrees to do
so in writing either before or after the alteration. But where the
company is a club or association, the articles may be validity
altered to provide for subscription or charges at a higher rate.-·
Sec. 38.
6. Alteration of certain provisions of the articles required
the previous consent of the Central Government (1'1=.. alteration
uf articles regarding the number of directors and their
remuneration: etc).
i. An alteration of articles which has the effect of converting
a public company into a private company shall not have effect
unless the alteration is aprroved by the Central Government.
8. The alteration must not constitute a fraud on the minority.
The ·majority (or the ruling group) Illust not by altering the
articles affect the interest, of the minority. The Courts have been
given extensive powers to prevent such misuse of power. (See
ch. 10)
9. But any ,alteration made bona fide. in the interests of the
Company as a whole. is valid and binding even though the private
interests of some members may' be affected.
E:wmp/e
In aprivate limited company. the majority of shares were held by
the directors. The articles were altered and the directors were given
powers to compel members carrying on business in competition with
the compan), to sell their shares (as full value) to a nominee of
580 COMPANY LAW

the directors. Held. the alteration was valid. Sidebottom v. Kershau'

Leese & Cd. Ud.'
10. The Court cannot order rectification of articles, even on
the ground of mistake. But the court can declare particular clauses
to be ultra vires SCali. v. Frank F SCOII Ltd. l
II. Articles may be altered with retrospective effect. The
company was allowed to insert a lien clause conferring upon the
company a lien on the shares of members for debts incurred
before and after the insertion of this clause. Held, that the
company had power to insert this clause which was valid and
effective. Allen v. Gold Reefs of West Africa Ltd. 3
12. The alteration must not lead a breach of contract with
the outsiders.

THE LEGAL EFFECTS OF THE MEMORANDUM

The Contractual Powers of a Company
A Company or a Corporation is an artificial person created
by law. It is a legal person capable of suing and of being sued.
But the contractual powers of a company are limited in two
ways: (i) natural possibility and (ii) legal possi"ility.
(,) Natural Possibility
The fact that a company is an artificial person leads to the
result that a company must always enter into contract through
agents.
(if) Legal Possibility
A joint stock company cannot enter into any contract the
object of which goes beyond the memorandum of association of
the company. A statutory corporation cannot enter into any
contract which is beyond the scope of its powers as laid down
in the statute by which it was created. (See below).
Forms of Contracts and Deeds of a Company-See eh. 7.
The Doctrine of Ultra Vires
The Memorandum of Association determines the constitution
and the powers of the Company. It was observed by Lord
Selbourne that the memorandum is the Company's "fundamental

, (1920) Ch. 154 , (1940) 1 Ch. 794

'(1900) Ch.656
 THE MEMORANDUM AND ARTICLES OF ASSOCIATION 581

and unalterable law".·A Company is incorporated only for the

objects and purposes expressed in the memorandum. Any act
purported to be done by the Company which is beyond the scope
of the functions of the Company as laid down in the memorandum
is ultra vires i.e .. beyond the powers of the Company. and of
no effect.
In Ashbury Railway Carriage & Iron Co. v. Riche. I a
company was constituted for the purpose of manufacturing
railway wagons. The company purchased the right to run a
railway in Belgium. It was held that the purchase was invalid.
In this case it was observed that the Memorandum of Association
has a twofold effect-fin affirmative effect stating what the
Company can do and a negative effect indicating what the
Company cannot do. "It (the Memo) states affirmatively the ambit
and extent of vitality and power "hich by law are given to the
carporlltion, and it states, if it is necessary so'"to state. negatively
that nothing shall be done beyond that ambit, and that no attempt
shall be made to use the corporation life for any other purpose
than that which is so specified." It was also observed in the
judgment that, "The directors and shareholders. even if they arc
unanimous, cannot do things "hich arc not authorised by the
memorandum,"
The important rules concerning the legal effects of the
memorandum can be summed up as follows :
I. The terms of the memorandum constitute a binding
contract between the Company and the members.-Sec. 36.
2. All acts done by the directors or members beyond the
powers given in the memo, are ultra l'ires and not binding on
the Company.
3. The members cannot ratify ultra vires acts. even by an
unanimous resolution.
4. It an act is within the powers given by the memo (il1ll'(/
vires the memo) but contrary to some provision of the articles
(ull"a vires the articles) the members c~n change the articles and
ratify the act.
5. The object clause in the memorandum is construed like •
other documents and the Company may do anything which is
fairly incidental to and consequential upon the powers specified.
A lIorney-Gelleral v. Greal Eastern Rly.'
I (1857) 7 H.L. 653 , (1880) 5 A.C 473
 582 COMPANY LAW

The following acts have been held to be val id even though

there were no provisions about them il\lhe Memo or Anicles.-
Grants to an University for research, Evans v. Brunner. MOl1d
& Co. Ltd. I ; payment to widows of ex-employees. Handerson
v. Bank of AUSlralia. 2 Ex-gratia payments to workers for
incentives, Hempson v. Price:S Patent Co.)
The Board of directors decided to pay a pension to the widow
of the former managing directors of the company. Held, such
a payment is not for the benefit of the company, 110r can it be
called incidental to the business of the company. The payment
is ullra vires. Re Lee Behren & Co. Ltd4
6. If a director makes an ultra vires payment (e.g., paying
interest out of capital) he can be compelled to refund the money
to the Company.
7. Contracts which are IIltra vires the Company are not
binding on the Company. But the aggrieved pany can be given
relief in certain cases.
Examples:
(i) If a Company takes an liltra vires loan and uses it to payoff a
creditor, the second creditor is substituted in the position of the first
creditor and can recover the money. In re 'fh!xham Rl.r Co_ 5
(ij) If goods are obtained by a Company by an ultra \'ires contract and
the goods can be traced in the hands of the Company, the Company
can be ordered to return it. Sinclair v. Brougham. 6
(iii) If money is lent by a Company not having power to lend it. the
money can be recovered because the debtor will be estopped from
taking the plea that the company laid no power to lend. Colman
v. Brougham. 7
8. Directors entering into lIiJra vires contracts may be liable
to the Ihird party for breach of warranty of authority.
9. The memorandum is a public document. Every persall
dealing with a Company is presumed to know the contents of
the memo.
LEGAL EFFECT OF THE ARTICLES
Section 36 of the Act provides that, "subject to the provisions
of this Act, the memorandum and anicles shall, when registered,
• bind the company and the members thereof to the same extent
I (t92t) I Ch. 359 1 (1889) 40 Ch. D. t70
3 (1876) 5 LJ. Ch. 437 • (1932) 2 Ch. 46
'(1899) I Ch. 440 '(1914) A.C. 398
'(1918) A.C. 514
 THE MEMORANDUM M:D ARTICLES or ASSOCIATION 583

as if they respectively had been signed by the company and by

each member, and contained covenants on its and his part to
observe all the provisions of the memorandum and of the
articles."

Binding Contract
Thus the articles constitute a binding contract between the
company and its members. Beartie " Beattie. LId. I; Hanuman
Prasad v. Hiralaf.2
A company is bound to the members in the same manner
as the members are bound to the company. The Articles constitute
a contract between members. But the Articles do not constitute
any binding contract as between the company and an outsider.
The provisions of the articles can be enforced by suit by
the company and the members.
But if the articles are violated by a member, a suit for the
enforcement of the articles can be brought only by the Company
and not by other· members, unless the person against whom relief
is sought, controls the majority of shares and wi II not allow a
suit to be brought in the name of the company. Burland v.
Earle. 3 ; The Dhakeswari Cotlon Mills LId. v. Nilkama/. 4
The articles come within the definition of public documents.
All persons dealing with the company are presumed to know the
provisions of the articles. So if anything is done contrary to or
beyond the provisions of the articles, the company is not bound.
Examples:
(i) The articles of a company provided that the company will have a
first char~e on the shares for debts due to the company from the
members. A member, owing money to the company, borrow<~d
money from a bank on the security of the shares. Held, the
company's claim would have priority because of the provision in
the articles, Bradford Banking Campall)' v. Briggs. 5
(ii) The articles of a company provided that if a member became
insolvent, his shares were to be sold to a nominee of the company
at a fixed price. Held the provision was binding and the trustee
in bankruptcy cannot claim the share. Borland"s Trustee v, Steel
Bros. 6

1 (1938) Ch. 708 , AIR (t 971) Supreme Court 206

3 (1902) A.C. 83 '( 1938) I Cal 90
'(1886) t2 A·.C 29 '(1901) ) Ch. 279
584 COMPANY LAW

(iii) By a special resolution the Company reduced the remuneration of

each director, with retrospective effect from the end of the preceding
year. Held. the company can vary the terms of the service as 10
the fllrther. but it cannot vary the lenns adversely with restropectivc
effect. Swaby v. PorI Danl in Gvld Co. I

THE DOCTRI:-iE OF INDOOR MANAGEMENT

Definition
When the articles of assoc iation of a company prescribed
a particular procedure for doing a thing, the duty of carr) ing
out the provisions lies on the person in charge of the management
of the company. Outsiders are entitled to assume that the rules
haye been complied" ith. This is kno\\ n as the Doctrine of Indoor
i\lanagcmcnt.
":HlIlIple
The articles of a company provided that the directors can give a
bond if authorised by a resolution of the company. The directors
gave a bond to T although no resoluti,on was passed. Held. Twas
entitled to aSSllme that the resolution was passed (because it \\'as
a maller of internal procedure) and the company was bound by the
bond. ROYll/ British Bank. v nlrqlUwd ~
The Doctrine of indoor management does not apply in certain
cases :
(a) Void Acts
Where the act IS void ab initio. the company is not bound,
e.g. forgery.
E\am(lle.~
(i) An act ultra l'ires the memo or articles cannot bind a company.
(Ii) A Share certificate forged by the secretary ofthe company and issued
under the seal of the company cannot confer any right on the holder
thereof. Ruhen v. Greal Fingall Consolidated 3

(b) Knowledge or irregularity

Where the person dealing with the company has notice.
actual or constructive, that the prescribed procedure has not heen
complied with the company is not bound.
Example:
X company lends money to r company on a mortgage of its asset.
The procedure laid down in the articles for such transactibn was

'11881) I Meg. 385 1 t 1856) 6 E & B 327

; t 1906) A.C. 439
 THE MEMORANDUM AJ'il ARTICLES Of ASSOCIATION 585

not complied with. The directors of the two companies were the
same. Here it may be presumed that the lender had notice of the
irregularity. Hence the mortgage is not binding. Prall Lid. v. Sassoon
& Co. Ltd. I Morris v. Kanssen. 2

(c) Lack of authority

If an agent of a company makes a contract with a third party
and if the act of the agent falls outside the ordinary authority
of the agent, the company is not bound. Houghton & Co. v.
Nothard, Lowe and Wills.)
Example:
A branch manager of a company drew bills of exchange and also
endorsed bills on behalf of the company, although they had no
authority for these acts from the company. Held, the company was
not bound. }·:redirbank Cassel v Schenkers 4

EXERCISES
1. \\'hat is a memorandum of association? State the contents of the
Memorandum. (Pages 565; 567-568)
2. State the points of ditTercnce between the tvlemorandum of
Association and the Articles of Association of a Limited Company.
(Page 566)
3. How can you make an alteration in the Objects Clause of a
Memorandum of Association 0 (Pages 571-572)
4. Describe the procedure for changing the object clause in the
memorandum of association of a company according to the
Companies Act, 1974. (Page 57~)
5. State how the Memorandum of Association can be altered. When
is such alteration given effect to 0 (Pages 571-572)
6. \\'hat are the restrictions on the name of a company? Stale the
methods of altering the name of a company. (Page 568)
7. Discuss the power to alter the Articles uf a company and its
liniitations. (Pages 578-580)
8. State ho\\' reduction of share capital can be made under the
Companies Act. (Pages 576-577)
9. Explain how a share capital of a company can be increased.'
(Page 575)
10. State and explain the doctrine of Indoor Management.
(Page 584)
II. What arc the effects of the memorandum and the articles after they
arc registered? (Page 578)

1 40 Born L.R. 978 2(1946) A.C. 459

, (1927) I K.B. ~46 , (1927) K.B. 8~6
586 COMPANY LAW

12. To what extent maya company lawfully undertake business and

perform acts not expressly set out in the object clause of the
Memorandum of Association? (Page 571)
13. What is the function of the liability clause in the Memo and its
limitation, if any? (Page 576)
14. Write notes on: (a) Anicles of Association. (6) Doctrine of indoor
management: (c) Objects Clause; (d) Reserve Capital; (e) Doctrine
of UI!ra Vires; if) Reduction of Capital.
[Pages (a) 565 ; (6) 583 ; (c) 566; (d) 578; (e) 580; if) 576]
15. Write note on the importance of the Objects Clause. (Page 567)
16. Discuss the 'doctrine of ultra vires' in the Compa,nics Act.
(Page 578)
17. Objective questions:
(a) What do you understand by Anicles of Association?
(Page 565)
(b) \Vrite an explanatory note on the do<:trine of ultra vires in
relation to companies. What are the liabilities of a company
and its agents for ultra ~'i,.es acts? (Page 580)
18. Problem (a) The object of a company is to supply. bOats ~or a
ferry. Is the company competent to emplov the boats, when not
wanted for the ferry_, in 'f!Scu~sion 1'7 (Pages 571-572)
 THE FORMATION OF
A COMPANY
\
ESSENTIAL STEPS
Before a company can be formed the following steps must
be taken:
I. ;rhe Memo and the Articles must be prepare~. These two
documents must be filed when application is made- for the
registration and incorporation of the company"-fhe Companies
Act lays down rules regarding the preparation of the
memorandum. Schedule I to the Act of 1956 contains four model
forms for use in different cases.
2. If it is proposed to have a paid up capital or more than
Rs. 3 crores, sanction of the Central Government must be
obtained under the Capital Issues (Control) Act, 1956. Formerly,
sanction was required lip to Rs. 1 crore or more.~ Th~ exemption
limit was raised to Rs.3 crores by an order of the Central
Government on 31 st March, 1978. The exemption is not available
to monopoly companies subject to the !0.onQPoli~ an<!Rcstrictiv\:.
Trade practices Act (MRTPA) of 1969 and companies with
foreign shareholding of more than 40%.
3. If the company to be formed intends to participate in an
industry which is included in the Schedule annexed to the
Industries (Development and Regulation) Act, 1951" a licence
must be obtained under that Act.
4. The company must be registered in accordance with the
provisions of the Companies Act, 1??I? lind the Certificate of .
Incorporation must be obtained. •.
In the case of a public company, the following further steps
are required to be taken before it can commence business.
5. The Prospectus or the Statement in lieu of Prospectus must
be issued and registered with the Registrar.
6. The minimum subscription must be raised and thereafter
the allotment of shares must be made.
7. The Certificate for the Commencement of Business must
be obtained from the Registrar.

587
588 COMPANY LAW

PROCEDURE OF REGISTRATION AND

INCORPORATION
For the registration of a company, the following documents,
together with the necessary fees, must be submitted to the
Registrar of Companies of the State in which the registered office
of the company will be situated.-Sec. 33.
I. The Memorandum of Association, prepared in accordance
with the provisions of the Companies Act, and signed by at least
7 persons in the case of public companies and 2 persons in the
case of private companies.
2. The Articles of Association, in case of unlimited
companies, companies limited by guarantee and private companies
limited by shares.
3. A declaration by any of the following persons, stating that
all the requirements of the Act have been complied with-an
advocate, an attorney, a pleader, a chartered accountant, or a
person named in the articles as director, manager or secretary
of the company.
4. A duly signed list of persons have consented to be
directors of the company, their consent in writing and the signed
agreement with every such director to take the number of shares
required to qualify as director. These are ilOt required in the case
of private companies and companies not having a share capital.
5. The Registration fees of a Company is fixed on a
graduated scale on the amount of nominal capital or the number
of members. There is also a filing fee per document.
Comments
If the Registrar is satisfied that all the requirements of the
Act have been complied with, he will register the company and
issue a certificate called the Certificate of Incorporation.
The purpose of forming the company must be lawful.
Example ; A company was formed with the object of carrying
on unauthorised lotteries. Registration was refused ; More, Ex
parle, I

THE CERTIFICATE OF INCORPORATION

The certificate issued by the Registrar after a company is
registered is called the Certificate of Incorporation.
I (i 931) 2 K.B. 197
 THE FORMATION OF A COMPANY 589

Section 3S of the Act states that the Certificate of

Incorporation is conclusive evidence about the following ~atters.
I. All the requirements of the act has been compl ied with
any respect of registration and matters precedent and incidental
thereto.
2. The association is a company authorised to be registered
and duly registered under the Act.
3. The legal existence of the company begins from the date
of issue of the certificate.
Once the Certificate is issued. the incorporation cannot be
challenged even though there were irregularities prior to
registration.
Case Law:
Incorporation was upheld in the following cases.
(0) Memo materially altered after signature but before registration.
Pf!el S case. I
(b) Signatories to the memo all infants. J\.1oosa v. £brahim.2
(c) The shares of the company were allotted before the issue of
certificate of incorporation. Jubilee COllon A-fills I.td v. Lewis. 3
(d) The objects of a company were all found to be illegal. BOll'man
v. Secular Society Ltd. 4
Effects of registration (Sec. 34)
As. soon as a Company is registered and a certificate of
incorporation is issued by the Registrar, three important legal
con seq uences follow :
I. The company acquires a distinct legal entity.
2. It secures a perpetual succession.
3. Its property is not the property of its shareholders.

PROMOTERS

--
Definition
The term Promoter is not defined in the Act. Promoter· is
a word which is used to describe the persons who initially plan
the formation of a company and bring it into existence. .
"A person who originates a scheme for the formation of the
company. has the Memo and the Articles prepared. executed and
registered. and finds the first directors, settles the terms of the
preliminary contracts and prospectus (if any) and makes arrangements
1 (1867) L.R. 2 ch. App. 674 '40 Cal I WC)
'( 19"4) AC 958 '( 1917) A.C 406
590 COMPANY LAW

for advertising. and circulating the prospectus and placing the

capital is. Promoter."-Palmer, "CompaIlY Pre<e(k"t~ ".
"A person who has not done il1'these things but has done
a substantial part of them so that he may be regarded as having
an effective hand in the formation or floatation of the company
is also a promoter".-Sengupta, "Indian Company Manual".
Bowen L.J., in Whaley Bridge Printing Co. v. Green,' stated
that the tenn promoter is not a term .of law, but of business
"usefully summing up in single word, a number of business
operations familiar to the commercial world by which a company
is generally brought into existence."
Sometimes company promotion is undertaken by promoting
companies or syndicates formed for the purpose. The rights and
liabilities of such companies or syndicates are the same as those
of individual promoters. The directors of such companies and
members of such syndicates are personally responsible if any
breach of trust or fraud is committed.
Promoter's Remuneration
But for any con.tract a promoter has no right to get any
remuneration for the services rendered by him in promoting the
company. In practice, however,. he takes remuneration for his
work. The usual methods of taking remuneration are as follows:
(i) selling to the company at a profit some property purchased
by the promoter before he became one; (ii) taking a commission
on the shares sold; (iii) taking a grant of some shares of the
company; (iv) lump Sum from the company.
The amount of remuneration and the mode of securing it
is settled by the promoters themselves and are expressed in the
prospectus or the memo or the articles.
Functions of the Promoter. (I) The promoter decides the
company's name and asserts that it will be accepted by the
Registrar of companies.
(2) He decides the details of the Company's Memorandum
and Articles, the nomination of directors, solicitors, auditors.
bankers and the registered office of the company.
(3) He makes arrangements for printing the Memorandum and
Articles, the registration of the company and the issue of prospectus.
(4) He is responsible to bring the company into existence.
I (t 879) 5 Q. B D. III
 ,
THE FORMATION OF A COMPANY 591

I Jhe Duties and Liabilities of Promoters

~. I. A promoter cannot be described as an agelll of the
Company. The contract betweenthe pro.ll ot(!r and the so-called
agent of the company is not 'binding upon the company, -[O[jIlt!"
company tlum had no existencf!. -- - .
2. A company cannot ratifY a contract made by a promoter
before the incorporation of th-e-compan- ·~~cause the ratifier was
then not in existence. Re Emprees E Igilleering Co. I
3 ...for the reasons stated in paras I and 2, a promoter cannot
be a trustee of the company.
4. A promoter stands itl a fiduciary position to the.company.
5. A promoter cannot make secret profits. If any secret profit
,or undisclosed financial benefits is madt by the promoter, the
company can recover it from him. Glucksteill v. Bames 2 :
Lagullas Nitrate Co. v. Lagunas Nitrate Syndicate. J
6. The promoter is not prohibited from making profits. He
can do so, provided he discloses all the facts (including the fact
that a profit is being made) to the Board of Directors of the
proposed company. If a person purchases some property and later
decides to sell it to a company to be formed for using the •
property, the sale may be made as a profit. Erlanger v. Sombrero
Phosphate Co. 4
7. A promoter has gol certain dutic,sjn~onnectinn with tbe.
prospectus, if any is issued, or the statement in-lieu of pr9spcctuS.
These duties are: ti) he must see that the documents contain
the particulars which, according to Schedule II. t.oj~heAct, -they_
must contain ~ and (il) he must see that the documents do not
contain any untn.e statement.
8. For faIlure to perform these duties the promoter, (i) is
liable to pay compensation to any perSOn who buys shares on
the basis of the erroneous prospectus or statement in Iieu of
prospectus and suffers damage: and (ii) he may be prosecuted
in the criminal courts according to the provisions of the
Companies Act .
•
PROMOTERS AND PREINCORPORATION CONTRACTS
Before a company is formed and registered, the promoters
of the company have to enter into contracts for drafting the

• (1880) 16 Ch. D. 125 , (1900) 240

) (1899120.392 • (1878) 3 A.C. 1218
r
592 COMPANY LAW

necessary documents, transfer of goods and property etc. Such

contracts may be called preliminary or preincorporation contracts.
They are entered into before a company comes into existence.
The question arises whether contract by the promoters with a
non-existing company are enforceable or not. The rules regarding
the subject are summarised below.
I. A company is not bound by any preincorporation contract
before its incorporation even where it enjoys the benefit of the
pre incorporation contr-u\..~ entered into on its behalf.
The company cannlt enforce preliminary contract. See
Example (a) below.
2. The other party to the contract is not bound by the
preincorporation contract. See Example (b) below.
3. A company after it is formed, cannot ratifY a pre incorporation
contract. Because by the Contract Act, a non-existing principal
cannot ratify a previous contract. (See pp. 180-181)
4. The promoters and the agents who had formed the
company may incur personal liability for a prcincorporation
contract made on behalf of company not yet in existence, such
• a contract is considered to have been entered into presonally by
the promoters. See Example (c) in lhe next page.
5. Specific Performance: Sections 15 and 19 of the Specific
Relief Act, 1872 provide that if the promoters and agents of a
company enter into a pre incorporation contract and such a
contract is within the terms of incorporation, specific performance
may be obtained by or enforced against the company, if the
company has accepted contract and has communicated such
acceptance to the other parties.
COtllme11l: A company can, after its incorporation, enter into
a new contract with the other parties. In this case the liability
of the promoters and the agents comes to an end. The obligation
and rights of the company and the other parties will depend on
the ne,,, contract.
Examples ..
(a) X. Co .. a firm of solicitors. was appointed by Y. a promoter of
E. Ltd. (which was to be incorporated latcr) to prepare the
~lcmoral1dutn and Anicles of the company. X & Co, incurred costs
of registration of the company. Held that they were not entitled to
recover these costs from the company. Re English and Colonial
Produce Co. LId. I
'(1906) 2 C"h. 435 (A.C.)
 THE fQR'IATION OF A COMPANY 593

(b) Ii made a contract with S. Ltd. for and on behalf of N. Ltd. for
selling tinned ham to S. Ltd. The contract was signed by him as
";SO', The said N. Ltd. was not incorporated on the date of the
contract but it became so aftcrv.ards. Thereafter market price of ham
rell and S. Ltd. refused to take delivery or tinned ham. On an action
brought by N. Ltd. it was held neither this company nor N himself
could enforce it on the defendants S. Ltd. on the grounds that
contract by a nonexistent company is a nullity. /t.'ell"borne v. SensoJid
(Greal Brifain) Lid I
(c) A. a promoter of X. Co. Ltd. made a contract in his own name.
on behalf of X Co. Ltd. with K for the purchase of wine costing
£ 900. The Company was registered afterwards. The company
obtained deli\'ery of the wine from K and consumed it. Before
payment X Co. Ltd. \\cnt into liquidation. It was held that the
promoter A was personally liable on the contract. Kelner v. BaTtif!/: l

PROSPECTUS
The prospectus is the basis on "hich the investors at large
get all idea about the prospectus of the company.
~efinition. .
i\ pro'pectus has been dd'ined In the Act as. "any document
described or issued as a prospectus and includes any notice.
cin.;ular. ad\'ertisement. or other document inviting deposits from
the public or inviting offers from the public for the subscription
or purchase of any share in. or debentures of a body corporate. "--
Sec. 2(36).
The words, "inviting deposits from the public or" were added
by the Companies (Amendment) Act. 1974.
Characteristics
The essential characteristics and the t<:atures of the prospectus
are the following :
I. It is a document described or issued as a prospectus.
2. It includes any notice. circular. advertisement inviting
deposits from the public or other document.
3. It is an invitation to the members of the public.
4. The public is invited to subscribe the shares or debenture
of the company.
5. The term public does not mean an invitation of very large
numher of people. It IS enough if the invitation is to a section

l 11()5~) Q.B. 45 : tl8661 LR. 2 Ci'. tn

Commercial La\'" - 38
r

594 COMPAI'Y LAW

of the public. From the examples, stated below, if follows that

there must be some degree of publicity even though it may be
of a small scale.
F.xamples :
(0) Three thousand copies of prospectus were distributed among the
members of this company. Re South of England Natural Gas Co
Ltd'
lb) An invitation to a few friends and relatives or to the customers
of the· promoter does n01 institute a prospectus. Shonrell v.
Combined Incandescent Manlles_ 2
6. Prospectus is the document through which the company
secures the capital needed for carrying on its business. Any
document having this object, comes within the definition of
prospectus. But an advertisement for securing business or trade,
is not a prospectus.
Form and Contents of the Prospectus
Schedule II to the Companies Act specifies a list of
particulars which must be included in the prospectus. The
principal items are the following :
(I) Principal objects of the company and particulars of
signatories of the memorandum of the company and shares
subscribed by them;
(2) number and classes of shares and extent of interest of
holders and particulars regarding debentures and
redeemable preference shares;
(3) the rights in respect of capital and dividends attached to
different classes of shares;
(4) particulars regarding the directors, managing agents,
secretaries and treasurers, etc. and of the contract fixing
the remuneration of managing agents, etc; (Managing
Agency & Secretaries and Treasurers have been abolished).
(5) the minimum amount of subscription and amount payable
on application;
(6) time of opening of subscription list;
(7) preliminary expenses incurred;
(8) particulars in regard to the company and other listed
companies under the same management which made any
capital issue during the last 3 years;
(9) detail!) 4..)f an~ premium or under-writing commissions paid:
, , 1') 1 • ! Ch .5 73 ? (1907 \ 23 TLR. 482
 · THE FORMATION OF A COMPANY

(10) particulars of reserves including reserves capitalised;

(11) nature and extent of interest of every director and promoter;
(12). names and addresses of the auditors of the company;
(13) in case of existing companies. a report by the auditors
showing the profit and loss and assets and liabilities of
the company, rates of dividend paid for five years preceding
issue of prospectus and particulars regarding subsidiaries;
(14) whether the prospectus is issued at the time of the
formation of the company or subsequently;
(15) the nature and extent of restrictions upon members at
company meetings;
(16) restrictions upon the powers of the directors;
(17) voting rights,' capitalisation of reserves and surplus of
revaluation;
(18) inspection of balance sheet and profit and loss account;
(19) The following reports are to be annexed to the prospectus
(i) report by auditors and (ii) report by the accountant.

THE LEGAL REQUIREMENTS OF PROSPECTUS

1. Time
A prospectus is to be issued after the incorporation of the
company.
2. Particulars
The prospectus must contain all the particulars. listed In
Schedule II to the Companies Act. (See above).
3. Date
The prospectus must be dated and this date will be considered
to be the date of publication unless otherwise proved-Sec. 55.
4. Signature
The prospectus must be signed by every person mentioned
therein as director or proposed director or his agent.
5. Copy of prospect.s .'
Every application form for shares, issued by the company,
must be accompanied by a copy of the prospectus except
(i) application forms issued in connection with a bona fide
 596 COMPANY LAW

invitation to a person to enter into an under-writing agreement,

and Ui) application forms issued to existing members and
debenture-holders.-Sec.56(3).

6. Statement by expert
A statement, relating to the company, by an expert, can be
included in the prospectus only if the expert concerned is not
engaged or interested in the formation, promotion, or the
management of the company. (Sec. 57). The statement of an
expert can be included only if he has, in writing, authorised its
issue. (Sec. 58). The term expert includes an engineer, valuer,
accountant and any other person whose profession gives authority
to a statement made by him.
7. Deposits
Deposits are not to be invited without issuing an
advertisement. The Central Government may, in consultation with
the Reserve Bank of India prescribe the limits, the manner and
the conditions subject to which deposit may be invited or
accepted by a company either from the public or the members.
The ad\ertisement must include a statement showing the
company's financial position, issued by the company and in such
form, or in such manner, as may be prescribed. The Rules shall
prescribe how the deposit is to be continued or repaid.
The com pany and the officer which contravene the above
rules shall be punishable. These rules arc not applicable to a
banking company and such other company as the Central
GClvcrnmcnt after consultation with the Reserve Bank of India.
specify in this behalf.-Sec. 58A. Companies (Amendment) Act,
i 974. Such rules are valid. D.C. & G. M Co. LId. v. Union of
lndia. I
The provisions llf this Act relating to prospectus shall, so
far as may be. apply to an advertisement referred above.-Sec.
58B. Companies (Amendment) Act, 1974 .
. Section 58A of the Companies Act has been amended in
1988. The amcnded provision states.
"(3A) Every deposit accepted by it Complmy aftcr the
commencement of the Companies (Amendment) Act, 1988, shall,

I AIR (1983) Supreme Coun 937.

l
 TIlE FORMATION OF A COMPANY 597

unless renewed in accordance with the rules made under sub-

Section (I), be repaid in accordance with the terms and conditions
of such deposit".
Section (9) : If a Company has failed to repay any deposit.
in accordance with the terms and conditions of such deposit, the
Company Law Board may, direct by order, the Company to make
repayment of such deposit within such time and subject to such
conditions as may be specified in the order.
One who fails to comply with any order made by the
Company Law Soard under sub-Section (9) shall be punishable
with imprisonment and fine.
8. Registration
Before a prospectus is issued, it must be registered with the
Registrar of Companies. Copies of relevant documents (e.g..
consent of directors and experts to the issue of the prospectus
and copies of contracts) have to be filed when application is made
for registration. If the relevant documents are not filed or if the
prospectus does not comply with with the provisions of the Act.
registration will be refused. No prospectus can be issued more
than 90 days after a copy of it is filed for registration.-Sec."60.
9. Terms of contracts
The terms of any contract. mentioned in the prospectus,
cannot be varied after registration of the prospectus except with
the approval of the members in a general meeting.-Sec. 61.
10. Prospectus by a foreign company
A prospectus issued by a foreign company, with a view to
selling shares in India, must include certain additional particulars.
(See p. 559)
n. Penalty for non-compliance
If the aforesaid rules, rdating to the matters to be included
in the prospectus, are not complied with, any person who is
knowingly 3 party to the issue thereof, shall be punishable with
a fine which may extend to Rs. 5000.-Sec.59.
12. Defence
A person charged with non-compliance of the aforesaid rules
will be excused in the following cases: [Sec. 56(4).]
598 COMPANY LAW

(a) as regards any matter not disclosed, if he proves that he

had no knowledge thereof; or
(b) if he proves that the non-compliance or contravention arose
from an honest mistake of fact on his part; or
(c) if the non-compliance or contravention was in respect of
matters which, in the opinion of the Court dealing with
the case, was immaterial or was otherwise such as ought
(having regard to all the circumstances in the case)
reasonably to be excused.

MISSTATEMENTS IN THE PROSPECTUS

Liability for not stating particulars
The public invest money in the purchase of shares and
debentures of companies on the basis of statements contained
in the prospectus. Misstatements and false statements in the
prospectus arc instruments through which dishonest company
promoters may praclise fraud on the public. To prevent such
practices the. la" imposes certain duties and liabilities on all
persons "ho are responsible for the issue of the prospectus. One
of the duties has already been mentioned viz., the duty of
including in the prospectus, the particulars mentioned in Schedule
II to the Act. (See p. 594)
Liability for untrue statement
The authors of the prospectus haye to see that the prospectus
contains no untrue statement likely to mislead the public. Section
65 of the Companies Act lays down that the term "untrue
statement" in connection with a prospectus shall be deemed to
include :
(a) a statement which is misleading in the form and context
in which it is included, and
(b) an omission (of any matter) which is calculated to mislead.
Thus, the term untrue statement or misstatement, is used in
a wide sense. It includes not only false statements but also
statements which produce a wrong impression of actual facts.
Concealment of a material fact also comes within the category
of misstatement.
 THE FORMATION OF A COMPANY 599

£Xampl. :
Lord Kylsant, the managing director of Royal Mail Steam Packet
Company. issued a prospectus inviting subscription to debentures
of the company. In the prospectus it was stated that the company
was in a good position and that dividends were regularly paid. But
the prospectus omitted to state that there were large losses in several
years and that in those years dividends were paid out of reserves.
It is apparent that the prospectus tried to create a false notion of
company's soundness. It was held by the House of Lords that Lord
Kylsant wilfully issued a false prospectus and he was convicted
under the criminal law. Re." v. Kylsanl. I

Persons liable for untrue statements in the prospectus

Section 62( I) of the Act provides that the following persons
are liable (and punishable) for untrue statements in the
prospectus :
(a) every per~on who is a director of the company at the time
of the issue of the prospectus;
(b) every person who has authorised himself to be named and
is named in the prospectus either as a director, or as having
agreed to become a director, either immediately or after
an interval of time;
(e) every person who is a promoter of the company; and
(d) every person who has authorised the issue of the
prospectus.
The extent of the liability for untrue statements
The Companies Act imposes the following liabilities on the
persons responsible for untrue statements in the prospectus.
(a) Civil Liability: Section 62( I) provides that such persons
are liable to pay compensation for any loss or damage which
any person may suffer from the purchase of any share or
debenture on the basis of the untrue statement.
A person who has been made to pay compensation under
this section can claim contribution from the others who were
associated with him in the issue of the prospectus, unless it
appears that he was guilty or fraud while the others were not.
(b) Criminal liability: Section 63(1) provides that every
person who has authorised the issue of a prospectus containing
untrue statements, shall be punishable with imprisonment which
1(1932) I K. B. 442
600 COMPANY LAW

may extend to two years or with fine which may extend to

Rs. 5000, or both.
(c) Liability under the 10.... of fraud: A person who has
suffered damage by purchasing 9hares or debentures on the basis
of.untrue statements in the prospectus may, instead of proceeding
under Section 62(1 \ of the Companies Act, take action under the
generalla" cffraud. The law relating to fraud provides that when
a person is induced to enter into a contract by fraud, he is entitled
to rescind the contract and to get compensation for the loss or
damage which he may have suffered. The aggrieved shareholder
or debenture holder must prove that (i) there was fraudulent
misstatement (ii) misrepresentatIon relating to material facts
(iii) the shareholders had purchased the share on the basis of
prospectus, and (ir) that he had been actually deceived. Derry
v. Peek I
(d) Penalty for fraudulently inducing persons to invest
mOllcy : Any person who, either by knowingly or recklessly
making any statement, promise or forecast which is false,
decepti\'e or misleading, or by any dishonest concealment of
material facts, induces or attempts to induce another person to
enter into, or offer to enter into---
(a) any agreement for, or with a view acquiring, disposing of,
• subscribing for, or underwriting shares or debentures; or
(b) any agreement the purpose or pretended purpose of
which is to secure a profit to any of the parties from
the yield of shares or debentures, or by reference to
fluctuations in the value of shares or debentures ;
shall be punishable with imprisonment for a term which may
extend to five years, Itf with fine which may extend to ten
thousand rupees, or with both.--,-Sec.68.
In Sec. 68 the word 'recklessly' is used. A 'reckless'
statement or promise is one which is made without any real fact
or heedless of its base. R. v. Grumvald. 2
Defences available in an action on tbe prospectus
The parties against whom proceedings have been taken for
untrue statement in the prospectus are allowed to use certain pleas
in their defence. The defences are summarised in the next page:
'(1889) 14 A.C'. 337 , (1961) W.L.R. 606
 THE FORMATION OF A COMPANY 601

A. Defences against the civil liability imposed by Sec.

62(1) : Sec. 62(2) provides that nO decree for damages will be
passed if the person charged can prove any of the following facts.
I. Issue without authority: He withdrew his consent to
become a director of the company before the issue of the
prospectus and it was issued without his authority or consent.
2. Issue without knowledge: The prospectus was issued
\\ ithout his knowledge or consent and on becoming aware of its
issuc, he forthwith gave reasonable public notice that it was
issucd without his knowledge or consent.
3. Withdrawal of consellt: After the issue of the prospectus
and before aiIotment thereunder, he, on becoming aware of any
untrue statements therein, withdrew his consent to the prospectus
and gave reasonable public notice of the withdrawal and of the
reason thereof.
4. Statemenl I,y all e.<pert: If the statement alleged to be
unlrue purports to be a statement of an expert or a copy or extract
from such a statement or of a valuation report of an expert, the
person charged can escape liability ifhe can prove the following:
(i) it is a rair and correct copy or representation or extract of
the expcrt"s statement; (ii) he had reasonable grounds to believe
and did believe (up to the time of the issue of the prospectus)
that the person making the statement was competent to make il ;
(iii) the expert had given his consent to the issue. of the
prospectus; and (iv) the expert had not withdrawn his consent
before registration of the prospectus or allotment thereunder.
5. Copy of official slatelllem or document: If the statement
alleged to be untrue is one purporting to be from an official
statement or a publiC official document, the person charged can
escape liability if he can show that it is a fair and correct
representation or copy or extract from the official statement or
public official document.
6. True sta/emellt: As regards statements other than those
of experts or those contained in official documents, the person
charged can escape liabi lity if he can prove that he had reasonable
grounds to believe, and did, up to the time of the allotment of
shares or debentures, believe that the statement was .true.
B. Defences available 10 an experl: An expert whose
opinion was included in the prospectus, can use the following
defences.-Sec. 62(4).
602 COMPANY LAW

I. Withdrawal of consent: Having given his consent to the

issue of the prospectus, he withdrew it in writing before delivery
of a copy of the prospectus for registration.
2. Know/edge of untrue statement: After delivery of a copy
of the prospectus for registration and before allotment there
under, he, on becoming aware of the untrue statement, withdrew
his consent in writing and gave reasonable public .notice of the
withdrawal, and of the reason thereof.
3. True statement: He was competent to make the statement
and he had reasonable ground to believe, and did, up to the time
of the allotment of the shares or debentures, believe that the
statement was true.
e. Defences against crimillaf liability: A person charged in
a criminal court under Section 63( 1) will be acquitted if he can
prove either of th~ following :
(a) that the statement was immaterial, or
(b) that he had reasonable ground to believe, and did, up
to the time of the issue of the prospectus, believe that
the statement l1-'aS true.

Loss of the right of rescission and damages

There have been a large number of cases in English courts
regarding the prospectus and the shareholder's rights thereon. It
has been held that the shareholder has no rights, either to damages
or to rescission of the contract of purchase, in the following
cases:
I. Purchase not 011 the basis of the prospectus: A person
who has not purchased the shares on the basis of the prospectus,
is not entitled to any remedy. A person who has purchased shares
from an existing shareholder cannot be said to have purchased
the shares on the basis of the prospectus, and is not entitled to
any relief if there are untrue statements in the prospectus. Pe~k
v. Gurney. I
2. Opinion or expectation: The statement complained of
must come ",ithin the definition of untrue statement. A mere
expression of opinion or expectation gives no ground of action.
Karberg's case·
I (1873) 6 H.L. 377 1 (1892) 3 Ch. I
 THE FORMATt0N OF A COMPANY 603

3. Confirmation: If the shareholder does any act which

amounts to confirmation of the purchase (e.g., if he accepts
dividends) the right to rescind the contract or get damages is lost.
4. Laches: The shareholder must bring his action without
undue delay, otherwise he loses his right.

STATEMENT IN LIEU OF PROSPECTUS

A public company having a share capital and not issuing
a prospectus must at least 3 days before the first allotment of
shares or debentures. file with the Registrar for registration a
statement in lieu of prospectus. The statement must be in the
form prescribed in Schedule 1lI to the Act. The prescribed form
provides for the disclosure of all material facts relating to the
company-Sec. 70( I)
If the statement in lieu of prospectus contains any untrue
statement, the persons responsible for the issue thereof may be
punished by imprisonment which may extend to 2 years or with
fine which may extend to Rs. 5,000 or with both.-Sec. 70(5).
Statement in lieu of Prospectus like in the Prospectus.
constitutes the basis of the contract of purchase of shares between
the company and the shareholder. Liabilities for misstatements
and false statement are the same as in a prospectus.

PROSPECTUS BY IMPLICATION
Section 64 provides that certain documents are to be included
within the term Prospectus by implication of law. Where a
company allots or agrees to allot any shares in or debentures
of the company with a view to all or any of those shares or
debentures being offered for sale to the public, any document
by "hieh the offer for sale to the public is made, is deemed
to be a prospectus issued by the company.
Subject to the modifications stated below, all the rules laid
down in the Act, regarding prospectuses, (contents, liability for
misstatements etc.) apply also to a prospectus by implication
l. The following additional matters must be stated in it-
the net amount of consideration to be received by the company
in respect of the shares or debentures: and the place and time
at which the contract (under which the shares or debentures are
to be allotted) may be inspected.
604 COMPANY LAW

2. The persons making the offer of sale to the public arc

to be deemed directors of the company for the purpose of
registration of the prospectus.
3. Where the person making the offer is a company, the
prospectus may be signed by any two directors; where the offer
is made by a firm, it may be signed by not less than one-half
of the partners.
Unless the contrary is shown, an allotment or agreement to
allot shares or debentures will be deemed to have been made
with a view to sale to public, under the following circumstances :
I. When the offer for sale was made within six months after
the allotment or agreement to allot.
2. When at the date of the offer for sale, the whole
consideration to be received by the company for the shares or
debentures had not been received by it.

MINIMUM SUBSCRIPTION
Where shares are offered to the public for subscription, the
prospectus must mention the minimum amount which must be
raised by the issue of shares before the company can commence
business.-Schedule II, clause 5.
The minimum subscription is to be fixed by the directors
or by the persons who have signed the memorandum. Its amount
is to be detennined by taking into account the followin~
expenses:
(I) the purchase price of any necessary property :
(2) the preliminary expenses, including commissions payable
for the sale of shares;
(3) repayment of any moneys borrowed by the company for
the above two purposes;
(4) working capital;
(5) any other necessary expenditure.
The information regarding each of the above items must be
stated IInder each head .
. The amount stated in the prospectus as minimum subscription,
is to. be reckoned exclusively of any amount payable otherwise
than in money.
Shares cannot be allotted until applications have been
received sufficiently to cover the minimum subscription.
 THE FO~fION OF A CO~lPANY 605
,.l"/
ALLOTMENT OF SHARES
Definition
"Allotment means the appropriation to an applicant by a
resolution of the directors of a certain number of shares in
response to an application. Shares so allotted are not, in general
specific shares identified by number; the numbering is left ti II
later."-Palmer's Company Law, 19th cd. p. 104.

Rules regarding allotment

The rules regarding allotment are summarised below.
l. Application Form
The prospectus is an invitation to the public to purchase
shares. Persons intending to purchase shares have to apply in
a form prescribed in the prospectus for the purpose and called
Ihe "application form." The prospectus also fixes Ihe tillle when
the applications will be opened and the allotment of shares to
the applicants will be made. The time is known as "Ihe time
of opening of the subscription lists." Applicants 10 whom shares
have been allotted arc informed by a letter. This IcHer is called,
"the notice of allotment." As per SEBI guidelines, application
money cannot be less than Rs. 2,000 and that issue IllUSt be kept
open for at least 3 working days.

2. Result of a contract
Membership of a company by purchase of shares is the result
of a contract. The application by the intending shareholder is
the "offer" for the purchase of shares. Allotment by the directors
is the "acceptance of the offer". The notice of allotment is the
"communication of the acceptance". Each of these stages in the
formation of the contract must conform 10 the rules laid down
in Ihe Conlracl Act.
/'Conditional offers and acceptance of shares
Conditions are usually printed on the application form. One
ver\' common condition is that in case of over-subscription. the
11l,,;,ber of shares allotted to each subscriber will be propor·
tionately less than the nllmber of shares applied for.
But conditional acceptance is usually im·alid. No condition
should be attached to Ihe acceptance of the offer 10 purchase
606 COMPANY LAW

shares. If the acceptance introduces a new term it will be a new

offer by the company and it shall not be effective unless it is
accepted. Jackson v. Turquand I
4. By the proper authority
The allotment of shares is to be done by the board of
directors of the company. Allotment can be delegated to some
persons or a Committee. provided there is a provision in the
Articles of the company. Allotment made by any other than the
proper authority is vo.id.
~Vithin a reasonable time
The allotment must be made within a reasonable time,
otherwise the applicant is not bound to take the ~res. The offer
to buy the shares is deemed to be revoked if there is an
unreasonable delay in accepting the offer. Ramsgate Victoria
Hotel Co. v. MOlllefiore 2 ; Indian Co-operative Navigation v.
Padamsey. 3 As per SEBI guidelines, if allotment is not made
within 30 days from close of issue. interest @ 15% must be paid.
6. Aplllication in a fictitious name
Any person who (a) makes in a fictitious name an application
to a company for acquiring. or subscribing for, any shares therein.
or (b) otherwise induces a company to allot, or register any
transfer of. shares therein to him, or any other persoll in a
fictitious name shall be punishable by imprisonment up to 5
years. This provision must be printed in every prospectus and
application form.-Sec. 68A.
Restrictions
The Companies Act prescribes the following restrictions on
the allotment of shares :
1. Opening of subscription list
No allotment can be made 'until tile beginning of the 5th
day after the publication of the prospectus or such later time
as may be prescribed for the purpose in the prospectus, (Sec. 72).
The 5th day is to be counted from the date when the prospectus
1(1869) H.L. 305 2 (1866) L.R. 1 Ex. 109
336 Born. t..R. 32
 TI-IE FORMATION OF A COMPANY 607

was published in a newspaper or was otherwise notified to the

public. The object of this rule is to provide sufficient time to
the public to send the applications.
2. Revocation of the application
An application for shares cannot be revoked until after the
""pi ration of the 5th day after the 'j"'e of opening of the
,;ubscription lists, except in one cas·:. If any of the persons
responsible for the issue of the prospectLs, gives public notice
of withdrawal of his consent to the issue of the prospectus. any
of the applicants can revoke his application, whereupon no shares
can be allotted to him.
3. Punishment
An allotment of sh~res prior to the time prescribed under
this rule is not void. But the directors making such allotment
are liable to punishment.
4. Minimum subscription
No allotment can be made until the amount fixed as the
mmllnum subscription has been received.-Sec. 69( I).
5. Application money
The amount payable on each share, with the application form,
shall not be less than 5 per cent of the nominal value of the
share.-Sec. 69(3).
6. Deposit in a Scheduled Bank
All moneys received from the applicatants must be kept in
deposit in a scheduled bank until the certificate to commence
business has been obtained, or, (where such certificate has already
been obtained) until the entire amount payable on applications
for shares in respect of the minimulll subscription has been
received by the company.-Sec. 69(4).

7. Return of Money
If the minimum subscription is not raised or if, for any other
reason, allotment could not be made within 120 days frolll the
date of publication of the prospectus, the directors must forth", ith
relurn the moneys received from the applicants. No interest is
608 COMPANY LAW

payable if the money is refunded within 130 days. Thereafter,

the directors are, jointly and severally, liable to pay interest at
6 per cent per annum from the 130th day to the day of repayment.
But a director shall not be so liable if he proves that the default
in the repayment of the money was not due to misconduct or
negligence on his part.-Sec. 69(5).
8. Statement in lieu o. Prospectus
A public company wh ch has not issued any prospectus must,
at least 3 days before the first allotment of shares, deliver to
the Registrar for registration, a Statement in lieu of Prospectus,
signed by every director or proposed director or his agent in the
form prescribed in Schedule III of the Act.-Sec. 70.
9. Stock Exchange recognition
Where the prospectus states that application has been made
or will be made for the shares (or debentures) being dealt with
in a stock exchange, the application necessary for securing
permission of the authorities of the stock exchange must be made
before the 10th day after the tirst issue of the prospectus. The
/lame of stock exchange must be slated Any allotment, made
on an application based on such a prospectus, becomes void if
stock exchange permission is not appl ied for or if such permission
is not granted within 10 weeks from the date of the closing of
the subscription list. The company must thereupon return all
moneys received from the applicants of shares. No interest is
payable if the moneys are returned within 8 days. Thereafter,
interest is payable at 12%-Sec. 73. Companies (Amendment)
Act, 1974.
Section 73 of the Companies Act has been amended and the
amended section provides that all public issues of every Company
mllst be listed with recognised stock exchanges.
If a Stock Exchange refuses to list the shares of a public
company. the company can appeal to the Central Government.-
Sec. 22 of Securities Contracts (Regulation) Act.,.1956.
Section 73(2A) provides that where "the moneys received
from applications for shares or debentures are in excess of the
aggregate of the application moneys relating to the shares or
debeJillres iii resped' of-\~hich allotmtnts have lieeli"lMde.lhe
COliipany shall repay the moneys to the extent 'of slith excess".
 THE FORMATION OF A COMPANY 609

within eighth day. The Company and every director of the

Company who is an officer in default shall, on and from the
expiry of the eighth day, be jointly and severally liable to repay
that money with interest at such rate, not less than four per cent,
and not more than fifteen per cent, as may be prescribed.
Effects of an irregular allotment
An allotment made in violation of sections 69, 70 and 73
(summarised in ru les I to 7 above) has the following
consequences:
I. Option: The allotment becomes voidable at the option
of the shareholder. The option, to avoid t~e contract, must be
exercised within 2 months of the holding of the statutory meeting
or, where no statutory meeting is required to be held or where
the allotment is made after the holding of the statutory meeting.
within 2 months after the date of allotment. The option to avoid
can be exercised even if the company is in course of liquidation.-
Sec. 71 (I) and (2). .
2. Compensation: Any director knowingly or wilfully
contravening the rules or authorising the contravention, shall be
Jiable to pay compensation to the shareholders concerned for any
loss or damage suffered. The suit for compensation must be
brought within 2 years of the date of allotment.-Sec. 71(3).
3. Fine: "The validity of an allotment shall not be affected
by any contravention of the foregoing provisions of this section;
but in the event of any ~uch contravention, the company, and
every officer of the company who is in default, shall be
pU,nishable with fine which may extend to five thousand
rupees."-Sec. 72(3).
4. Void: Any allotment made in violation of Section 73 IS
void. (See para 9 above.)

THE RETURN AS TO ALLOTMENT

Whenever a company having a share capital makes any
allotment of its share, it must within 30 days thereafter file with
the Registrar a return of the allotment, giving full particulars of
the a,llotment made.-Sec. 75.
Allotment means appropriation out of the previously
unappropriated capital of a company of a certain number of shares
to a person. In this sense the re-issue of a forfeited share toa

Commercial Law - 39
,
610 COMPANY lAW

person is not allotment, within the meaning of Sec. 75.---cSri Gopal

Jalan & Co. v. Calculla Stock Exchange Association & ors.l

COMMENCEMENT OF BUSINESS
A public company, having a share capital and issuing a
prospectus, cannot commence business until the Registrar issues
a certificate known as the "Certificate of Com,mencement of
Business". This certificate is issued after the following formalities
have been complied with.-Sec. 149(\) :
(a) The minimum subscription has been raised.
(b) Every director has paid the moneys payable, on
application and an allotment, for the shares taken up by him.
(c) No money is repayable for failure to obtain stock exchange
recognition for the shares, where such recognition was promised.
(d) A duly verified declaration by a director or the secretary
has been filed with the Registrar stating that the above
requirements have been complied with.
A pul>lic company having a share capital but not issuing a
prospectus, will get the commencement certificate if the following
conditions are satisfied.-Sec. 149(2) :
(a) A statement in lieu of prospectus has been filed with
the Registrar.
(b) The directors have paid the moneys due from them on
account of shares.
(c) A declaration by a director or the secretary has been fi led
with the Registrar stating that condition (b) has been satisfied.
. The amending Act of 1965· adds a new sub-section (2A) to
Section 149 which places certain further resttlctions on tbe
commencement of business in certain cases.
Section 13 of the Act, as amended by the Act of 1965,
provides that the Memorandum of Association of a company
formed after the commencement of the Act of 1965 must state
separately (a) the main objects of the company together with
objects incidental and ancillary to them and (b) other objects,
if any. (See p. 567). The new subsection (2AJ of Sec. 149
provides that (I) in the case of such a company, if it starts any
business coming under (b) above, viz., other objects and (2) in
the case of a company already existing at the date of
commencement of the amending Act of 1965, if it starts a new
I (1964) 3 S.C.R. 698 (702) (Supreme Court)
 THE FORMATION OF A COMPANY 611

business not germane to the business it is carrying on, 011 that

date, the following conditions must first be fulfilled.
I. The company has approved of the commencement of any
such business by a special resolution passed on that behalf by
it in general meeting.
2. There has been filed with the Registrar a duly verified
declaration by one of the directors or the secretary that the above
provision or the exception noted below has been complied with.
The new sub-section (2B) provides for one exceptional case.
The Central Government may, on an application made to it by
the Board of Directors, permit such new business in cases where
no special resolution has been passed but where in the general
meeting the votes cast in favour of commencing such business
is more than the votes cast against it.
Contravention of the provisions relating to commencement of
business a punishable by fine which may extend to Rs. 500 per day.
The restrictions on the commencement of business, as
provided in Sec. 149, apply to all public companies having a
share capital, "hether issuing a prospectus or not.
A company may enter into contracts before the date of
commencement of business but such contracts remain provisional
up to the commencement date and become binding on that date.

EXERCISES
l. State the usual steps to be taken in the fonnation of a company
under the Companies Act, 1956. (Page 587)
2. What do you understand by certificate of incorporation of a
company? What are the principal documents to be filed for
purposes of incorporation of company? (Pages 587-588)
3. What are the formalities for incorporation of a company 0
(Pages 587-588)
4. Define the promoters. State the duties and liabilities of promoters.
(Pages 589-590)
5. Can a Company be a party to a contract before it has come intp
an existence? (Page 591)
6. Define Prospectus. State the contents of a Prospectus.
(Pages 593-594)
7. Is a Company bound by a contract entered into by the promoters
on its behalf before its incorporation 0 (Page 591)
8. What is a 'prospectus? What does it contain 0 What is
'misstatement in a 'prospectus'? Who is liable? What is the nature
of the liability 0 (Pages 593, 598)
r
612 COMPANY LAW

9. What are the contents of the prospectus of a company? Must a

company file a prospectus before it can commence business?
(Pages 593-594, 608)
10. Define the term 'statement in lieu of prospectus'. State the
particulars required to be mentioned in the 'statement in lieu of
prospectus'. (Page 603)
II. Who is an ex pen in relation to the prospectus of a company? State
the conditions which must be satisfied before a repon by an expen
can be published in prospectus. (Page 595)
12. What are the rules regarding invitation of deposits by companies?
(Page 595)
13. Define 'irregular allotment' of shares. What is the effect of such
an allotment? (Page 609)
14. What is minimum subscription? In what case is minimum
subscription necessary and what are the consequences of its not
being subscribed? (Page 604)
15. Enumerate the conditions to be fulfilled by a public company before
it can commence business. (Page 610)
16. Define the following terms as used in Companies Act :
(a) Registration of a Company: (b) Pre· incorporation contracts;
(e) Company Deposits: (tf) Misstatement in the Prospectus;
(e) Minimum Subscription; if) Return as to allotment;
(g) Statement in lieu of Prospectus. [Pages (a) 588; (b) 591 ;
(e) 596; (tf) 598; (e) 604; if) 609)

fB . Problems: (I) A mining company stated in its prospectus that the

company had taken a lease of land containing first grade coal. Later
on. it turned out that the coal was of much inferior quality. What
legal action a subscriber to share capital may take against the
.~~pany 0 (Page 598)
JZl A prospectus was issued on the basis of the repon of an expen
who examined the propeny purchased by the company. If such
repon contained false statements of facts which were relied upon
by a shareholder. what will be his remedy? (Page 600)
(3) The promoter of a Company purchased wine from Q on behalf
9f the Company. The Company was incorporated but, before
paying the price, went into liquidation. Can the claim of Q is
maintainable against the company 0 (Page 592)
18. Comment on : The term 'promoter' is a term of business and not
of law. (Page 589)
19. Define the term ·promoter. (Page 589)
20. Write shon notes : Cenificate of Incorporation: Commencement
of business; Preliminary expenses. (Pages 588: 610; 604)
21. What is a statement in liell of prospectus? (Page 603)
22. Discuss fully the· effects of misstatement made in the prospectus
of a company. (Page 598)
 CAPITAL, SHARES AND
SHAREHOLDERS

SHARE CAPITAL
The term "capital", in connection with company formation,
may mean anyone of the following things :
1. Nominal Capital or Authorised Capital
Nominal Capital or Authorised Capital is the total face value
of the shares which the company is authorised to issue by its
memorandum of association. The total share capital of a company
is also called its Registered Capital.
The full authorised capital may not be needed by a company
at the time it commences business. A company may issue less
than the authorised capital, reserving the right to raise further
moneys by the sale of the unissued shares at a later time.
2, Issued Capital
Issued Capital is that part of authorised capital which IS
actually offered to the public for sale.
3. Subscribed Capital
Subscribed Capital is that part of issued capital which IS
taken up and accepted by the public.
4. Paid up Capital
Paid up Capital is the amount of money actually paid by
the subscribers or credited as so paid.
S.. Uncalled Capital
The unpaid portion of the subscribed capital is called
Uncalled Capital. A limited company may by special resolution
determine that a porti()I1 of the share capital, which has not been
called up, shall not be called up except in case of Liquidation.
Such uncalled cap'ital is called Reserve Capital. (See p. 578)
c.SHARES ~
( Definition - '2':
The shareholders are the proprietors of the company.
Therefore a "Share" may be defined as an interest in the company
entitling the owner thereof to receive proportionate part of the

613
614 COMPANY LAW

profits, if any, and of a proportionate part of the assets of the

company upon liquidation. A shareholder has certain rights and
liabilities. Formerly it was thought that the shareholders are the
proprietors of the company. Nowadays, however, there has
emerged a new conce~t of company. The views of the Supreme
Court, in the case of~ationalTextile Jf'orkers' Union y. P R.
Ramakrishnan are quoted in p. 542 subject to the control of the
Government and social objectives of the nation.
Features and Characteristics ~
The main characteristics of shares are stated below.
1. 'A share is not a sum of money, but is an interest measured
in a sum of money and made up of various rights, contained
in the contract.'-Farwell J. in Borland's Trustee v. Steel Bros.
& Co.'
2. A share is an interest having a money value and made
up of diverse rights specified under the Articles of Association.
Commissioner of Income Tax :r. Standard Vacum Oil CO.2
3. The holder of a share has certain rights, duties and
liabilities, as stated in the Companies Act and in the Memo and
Articles of a company.
4. A share is transferable and heritable subject to regulations
framed in the Articles of Association of the company.
5. The shares or '41her interest of a member in a company
is movable property, transferable in the manner provided by the
articles of the company.-Sec. 82. .
6. The shares must be numbered so as to distinguish them
from one another.-Sec. 83. ~

Classification of Shares -...,../

The Companies Act of 1956 provides that after the
commencement of the Act, there can be only two types of shares
capital, viz.,
(a) Equity Shares Capital, and
(b) Preference Share Capital. \
Preference Shares ~ /
Preference shares are those shares which are given, by the
articles of the company, two privileges viz., (i) priority in the
payment of dividends over other share, and (ii) priority as regards
return of the capital in the event of liquidation.-Sec. 85.
I (1901) I Ch.279 2 AIR (1966) Supreme Court 1396
 CAPITAL, SHARES AND SHAREHOLDERS 619

4. The memo and the articles constitute a binding contract

between the shareholder and the company.-Sec. 36.
5. All the shareholders are bound to foll;;W-the decision of
the majority of the shareholders, unless the majority zre guilty
of mismanagement and oppression.-Secs. 397,398.--.
7'6. Cases of unlimited liability. =(iI) Under the Articles,
directors and managers can be made liable to an unlimited extent.
(See ch. 6.)
'--~If the number of membership of the company falls to
below 7 in public companies and below 2 in private company,
the existing members become liable for the debts 9f the company
to an unlimited extent.-Sec. 45 (See p. 555) \

REDEEMABLE PREFERENCE SHARES

Section 80 of the Act provides that a company limited by
shares may, if so authorised by the articles, issue preference
shares which are, or at the option of the c'ompany are to be liable,
to be redeemed. The rules regarding redemption are stated
below:
I. Such shares shall not be redeemed except out of profits
of the company which would otherwise be available for dividend
or out of the proceeds of a fresh issue of shares made for the
purpose of the redemption.
2. Such shares shall not be redeemed unless they are fully
paid up.
3. The premium, if any, payable on redemption shall be
provided for out of the profits of the company or out of the
company's share premium account.
4. Where any such shares are redeemed otherwise than out of
the proceeds of a fresh issue of shares, they shall be transferred to
an account, to be called "the capital redemption reserve account",
a sum equal to the nominal amount of the shares redeemed.
5. The capital redemption reserve account may, not
withstanding anything in this section, be applied by the company,
in paying up unissued shares of the company to be issued to
members of the company as fully paid bonus shares.-:Sec. 80(5).
Subject to the aforesaid rules, the redemption of preference
shares may be effected on such terms and in such manner as
may be provided for by the articles of the company.
620 COMPANY LAW

The redemption of preference shares under Sec~ion 80 of the

Act, shall not be taken as reducing the amount of the authorised
share capital of the company.
Where in accordance with the aforesaid provisions, a
company has redeemed or is about to redeem any preference
shares it shall have power to issue shares up to the nominal
amount of the shares redeemed or to be redeemed as if those
shares had never been issued. The issue of such new shares shall
not be taken into account for the p'urpose of calculating the fees
payable under Section 611, if the old shares are r~deemed within
one month after the issue of the new shares.
Section 80 has been amended and 80(SA) provides that no
Company limited by shares shall issue any preference share
which is irredeemabl .. or is redeemable after the expiry of a
period of ten years from the date of its issue. Company
(Amendment) Act, 1988.

INCREASE OF CAPITAL : RIGHTS SHARES

There are two methods of increase of capital : (I) further .
issue of capital and (2) conversion of Government loans into
shares.
Further issue of Capital
After the formation of a company, further shares may be
issued. The rules regarding such issues are as follows.-Sec.
81 (I ).
Where at any time after the expiry of two years from the
formation of a company or at any time after one year from the
first allotment of shares, whichever is earlier, it is proposed to
increase the subscribed capital of the company by allotment of
further shares, the following procedure must be adopted :
I. Such new shares shall be offered to the persons who, at
the date of the offer, are holders of the equity shares of the
company in proportion, as nearly as circumstances admit, to the
capital paid up on those shares at that date.
2. The offer aforesaid shall be made by notice specifying
the number of shares offered and limiting a time not being less
than fifteen days' from the date of the offer within which the
offer if not accepted, will be deemed to have been declined.
 ,
CAPITAL. SHARES AND SHAREHOLDERS 621

). The offeree of the shares may renounce the offer in favour

of any other person, unless the articles of the company provide
otherwise.
4. After the expiry of the time specified in the notice
~foresaid or on receipt of earlier intimation from the person to
whom such notice is given that he declines to accept the shares
offered. the Board of Directors may dispose of them in such
manner as they think most beneficial to the company.
Shares. issued under this Section are called "Rights" shares.
However, in issuing shares to public companies are required to
follow the SEBI guidelines .
. Exceptions :
I. Section 81 (I A) provides that further shares may be offered
to any person in any manner whatsoever in the following cases :
(a) if a special resolution to that effect is passed by the
company in general meeting; or
(h) if a proposal to that effect is passed by the majority of
members in a general meeting and the Central
Government is satisfied that the proposal is most
beneficial to the company.
2. Section '81 (3) provides that the rules contained in Section
81 (I) shall not apply. •
(a) to a private company; or
Sb) where the subscribed capital of a public company is
increased because debenture holders or creditors were
given an option (by a special resolution passed by the
company in general meeting and approved by the Central
Government) to convert the debentures or loans into
shares of the company.

CONVERSION OF GOVERNMENT LOANS INTO

SHARES
When any debentures have been issued to, or loans have been
obtained from, the Government by a company, the Central
Government may direct that such debenlUres or loans. or any
part thereof shall be com'erled illlo shares of the company.-
Sec. 81(4) to (7).
The Government will issue such orders if, in its OpinIOn,
it is necessary in the public interest. The terms and conditions
r
622 COMPANY LAW
of such conversion are to be determined by the Government. Due
attention is to be given to the financial position of the Company,
the terms of the debenture or loan etc. A copy of the order is
to be laid before Parliament. If the Company is dissatisfied with
the terms of conversion, it can appeal to the Court whose decision
will be final.
Share capital will stand increased where an order is made
under section 81(4).-~ec. 94A, Companies (Amendment) Act
1974.

SHARE CERTIFICATE
Definition •
The share certificate is a certificate issued under the common
seal of the company specifying the number of shares held by
any member. A share certificate must be issued and delivered
within 3 months from date of allotment. However, Company Law
Board (CLB) can extend the period up to 9 months. In case .of
default, CLB can order the company concerned to make good
the default and to pay all costs incidental to the application.
Rules
The rules regardin~ share certificates are stated below.
I. A company must prepare the share certificates and have
them rcady for delivery, within two months of the allotment of
shares and/or registration of any transfer of shares unless tne
conditions of the issue of the shares provide otherwise.-Sec.
113. The Company Law Board may, on being satisfied, extend
the above periods to nine months.--Sec. 113( I) ..
2. The share certificate is prima facie evidence of the title
of the member of such shares.-Sec. 84( I).
3. Duplicate : A certificate may be renewed or a duplicate
issued if it (a) is proved to have been lost ~r destroyed, or
(b) having bcen defaced or mutilated or torn, is surrendered to
the company.-Sec. 84(2).
4. If a company renews a certificate or issues a duplicate
with intent to defraud, it shall b'e punished with a fine and every
officer in default shall be punished with a fine or imprisonment.-
Sec. 84(3).
5. The Government may prescribe rules regarding the issue,
renewal etc. of share certificates.-Sec. 84(4).
 CAPITAL. SHARES AND SHAREHOLDERS 623

6. Estoppel: A share certificate issued by persons authorised

by the company, binds the company regarding title and payment.
Examples:
(i) The company cannot deny the title of the certificate holder. Dixon
v. Kennaway. I
(ii) If the certificate states that the shares are fully paid up the company
cannot plead that they are not so. B/ol r'I1Pnlhal v. Ford. 2
(iii) A share certificate is the only legal do- umentary evidence of title
in possession of the shareholder. Societe Generale de Paris v.
Walker.'
(iv) A share certificate, being a document of title. is essential for the
purpose of transfer by way of sale. mortgage or pledge. It provides
marketable title and a shareholder can sue the company for a
certificate. Burden v. Standard Exploration CO.4
(v) Forgery cannot displace the real shareholder. Bar/on v. L &!v W
Rly. Co'

,. SHARE WARRANT
A share warrant is a document issued by a company, stating
that its bearer is entitled to the shares therein specified. It is
a substitute for the share certificate. Share warrants may be issued
for fully paid up shares, if the articles so provide and if the
• approval of the Central Government has been obtained .. A share
warrant may have attached coupons on the production of which
the dividends due on the shares will be paid. Shares may be
transferred by delivery of ,he warrant.-Sec. 114.
When a share warrant is issued, the name of the holder of
the share certificate concerned shall be removed from the Register
of Members and the number and date of the share warrant shall
be noted there. Any holder of the warrant can, if he so desires,
surrender the warrant and take a share certificate, whereupon his
name shall be recorded in the Register of Members. The holder
of a share warrant does not ordinarily possess the right to vote
and exercise other right of membership, but the articles may give
him that right.-Sec. 115. Conditions for issue of share warrants.
(I) The shares shall be fully paid-up. (2) The Articles shall
authorise the issue of share warrants. (3) Prior approval of the

I(1900) I Ch. 833 1 (1897) A.C. 156

3 (1885) '11 A.C. 20 4 (1899) 16 T.L.R. 112
'( 1888) 38 Ch. D. 144
624 COMPANY LAW

Central Government shall be obtained, (4) The share warrants

shall be issued under the common seal of the company.-
Sec. 114( I).
Examples:
(i) A share warrant can be transferred by delivery of possession.
8echllanaland Exploration Co. Ltd v. London Trading Banfc.'
(ii) In the case of a stolen share warrant the transferee in good faith
gets a good title '0 t. Webb Hale & Co. v. Alexandria Water Co'>

DIFFERENCES BE1'WEEN SHARE WARRANT AND

SHARE CERTIFICATE
The differences between a share warrant and a share
certificate are summarised below.
1. A share warrant states that a bearer is entitled to the shares
specified therein. It is a substitute of the share certificate.
2. Share warrant is issued only with fully paid up shares.
The share certificate may be issued even though the share is
partly paid.
3. A share and the share certificate are transferred by the
procedure stated in the Companies Act and the articles of the
company. A share warrant can be transferred by the delivery of
the warrant.
4. A shareholder is paid dividend by the procedure stated·
in the Articles of the Company. (It is usually paid by cheque,
sent. by registered post). A share warrant may have attached
coupons on the production of which dividends due on the shares
wi II be paid.
5. The holder of a share warrant does not ordinarily possess
the right to vote and to exercise other rights of membership. The
holder of a share certificate exercises the right of all the
membership, including the right of voting.
6. The holder of a share certificate has his name included
in the Register of Members. When a share warrant is issued,
the name of the holder of the share Certificate is removed and
only the number and date of the warrant are noted.
STOCK
When all the shares of a company have been fully paid up,
they may be converted into stock if so authorised by the
articles.-Sec. 94(1)(c).
'(1898) 2 Q.B. 658 , (1905) 93 L.T.R. 572
 CAPITAL. SHARES AND SHAREHOI.DERS 625

Conversion into stock is made because it is a convenient

method of denoting the capital of the company and the interest
of the members. It does not effect the rights of the members
in any way.
When shares are converted into stock. notice must be given
to the Registrar. The register of members must thereafter show
the amount of stock held by each member instead of the amount
of shares.-·Sec. 150.
The provisions of the Act relating to shares only. cease to
apply to shares which have been converted into stock.-Sec. 96.
"The USe of the tenn 'stock' merely d",notes that the company
have recognised the fact of the complete payment of the shares.
and that the time has come when these shares may be assigned
in fragments, which for obvious reasons could not be permitted
beforc."-Per Lord Cairns' in Morris v. Aylmel: I
Distinction between Shares and Stocks
Shares and Stock are two methods of denoting the intere~t
of a member of a company. According to Sec. 2(46) of the Act,
the term share includes a stock, except where a distinction
between them is expressed or implied.
The differences between Shares and Stock are stated below.
I. The shares of the same company are of equal nominal
. value. But stock may be divided into unequal amounts. Thus
Rs. 100 worth of stock can be divided into two parts of Rs. SO
each.
2. Shares cannot be issued or transferred in fragments. Thus
a member cannot hold half a share. But a stock can be transferred
in fragments.
3. Shares may be partly paid. Shares can be converted into
stock only when fully paid up .
.t. Stock cannot be issued "hen a company is initially
formed. Shares are issued when a company is formed.
S. Shares are numbered consecutively. Stocks are not
numbered. But the names of the stock-holders are recorded in
the Books of the Company.
6. Shares can be directly issued to the publ ic whereas ,tock
cannot be issued directl}.

'(1878) 10 lh App. 154

Commer.:ial LIW - 40
626 COMPANY LAW

SCHEMES OF ARRANGEMENT, RECONSTRUCTION

AND AMALGAMATION
A Company may find it necessary to settle or compromise
with its creditors or with particular groups of shareholders. For
this purpose it may be necessary to recognise its structure or
to ama Igamate with another Company. Sections 391 to 396A of
the Companies Act lay down the procedure for such reo
organisation and amalgamation. The procedure is summarised
belo".
I. Schemes for Arrangement
The expression" Arrangement" includes a re-organisation of
the share-capital of the Company by the consolidation of shares
of different classes or by the division of shares into shares of
different classes or by both these methods.
A compromise or arrangement may be proposed (a) between
the company and its creditors or any class of them; or
(b) between a company and its members or any class of them.
Upon such a proposal being made, the company, or any
creditor, or any member, or the liquidator (if the company is in
the process of being wound up) may apply to the court for an
order directing the holding of a meeting of the members or the
creditors concerned.
If in such a meeting the proposed scheme or arrangement
is accepted by a majority representing at least 3/4ths in value
of the creditors or members concerned, and if thereafter, the
scheme is sanctioned by the court, it becomes binding on the
company and all parties concerned and the scheme must be given
effect to.
The court will not sanction any compromise or arrangement
unless it is satisfied that all material facts relating to the company
(e.g., its latest financial position) has been discloied to the Court.
A certified copy of the Court's order is to be filed with the
Registrar and annexed to every copy of the memorandum issued
subsequently.
When a scheme is sanctioned by the High Court, it shall
have power to supervise the carving out of the arrangement and
to issue directions concerning the same. .
Information of the arrangement shall be given to all persons
concerned.
 CAPITAL. SHARES AND SHAREHOLDERS 627

Case Law:
(I) A scheme sanctioned by the Court does not operate as a mere
agreement between the parties. It becomes binding on the company,
the creditors and the shareholders and by statutory force. But it does
not mean that the scheme becomes part of the constitution of the
company. J K PriMle Ltd. v. Ne ... Kaiser-i-Hind. Sp. & Wvg Co I
(2) Who can apply? The Court can take action under S. 392 on the
application of any person interested in the affairs of the company
Such an application is not limited or restricted to a member, the
liquidator or the creditor of the company. The Court can also act
suo molu. S. K. Gupta and another v. K. P Jain and anolht!T. 2

II. Amalgamation through the Court

A scheme of compromise or arrangement may involve the
amalgamation of one company with another by the transfer of
the whole or part of any company to another. In such cases the
scheme must be approved by holders of three-fourths in value
of the shares concerned and sanctioned by the court. The
procedure is the same as that outlined in I above. While
sanctioning the scheme the court can facilitate the amalgamation
by passing order for any of the following purpose:
(a) the transfer to the transferee company of the whole or
any part of the undertaking, property or liabilities of any
transferor company;
(b) the allotment or appropriation by the transferee company
of any shares, debentures, policies, or other like interests in that
company which under the compromise or arrangement are to be
allotted or appropriated by that company to or for any person;
(c) the continuation by or against the transferee company
of any proceedings pending by or against any transferor company.
(d) the dissolution. \\ ithout winding up, of any transferor
company;
(e) the provision to be made for any person who, within such
time and in such manner as the Court directs. dissents from the
compromise or arrangement: and
if) such incidental, consequential and supplemental matters
as are neccssaT)' to secure that the recol1$tructiol) Of amalgamati,.)o
shall be fully and effecti\ely carried out.

I AIR (1970) Supreme Court 1041 ~AIR (1979) Supreme Court 73-1
628 COMPANY LAW

No compromise or arrangement in connection with a scheme

for the amalgamation of a company (which is being wound up)
with another company will be sanctioned unless the court receives
a report from the Company Law Board or the Registrar that the
afTairs of the company have not been conducted in a manner
prejudicial to the interest of the members or to public interest.
A similar repon, from the OtTicial Liquidator, is necessary before
the court orders dissolution without \\ inding up of any transferor
company. [See (d) above].
The court shall give to the Ccntral Government. notice of
all applications for sanction of schemes of arangement,
composition and amalgamation. The court shall take into
consideraion the representation of the Central Gmernemnt, if
any-Sec. 394A.

III. Compulsory purchase of the shares of dissenting

shareholders (Sec. 395)
Scheme fur 'lake over' of share.1 : Whcre a scheme or
contract involving the tr~nsfer of :.-.harcs of one company to
another has been appl nved by the holders of not less than ninc-
tenths in value of the shares involved within four months of the
date of making the ofTer. the transferee company may, at any
time within two months alier the <"piry of the said four months,
give notice to any dissenting shareholders that it desires to
acquire his share. The ofTer must be sent \\ ith full and detailed
information.
Upon such notice being gilen, the transfer~e company
becomes entitled and bOllnd t() acquire the shares, within one
month ()f the date of notice. on the same terms as those on which
the shares of the approving members arc being acquired under
the scheme.
A dissenting shareholder Illay appl) to the court within one
month of Ihe notice, for an order prohibiting the purchase. The
C01ll1 may do so if sufficient grounds are showlI.
The right of compulsory purchase can be exercised when the
transferee c()mpany already holds a cenain proportion of the
shares in qUL'stion.
After the formalities have been complied with and the
instrument of transfer has been executed by the shareholders or
 CAPITAL. SfiARES AND SHAREHOLDERS 619

by any person appointed by the transferee company, the purchase

price of the shares together with instrument of transfer is to be
deposited with the transferor company. Thereupon the t-ansferor
company shall record the name of the transferee company as the
holder of the shares and within one month inform the d,ssenting
shareholders, the fact of such registration and the receipt of the
money. The purchase price paid is to be held in trust for payment
to the persons entitled to it.
Through the procedure provided by Section 395, it is possible
to carry through a scheme of amalgamation, without the assistance
or the court.

IV. Amalgamation by Order of Central Government (Sec. 396)

Where the Central Government is satislied that it is essential
in the public interest that two or more companies should
amalgamate, it may, by order notiiied in the official Gazette.
provide fur the amalgamation of those companies into a single
company with such constitution; with such property, power.
rights. interests, authorities and privileges; and with such
liabilities and obligations: as may be specified in the order.
The order' of the Central Government may contain such
consequential, incidental and supplemental provisions as may be
ne.:essary to give errect to the amalgamation.
Members and creditors (induding debenture-holders) of the
original companies shall have. against the new company. as nearly
as possible the same rights as they had against the original
companies. If the rights and interests of any member or creditor
is alTected prejudicially by the amalgamation, he will be entitled
to compensation. the amount of which will be determined by such
authority as may be .prescribed. The compensation will be paid
by the new company.
Before issuing the order of amalgamation. the Central
Government will send a copy of the proposed order in draft to
eac" of the companies concerned and wiil consider their
suggestions and objections if any.
Copies of the order of amalgamation must be laid before
both houses of Parliament.
Books and papers of a company amalgamated with or
a,quired by another company under sections 391 to 396 shall
630 COMPANY LAW

not be disposed of without the prior permission of the Central

Government. They may be examined for evidence of any
offence.-Sec. 396A.

ISSUE OF SHARES AT A PREMIUM

A company may issue shares at a premium i. e., at a value
greater than its face value. If it does so, it must transfer an amount
equal to the aggregate value of the premium received to an
account to be called, "the share premium account". Section 78
provides that the share premium account may be applied ',y the
company for any of the following purposes :
(0) in paying up unissued shares of the company to be issued
to members of the company as fully paid bonus shares;
(b) in writing off the preliminary expenses of the company:
(c) in writing off the expenses of or, the commission paid
or discount allowed on, any issue of shares or debentures of the
company; or
(d) in providing for the premium payable on the redemption
of any redeemable preference shares or of any debentures of the
company.
Except for the purposes mentioned above, the share premium
is to be considered part of the capital of the company. The
provisions of the Act relating to reduction of capital are
applicable to the share premium.

ISSUE OF SHARES AT A DISCOUNT

Under Sec. 79 a company can issue shares at a discount,
i.e., at a value less than its face value if the following conditions
are fulfilled :
(a) the issue of the shares at a discount is authorised by
a resolution passed by the company in general meeting, and
sanctioned by the Company Law Board;
(b) the resolution specifies the maximum rate of discount
at which the shares are to be issued:
[Provided that no such resolution shall be sanctioned by the
Company Law Board if the maximum rate of discount specified
in the resolution exceeds ten per cent. unless the Board is of
opinion that a higher percentage of discount may be allowed in
the special circumstances of the case.]
 CAPITAL. SHARES AND SIlAREI10LDERS 631

(c) not less than one year has, at the date of the issue, elapsed
since the date on which the company was entitled to commence
business; and,
(d) the shares to be issued at a discount are issued within
two months after the date on which the issue is sanctioned by
the Court or within such extended time as the Court may allow.
Every prospectus, relating to the issue of shares, shall contain
particulars of the discount allowed and so much of the discount
as has not been written off.
The proviso added in clause (b) was inserted in the
Companies (Amendment) Act, 1974.

COMMISSION AND BROKERAGE

Commission
A company can pay commission to a person subscribing to
the shares or (debentures) or procuring subscription for them.
provided the following conditions are fulfillcd.-Sec. 76.
I. The payment must be authorised by the articles.
2. The rate of commission must not exceed in the case of
shares: 5% of the issue price or the rate prescribed in the articles.
whichever is less; and in the case of debentures: 2.5% of the issue
price or the rate prescribed in the articles, whichever is less.
3. The amount or rate of commission payable, and the
number of shares and debentures which have been agreed to be
subscribed at a commission must be disclosed in the prospectus
or statement in lieu of prospectus.
4. A copy of the contract for the payment of commission
must be delivered to the Registrar at the time of delivery of the
prospectus, or statement in lieu of it, for registration.
No commission shall be paid on shares or debentures which
are not offered to the public for subscription, except where they
were subscribed or agreed to be subscribed before the isslle of
the prospectus or the statement in lieu of it and that fact together
with the amount of commission payable is disclosed in the
prospectus or statement.
Brokerage
A broker is one who brings buyers and sellers into contract
with one another. The rules stated in. Sec. 76 (see above) do
632 COMPANY LAW

nol apply 10 brokerage paid for Ihe sale of share or debenlures.

A company is free 10 pay such brokerage, "as il has heretofore
been lawful to pay".-Sec.76(3).

PURCHASE OF THE COMPANY'S OWN SHARE

A comp-any limiled by shares or by guarantee cannol
purchase ils own shares because such a purchase amounts 10 a
reduclion of capilal.-Sec. 77( I).
No public company and no privale company which is a
subsidiary of a public company can give by loan or olhemise
any financial assislance for Ihe purchase of its own shares or
the shares of its holding company.-Sec.77(2).
Exceptions: The rule Ihal a company cannol purchase ils
own shares. is subjecl 10 Ihe following exceptions :
I. A company may purchase ils own shares if Ihe consequenl
reduction of capital is effected and sanclioned in accordance with
the rules prescribed in Ihe Act for reduclion of capilal.
2. A company can redeem its redeemable preference shares
"here it can lawfully do so.
3. This rule does not prevenl forfeiture or surrender of shares
where lawfully made.
4. The court can direct purchase of shares under section 402
whell necessary for protection of the interest of the minority.
The rule Ihat a company cannol finance the purchase of its
own shares [Sec. 77(2)J docs not imply a prohibition of the
following types of tl~llSaclion :
(0) the lending of money by a banking company In Ihe
ordinary course of its business;
(h) the provision of money, in accordance wilh a scheme
for Ihe time being in ~rce. for Ihe purchase of fully paid up
shares in Ibe company or its holding company, by trustees of
employees or for the benefit of employees (the term employee
includes a director holding a salaried employment under the
company); and
(e) the· making of loans to employees (not exceeding 6
months' wages) for the purchase of purchasing shares in the
company or its holding company. (The clause does nol apply to
loans to directors and manager.)
However. Section 77 A of the Companies (Amendment)
Ordinance 1998 permits a company to purchase its own shares
 CAPITAL, SHARES ANt) SHAREIIOLDERS 633

(buy back) subject to certain conditions, On the othcrhand Sec.

77B prohibits buy back in certain cases,
Buy Back
Notwithstanding anything ccrtained in the Companies Act,
1956 a company may purchase its own shares or other specified
securities, This is subject to provisions of Section 77 A (2 and
Sec, 77B), Thus a company may purchase its own shares or other
specified securities from-
(I) out of its free reserves; or
(2) out of the securities premium account: or
(3) out of the proceeds of an earlier issue other than fresh
issue of shares made specifically for buy back purpose [Sec,
77A( 1)],
Conditions for Buy Back
No company shall purchase its own shares or other specified
securities as referred to above unless-
(a) the buy back is authorised by its Articles:
\h) a special resolution has been passed in general meeting
of the company authorising the buy back:
(e) the buy back does not exceed 25 per cent of the total
paid up capital and free reserves of the company purchasing its
own shares or other specified securities,
(d) the ratio of the debt owed by the company is not more
than twice the capital and its free reserves after such buy back;
(e) all the shares or other specified securities are fully paid up,

THE REGISTER AND INDEX OF MEMBERS

Hegistcr
Every company is bound to keep a Register of Membcrs iII
which particulars are entered regarding the name, address, and
occupation of the members: the number of shares he Id by each:
the date of commencement and cessation of membership; and
similar particulars regarding ownership of stock, where thc shares
have been converted into stock,-Sec, I SO,
Index
Every company having more than SO members. shall keep
an Index of Members, unless the Register of Members is kept
in the form of an index,-Sec. 151,
634 COMPANY LAW

No notice of any trust, express, implied or constructive, shall

be entered in .the Register of Members.~Sec. 153.
A company may after giving not less than 7 days' notice
by advertisement in some local newspaper, close the Register of
Members for a period of not more than 45 days in the year and
not more than 30 days at a time.~Sec. 154.

Rectification of the Register of Members. (Sec. 155)

In respect of rectification of ·register the provisions for
private company and public company are entirely different. In
case of a private company, if name of a person is entired into
register of members or deleted from the register of numbers the
person to aggrieved or any other member of the company or
company itself can apply to the Company Law Board (CLP) for
rectification of the register. As the powers of the CLP (Company
Law Board) are wirder it can order to rectifications for any
reason.
In case of public company, company must register transfer
within two months. Transfer cannot be refused without sufficient
cause. But rectification can be applied only when transfer is in
violation of any law

Tbe Foreign Register

A company may. if so authorised by the articles, keep in
a country outside India, a branch Register of members resident
in that country. Such a register is called the Foreign Register.
A duplicate of the Foreign Register must be kept in India and
a copy of all changes made in the entries must be transmitted
to the registered office in India.~Sections 157, 158.

TRUST OF SHARES AND DEBENTURES

Public Trustee
Sections 153A and 153B provide for the appointment of a
Public Trustee to whom all persons holding company shares or
debentures in trust are to make a declaration. However, under
SEBI guidelines. appointment of trustees is mandatory if
debenture maturity is 18 months or more. -
Voting rights in the company are exercisable. at his option,
by the Public Trustee.~Sec. 1878.
 CAPITAL. SHARES AND SHAREHOLDERS 635

Declaration as to shares and debentures held in trust

The holder of a share in, or debenture of, a company, but
who does not hold the beneficial interest in such share or
debentures, shall within such time and such form as may be
prescribed, make a declaration to the company specifYing the
name and particulars of the persons who hold (he beneficial
interest of such a share or debentures.
The holder shall declare to the company whenever there
occurs a change of beneficial interest of the shares or debentures.
The company shall make a note of such declaration in its
Register of Members and shall file the declaration of the
Registrar within 30 days from the date of receipt.
If any person required to make a declaration under the above
rules and fails to do so without any reasonable excuse, he shall
be punishable (fine up to Rs. 1000 per day). If a company or
its officer fails to comply with the above provision, who is in
default, shall be punishable (fine up to Rs. 100 per day).
If allY charge, promissory note or any c011ateral agreement
is created, executed or entered into in reIati0n to any share or
debentures by the ostensible owner, or any hypothecation by the
ostensible owner of the shares or debentures, when there was
no declaration required under the rules, it shall not be enforceable
by the beneficial owner or any person claiming through him.
Nothing in this section shall be deemed to prejudice the
obligation of a company to pay dividend under sec. 206. The
obligation, on such payment stands discharged.-Sec. 187C,
Companies (Amendment) Act, 1974.
The Central Government may investigate the beneficial
ownership in such ca,es.-Sec. 1870, Companies (Amendment)
Act, 1974.

MEMBERSHIP OF A COMPANY

Definition of "Member"
According to Section 4 I of the Act, the term "l11ember" of
a company means-
(I) the subscribers of the memorandum of the company, and
(2) every other person who agrees in 'Hiting to become a
member of a company and \\ hose name is entered in its
register of members.
636 COMPA."Y LAW

How is membership created?

A person can become member of a company in anyone of
the following ways-
I. Sigilli/urI! : By signing the memorandum of association
before it is presented for registration.
2. AI/v/melll: Ily getting an allotment of shares and having
his name included in the register of members.
3. Trallsfer: By gctting a transfer of shares from an existing
member and having the transfer recognised hy the company.
4. Ihlllsmissio/l : By obtaining shares by inheritance from
a decreased member and getting his name included in the register
of members.
5. Acquiescence: By allowing his name to rcmain in the
register of mcmbers under sllch circumstances that hc cannot later
on plead that he is not a member. A right to disclaim the
owncrship of shares on legal grounds must be exercised within
a reasonable lime. If a sharcholder makes inordinate delay he
"ill be prevented from doing so on the doctrinc of holding out.
Lord Cairns in Sewell s case. I
Mern ber and Shareholder
In companies having a share capital, a shareholder is also
a member of the company. In companies, not having a share
capital, thcre are mcmbcrs but no shareholdcrs. "The terms
'member' and 'shareholder' are synonymous, apart from the now
exceptional case of the bearer of a share warrant who is
shareholder hut is not 3 nlember because he is not registered
in the rcgister of members." (Palmer's Company Law, 21st ed ..
p. 439)
The words, "member", "shareholder", and "holder of a sharc"
have been used interchangeably in the Companies Act. The
cxpression, "holder of a share" denotes, in so far as the company
is cl'nccrncd. only a person who, as a shareholder. has his name
entered in the rcgister of membcrs. HOlVrah Trading Co. v. I. T
Commissioners. 2
Transfer and Transmission of Shares
When shares pUS5 from one person to another by a voluntary
act e.g., by sale. gift or otherwise, it is called transfer. When
I (IR68) 3 0 . ..\pp. 131 1 AIR 11959) Supreme Court 775
 CAPITAl.. SHARES AND SIIARUIOLDFRS 637

shares pass by operation of law from one person to another, e.g..

by inheritance. i.t is called transmission.
On the deat'll of a member, his shares vest in his executors
or administrators or other legal representatives, and such shares
are liable for calls if the shares remain partly paid. Baird:, Case. I

Who can be a member?

The Companies Act does not prescribe any qualification for
membership of a company. But since membership is created by
agreement, it may be argued that persons incapable of elitering
into contracts cannot be members .
.'\finor: An agreement by a minor is void in India. Therefore
.. minor cannot apply for and be a member of a company. If
" minor has, by mistake, been recorded as a member, the compan)'
Lan rescind the transaction and remove the name from the
reg.ister. The minor can also repudiate the transaction and get
his Ilame removed, from the register. But where a minor \\:as
made a member and, after attaining majority. he received and
accepted dividends. he \ViII be estopped from denying that he
is a member. Fa=albllO,l' \. The Credit Bank of India 2 Sadik Ali
Khan v. Jaikis,}wre. 1 (See p. 53).
Company: A company can be a member of a company. But
a subsidiary company cannot be a member of its holding
company, except" here the subsidiary company comes in as the
legal representative of a deceased member.-Sec. 42·.
Creditor A person to whom shares have been transferred
by way of security. becomes a member of the company and is
liable as such.
Fictitious person: It is a punishable offence to apply for
allotment of shares. or for the registration of transfer of shares.
or for the registration of transfer in a fictitious name.--Sec. 68/\.
Trustee : A company will not register notice of any trust. A
trustee who buys shares will be treated as a member in his individual
capacity.-Sec. 153. But see 'Trust of Shares" pp. 634-635.

How membership ceases

The membership of a person in a compan) may terminate
ill all~ one of the follo\\ing \\3)5 :
'.1870) , Ch App. n5 , 39 BOI11. ,} I
.' .--\IR (19~8) Privy Council 152
638 COMPANY LAW

I. By death: When a member dies the ownership of the

shares passes to his successors. The successors will, on production
of evidence of ownership, be registered as members in place of
the deceased member. But a company may have, under the
articles, a right to refuse to recognise the successors as members.
2. By insolvellcy: Upon insolvency of a member, the shares
vest in the Official Assignee or the Official Receiver.
3. By rescission: The contract to purchase shares may be
rescinded. A person who has purchased shares may under certain
circumstances have the contract rescinded, e.g., when there are
untrue statements in the prospectus. Upon rescission, he ceases
to be a member.
4. By forfeiture: Shares may be forfeited according to the
provisions of the articles.
5. By a surrender: Shares may be surrendered where
surrender is permitted.
6. By transfer: Shares may be transferred.
7. By sale: Shares may be sold in execution of a decree
of the court.
8. By power uj lien: Shares may be sold by the company
in exercise of a power of lien over it for the dues of the company:
9. H" (l mortgage: Where shares are mortgaged and
according to the terms of the mortgage, the shares have been
transferred to the mortgagee, the latter can have his name
registered as a member. It he does so the original member loses
his Il1cmhership.
10. By redemption: Preference shares may be redeemed.
II. By winding up: When the company is wound up according
to the provisions of the Act, membership ceases to exist.
TRANSFER OF SHARES
Shares may be transferred in the manner provided for the
purpose in the articles of the company and subject to the
restrictions contained in the articles. The Companies Act contains
the following provisions regarding transfer of shares.
1. Documents
[Section 108 (I)] A company shall not register a transfer
unless the following documents are produced before it:
(0) a propcr instrull1enl of transfer duly stamped and executed
 CAPITAL. SHARES AND SHAREHOLDERS 639

by or on behalf of the transferor and by or on behalf of the

transferee and specifying the name, addres$ and occupation, if
any. of the transferee, and
(h) the certificate relating to the share, or if'no certificate
is in existence. the letter of allotment.
The instrument of transfer is not required in cases of
transmission of shares by operation of law but the company may
require evidence of transmission.
The above provisions also apply t'J the transfer of the interest
of a member in a company which has no share capital.
As per Section 113(1), shares must be transferred within two
months after the issue of the certificate_ The paid can be extended
to 9 months by the Company Law Board if there are sufficient
reasons. eLl) can also urge the company to make good the
default. of any, and to bear all costs incidental to the application
process in this respect,

2. The prescribed form

(Sec. 180 (I A}l Every instrument of transfer of shares shall
be in the prescribed form_
(a) It must be presented to the prescribed autllOrity, (being
a person in the service of the Government) before it is signed
by or on behalf of the transferor. The prescribed authority will
stamp or endorse thereon the date of presentation.
(b) If the share is one which is dealt with in a recognised
stock exchange, the instru"1ent of transfer shall be delivered to
the company any time before the next closing of tile register of
members or within two months from such date of presentation.
whiche,'e.- is later. In other cases the instrument of tran,fcr shall
be delivered to the company within two months from the date
of presentation to the prescribed authority. The Central
Government may extend the periods mentioned above,
In certain exceptional cases, a transfer must be accepted by
a company.•,-en though the above requirements are not complied
with.
(e) The provisions stated above do not apply to shares
deposited (as security for a loan or for the performance of an
obligation) to the State Bank of India, any scheduled bank or
an} banking company or financial institution apprO\'ed and
nOlified by the Central Government.
640 COMPANY LAW

J. Lost Instrument
If the instrument oftransfer is lost. the directors may allow
the transfer. on such terms as to indemnity as they think fit.
4. Share of a deceased member
The legal representative of a deceased member can transfer
shares. although he i· rot himself a member.-See. 109.
5. Who will apply ror ;ran,fer?
An application for the registration of transfer may be made
either by the transferor or by the transferee. Where the application
is made by the transferor and relates to a party paid up share,
the company must give notice to the transferee (by post) and
the transfer can be registered only if the transferee makes no
objection within two weeks of the time he ought to have received
the notice by post.-Sec. 110.
6. Refusal
The articles may empower the company to refuse to register
a transfer or transmission of shares.-Sec. 111(1). In cases of
such rcfus~l. the applicant is to be notified within two months.-
Sec. 111(2).
Section 111 of the principal Act has been amended in 1988.
The amended section provides that if a Compan~ refuses to
register the transfer of or transmission of the right to any shares
or debentures of the Company it shall send notice of the refusal
within two months giving reasons for such refusal.
The transferor or transferee may appeal to the Company Law
Board against any refusal of the Company to register the transfer.
Such appeal must be made within two months of the receipt
of notice of such refusal.
The power of refusal must be e"ercised reasonably and in
good faith. (See the cases below).
7. Appeal against rrfusal to transfer [Sec. 111(3) to 111(9)J
A. In the clise of a public compa"y (/"d a private compa"y
which is a suhsidiary of a puhlic company. The transferor or
the transferee or the person who gave intimation of the
transmission may appeal to the Central Government against the
company. The appeal must be filed withi·n two months of the
 CAPITAL.. SHARES AND SHAREHOWIRS 641

receipt of the notice of refusal, or where the company fails tu

give any notice, within two months after the expiry of the period
within which such notice should have been issued. The appeal
must be by a petition in writing and shall be accompanied by
prescribed fec.
The Central Government shall give an opportunity to the
appellant, the previous owner, If any, and the company to
represent their case. The Central Government may require the
company to disclose the reasons why transfer was refused. If til<'
company fails to disclose the reasons, the Central Government
may presume that the disclosure, if made, would he unfavourable
to the company,
The Central Government may reverse the decision of the
company or confirm it. In the former case, the company mllst
register the transfer within 10 days of the receipt of the order.
The Central Government may also order the payment of costs
to the aggrieved party.
All proceedings connected with the appeal shall he
contidentlal. '10 slIit shall lie concern inA any allegation made
in such proceedings.
B. III 'he case (!f olher private companies. In such cases.
the decision -of the company to refuse registration cannot be •
challenged, except in one case. If any shares of such a company
are sold in execution of a decree or the orders of a public
authority and the purchaser's name is not registered, he can
appeal to the Central Government. Such an appeal is dealt with
in the same manner as an appeal against a public company (See
above). There is, however, an additional provision for such cases.
The Central Government may give an option to the company,
either to accept the purchaser as a member or to get the shares
purchased by a member of the company at a reasollable price
10 be determined by the Central Government.

RESTRICTIONS ON ACQUISITION AND TRANSFER

OF SHARES
The Companies (Amendment) Act of 197~ enacted the
following restrictions on acquisition and transfer of share,;_
,
I. RrstrictioDs on the acquisition of shares
Except "ith the previous approval of the Central Go\ernment,
a group or anf constituent of the group must qut, jointl~ 1•.'1"

Commt."rcial Law - 41
 642 COMPANY LAW

• severally,
acquire or agree tO,acquire, which exceed 25% of the
paid up equity share capital (together. with the shares already
owned) of the company under the same management. The rule
is applicable to a public and also a private company which is
a subsidiary of a public company,. Any person who acquired an}
share in contravention of this provision is published (Up to 3
years' imprisonment and/or fine up to Rs. 5,000}-Sec. 108A.
(Definition of 'Group'-See p.548)
2. Restrictions on transfer
Any body corporate or bodies corporate under the same
management holding, (whether singly or aggregate) 10% or more
of the nominal value of the subscribed equity shares shall (before
transferring one or more such shares) intimate the Central
Government with all particulars. On receipt of the intimation,
if the Central Government is satisfied that as a result of such
a transfer, a change in the composition of the Board of directors
of the company is likely to take place and that such a change
wiil be prejudicial to the interest of the company or the public
interest, it may by order direct that, .
(a) no such share shall be transferred to the proposed
transferee or,
(b) in certain "listed industries' such share shall be transferred
to the Central Government or to a corporation owned or
controlled by the Government.
In case of transfer, the transferee must be paid in cash
according to its market value. Any contravention of this section
may be punished by imprisonment up to 30 years and/or fine
up to Rs. 5,000.-Sec. 108B.
The term "market value" means the value as quoted on any
recognised stock exchange. If such a share is not quoted in a
,tock exchange, market value means the value agreed between
the shareholder and the Central Government or the specitied
. corporation. In the absence of such an agreement its value will
be determined by the Court.
A "Iisted industry" means an industry listed in schedule XII
of the amended Act. Some examples are A ir transport, Coal, Iron
and Steel. Antibiotics etc.
If the Central Government does ndt make any direction,
within 60 days from the date of receipt of its intimation, tile
provisions regarding transfer shall not apply.
 CAPITAL. SHARES AND SHAREHOLDERS 643

3. Restriction on the transfer of shares of foreign companies

No body corporate or bodies corporate under the same
management, which holds, or hold in the aggregate. 10% or more
of the nominal value of the equity share capital of a foreign
company, ha'ving an established place of business in India shall
transfer any share in such foreign company to any citizen of India
or any body corporate incorporated in India except \\ ith the
previous approval of the Central Government.
Such pr~vious approval shall not be refused unless the
Central Government is satisfied that such transfer would be
prejudicial to the public interest.--Sc·c lOSe.
Contravention of this section is puni·shable.

4. Central Government can direct' companies nol to give

effecl 10 the, transfer
Where the Central Government is satisfied that as 3 re,ult
of the transfer of any share or block of shares of a company.
a change in the controlling interest of the company is likely to:
take place and that such change is prejudicial to the interests
of the company or to the public inten!s\. the Government may
direct the compan) not to give effect to the transfer of any 5uch
share or block of shares.
The transferee of such shares will not exercise vOling or
other rights, including that of any nominee or proxy ,.: lil"
transferee. ,
Where the transfer of-share or block of shares is not allow·cd
by the Central Government, the sale price shall be refunded to
the transferor. Such an order may be enfo.rced as if it were a
decree of the Civil Court.
If the transfer is allowed, the transferee will be cligible to
exercise voting or other rights.--Sec. 108D.
S. The time of refusal
. Every request made to the Central Government for according
Ots approval to the proposal for the acquisition of any share or
the transfer of any share shall be presumed to have been granted
unless, within a period of 60 days from the date of receipt of
such request. the Central Government communicates to the person
'b) "hom the request was made. that the approval' prayed for
cannot be granted.·-Scc. 108E.
 COMPANY LAW

6. Penalty
Any person who exercises any \ oring rights or other rip.hls
conlra' enes the pro"isi,,,,s of Secs. I U8A. 10813 and 108C shall
be Plllli,habic (lip to 5 years imprisonment a!,d also fine). The
cOlllpany and every orlicer is punishable by fine lip .to Rs. 5000
and lip to 3 ycars' imprisonment.-Sec. IOSF.

7. Some Exemptions
Nothing. contained in section 108A. section I08B. section
108C or section IOSD shall apply to the transfer Of any share
to. or by.--
(<1) any company in \\hich not less than fifty-one per cent or
the share capital i's held by the Central Government:
(b) any corporation (not being a company) established by PI"
under any Central Act;
(e) an)' public financial institution specified by or under
section 4A. (See p. 548)

CASE LAW CONCERNING TRAi'lSFER OF SH.-\RES

Effect of Transfer
A transfer of shares remains incomplete until the transferee'S Ild!Jh.'
is registered. Pendjn~ registration, the transferor is trustee of the sh.:Jrt's
for the transferee. liarcioon v. Belilios_'
A transferee, not replying to a notice of transfer by the company. is
not estopped from denying the validity of the transfer. Bar/Oil v. L {~. S.
Ii' RI.~·. Co_ 2
Companies Act (!956\. S. I08-Whether mandatory or director)
\"t.~gative, proilibit01}' and exclusive words arc indicative of the I~gislali\'e
in!enl when the statute is mandatory. Negative wmds are clearly prohibito~
;md arc ordinari Iy used as a legislative device to l11<Jkc a statutory pnwisiml
iJllpl'r:tlivc. The words "shall 110t register," arc mandatory in characlt.:"r.
.\1(/1111(1101 kheloll I!/( etc.. v. J..:edar Amh Kht!lan tJnd vlhl.'rs. ek-~

Powe-r to refuse registration

\~'hcre directors haVe power to refuse registration of a transfer tile
power must be exercise-d in a bona/ide and just manncr. Re Cpa/pur! Chl/ld
Co~

A member of a c0ll1p;my has 311 unfettered right to transfer the s!J:lTC;-;

HI ;mother persoll. unless this right is takcn away by the AJ1iclcs. and

I (1901) .".c. liS '(lSSS) 38 Ch' fl. 114

3 .'\IR \ 1977) Suprcme Court 536 '(lS95) C n. 404
 CAPITAL SHARES AND SHAREHOLDERS 645

3 transfen.'c,' under a valid transfer has an absolute right to be registered

unless Ill.. 'fnpany has a power to refuse to register. Rangpur Tea Assn.
v. ,\/ .1.,.111;",:'/,11" I
Where the directors under the articles of a company have uncontrolled
and absolute discn:tion in regard to declining registration of transfer of
shares, discretion docs not mean a bare affirmation or negation of a
proposal. Directors \\t'iII act for the paramount interest of the company and
for the general interests of the shareholders. The directors are therefore
required to ad hona fide and not arbitl ,II II: and not for any collateral
motive. Ulljuj Auto Ltd. v ..~'. 1\. Firvdhl
III the case of private >,:prnpanies there may be rcstril'tl' I, I the righls
of lllembt'Ts to transfer til;.' 1 . . hares. In a company tht' Artl,,)..: . . r[\l\idcd
tha.t a share can he transll.:rn.:c! I'll!) to male relative.;,. !hat i:, ~vll" or hI others
and Ihl"ir lineal descendant:::._ 'f Ilt: '·Iouse of Lords did not obJc(;t to such
r~strictinns_ I R e v. lro.'iSnlllrr'~
Central Government, when exercising powers under S. Ill. is a
tribunal \\ithin the meaning of Art. 136 and is required to act judicially.
It has to he decided whether the djrectors have acted oppressively.
capriciously, corruptly or mala fide Harinagar Sugar ,\fills Ltd V. Shplm
Sundar Jh,mjhtmH·ala.-1
If the Board of directors had refused a transfer and on appeal the
decision was reversed and the tran-...fcree was later on again registered, the
transferee is entitled to damages on the basis of the fall in a market price
of the shares and between the d •.He of refusal to register and the date of
suit. \\/hcre there was no fall in a market-price, the transferee would be
entitled to nominal damages only. Thellappa v, Indian Ol'eTSt!(1S BOllk ~

Forged transfers
If the instrument of transfer is forged anrt the company in good faith
issues a certificate to the "transferee", the title of the real holder is not
affected. The transferee's name may be removed from the register on
appropriate steps being taken, Borlon 'Y. L & IV. 101 1 Rly CO.6 If th~
"transferee" sells the shares to a bonafide purchaser for value. the purchaser
gets no right to be a member of the company but he is entitled to damage
from the t.:ompany for having issued a share certificate on lhe basis of
a forged insl;lIment of transfer. In re Bahia & San Francisco Rfy. Co.'.
The company i:> entitled to get damages from the person who induced them
to issu,.; share eerti 1i,,;~HC un the basis of a forged instrument of transfer.
Sht!ffield Corporalion v. Barclay. g

'(1972) 76 CW.N. 393 2 AIR (1971) Supreme CotWt 321

3 (19371 A.C 26 4 (1962) 2 S.C.R. 339 Suprt!l1le Cl~i1rl
'AIR (1943) Mad. 743 6 24 Q.BD. 77
'11868) 3 Q.Il. 584 '(1905) A.C 392
646 COMPANY LAW

LODGING THE CERTIFICATE

Whcn a person is the owner of a number of shares, the
company issues only one certificate in respect of all the shares
and not one for each share. It follows that when the holder
transfers some of the shares he owns he has to deposit the share
certificate with the company for the issue of a fresh certificate
for the balance of the shares that remains in his ownership. When
a certificate is deposited for this purpose the company writes
on the instrument of transfer the words "certificate lodged" or
"thn similar words. The original certificate is thereafter corrected
and a fresh certificate issued.

BLANK T~ANSFERS
Blank transfer of shares may be (i) by way of mortgage.
and (ii) by sale.
A blank transfer is an instrument of transfer of shares. in
which the name of the transferee is not mentioned. Whoever has
the instrument he has the implied authority of putting in his own
name or the name of any other person as the transferee. An
application can be made to the company to record the person.
whose l1ame is finally put on the instrument. as a member of
the company. The utility of a blank transfer is that a single
instrument can be used for several salcs. The procedure can avoid
stamp duty.
A sells some shares to B. giving him a blank transfer, B can
sell the shares to C by simply handing over the instrument to
C C can transfer the shares to D in the same way. D, if he
wishes to be recorded as member can write do\\n his own name
on the transfer form and apply for registration.
The handing over of a transfer form executed in blank, does
'h.t by itself authorised the person to whom the form has been
transfelTed to sell the share or get himself registered as the owner.
Thus. if a person borrows money on the security of a share and
gives to the lender the share together with a transfer form signed
in blank. the . lender is not entitled to sell the share except for
non-payment of the amount lent.
In MIl! case of a blank transfer. equities exist between the
transferor and the transferee and the transferee has the right to
claim the di, idend from the transferor \\ho holds it in trust for
 CAPITAL. SHARES AND SHAREHOLDERS 647

him, but the company is only liable to Ihe transferor and not
to the transferee. Though the transferee is clothed with an
equitable ownership, he is not a full owner. Howrah Tradmg Co.
Ltd. v. CommiJSiuner of Income-Tat. I

CALLS
The Companies Act provides that not less than 5% of the
face valut> of a share must be paid with the application for the
purchase of Ihe share. The balance of the purchase price is
payable in the manner laid down in the articles.
Suppose that the face value of a share is Rs. 100. F ivc per
cent of this, i.e .. Rs. 5 is payable with the application. The
balance Rs. 95 is payable upon allotment, or partly upon
allolment and partly when demanded by lhe company. It may
be provided that Ihe company will demand the balance by a
nllmber of "calls" at different times. When the company demands
payment of any part of th,' purchase price payable in this fashion.
it is said to made a "call"'.
Rules
The requisites of a valid call arc stated below.
I. Notice: The decision to make a call must be taken by
the Board of Directors and notified to the shareholders concerned
under Section 292( I) (a)(b).
2. TIme and amoumt: The resolution of the Board must state
the amount to be paid and its time.
3. Interest: The Articles of the company usually provides
that in case of default, interest is to be paid by the shareholder.
4. Uniformity: Calls shall be made on a uniform basis on
all shares falling under the same class, i.e .. there must be no
discrimination in favour of any shareholder.-Sec. 91.
5. Ad"allce call: A company may. if so authorised by the
articles, accept an advance paymenl _)f any part of the money
due (i.e., before any call has been madel.-Sec. 92. Such advance
payment does not enritle the shareholder to any extra voting
power. But a company may, if so authorised by the articles. pay
dividends. in proportion to the amount paid up on each share
where a larger amount is paid up on some shares than on
others.-Sec. 93.
648 COMPANY lAW

6. Call is a debt: When a call has been validity made, it

becomes a debt due from the shareholder and the money can
be recovered by su it.
7. It must follow SEBI rules.
8. Legal decisions: The formalities laid down in the articles
regarding the making of calls must be scrupulously complied
with. A call made in contravention of the provisions of the
articles is invalid. Re Cawley & Co.' But irregularities of a
trifling nature do not maner. Dawson v. African Consolidated
Cn. ~ The power to make calls is of a fiduciary nature and must
be exercised for the benefit of the company. Lomb v. Sambas
Rubber Co.3 The call-making power is in the nature of trust and
this power should be exercised for the benefit of the company.
Alexander v. Automatic Telephone Co.4

LIEN
The articles of a Company may provide that the Company
shall have a lien or first charge on the shares of a member for
moneys due from him to the Company. In such cases if any share
is mortgaged, the claims of the Company on the share, if any,
will have priority over the claims of the mortgage.
The liell on the shares, where it exists, extends also to the
dividends payable on the shares and the assets receivable by the
shareholder upon winding up. In Allen v. Gold Reefs5 it was held
that the company's lien continues after the death of the
shareholder.
The articles usually empower a company to enforce its lien
by a sale of the shares. But a lien cannot be enforced by forfeiture
of shares. Th'e lien is not a possessory lien, but creates an
equitable charge, which is assignable. Everell v. Au/oma/ic
Machine. 6

Loss of lien
A company losses lien if--{ I) it registers a transfer of shares
subject to the lien of the transferee.

, (1889) 42 Ch. D. 209 2 (1898) 1 Ch. 6

) (1908) I Ch. 845 • (1900) 2 Ch: 56
'( 1900) 16 Ch. 656 ·(1892) 3 Ch. 506
 C APIT AI.. SHARES AND SHAREHOLDERS 649

(2) A member pledges his shares to a third party for a loan

and informs the company, then pledgee gets priority over the lien
of company.

FORFEITURE OF SHARES
The articles may provide that the shares of a shareholder
can be forfeited under certain circumstances. e~g, non-payment
of calls.

Rules
The following rules, regarding forfeiture of shares, are
generally provided for in the Articles of a Company :
I. The decision of forfeiture of the share must be made by
the Board (·f Directors.
2. A notice must be issued to the holder, demanding to pay
the call within a fixed period usually 14 days on default of which
the share will be forfeited.
3. On forfeiture, the Company becomes the owner of the
shares and they can be sold to others.
4. Upon forfeiture the original shareholder ceases to be a
member and his name must be removed from the Register of
Members.
5. The forfeited shares can be sold at any price.
6. A forfeiture is not valid unless the power to forfeit the
shares has been strictly and literally complied with. Pramila Devi
v. People s Bank of N India. I
7. The power to forfeit is in the nature of a trust and must
be exercised for the benefit of the company.
8. The purchaser of a share. forfeited f;)r non-payment of
calls, is liable to pay all unpaid calls due on the share. The
company cannot sell a share free from the liability to pay calls.
The original holder of the forfeited share remains liable as an
ordinary debtor for the unpaid calls according to the provisions
of the articles and can be sued for the debt.
9. There is nothing in the Companies Act. 1956. which
prevents a company from forfeiting the shares of any member
for non-payment of any money due to the company other than

I AIR Ilq38) Privy Council. c84

650 COMPANY LAW

money due for payment of calls. Under the articles of association.

the Exchange has the authority to sell the forfeited shares and
to appropriate the sale proceeds towards the satisfaction of the
debts, liabilities or engagements. Naresh Chandra Sanyal v.
Calcutta Stock Exchange Association Ltd. I
However, shares issued as fully paid shares cannot be
forfeited as in K. Md. Farooq Ahmed v. Fortorn Cirkil Electronics
P. Ltd. (1997) •

SURRENDER OF SnARES
Surrender of shares means abandonment of the shares by the
holder thereof in favour of the Company. There is no provision
in the Act or in Table A for surrender of shares. But the articles
of a company may provide for the acceptance of a surrender under
circumstances which would justify forfeiture.
The surrender of shares by a member to the company
becomes valid-
(I) Where the Articles empower the directors to accept it
and it is accepted, in case of partly paid shares, to save the
company from going through the formalities of forfeiture.
(2) Where it is in accordance with the Articles and accepted
in case of fully paid shares in exchange for new shares of the
same nominal value and the surrendered shares are capable of
re-issue.
Surrender amoulits to a reduction of capital. Therefore, the
"Itieles can provide for the acceptance of surrender under
circumstances which would justify forfeiture. Any provision in
the articles, for the acceptance of surrender in other circumstances,
is invalid. Madras Native Fund v. Natesa Sastri2 ; Be/lerby v.
Rowland and Manl'ood S. S. Co. )
A valid surrender of shares justifies in case of forfeiture.
Trevor v. Whitworth. 4
The Articles of a company may provide that certain specified
shares may be surrendered in exchange of new shares to be issued
by the company.

I (t972) I S.C.A. 172 (Supreme Count , 52 Mad. 915

'(1902) 2 Ch. 14 '(1887) 12 A.C. 409
 CAPITAL SHARES AND SHAREHOLDERS 651

EXERCISES
I. Explain the concept of 'Capital' in relation to a limited company
and state the various senses in which the tenn 'Capital' is used
in company law. (Pages 613-616»
, State the voting right of a shareholder in a Company lv1.eeting.
(Pages 616-617)
3. State the rights. duties and the liabilities of a shareholder.
, • (Pages 617-619)
4. Explain how the share capital of a company can be increased. What
arc Rights Shares? (Page 620)
5. Write explanatory notes on : (I) Schemes of Arrangements
(ii) Reconstruction and (iii) Amalgamation. (Pages 626-629)
6. What are the modes of acquiring and cessation of membership of
a companv? (Pages 636-638)
7. What is the law relating to restrictions on the pu!cha!'c of own
shares by the company 0 (Pages 632-633)
8. "Shares are prima fi,cie transferable:~ Discuss. (Pages 638~641)
9. State the rules regarding registration of transfer of shares of a
Company. (Pages 638-641)
10. State the remedies available to person for refusal or failure of
directors to register the transfer of shares. (Pages 642-644)
11. State \",hether a loan can be converted into the shares of the
company. If it can be done. then at what time and what is the
procedure 0 (Page 622)
l:::!. State the rules regarding issue of shares at a premium and at a
discount. (Pages 630-631)
13. State the differences between the following:
(a) Equity Shares and Preference Shares. (Pages 614. 616)
(h) Member of a Company and a Shareholder. (Page 636)
(el Share Cenificate and Share Warrant. (Pages 623-624)
(iI) Shares and Stock. (Pages 624-625)
(e) Transfer of Shares and Transmission of Shares. (Pages (,_;6-637)
14. Write notes on the following :
Share; Redeemable Preference shares; Register and Index of
members; Reserve Capital; Trust of shares; Public trustee;
LOdging the cenificate ; Blank transfers; Calls; Lien on the shares;
Forfeiture of shares; Surrender of shares. (Pages 613 : 6 I 9 :
634: 578: 634 ; 635 : 635; 646: 646: 645: 647: 646)
15. Objective Qllestions.
(a) ""hat is Capital? (Page 613)
(h) What is convenible debenture? (Page 736)
(el Arc Ihe shareholders of a Company the proprietors of the
company? (Pag~ 613)
(5) MEETINGS AND RESOLUTIONS
Objects
The corporate system of business organisation is essentially
democratic in structure. Th~ business of the Company is carried
on by officials acting under the orders'"of the Board of Directors,
which is the executive head of the Company. But Ihe directors
are elected to the Board by Ihe shareholders of the Company
and must abide by the wishes of the shareholders as expressed
in resolutions passed in meetings convened for the purpose. The
shareholders are, subject 10 Ihe provisions of Ihe Memorandum
and the Articles, the final aUlhority as regards Ihe affairs of Ihe
Company. The shareholders cannot interfere in the day to day
administration of the Company but thcy can elect Directors who
will carry on the administration in the manner desired by them.
Also, there are many matters which arc beyond Ihe powers of
Ihe Board of Directors to decide and which must be placed before
the shareholders for decision. Meetings of shareholders are held
for this pucpose and the decisions of the shareholders are
expressed in the form of resolutions.
Meetings
The Companies Act provides for the following types of
meetings:
A. Meetings of the shareholders: (I) Statutory Meeting
(2) Annual General Meeting (3) Extra-ordinary General
Meeting (4) Class Meetings. Under certain circumstances
the Court can order certain meetings.
B. Other Meetings : (I) Meetings of the creditors
(2) Meetings of the debenture holders.
C. Meetings of directors.

STATUTORY MEETING
Every public company limited by shares and every company
limited by guarantee and having a share capital, must within a
period of not less than one month and not more than six months
from the date at which the company is entitled to commence

652
 \IIEETINGS AND RESOLFfI()~S 653

business. hold a general meeting of melllbers \\ hich is to be

callcd. the Statutory Meeting. In this meeti 19 the members are
to discuss a report by directors, known as the Statutory Report.
which contains particulars relating to the formation of the
Company.-Sec. 165( I).

STATUTORY REPORT
This is a rep0l1 drafted by directors and certified as correct
by at least two of them (including the managing director, "'here
there is one). A copy of the report must be sent to every member,
at least 21 days before the date of the Illeeting. A copy is also
to be sent to the Registrar for regi.'Ii.:tion. Section 165(3)
provides that the Statutory Report nlUq cl)ntain the following
particulars :
(a) the IOtal nllmber of fully paid lip and partly ,,:lid "I'
shares allotted :
(n) the total amollnt of cash received by tile eompaliy in
respect of tile shares;
(e) an abstract of t:,e receipts, classifying them according
to sourc~ and mentioning the e.\pcnses inclirred for
commission. brokerage etc.
(d) the name, address and occupatiolls tlf directors. auditors.
manager and secretary and chang.l's of the names.
addresses etc. :
(e) particulars of contracts whIch arc tu he ",brnittcd to the
meeting for <1PP1\1\ :li. \\ iIh proposeJ lllodifi(atioJ1s. if
any:
(f) if any UndCT\\Tiling. contraL:ts ha\ c not been carried out.
the reasons thercfc)r;'
(g) the arrears due on calls from dircct0rs and others:
(iI) particulars of comrnis~ions anJ brokerages paid to
directors and managers ..
Particulars as regards cash in the statuto!") report arc to be
certiflcd as correct by the auditors' of the Comran~.
The mCll1bers of the compiJny~\ hn arc present ill the
SlattJlOr~ !\1ccling arc at lihl.'rt). to discuss all). matter relating
to the formation of the L~lInp,Hl~ ql' a;-i:-.ing lllil of the..: StatutL-,r:
RCP()ft. whcthc..:1' pre\ iOlls llo1il'i.:' ha~ h~L'1l ,SI\ C'1l i,)j' ]WI. BUI 111.\
r~:..ollltil\11 can be passed of \\hidl~jlnti..:e h;)s nnt bCL'11 gl\CI1 Jll
a..::cord:lI1cc \\ ilh the pro\ i:-i{llb ,,-~'.111c \:::1.
,.
 654 COMPANY LA\\'

If default is made in complying with the provisi(ms of

Section 165, every director or other officer of the company who
is in default shall be punishable with fine which may extend to
Rs. 500.

ANNUAL GE:"\,ERAL MEETll"G

General Meeting of a company means a. meeting of its
member~ for specified purposes. There arc two kinds of General
Meetings, (i) the Annual General Meeting and (ii) other General
Meetings. The statutory provisions regarding the Annual General
Meeting are summarised below :
(a) Sec lion 166: The first Annual General Meeting of a
company may be held within a period of not more than 18 months
from th, date of its incorporation. If such a meeting is he Id within
the period. it shall not be necessary for the company to hold
any annual general meeting in the year of its incorporation or
in the following year.' .,
Subject to the above meqtioned provision. a company must
hold an annual general meeting each year. Not more than 15
months shall elapse between the date of one annual. general
meeting and the next.
. The Registrar may, for any special reason, extend the time
of holding an annual general meeting (other than the first annual
general meeting) by a period not exceeding 3 months.
The notice, by which an annual general meeting is called,
must specify it as such.
Every annual general meeting shall be called during business
houfs, on a day which is not a public holiday, at the Registered
Office of the Company or at some other place within the town
or village where the Registered Office is situated. The Central
Government may exempt any class of companies from the
proviSions mentioned in this' paragraph.
The tillie of holding of the annual general meeting may be
fixed by the articles of the company. A Pllblic company or a
private company which is a subsidiary of a public cOinpany may.
by a resolution passed in one general meeting. tlx the time for
its subsequent general meetings. Other private companies may
.' do so by a resolution agrecd to by ,,1/ the members thereof.
(h) S('c. 167: If default is made in holding an annual general
mceting III accordance" ith Sec. 166. the Regional Director of
 MEETINGS AND RESOLUTIONS 655

the Company Law Board may (on the application of any member
of the company) call or direct the calling of a general meeting.
He may also give directions regarding the calling. holding and
conducting the meeting. Such a meeting shall be deemed to be
an annual general meeting of the Company.
(c) Sec. 168: If the provisions of Sections 166 and 167 are
not complied with the company and every officers of the company
in default be fined. (Maximum fine-R . 5.000. lior .continuing
default-further fine of Rs. 250 per day.) ..
(d) Sec. 171: A general meeting may be called by givin~ •
not less than 21 days' notice in writing. The aimual general'
meeting may be called with a shorter notice if it is agreed to
by all the members entitled to \ote in the meeting.
The court has no power to direct the calling of the allnual
general meeting. In re Coal Marketing Company of Illdiu (P) Ltd.'

OTHER GENERAL MEETINGS

Meeting called by the Board of directors
The Board of directors can call a general meeling of the
members any time by giving not less than 21 days' notice. A
general meeting may be called" ith a shorter notice under certain
circumstances (Sec below, under Notice).
Meeting by order of Company Law Board
The Company Law Board can order a meeting of a company
other than an annual general meeting. The Company Law Board
can call such a meeting of its own motion or on the application of
any director of the company or any member of the company who
would be entitled to vote in the meeting. The Company Law Board
can decide when the meeting is to be called. how it is to be
conducted and also direct other ancillary and consequential matters
regarding such meetings.-Sec. 186, (as amended in 1974).
Extraordinary General Meeting on Requisition
The Board of directors can be compelled to hold a General
Meeting upon request or requisition made for it. under the
following condilions.-Sec: 169 :

'71 CW.". 440

656 COMPANY LAW

(a) The requisition must be signed by members holding at

least 111 Oth of the paid up capital of the Company, in the case
of Companie; having a share-capital; and, by members holding
at least 111 Oth of the total voting Po\\ er in other case~.
(b) The requisition must set out the matters which will be
considered at the meeting.
(e) The requisition must be deposited at the registered office
of the Company.
The Board Illust. \\ ;thin 21 days of the receipt of a valid
requisition. issuc a notice for the holding of the meeting on a
date fixed \\ ithin 45 days of the receipt of the requisition. If
the Board docs not hold the meeting as aforesaid, the
requisitionist;, can call a meeting to be held on a date fixed within
3 months of Ihe date of requisition.
Resolutions, properly passed at a meeting called by thl'
requisitionists. are binding on the Company.

RULES OF PROCEDURE REGARDING MEETINGS

The general rules of procedure as regards shareholders'
meeting can be slIlllmarised as foJlI..)\\S
l. Proper authority
The Board of directors is th~ proper authority 10 pas, a
resolution at a duly cOlln::ncd Hoard meeting to convene a
meeting.
2. Notice (Sec. 172)
Notice of every meeting must be given to (a) all members
entitled to vote upon the matters which are proposed to be dealt
with in the meeting: (b) the legal representatives of deceased
or insolvent members coming lInder the above category: and
(c) the auditors of the Company. Notice mllst be given at least
21 days before the meeting.
Meetings may be called with a shorter notice Linder the
following circumstances:
(a) rn the case of an annllal general meeting, if it is agreed
10 h· all the members entitled to vot< thereat.
(b) In the case of any dher m~eting of
a C011l/umy \I'ilh a
sltare capilul. if it is agreed to b~ members holding 11I)t less than
95% of slich part of the paid up share C;'p.ilal of the cOlllpan)
<.1, gives a right in V(Jtc at the meeting. If tit.: Cl)!llP~.!1y has lin
,,!tare COpiIU!. a meeting ma) be held \\ilh \,1 51h'11cr lwrice if
 MEETINGS AND RESOLUTIONS 657

holders of not less than 95% of the total voting power exercisable
at that meeting agree to it.
3. Tbe Agenda: Tbe Explanatory Statement (Sec. 173)
The notice must specify the business to be transacted in the
meeting. The Act states that notice must annex an "Explanatory
Statement"' at which some special business is to be transacted.
The statement must contain all the material facts re.lating to each
item of the business, indicating the nature and extent of the
interest of every director and the manager of the company. Th¢
statement must mention the time and place where all documents
relating to special business can be inspected. .
The business transacted in a shareholders' meeting, can be
divided into two classes, (i) Ordinary and (ii) Special. Ordinary
business means, consideration of accounts and the balance sheet;
declaration of dividend; appointment of directors; 311d
appointment of and fixation of remuneration of auditors. All other
business in special busi(less.
4. The Quorum (Sec. 174)
Quorum means the minimum number of members required
to hold a meeting. According to the Act, quorum is constituted
by 5 members, personally present (in the case of a public
company, other than a public company which has become such
by virtue of Sec. 43A) and 2 members, personally present in the
case of other companies. The articles may prescribe a larger
number.
If there is no quorum v.:ithin half an hour of the noti fied
lime for starting the meeting, it is dissolved. If the meeting is
one called u·pon requ isitipn, no further meeting on the same notice
is permitted. In other cases, the meeting is automatically adjourned
to the same day next week at the same hour and place or at
such other day, hour and place as the Board may determine.
No quorum is necessary in any adjourned meeting.
5. Cbairman (Sec, 175)
Unless otherwise laid down in the articles, the members
pe"rsonally present at the meeling shall elect a Chainnan, from
amongst themselves, by show of hands. But if a poll is demanded,
it must be taken forthwith with a chairman elected for the
purpose. (Poll means secret voting by ballot papers.)

Commercial La,,··-.f2
658 COMPANY LAW

6. Proxy (Sec. 176)

Any member, entitled to attend and vote in a meeting, can
appoint another person to attend and vote on his behalf. The
person appointed is called the Proxy. The appointment of a proxy
must be made by a written instrument (See below) signed by
the appointer and deposited with the Company, not more than
48 hours before the meeting.
A. B. LIMITED
Registered Office •
201/A, Netaji Subhash Chandra Bose Road, Kolkata-700001
PROXY FORM
Twefth Annual General Meeting-September 24th, 200 I
Regd. Folio No ................................................................. ,............. , ................ .
[/We ........................................................... of ......................................... being
a ,member/members of the above company hereby appoint .......................... .
.............................................. ,.. of ................. _.................................. or failing
himlher .................................................. of .................................................... ..
as mylour proxy to vote for melus on mylour behalf at the TWELfTH
ANNUAL GENERAL MEETING of the Company to be ,eld on Monday,
September, 24th 2001 and at any adjournment thereof.
Signed this .......... day of ........ .. .......... 2001
11- Rupee
Signature .... .. ........ ........... .. ......... Revenue
Stamp
Note: This fonn in order to be effective should be duly stamped, completed
and signed and must be deposited at the Registered Office of the
Company not less than 48 hours before the meeting.

A. B, LIMITED
Registered Office
20 II A, Netaji Subhash Chandra Bose Road, Kolkata-70000 1
ATTENDANCE SLIP
Twelfth Annual General Meeting-September 24th, 200 I
Regd. Folio No .................................... .
I certifY that I am a registered shareholder proxy for the registered shareholder
of the Company. I hereby record my presence at the Twelfth Annual General
Meeting of the Company at Bharatiya Bhasha Parishad Auditorium, 36A,
Shakespeare Sarani, Kolkata-7000 17 on Monday, September, 24th 200 I.
.." ................................ ...... .
~

Members/Proxy's name in BLOCK leUer l\'lembersIProxy's siinature

Note: Please fill in this attendance slip and hand it over at the Entrance of
the meeting Hall. .
 MEETINGS AND RESOLUTIONS 659

A proxy is not entitled to speak in the meeting and can "Qle

only on a poll unless the articles provide otherwise. A proxy
need not be a member of the Company. A member of a private
company cannot appoint more than one proxy to attend on the
same occasion. unless the articles otherwise provide.
A member entitled to vote can inspect the proxy forms
deposited, if he gives 3 days' notice of his intention to do so.
An instrument appointing a proxy, if in one of the forms
set out in Schedule IX to the Act, cannot be questioned on the
ground that it fails to comply with any special requirement
specified for such instruments in the articles.
Every notice of meeting must prominently mention that a
member is entitled to appoint a proxy and that the proxy need
not be a member.'
A body corporate, which is a member of a Company, can
appoint a representative or proxy, by resolution of the Board.
The President of India or the Governor of a State, if he IS
a member of a company, may appoint any person to act as his
representative in a meeting.-Sec. 187 A.
7. Method of Voting (Sections 177-185)
Resolutions are to be voted upon, in the first instance, by
show of hands. The Chairman's declaration of the results of
voting by show of hands is conclusive.
A poll is to be taken (i) if the Chairman so directs; (ii) in
all cases, if it is demanded by members holding at least III Dth
of the voting power or paid up capital; (iii) in the case of public
companies if it is demanded by at least 5 members present and
entitled to vote; and (iv) in the case of private companies if
it is demanded by ·any one member if not more (han seVen
members are present and by two members if more than seven
members are present.
A poll on a resolution for adjournment, or for the appointmenl
of a Chairman is to be taken immediately. In other cases it is
to be taken when the Chairman decides; but it must be within
48 hours of the demand for poll.
A poll is to be taken in the manner decided by the Chairman.
The usual method is to ask each member to record his decision
on ballot papers provided for the purpose. The Chairman shall
appoint two scrutineers to scrutinise the ballot papers. A( le",(
 one of them shall be a member present in the meeting, if a
member, willing to act as such, is found.
The Chairman has a casting vote in addition to h is ordinary
Yote, i.e .. in case of a tie, he can give another vote, either for
or against the resolution.
Section 179 states that a poll may be ordered on a demand
made in that behalf by the shareholders.

RESOLUTIONS
The Act of 1956 classifies resolutions into the. following
types: (i) Special Resolution (ii) Ordinary Resolution and
(Iii) Resolution requiring Special Notice.

'Special Resolution
A special resolution is necessary for deciding important
matters .. The Act specifies what these matters are. (Examples:
Reduction of Capital; Winding up etc.)

Procedure for Passing a Special Resolution

A special resolution may be passed in a general meeting of
members called in the usual way with the usual notice. But the
following conditions must be satisfied.-Sec.189.
(a) The notice calling the general meeting must specifY that
a special resolution will be moved.
(b) The number of votes cast in favour of the resolution
whether by show of hands or by poll, must be at least three times
the number cast against it. _
Special resolution is required for the following issues.
(a) Alteration of Memorandum for changing the place of
registered office from one state to another or alteration of objects
with the leave of the Company Law Board, (b) change of name
of the company with the consent of the Central Government,
(e) alteration of the Articles of the company, (d) conversion of
any portion of the uncalled capital into reserve capital,
(e) reduction of share capital, (j) variation of shareholders'
rights, (g) payment of interest out of capital, (h) allowing a
director to hold an office of profit under the company,
(i) alteration of memorandum of render the liability to directors
unlimited, (j) winding up a company voluntarily.

l
 MEETINGS AND RESOLUTIONS 661

Ordinary Resolution
All matters not required to be decided by a special resolution,
may be decided by ordinary resolution. An ordinary .esolution
is passed, when the number of votes cast in its favou' exceeds
those cast against it.
Member's Resolution
If members of a Company intend to move a resolution, at
the next annual general meeting, the following procedure is to
be adopted. (Sec. 188) :
1. A requisition in writing, with a copy of the resolution.
must be deposited with the Company. If it is desired to circulate
the requisition to the members, it must be deposited not less than
6 weeks before the meeting. In other cases it may be deposited
not less than 2 weeks before the meeting.
2. The requisition must be signed «(1) by members holding
at least 1II0th of the total voting power, or (b) by not less than
100 members, holding shares with an aggregate paid up capital
of Rs. I lakh.
3. The requisition may require the circulation to the members,
along with the resolution, a statement of not more than 1000
words relating to the resolution.
4. The requisitionists must pay the expenses necessary for
circulating the notice and the statement.
If the aforesaid procedure is complied with, the resolution
must be dealt with at the next annual general meeting. But the
statement, if any is sent with the resolution, will not be circulated
m the following cases :
(a) If the Company is a banking company and the Board of
Directors is of opinion that its circulation will injure the
interest of the Company.
(b) If on an application made by the company or of any
person feeling aggrieved, the Court is satisfied that the
rights conferred by Section 188 are being abused to secure
needless publicity for defamatory matter, it may prohibit
the circulation.
Registration of Resolutions
All special resolutions and important resolutions (like
voluntary liquidation) must, within 30 days of their adoption be
662 COMPANY LAW

registered with the Registrar and also annexed to ail copies of

the articles.-Sec. 192.

RESOLUTION BY SPECIAL NOTICE

Where by any provision contained in the Act or in the
articles, special notice is required of any resolution, the intention
to move the resolution shall be given to the Company not less
than 14 days before the date of meeting where the resolution
is to be moved, exclusive of the day on which the notice is served
or deemed to be served and the day of the meeting.-Sec. 190( 1).
The Company shall give notice of the resolution to the
members in the same manner as it gives notice of the meeting.
If this is not practicable, it shall give notice by advertisement
in a newspaper having an appropriate circulation or in any other
mode allowed by the articles, not less than 7 days before the
mccting.-Sec. 190(2).
The Act requires special notice in certain cases. Examples-
Appointment of a retired o'r removed auditor (Sec. 225);
appointment of a director in place of a removed director; etc.

MINUTES OF PROCEEDINGS
By the term "minutes" is meant a written record of the
proceedings of a meeting. As company meetings are of
considerable legal importance, it is necessary to keep a record
of the proceedings in a permanent form. Section 193 of the Act
provides as follows :
(I) Every company shall keep minutes of all proceedings of
every general meeting, meetings of its Board of Directors, and
of every committee of the Board. Entries in the minute books
must be made within 30 days of the conclusion of a meeting.
The pages of a minute book must be consecutively numbered.
Each page must be initialled or signed and the last page recording
the proceedings of a meeting must be dated and signed (a) in
the case of Board meetings or committee meetings, by the
Chairman of the meeting or the succeeding meeting, and (b) in
the case of general meetings. by the Chairman of the same
meeting, or in the event of his death or liability, by a director
duly authorised by the Board. Entries in a minute book must
not be attached to it by pasting or otherwise.
 MEETINGS AND RESOLUTIONS 663

(2) The minutes of e~ch meeting shall contain a fair and

correct summary of the proceedings.
(3) All appointments of officers made at the meeting shall
be included in the minutes.
(4) In the case of a meeting of the Board of directors Or
of a committee of the Board, the minutes shall also contain-
(a) the names of the directors present at the meeting, and
(b) in the case of each resolution passed at the meeting, the
names of the directors, if any, dissenting from, or not
concurring in, the resolution.
(S) The minutes need not contain any matter .which, in the
opinion of the chairman of the meeting-
(a) is, o( could reasonably be regarded as, defamatory of
any person;
(b) is irrelevant or immaterial to the proceedings, or
(c) is detrimental to the interests of the company.
The Chairman's discretion, as regards what is to be included
\0 the minutes, is final.
The minutes kept in accordance with the aforesaid rules shall
be evidence of the proceedings in a meeting. They are presumed
to be correct records of proceedings, unless otherwise proved, The
minutes of general meetings are to be kept at the registered office
of the Company and can be inspected members. Copies of any
minutes are to be furnished upon payment of the 'requisite fees,
Apart from the minutes, no reports of the proceedings of
a general meeting are to be published at the expense of the
Company.

ANNUAL REtURN
The Annual Return is a statement of particulars, which is
required to be filed by a company after every annual general
meeting. Section 159 of the Act provides that every company
having a share capital shall, within sixty days from the day on
which each annual meeting is held, prepare and file with the
Registrar a return containing particulars regarding the following
(a) its registered office, '
(b) the register of its members,
(c) the register of its debenture holders,
(d) its shares and debentures,
664 COMPANY LAW

(e) its indebtedness,

if) its members and debenture holders, past and present, and
(g) its directors, managing directors, managing agents,
secretaries and treasurers, managers and secretaries, past
and present.
Where full particulars as to past or present members were
given in any of the two immediately preceding Returns, a Return
may mention only the changes that have occurred in shareholding.
The Return must be in the form set out in Part II of
Schedule V or as near thereto as circumstances admit.
A similar return is to be field by Companies not having a
share capita I.-Sec. 160.
The copy of the Annual Return filed with the Registrar by
a director and by the manager Or secretary of the company; or
where there is no manager or secret!lry, by two directors of the
company, one of whom shall be the managing director where
there is one.-Sec. 161 (I).
Section 161 has been amended and the amended section
states that where the annual return is filed by a Company whose
shar.es are listed on a recognised stock exchange, the copy of
such annual return shall be signed by a secretary in whole-time
practice.
In the case of private companies, the directors must certify
that there has been no violation of the rules of private companies
regarding number of members and invitation to the public for
purchase of shares.-Sec. 161 (2)(b). The directors must also
certify that 25% or more of the shares are riot being held by
any bodies corporate and if so, why the company will continue
to be treated as a private company.-Sec.43A.

EXERCISES
I. Discuss the provisions of the Companies Act relating to meetings.
(Page 652)
2. What are the classes of general meetings held by companies? State
the powers and duties of the chairman of a general meeting of a
company. (Pages 652, 657-658)
3. (a) What do you understand by "Statutory Meeting" ot the
shareholders of a Public Limited Company? (h) Must a Private
Limited Company hold such a meeting? (Pages 652, 654)
 MEETINGS AND RESO~UTlONS 665

4. Explain' Annual General Meeting' of a company, its objects and

purposes, and the requisites for holding a valid anntal general
meeting. Who may call it? (p.ge 654)
5. What kinds of meetings are held by a company? State th. nature
of business to be transacted in each meeting. (Pages 652-654)
6. What are the consequences of the failure by a company to hold
its Annual General Meeting? . (Pages 654-655)
7. State rules regarding an extra-ordinary general meeting to be held
on reqUIsItiOn. (Page 656)
8. What is a statutory report and what are tbe contents of a statutory
report? What is tbe effect of not holding a statutory meeting?
(Page 653)
9. Can a member of a company, by him OJ jointly with others, insist
on, convening a general meeting of a company? What are the
conditions to be fulfilled? (Page 656)
10. State the provisions of the Companies Act relating to resolutions
requiring special notice, mentioning the matters required.
(Pages 662)
II. What are the consequences of not filing the Annual Return of a
company in time? (Pages 664)
12. Explain the following terms:
(a) Statutory Meeting; (h) Statutory Report; (e) Annual General
Meeting; (d) Extraordinary General Meeting on Requisition;
(e) The. Quorum, if) Proxy; (g) Special Resolution; (h) Ordinary
Resolution; (,) Special Notice; Ij) Annual Return.
(Pages 652-664)
13. Objective Questions:
(a) What are the different kinds of meetings of the shareholders 0
(Page 652)
(b) Enumerate six purposes for which a special resolution is
required. (Page 660)
(e) What is the length of notice fer calling a general meeting?
(Page 656)
(d) Can the Company Law Board to call a general meeting of the
Company? (Pages 655)
(e) Fill in the blanks-
(i) The First Annual General Meeting of a Company may be
held within a period of not more than-months !Tom the
date of its incorporation. (Page 654)
(ii) Not more than-months shall elapse between the date of one
Annual General Meeting and the next. . (Page 654)
 . DIRECTORS

DEFINITION
ne Directors of a Company are selected according to the
Articies of Association of the Company and provisions of the
Companies Act. They are in charge of the management of the
affairs ohhe Company. The directors are collectively called the
Board of directors. The Board is the Company's executive
authority.
A director is an officer of the company within the meaning
of section 2(30). Section 2( 13) states that a director includes "any
person occupying the position of the director by whatever name
called. "
The welfare of the shareholders and of the company depends
upon who the directors are and how they carry out their duties
and responsibilities. To protect the interests of the Company and
of the shareholders, the Companies Act contains detailed rules
regarding the. appointment, remuneration, powers, duties,
liabilities and various other matters concerning directors_

NUMBER OF DIRECTORS
The number of directors to be appointed to the Board of
directors of a Company is determined by the articles. The Act
provides that there must be at least 3 directors in a Public
Company (other than a public company which has become such
by virtue of Sec. 43A) and at least 2 directors in other
Companies.-Sec. 252.
[Sec. 43A states that under certain circumstance a. private
company may become a public company by a change in its
structure of ownership.-See p. 553]
Subject to the minimum stated above and the maximum fixed
by the articles, the Company can, by ordinary resolution, increase
or decrease the number of directors. It can also appoint additional
directors for one year.-Sec. 258.
The Company can increase the number of directors beyond
the maximum fixed by the articl'es provided previous sanction

666
 DIRECTORS 667

of the Central Government is obtained. Where the maximum

fixed by articles is 12 or less, the number can be increased to
12 without Government approval.-Sec.259.
MODE OF APPOINTMENT OF DIRECTORS
1. First directors
Persons named in the articles of association as directors
become the first directors of the Company. In the case of public
companies, the persons named as directors must file with the
Registrar, their consent in writing to become directors and must
agree to pay for the minimum number of shares which, by the
articles, a director is required to have.
Persons who sign the Memo
If no person is named in the articles as directors, the pers!Jns
who sign the memorandum of association of the Company (and
who are individuals, not companies) become the first directors.-
Sec. 254.
Election
The normal mode of appointing directors is election by the
members at the annual general meeting. The manner of hold ing
the election must be provided for in the articles.-Sec. 255.
2. Appointment of directors by company
According to Sec. 255 directors must be appointed by the
company in a general meeting.
3. Appointment of directors by the Board of directors
The Board of directors may appoint directors in the following
circumstances :
(a) Additional directors: The Board of directors can appoint
additional directors subject to the maximum number, fixed
by the Articles of the company. Such additional directors
hold office only up to the date of the next annual general
meeting of the company.-Sec. 260.
(b) Casual vacancy : Casual vllcancies among directors in
public companies and private subsidiaries of public
companies may be filled by the Board of directors b)
nomination. The person appointed to a casual vacancy
holds office for the period during which the director, whose
post is vacant, would have remained in office.-Sec. 262.
668 COMPANY LAW

(c) Alternate Directors: The Board of directors of a company

may, if so authorised by its articles or by a resolution
passed by the company in a general meeting, appoint an
alternate director to act for a direct during his absence for
a period not less than three months from the State in which
meetings of the Board are' ordinarily held. The alternate
director cannot hold office longer than the original director
and vacates his office if and when the original director
returns to the State.-Sec. 3 \3.
4. Appointment of directors by third parties. The Articles
under certain circumstances empower the debenture-holders or
other creditors who have advanced loans to the company to
appoint their nominees to the Board.
5. Appointment of directors by proportional representation.
The Articles of a company may provide for the appointment of
not less than two-thirds of total number of directors of a public
company, according to the principle of proportional representative
whether by the single transferable vote or by a system of
cumulative voting or otherwise.
6. Nomination by tho: Central Government
Under Section 408 of the Act, the Central Government can
(in case of mismanagement and oppression) nominate some
directors to the Board of a company as the Company Law Board
may specify as being necessary to effectively safeguard the
interest of the company, its shareholders or the public interest.
The Directors so appointed are not required to hold any •
qualification shares. Besides, they are required to keep the
Company Law Board informed of the affairs of the company to
take such timely action as may be required.
7. Nomination in Statutory Corporations
The Government can' nominate a director to the Board of
a Company coming within the Pllrview of the Industries
(Development and Regulation) Act of 195 \. Certain statutory
corporations possess similar powers. For example, the Industrial
Finance Corporation Act of \947 empowers the Corporation to
nominate a director to the Board of a Company to which it has
advanced money.
 UU'CL..VK~ 669

Other rules regarding the appointment of directors are

mentioned below:
1. Qualification Sbares
(Sections 270, 272, 273). The articles may provide that no
person shall be eligible for appointment as director unless he
holds a certain minimum number of shares. Such shares are called
Qualification Shares. In the case of public companies and private
companies which are subsidiaries of public companies, the
following provisions apply, notwithstanding anything to the
contrary contained, in the articles :
• (a) A director shall be deemed to be qualified if he secures
the qualification shares within two months after his appointment.
(b) The nominal value of the qualification share or shares
shall not exceed Rs. 5,000, or the nominal value of one share
where it exceeds Rs. 5,000.
(c) The bearer of a share warrant shall not be deemed holder
of shares for the purposes of qual ification shares.
If after the expiry of the said period of two months, any
person acts as a director of the company when he does not held
qualification shares, he shall be punishable with fine which may
extend to Rs .. 50 for every day between such expiry and the last
day on which he acted as director.-Sec. 272. Also he has to
vacate his office as director.
2. Notice
In the case of public companies and private companies which
are subsidiaries of public companies, when it is intended to
propose the name of some person as director, notice of the fact
must be given by the candidate or the proposer to the Company
at least 14 days before the date of the meeting in which the
election will take place. This provision does not apply to a
retiring directors. The company shall inform every member of
the candidature by individual notices not less than 7 days before
the meeting or by advertisement in two loca I newspapers (one
English and one regional language paper) not less than 7 days
before the meeting.-Sec. 257.
Section 257 of the Principal Act has been amended and the
amended provision states that any person contesting the post of
670 COMPANY LAW

director must submit a notice "along with a deposit of five

hundred rupees which shall be refunded to such person" if the
person succeeds in getting elected as a director.
3. Filing of Consent
In the case of public companies and private subsidiaries of
public companies every person (other than a director retiring by
rotation) proposed as director must sign and file with· the
company his consent to act as such if appointed, unless he himself
notifies his candidature to the company.-Sec. 264{ I).
A person shall not act as director unless he has within 30
days of his appointment signed and filed with the Registrar his
consent in writing to be one. But this rule does not apply to
(a) a director re·appointed ,after retirement by rotation or
immediately on the expiry of his term of office; (b) an additional
or alternate director, or a person filling a casual vacancy,
appointed or re-appointed under Sec. 262, and (c) a person named
as a director of the company under its articles as first registered.-
Sec. 264(2),
4. Method of Voting
Every person, proposed for election as a director, must be
voted upon individually. Two or more names are not to be put
together, unless such a procedure is agreed to by the members
present unanimously. The articles may provide for the election
of not less than two-thirds of the directors by the method of
proportional representation with single transferable votes or
cumulative votes. A non.profit and non-dividend paying company
may provide in its articles for the election of all its directors
by ballot.-Sections 263, 263A, 265.
5. Amendment of provisions relating to appointment of
Directors
In the case of a public company or a private company which
is a subsidiary of a public company, an amendment of any
provision relating to the appointment or re-appointment of a
managing or whole-time director or a director not liable to retire
by rotation, whether that provision be contained in the Company's
memorandum or articles, or in an agreement entered into by it,
or in any resolution passed by the Company in general meeting
or by its Board of directors, shall not have any effect unless
 DIRECTORS

approved by the Central Government; and the amendment shall

become void if, and in so far as, it is disapproved by t~at
Government.-Sec. 268.
6. Directors to be Individuals
A body corporate, association or firm cannot be appointed
director, only an individual can be sc appointed.-Sec.253.
7. Disqualification of Directors
Section 274 provides as follows : A person shall not be
capable of being appointed director of a company, if-
(a) he has been found to be of unsound mind by a Court of
competent jurisdiction and the finding is in force;
(b) he is an undischarged insolvent;
(c) he has applied to be adjudicated as an insolvent and his
application is pending;
(dJ he has been convicted by a Court of any offence involving
moral turpitude and sentenced in respect thereof to
imprisonment (or not less than six months and a period
of five years has nol elapsed from the date of expiry of
the sentence; .
(e) he has not paid any call in respect of shares of the
Company held by him, whether alone or jbintly with others,
and six months have elapsed from the last day fixed for
the payment of the call; or .
if) an order disqualifying him for appointment as director has
been passed by a Court in pursuance of Section 203 and
is in force, unless the leave of the Court has been obtained
for his appointment in pursuance of that Section.
(Section 203 empowers the Court to prohibit a person, who
is guilty of fraudulent practices, from participating in the
management of Companies.)
The Central Government may, by notification in the Official
Gazette, remove the disqualifications under Clauses (d) and (e)
above, as regards any individual.
A private company, which is not a subsidiary of a public
company, may provide by its articles thlft· a person shall be
disqualified from being appointed a director on any ground in
addition to those specified in (a) to if) above.
 COMPANY LAW

,r Directonh'ips
e commencement of the Act of 1956, no person can
as director,. at, the same time, of more than 20
..-Sec. 275.
ptions: But the following companies' are not to be taken
.count while calculating the maximum allowable
app" ... ments as director: (a) a private company which is neither
a subsidiary nor a h,,!"'ng company of a public company;
(b) an unlimited compan) ; (e) an association not-carrying on
business for profit; ~.nd \t!) a company in which the person
concerned is only an alternate director.-Sec.27S.
Penalty: A person who contravenes this rule can be fined
up to Rs. 5000 for each Company of which he is a director in
excess of 20.-Sec. 279.
Who can be a Director?
Qualification of a Director: A director must be appointed
in the mode stated in page 50S. A director need not have any
academic qualification : he need not have any degree from the
university; he ~eed not have been to school. From the Contract
Act and the Companies Act, it can be said that the director must
have the following qualifications;
I. A director must be capable of entering into a contract,
Le., (a) he must have attained the age of majority, (b).he must
have sound mind and (c) he must not be disqualified from
contracting by any law to which he is subject.-Sec. II, Contract
Act, p.50.
2. A director must be a natural person, i.e. not an artificial
person. (See para 6 above)
3. A director must have the requisite qualification shares.
(See para I above). The qualification shares are not required in
nomination by the Central Government or in certain Statutory
Corporations.
4. A director must not be disqual ified under the circumstances
enumerated in Sec. 274, e.g., if he is an undischarged insolvent
or a person convicted by the Court. (See para 7 above).

RETIREMENT OF DIRECTORS
Rotation
Section 255 of the Companies Act provides that not less than
two-thirds of the total number of directors of a public company,
 DIRECTORS 673

or of a private company which is a subsidiary of a public

company, shall be persons whose period of office is liable to
terminate by rotation. The articles may be provided for the
retirement of all directors at every annual general meeting.
Section 256 of the Act provides that at every annual general
meeting after the one by which the first directors are appointed,
one-third of such of the directors for the time being as are liaole
io retire by rotation, shall retire from office. If Ihe number of
directors is not three or a multiple of three, then the number
nearest to one-third shall so retire.
The directors to retire by rotation at every annual general
meeting shall be those who have been longest in office since
their last appointment, but as between persons who became
directors on the same day, those who are to retire shall, in default
of and subject to any agreement among themselves, be det~rmined
by lot.
At the annual general meeting at which a director retires as
aforesaid, the Company may fill up the vacancy by appointing
the retiring director or some other persons thereto.
If the vacancy is not filled at the annual general meetiI]g
or at the adjourned meeting, the retiring directors will be deemed
to be automatically re-elected.

RESIGNATION OF A DffiECTOR
The Company Act does not provide for resignation of a
director. But the Articles of a company may have express
provision of it. A director is an agent of a company and,
therefore, he can resign his office by notice. A resignation cannot
be withdrawn without the consent of the company. Glossop v.
Glossop.l An oral resignation is effective, if it is accepted at a
meeting of the company, even though the Articles provide that
the director must vacate his office in writing. Latchford Premier
Cinema v. Ermion. 2 A resignation is effective only when it is
accepted by the Board of directors of the company. If a director
part with his qualification shares he has to vacate his office. If
this is voluntary, then parting with his qualification shares is
equivalent to resignation.

I (1907) 2 Ch. 370 '(1931) 2 Ch. 400

Commercial Law - 43
674 COMPANY LAW

VACATION OF OFFICE BY DIRECTORS

1. Statutory vacation
Section 283 of the Companies Act provides that the office
of a director shall become vacant under the following
circumstances :
(a) if he fails to obtain within due time or ceases to hold the
share qualification, if any, required of him by the artioles
of the Company;
(b) if he is found to be of unsound mind by a Court of
competent jurisdiction;
(e) if he applies to be adjudicated an insolvent;
(d) if he is adjudged all insolvent;
(e) if he is convicted by a Court of any offence involving moral
. turpitude and is sentenced ill respect thereof to
imprisonment for not less than six months;
(j) if he fails to pay any call in respect of shares of the
company hcld by him whether alone or jointly with others
within six months from the last date fixed for the payment
of the call, unless the Central Government has by
notification in the Official Gazette removed the
disqualification incurred by such failure;
(g) if he absents himself from three consecutive meetings of
the Board, or frOl!l all meetings of the Board for a
continuouli. pj:riod of three months, whichever is longer,
without obtaining leave of absence from the Board;
(h) if he (whether by himself or by any person for his benefit
or on his account) or any firm in which he is a partner or
any private Company of which he is a director, a~ce'pts a
loan, or any guarantee or security. for a loan, from the
Company in contravention of Section 295; [Section 295
deals with the rules relating to the grant of loans to directors.]
(i) if he acts in contravention of Section 299 (which imposes
a duty on directors to disclose their personal interest, if
any. in any contracts entered into 'by the Company);
(j) ifhe becomes disqualifieihy an orderofC6urt under Section
203 (which' provides tha(the' Court' can prohibit a person
guilty of fraudulent practicCS"!j:b'ili managing a 'company) :
(*l if he is removed from the post of director b) the
members: or , ..
 DIRECTORS 675

(I) having been appointed a director by virtue of his holding

any office or other employment in the company, he ceases
to hold such office or other employment in the company.
Consequences : (I) The office of a director shall become
vacant.
(2) In case of insolvency or conviction, the director shall
vacate office within 30 days of the order of adjudication Or
sentence. But if there is any appeal or petition against the order
of adjudication or sentence, he shall vacate office within seven
days of the disposal of the appeal or petition, unless the order
or sentence is set aside.
(3) If a director continues to function when be knows that
his post has become vacant under any of the aforesaid provisions,
he is liable to a fine up to Rs. 500 per day.
2. Additional grounds of ,'acation in private companies
A private company, which is not a subsidiary of a public
company, may by its articles provide that the office of director
shall be vacated on any grounds in addition to those specified
111 Section 283.

3. Acceptance of office of profit

Under Section 314 of the Act. if a director accepts an office
of profit under the company (except c~rtain special posts like that
of a managing director. etc.) without previous consent of the
company accorded by a special resolution. he shall be deemed
to have vacated his office as director. (See 'office of profit' p. 696)

REMOVAL OF DIRECTORS
Directors may be removed by shareholders. the Central
Government or the C ollrt. The rules regarding the removal of
directors are stated below,
1. Removal by Shareholders
Section 284 of the Act provides that the members of a
Company may, by ordinwy resolution remove a director before
the expiry of his period of office, except in the following cases :
I. An additional director appointed by the Central Govern-
ment under Section 408 (in case of mismanagement and
oppression) cannot be removed. (See Ch. 10.)
 676 COMPANY LAW

2. In a private company, a director appointed for life and

holding office as such on I st April 1952, cannot be removed
by a members' resolution.
3. When the articles of a company provide for the election
of directors by proportional representation, a director elected by
that method cannot be removed by resolution.
Special notice must be given of the resolution to remove
• a director. A copy of it must be given to the director concerned.
A statement relating to the matter may be sent by the director
concerned, to the company and such statement shall be circulated
among the members, if received in time, or read out in the
meeting. The circulation of such statement may be prohibited by
Court if it contains defamatory matter.
The meeting which removes a director can elect another in
his place if the director was originally appointed by election.
If a director is, by agreement or otherwise, entitled to receive
compensation for premature termination of his services, he can
enforce his claim notwithstanding the removal by resolution.-
Sec 284(7)(a).
II. Removal by the Central Government
The Central Government can make a reference to the High
Court to remove managerial personnel, including directors when-
(a) any person is guilty of fraud, misfeasance, persistent
negligence or default, etc., or (b) the business of the Company
is not following sound business principle or prudent commercial
practices or (e) the Company is causing damage to the trade and
industry of the business pertaining to it or (d) any person of
the Company is trying to defraud creditors, members, etc. or a
fraudulent or unlawful purpose.-Sections 388B to 388E. See
Chapter 10.
III. Removal by the Company Law Board
Under Section 402, where, on an application to the Company
Law Board for prevention of oppression (Sec. 397) or
mismanagement (Sec. 398), the CLB finds that the relief ought
to be granted, it may by an order provide for the term ination,
setting aside or modification of any agreement between the
Company and the Director. When the appointment of a Director
so terminated or set aside, he or she cannot sue the Company
for damages or compensation for loss of office.
 DIRECTORS 677

MANAGIJlfG DIRECTOR
Definition
The term Managing Director is defined in Section 2(26) of
the Act. The Managing Director is a director who is "entrusted
with any substantial powers of management". The power to do
administrative acts of a routine nature when so authorised by
the Board (e.g .. the power to affix the common seal of the
company or to draw and indorse any cheque etc.) shall not be
deemed "substantial powers of management".
The term Managing Director includes a director occupying
the position of a managing director, by whatever name called.

Position of Managing Director

The Managing Director is a member of the Board of
directors. He is a wholetime director. He is the chief executive
of the company.
The managing director is not an employee, nor is he a servant
of the company. But he is a director of the company and has
certain duties and responsibilities. In an English case, it was held
that the managing director has two functions and two capacities.
lie is a director of the company and he has a contract with the
company fOF his services. There is nothing anomalous in this.
The same individual may have two or more capacities each
including special rights and duties in relation to the same thing
or matter in relation to the same persons. Anderson v. James
Sutherland (Peterhead) Ltd. I

Whole Time Director

A whole time director is a director who is entrusted with
certain duties and responsibilities. He is an employee of the
Company. The ambit of his jurisdiction is defined by his contract
of employment. The articles of some Companies contain the
provisions regarding their services. It can be inferred that a whole
time director gives the whole or the most of the working time
to the Company. The term "Whole time director" has not been
defined in the Act, but it has been used with the term managing
director in sections of the Act.

1(1941) S.c. 203

•
678 COMPANY LAW

Appointment of Managing Director and Whole Time Director

The appointment of a managing director or of a whole time
director can be made by any of the methods (i) an agreement
with the company, or (ii) a clause in a memo or artieles of the
company, or (iii) a resolution passed by a company in its general
meeting, or (iv) a resolution of the Board of directors.
Under the Amendment Act, every public company or a
private company which is a subsidiary of a public company
having a paid up share capital of such sum as may be prescribed
shall have a managing or a whole-time Director or a manager.
The sum prescribed is Rs. 5 crores or more. Such appointment
can be made without prior approval of the Central Government
provided the appointment is made in accordance with the
conditions specified in Schedule XIII and a return in the
prescribed form filed within 90 days from the date of such
appointment. [Sec. 269(2)]
Every application seeking approval to the appointment of a
managing or whole-time director or a manager shall be made to
the Central Government within a period of 90 days from the date
of such appointment. The Central Government shall not accord
its approval to such an application, if it is specified that (a) the
managing or whole-time director or the manager appointed is in
its opinion, not a fit and proper person to be appointed as such
or such appointment is not in the public interest; or (b) the terms
and conditions of the appointment of managing or whole-time
director or the manager are not fair and reasonable [Sec. 269(4)].
When the appointment is not approved by the Central
Government it may refer the matter to the Company Law Board
for decision under Section 269(7). '
The following rules are applicable to a public company and
a private company which is a subsidiary or a public company :
(I) The rules relating to the appointment or reappointment
of "managing" or "whole-time directors" or "a director in the
whole-time employment of the company" cannot be amended
without the approval of the Central Government.-Sec. 268.
(2) The appointment of a person as a managing or whole-
time director shall not have any effect unless approved by the
Central Government.-Sec. 269( I).
(3) In the case of an existing company, the re-appointment
of a person as a managing or whole-time director shall not have
•
 DIRECTORS 679

any effect unless approved by the Central Govemment.-Sec.

269(2).
(4) The Central Government shall not accord its approval
under Sec. 269(1) in any case, unless it is satisfied \ hat-
(a) it is in the interests of the company to have a ",anaging
or whole-time director,
(b) the managing or whole-time director of the compan)- is.
in its opinion, a fit and proper person to be appointed as
such and that the appointment of such person as managing
or whole-time director is not against the interest and
(c) the terms and conditions of appointment of the proposed
managing or whole-time director of the company are fair
and reasonable.-Sec. 269(3), Companies (Amendment)
Act. 1974.
(5) Regarding the appointment of the managing director or
whole-time director of a company, the Central Government can
reduce the period of appuintment when the approval is gi\ en.
(6) If the ~ppointment of a person is not approved, the person
so appointed shall vacate the office on the date when the decision
of the Central Government is communicated to the company. If a
person omits or fails to do so he shall be punishable with a fine
up to Rs. 500 per day.-Sec. 269 as amended in the Act of 1974.
Powers and Duties of a Managing Director
The powers and duties of a managing director are specified
in (i) the agreement with the company by which he is appointed
or (ji) in the memorandum or articles of the company or
(iii) in' a resolution passed by the company in general meeting
or (iv) a resolution by its Board of directors. Thus managing
directors of different companies may have different powers ar.d
duties. Strangely enough, Model Articles in Table A do not
provide any specific powers to Managing Director only. Articles
of some companies do provide the powers in Article itself. Again,
the Company Act does not provide any specific powers to M.D.
A managing director exercises his powers subject to the
sllperint~ndence, control and direction of the Board of directors.

Disqualification of Managing Director

As Managing Director or Whole-time Director is' a Director
first, he will be appointed only when he is qualified to become
a Director. If he is disqualified as director he is automatically
disqualified as Managing Director. So no company can employ,
680 COMPANY LAW

or continue the employment, of any person as its managing' or

whole-time Director who--
(a) is an undischarged insolvent, or has at any time been
adjudged an insolvent;
(b) suspends, or has at 1tny time suspended, payment to his
creditors, or makes, or has at any time made, composition
with them; or
(c) is, or has at any time been, convicted by a Court of an
offence involving moral turpitude.-Sec.297.
(d) A managing director is also a director. Therefore all the
disqualifications applicable to a director also apply to a
managing director. Further anyone who is below 25 years
or above 70 years of age is usually disqualified for
Managing Director.
Number of Managing Directorships
No person can ordinarily be managing director of more than
one public company or private company which is a subsidiary of
a public company. He can be managing director of two such
companies if the second appointment is approved by a resolution
of the Board of directors with the consent of all the directors
present in a meeting of which specific notice was given to all the
directors in India. No person can be managing director of more
than two companies. But the Central Government may, by a special
order, allow'a person to be managing director of more than two
such companies where it is satisfied that the companies should,
for their proper working, function as a single unit and have a
common managing director. A person may be managing director
of more than two companies where the companies are private
companies not subsidiaries of public companies.-Sec. 316.
Term of Office
No person can be appointed managing director for a term
exceeding five years at a time. There is, however, no bar to the
reappointment of a person after the expiry of his term of
service.-Sec. 317. This section does not apply to a private
company, unless it is a subsidiary of a public company.

LOANS TO A DIRECTOR, HIS RELATIVES ETC.

Without obtaining the previous approval of the Central
Government, no company can, directly or indirectly, make any
loan to, or give any guarantee or provide any security for,
 DIRECTORS 681

(a) any director of the lending company or of a company which

is its holding company or any partner or relative of any
such director;
(b) any firm, in which any such director or relative is a partner,
(c) any private company of which any such director is a
director or member;
(d) any body corporate at a general meeting of which not less
than twenty-five per cent of total voting power may be
exercised or controlled by any such director, or by two
or more such directors together, or
(e) any body corporate the Board of Directors, or Manager
whereof is accustomed to act in accordance with the
directions or instructions of the Board or of any Director
or Directors of the lending Company.-Sec. 295( I).
Sec. 295(2) provides that the above rules do not apply. to
any loan made, guarantee given or security provided-
(a) by a private Company unless it is a subsidiary of a public
Company:
(b) by a bonking Company; or
(c) by a holding Company to its subsidiary.
The restrictions imposed by Section 295 apply to a transaction
represented by a book debt which was from its inception in the
nature of a loan or an advance.-Sec.296.
Every person, including the director to whom the loan is
given, who knowingly contravenes the rules mentioned above,
may be punishable by simple imprisonment up to six months and
fine up to Rs. 5000. All persons who are knowingly parties to
the contravention, are liable to make good the amount which the
company paid on account of the loan, guarantee Or security.

CONTRACTS IN WHICH A DIRECTOR IS

INTERESTED
A director or his relative or a firm in which he is partner
or a private Company in which he is member or director, shall
not enter into contracts with the Company for the sale, purchase
or supply of goods and services or for underwriting the
subscription of its shares or debentures, except with the consent
of the Board of directors. -Sec. 297( I).
682 COMPANY LAW

The above rule does not apply to the following cases :

(a) contracts for the purchase and sale of goods and materials
for cash at prevailing market prices;
(b) contracts for the sale, purchase or supply of goods,
materials and services in which either of the parties
regularly trades or does business provided the value of the
goods etc. does not exceed Rs. 5000 in any year: and
(c) any transaction of a banking or insurance company in the
ordinary course of business.-Sec. 297(2).
[n circumstances of urgent necessity a contract may be
entered into without the prior consent of the Board, but such
consent must be obtained within 3 months of the date on which
the contract was entered into.-Sec.297(3).
The consent of the Board of directors is to be given by a
resolution passed in a meeting.-Sec. 297(4).
[f consent is not given, anything done in pursuance of the
contract shall be voidable at the option of the Board of
dircctors.-Scc.297(5).
[n case of a company having a paid-up share capital of not
less than Rs. I crore, no such contract shall be entered into except
with the previous approval of the Central Government.-Sec.
297. Amendment of 1974.
Every director who is in any way concerned or interested
in a contract by or on behalf of a Company shall disclose the
nature of his interest at a meeting of the Board of directors.-
Sec. 299.
No director of a Company shall, as a director, take any part
in the discussion of, or vote on, any contract or arrangement
entered into, or to be entered into, by or on behalf of the
company, if he is in any way, whether directly or indirectly,
concerned or interested in the contract or arrangement: nor shall
his presence count for the purpose of forming a quorum at the
lime of any such discussion or vote: and if he does vote his
vote shall be void.-Sec. 30D( I).
The bar imposed upon participation in the Board's discussion
does not apply in the case of a private Company which is not
a subsidiary or a holding Company of a public Company, and
certain other cases.-Sec.302(2).
 DIRECTORS 683

Every Company must maintain one or more registers in which

shall be entered particulars of all cOl1tracts entered into by the
Company, in which any of the directors are interested (except
contracts not exceeding Rs. 1000 in value and the ord,nary
transactions of banking and insurance companies)-Sec. 301.
When a director has an interest in a contract by which a
Manager or Managing Director is appointed, the Company must
send to every member of the Company an abstract of the contract.
together with a statement clearly specifying the nature of the
director's interest.-Sec. 302.
Case Law:
Interested Director·-Ji 'ho is : The interest or concern spoken of by
Sections 29c)( 1) and 300( 1) cannot be a merely sentimental interest
or ideological concern. Therefore, a relationship of friendliness ''''ith
the Directors who are interested in contract Of arrangement or even
the mere fact of a lawyer~clicnt relationship with such directors will
not disqualify a person from acting as a Director 011 the ground
of his being an "interested" Director. ,".'cecile Industries (/ndia) Ltd.
and Others, v. Xcedle Induslries Sell ey (India) l/oldilJgs Ltd. alld
others J

REGISTER OF DIRECTORS ETC.

Every Company shall keep at its registered office, registers
containing particulars about its Directors. Manager and
Secretary.-Sec. 303.
Copies of the particulars entered in the aforesaid registers
shall be sent to the Registrar, who shall keep similar registers.
All the registers can be inspected by. any person.
The Company must also maintain a register showing the
number of shares and debentures (of the Company, its subsidiaries
and its holding Company) held by every director and managcr.-
Sec. 307. Such persons must also disclose to the Company their
shareholdings in the Company.-Sec. 308.

REMUNERATION OF DIRECTORS
The remuneration payable to the directors must be determined
according to the provisions of Sections 198 and 309 either by
the Articles or by the resolution of a company.

, AIR (t981) Supreme Court I ~98

684 COMPANY LAW

Rules regarding director's remuneration are summed up

below.
I. The remuneration payable to the directors of a Company
shall be determined either by the articles, or by a resolution
passed in a general meeting of the members. The articles may
require the resolution to be a special resolution.-Sec. 309( I}.
2. If a director gives professional service to the company,
he may be paid for it, provided that, in the opinion of the Central
Government, he has requisite qualifications for the profession.
J. The remuneration of directors is part of the overall
maQagerial remuneration which, according to Section 198, cannot
exceed II % of the net profits. When profit is inadequate or
company is in loss a managerial person is entitled to a minimum
remuneration. The ceiling an minimum remuneration has been
prescribed in Part II of Schedule XIII. The minimum remuneration
is in terms of 'effective capital' of the company. Minimum
remuneration will be Rs. 40,000 up to effective capital Rs. I
crore, Rs. 57,000 between Rs. 1 and Rs. 5 crores effective capital,
Rs. 72,000 between 5 to IS crores and maximum remuneration
will be Rs.87,000 when effective capital is more than Rs. IS
crores.
4. A director may receive remuneration either by way of a
monthly payment, or by way of a fee for each meeting of the
Board, or a Committee thereof attended by him, or partly by the
one way and partly by the other.-Sec. 309(2}.
5. A director, who is either in the whole-time employment
of the company or a Managing Director, may be paid remuneration
either by way of a monthly payment or at a specified percentage
of the net profits of the company or partly by one way and partly
by the other. But, except with the approval of the Central
Government, such remuneration shall not exceed 5% of the net
profits for one such director, and if there is more 'than one such
director. 10% for all of them together.-Sec. 309(3}.
6. Directors (who are not in the whole-time employment of
the company and not a Managing Director) may be allowed a
monthly, quarterly or annual sum with the approval of the Central
Government, or a commission on net profits (if sanctioned by
a special resolution). Such commission shall not exceed for all
the directors together (i) I % of the net profits of the company,
if the company has a managing or whole-time director, or a
 DIRECTORS 685

manager; and (ii) 3% of the net profits of ~he company. in any

other case. Commission, in excess of these rates, may be allowed
with the approval of the Central Government if so resolved in
a general meeting of the company.-Sec. 309(4).
7. The net profits are to be calculated in the manner laid
down in Section 198( I ).-Sec. 309(5).
8. Remuneration drawn in excess of what is allowable. must
be refunded to the company and, till so refunded must be held
in trust for the company.-Sec.309(5A). The company cannot
waive recovery of such sums.-Sec. 309(5B).
9. A whole-time director or a Managing Director who
receives a commission from a Company is not entitled to receive
any commission or remuneration from any subsidiary of the
Company.-Sec. 309(6).
10. The rules stated above do not apply to private Companies
unless they are subsidiary of public Campanies.-Sec. 309(9).
II. Any provision relating to the remuneration of directors
or managing directors or an amendment thereof, whereby such
remuneration is increased, will not be valid unless sanctioned
by the Central Government. But the directors fee, for attending'
a. meeting of the Board or a Committee can be increased up to
Rs. 250 without Government sanction. When paid up capital of
the Company is not more than Rs. 50 lakhs Rs. 500 between
Rs. 50 lakhs to Rs. 5 crores paid up capital Rs. 750 between Rs. 5
crores and Rs. 10 crores and Rs. 1,000 in case of more than
Rs. 15 crares paid up capital.
12. Legal decisions :
(a) The remuneration payable to directors is a debt for which a director
may sue the Company_ OrIon v. Clel"eland elc. Co. I Such
remuneration may be paid out of capital if there are no profits.
(b) Directors are not entitled to any remuneration as of right. The
become entitled to remuneration when the articles so provide or
when a resolution is passed by the members granting them
remuneration. In re George J\-'ewman & Co 2 Stroud v. Royal
Aquarium_ etc, Society J
(c) Rand H were appointed managing directors of the company for
the first time after the coming into force of the Act. The Law Board,
while granting approval, inserted the condition that the total

1 ( 1865) 3 H & C 868 I (1895) I Ch. 674

'(1903) 87 L.T 243
 686 COMPANY LAW

remuneration of each managing director by way of commission and

salary shall not exceed Rs. 12,000 per annum. The said remuneration
was in addition to the benefit of certain perquisites which would
be available to the managing directors.
Held, in view of the provisions of the Sections 269 and 637 A, the
Company Law Board was well within its powers in imposing the
condition. Company Law Board v. The Upper Doab Sugar !dills
Ltd. etc I

MEETINGS OF THE BOARD OF DIRECTORS

The Board of directors is the executive authority of the
Company. Generally, the directors exercise their powers through
resolutions passed in meetings of the Board. The Companies Act
contains the following rules regarding Board meeting :
I. In the case of every Company, a meeting of its Board
of directors shall be held at least once in every three months
and at least four such meetings shall be held every year. The
Central Government may. by notification in the Official Gazette,
exempt any class of companies from this rule either wholly or
subject to modifications and conditions.-Sec. 285.
2. Notice of every meeting of the Board of directors shall be
given in writing to every director for the time being in India, and
at his usual address in India to every other dircctor.-Scc. 286.
3. The quorum for a meeting of the Board of directors shall
be one-third of its total strength (any fraction contained in that
one-third being rounded off as one) or two directors. whichever
is higher.
But "hen some directors are unable to participate in the
.discussions of the Board (because some contract or arrangement
in which they are interested is being discussed) and the number
of such directors exceeds or is equal to two-thirds of the total
strength, the number of the remaining directors, that is to say,
the meeting being not less than two, shall be the quorum during
s\lch time.-Sec. 287.
Case La\\' :
A quorum of two directo-rs meant a quorum of two directur'~ "Iw
were competent to trahsact and vote on the business befoTe (he:
Board . .\'eedle. Industries (India) Ltd.· and others. v. Seed/I!
Indus fries Sl!lI'l!y (/udio) Holdings Lid. anci ullrer. '2

1 AIR {19771 Supreme Court 831 , AIR (t 981) Supreme COlin 1293

.
I
 DIRECTORS 687

4. If a meeting of the Board could not be held for want

of quorum, then unless the articles otherwise prove, the meeting
shall automatically stand adjourned till the same day, in the next
week, at the same time and place, or if that day is a public
holiday, till the next succeeding day which is not a public holiday.
at the same time and place.-Sec. 288.
A meeting. which could not be held for want of quorum, will
count as a meeting for the purposes of ~~~lion 285. (Sec. 1, above.)
5. A resolution shall be deemed <0 have been passed by the
Board (or by a Committee thereof) by circulatioll, if the
resolution has been circulated in draft, together with the necessary
papers, if any, to all the directors, or to all the members of the
Committee then in India (not being less in number than the
quorum fixed) and to all other directors Or members, at their
usual address in India and has been approved by such of the
directors as are then in India or by a majority of SllCh of them,
are entitled to vote on the resolution.-Sec. 289.

LEGAL POSITION OF DIRECTORS

There are different views about the legal position of directors.
They have been described sometimes as trustees of the company
and sometimes as its agents. Neither view is wholly correct but
both contain elements of truth.
Trustees
A director is not a trustee in the correct legal sense of the
term. A trustee is a person who is the owner of property and
deals with it as principal. A director is not the owner of the
company nor does he enter into contracts with third partie,s as
owner of the company's property. 111crefore a director is nol a
trustee. But the direclor's posilion is similar 10 Ihal of a trustee
because the directors are bound to exerc ise their powers in the
interest of the company and are liable for misuse of powers if
any. A director may be ca\led trustee in the sense that the courts
expect from directors the same degree of integrity and standard
of conduct as is expected from a trllstee.
Fiduciary Position
It is generally agreed that the directors occupy a fidl/ciary
po.,ilion in relation to the company. R<! Lund., Allotment Cu. I They

1(1894) 1 Ch. 616

688 COMPANY LAW

cannot make secret profits and must make full disclosure of all
material facts concerning their interests in connection with the
company. There is, however, no fiduciary relationship between
a director and an individual shareholder and he is not a trustee
for any particular shareholder. Perceival v. Wright.!
Agents
If is more accurate to describe directors as agents. The
directors are agents 'Jf the company because the company acts
through the directors. Contracts with third parties are entered into
by the directors, not as principals, but as agents of the company.
But it is not strictly speaking true to say that the directors are
nothing more than agents of the company. By the articles and
under the Companies Act the directors have independent powers
in certain matters. An agent is bound to take instructions from
his principal and to abide by his wishes in the business of the
agency. But the directors are not bound to consult the shareholders
in all matters.
"Direct<lrs are, in the eye of the law, agents of the company
for which they act, and the general principles of the law of
principal and agent regulate in most respects the relationship of
the company and its directors."-Palmer's Company Law. Quoted
and approved in R. K. Dalmia v. Delhi Adm2 and in Chavalier
etc. v. The Dharmodayam C 0 3
In a case under the Penal Code, Sec. 409 (Criminal Breach
of Trust), the Supreme Court observed as follows : A Director
is not only an agent but is in the position of trustee. A Director,
being a trustee of the assets which has come into his hand, has
dominion and control over the same. Shivanarayan v. State of
Maharashtra. j

Officers
The Section 3(30) of the Companies Act provides that a
director is an officer of the C"mpany. Section 3(31) provides
that an officer, 'who is in default' may be punished if he is guilty
of default, non-compliance, failure or refusal of the rules
regarding the Companies Act (see p. 705).

1 (1902) 2 Ch. 421 3 (1963) S.C.R. 253 (Supreme Court)

4 (1963) I S.C.R 85 , AIR( 1980) Supreme Court 439
 DIRECTORS 689

E~ployees or Servants
A director may enter into a service contract with the
Company. For example, a director may be the legal advisor of
a company.
A Director can become a servant of the company under a
special contract of service. K. R. Kothandaraman v. Commissioner
of Income-Tax. I
Conclusion
In the case, Re Forest of Dean Coal Mining Co. 2 the position
of the directors was described as follows: "Directors are
described as trustees, agents or managing partners, not as
exhausting their powers and responsibil ities but as indicating
useful points of view. It does not matter much what you call
them, so long as you understand what their true posilion is, which
is that they are commercial men, man'aging a trading concern
for the benefit of themselves and all other shareholders in it."

POWERS OF DIRECTORS
Directors derive their power and authority from two sources
(i) the Articles of Associatiofl of the Company and (ii) the
Companies Act.
The articles of association generally contain a list of the
powers which may be exercised by directors and the limitations
on those powers if any.. The articles, also contain a list of those
matters which are to be decided by the members in a general
meeting. Section 291 of the Companies Act lays down that
subject to the provisions of the articles the Board of directors
of a company shall be entitled to exercise all such powers and
do all such acts and things as the company is authorised to
exercise and do.
All acts and things done by the Board of directors, within
the powers given to it by the articles, are valid and binding on
the company. If the Board does something which is beyond the
powers of the Board but within the powers of the company as
laid down in the Memo, the members can, if they wish, ratilY
the act of the Board. The thing done will thereupon be binding

I AIR (1967) Mad 143 2 (1878) 10 Ch. D. 450

... Commercial law - 44

690 COMPANY LAW

on the company. But the members, even if unanimous, cannot

ratifY and validate an act which is beyond the powers of the
company.
It is to be noted that a director individually has no authority
over the affairs of the company except as regards matters which
have been specifically delegated to him by the Board. Such
delegation is permissible within certain limits. Apart from such
delegated authority exercisable by individual directors, the
authority and powers of directors are to be exercised collectively
through resolutions of the Board of directors.
"The directors and shareholders in general meeting are
primary organs of the company between whom the company's
powers are divided.. The general meeting retains ultimate control,
but only through its powers to amend the Articles, to take away
powers from the directors and to remove the directors and to
substitute others to the taste of the shareholders." Murarka P
and V. Works Ltd. v. Mohan Lal. I
Section 292 of the Companies Act provides that the Board
of directors shall exercise the following powers on behalf of the
company and it shall do so only by resolutions passed at meeting
of the Board: (a) make calls on shareholders; (b) issue
debentures: (e) borrow moneys otherwise than on debentures;
(d) invest the funds of the company; and (e) make loans.
[Clauses (e) and (e) do not apply to banking companies.]
Some of these powers may be delegated to a committee of
directors, or to the managing director, manaaer etc.
Restrictions on the powers of tbe Board
Section 293( I) of the Act imposes the following restrictions
on the powers of the Board.
The Board of directors of a public company or of a private
company which is subsidiary of a public company shall not,
except with the consent of the company in general meeting,-
(a) sell. lease or otherwise dispose of the whole, or
substantially the whole. of the undertaking of the company. or
any of its undertaking where the company owns more than one
undertaking;
(b) remit or give time for the re-payment of any debt due
by a director (except in the case of a loan by a banking
company) :
I AIR (l961) Cal 251
 DIRECTORS 691

(c) invest otherwise than in trust securities the sale proceeds

resulting from the acquisition, after the commencement of this
Act without the consent of the company, of any such undertaking
as is referred to in clause (a), or of any premises or prope.1ies
used for any such undertaking;
(d) borrow moneys, where the moneys to be borrowed
together with the moneys already borrowed by the Company,
(apart from temporary loans obtained from the company's bankers
in the ordinary course of business) will exceed aggregate of the
paid-up capital of the company and its free reserves, that is to
say, reserves !lot set apart for any specific purpose; or,
(e) contribute, after the commencement of this Act, to
charitable and other funds not directly relating to the business
of the company or the welfare of its employees any amounts
the aggregate of which will, in any financial year, cxceed menty
five thousand rupees or five per cent of its average net profits
during the three financial years immediately proceeding,
whichever is greater.
Under Sec. 293A, the Board of directors of a company cannot
contribute to any political party or for any political purpose (See
below).
Sole seIling agents
Section 294 provides that after the commencement of the
Act of 1956, the Board of directors of a company shall not
appoint a sole selling agent for any area for a term exceed ing
five years at a time. There may be re-appointment or the
extension of the term of office. The above rules are subject to
the condition that the appointment shall cease to be valid if it
is not approved by the company in the first general meeting held
after the date on which the appointment is made.
An appointment of sole selling agent would be void ah initio,
unless the ag~eement contains the above condition. Arantee
Manufacturing Corpn v. Bright Bolts Pvt. Ltd'
The Central Government can prohibit the appointment of sole
selling agent in certain cases e.g, (I) where the agent to be
appointed has a substantial interest of the company (2) where
the company has a paid-up share capital of Rs. 50 lakhs or more,
etc.-Sec. 294AA. Companies (Amendment) Act, 1974.
I AIR (1967) Born. 440
692 COMPANY LAW

Validity of Acts of Directors

Acts done by a person as director are valid, notwithstanding
that it may afterwards be discovered that his appointment was
invalid by reason of any defect or disqualification or that his
appointment as director had terminated by virtue of any provision
contained in the Act or in the artic1es.-'-Sec. 290. It is, however,
provided that nothing in Section 290 shall be deemed to give
validity to acts done by a director after his appointment has been
shown to the company to be invalid or to have terminated. .

CONTRIBUTION FOR POLITICAL PURPOSES

293A. (I) Notwithstanding anything contained in any other
provision of this Act, neither a company in general meeting nor
its Board of directors shall, after the commencement of the
Companies (Amendment) Act, 1969, contribute any amount or
amounts~-

(a) to any political party, or

(b) for any political purpose to any individual or body.
(2) If a company contravenes the provisions of sub-section
(I) thcn-
(i) the company shall be punishable with a fine which may
extend to five thousand rupees; and
(ii) every officer of the company who is in default shall be
punishable with imprisonment for a tenn which may extend to
three years and shall also be liable to fine.
293B. The Board of directors of any company or any person
or authority exercising the powers of the Board of directors of
a company, or of the company in general meeting, may, contribute
such amount as it thinks fit to the National Defence Fund or
any other Fund approved by the Central Government for the
purpose of national defence.
Every company shall disclose in its profits and loss accounts
the total amount or amounts contributed by it to the Fund.
Donations
Companies can make donations to any individual or
organisation for charitable purposes and to other funds up to 5%
of its average profits during the three financial years immediately
preceding or Rs. 25,000 whichever is· greater. See Section.
293( I )(e), p.689.
 DIRECTORS 693

Every donor company will be required to disclose in its

annual statement of accounts the amount contributed by it to any
individual or organisation. It will also have to mention the name
of the recipient.
Any company failing to furnish the information and every
officer of the company in default will be punishable with a fine
of up to Rs. 5,000.

RIGHTS OF DIRECTORS
1. Participation
A director validly appointed to the Board, and not suffering
from any disqualification which would prevent him from acting
as such, is entitled to attend meetings of the Board and participate
in the direction of the company's affairs. If this right is interfered
with by the other directors or by the company's officers, it can
be enforced by a mandamus from High Court.
2. Remuneration
A director is entilled to receive the remuneration fixed by
the articles or otherwise, subject to the provisions of the Act.
3. Compensation
(Sections 318-321.] A whole-time director and a managing
Director may be given compensation by the company in case of
premature tennination of service .
. But no compensation can be given in the following cases-
where the termination is due to reconstruction or amalgamation;
where the director concerned has to vacate office in accordance
with the provisions of the Act; where the company is being
wound up; where the director is guilty of fraud or breach of
trust; and, where the director has instigated or has directly, or
indirpctly taken part in bringing about the tennination of his
office.
The amount of compensation paid must not exceed the
remuneration which he would have earned if he had been in office
for the unexpired residue of his term of office or three years
whichever is another.
694 COMPANY LAW

DUTIES OF DIRECTORS
The duties of directors of a company have been elaborately
explained by Rom~r L. J. in Re City Equitable Fire Insurance
Co. I The important duties are quoted from this case and summed
below:
1. Distribution of work
'"The manner in which the work of a company is to be
distributed between the board of directors and the staff is a
business matter to be decided on business lines."
2. Good faith
Every director must act honestly and in the interest of the
company.
3. Reasonable care
A director, "must exercise such degree of skill and diligence
as would amount to the reasonable care which an ordinary man
might be expected to take in the circumstances on his own
behalf."
4. Degree of skill
A director, "need not exhibit in the performance of his duties
a greater degree of skill than what can be reasonably expected
from a person of his knowledge and experience; in other words,
he is not liable for mere errors of judgment."
5. To attend meetings
A director, "is not bound to give continuous attention to the
affairs of his company; his duties are of an intermittent nature
to be performed at periodical board meetings and the meetings
of any committee to which he is appointed, and though not bound
to attend all such meetings, he ought to attend them when
reasonably able to do so."
6. The director's duty of disclosure
The Companies Act of 1956 makes it obligatc!ry upon
directors to disclose certain facts to the company :
(i) If a director is interested in any contract or arrangement
proposed to be entered into by the company, he must disclose
the interest to the Board of directors.-Sec.299.

I ()Q25) ) 0. 407
, DIRECTORS 695

(ii) He must disclose, for the purpose of entry in the register

of directors his name, address, occupation, nationality and certain
other particulars.-Sections 303 and 305.
(iii) He must disclose the number of shares of the company
which he holds.-Sec. 308.
7. Other duties
In addition to the duties mentioned above every director has
the following duties: (i) A director has to send to the registrar
stating his consent to the post of director.-Sec. 266. (ii) Every
director must obtain the qualification share of directorship
according to the article of the company.-Sec. 270. (iii) Every
director must pay his share monies according to tile 'Call' of
the Board of directors. (iv) A director must not participate in
the meeting of the Board of directors, when they decide his
contract with the company.
Conclusion
If a director fails to preform his duties, as explained above,
he is guilty of negligence. If on account of such negligence the
company suffers any damages, the director must compensate the
company.
DISABILITIES OF DIRECTORS
The Companies Act imposes certain disabilities on directors,
with a view to protect the interests of the company and of the
shareholders. A list of the disabilities is given below.
1. No Assignment
A director cannot assign his office.-Sec. 312.
2. No indemnity
Any provision (contained in the articles or in any other
document) for exempting any officer of the company or its
auditor from any liability for negligence, misfeasance, default,
breach of duty or breach of trust in relation to the company,
or indemnifying him against such liability is void.-Sec. 201.
The company may, however, indemnify any such officer against
any liability incurred for defending a civil or criminal proceedings
in w~ich judgment is given in his favour.
696 COMPANY LAW

3. Loans to director
There are restrictions on the giving of loans to directors.
4. Contract with directors
There are restrictions upon contract with directors.
5. Number of directorships
There are certain restrictions "pon the number of
directorships. •
6. Office or place of profit (Sec. 314)
. An office or place of profit means any post that carries with
it .any remuneration or any perquisite in the form of rent-free
quarters or otherwise.
Subject to the exceptions noted below, an office or place
of profit under a company or its subsidiary cannot be held by
a director of the company. Also, a director's partner or relative-
(i) a firm of which the director or his relative is a partner,
(ii) a private company of which the director is a director or
member, and (iii) all directors and managers of such private
companies---.cannot hold an office or place of profit carrying a
total monthly remuneration of Rs. 500 or more.
Exceptions :
(a) The office or place of profit can be held if the consent
of the company is given by a special resolution passed in the
general meeting first held after the appointment. In case the
relative of a director is so appointed without the knowledge of
the director, further time is given, viz., 3 months or 1st meeting
whichever is later.
(b) The office or place of profit can be held in the subsidiary
company, if the remuneration received is handed over to the
company or its holding company.
(c) The following posts are not considered to be offices or
places of profit for the purposes of this rule--the post of the
managing director, manager, legal or technical adviser, and banker
or trustee for debenture holders of the company. • "
(d) The relative of a director may hold an office or place
of profit if he was appointed before the director bec;ame a
director.
 DIRECTORS 697

Any person violating the above rules shall lose his post (as
director etc.) with effect from the date next after date on which
his appointment could have been sanctioned by the company in
a general meetjng. [See under para (a).] He shall also be liable
to refund to the company the remuneration received and the
money equivalent of the advantages enjoyed by him in respect
of the office or place of profit.
The Companies (Amendment) Act 1974 provides that (a) no
partner or relative of a director or manager, (b) no firm in which
such director or manager, or relative of either, is a partner, •
(c) no private company of which such a director or manager,
or relative of either, is a director or member shall hold any office
or place of profit in the company which carries a total monthly
remuneration of not less than Rs. 3,000, except with the prior
consent of the company by special resolution and the approval
of the Central Government.~Sec. 314(1 B).
If a contravention of the rule occurs the person conc"erned
must refund the remuneration and monetary equivalent of Ihe
perquisites or advantage. The company shall not waive Ihe
recovery of such monies.
The above rules are not applicable to a director appoinled
by Central Government under Section 40B.-Sec. 314(2B), (2C)
and (2D), Companies (Amendment) Act, 1974.

LIABILITIES OF DIRECTORS •
The liabilities of directors may be analysed with reference
to liability of directors to third parties, liability to the company,
liability for breach of statutory duties and liability for acts of
his co-directors. Directors' liability may be civil liability, criminal
liability and unlimited liability.
I. Civil Liability
The directors may, under certain circumstances, be liable to
pay compensation to the company and to outsiders. Some of these
circumstances are mentioned below.
\. The directors are liable for untrue statements in the
prospectus.
2. For contracts entered into on behalf of the company, the
directors are not personally liable. But if the authority possessed
 698 COMPANY LAW

by the directors is exceeded, they may be liable ,0 pay damage

to the other party for breach of warranty of authority.
3. The directors are liable to the company for ullra vires
acts. For example, if dividend is paid out of capital, the directors
are bound to refund the money to th~ company out of their own
pockets. (See p. 580)
4. If a director performs his duties negligently and the
company thereby suffers damage, he must pay compensation to
the com pan)'.
5. A director is liable to account for all secret profits made
by him in connection with the affair; of the company .
• 6. A director is liable for any act amounting to a breach
of trust relating to the properties and funds of the company.
7. Directors are liable for misfeasance, i.c., any breach of
duty which causes loss to the company.
Misfeasance and breach of trust include breach of duty to
the Company resulting in misapplication or loss of company's
assets. Proof of fraud is not essential. The offender is also
criminally liable. The offender is liable to repay or restore the
company's loss. P K. NedUllgadi v. Malayalee Balik LId. I See
Shi\'(lIrarayan v. Siale of Afaharashtra, p. 688.
II. Criminal Liability
For certain breaches of duty the Companies Act imposes a
criminal liability upon directors. Various sections of the Act
provide for the imposition of fines for non-performance of the
prescribed duties. There is provision for imprisonment in certain
cases. Examples-untrue statements in prospectus; failing to
keep certain register; falsification of books and reports etc.
Section 633 of the Act provides that in any proceedings
against any director or officer of the company for negligence,
breach of duty, misfeasance etc. the court can excuse him from
any liability if it is of opinion that sllch director or officer has
acted honestly and reasonably and that having regard to all the
circumstances of the case, he ought fairly to be excused. But
in criminal proceedings, the court has no power to grant relief
from any civil liability.
Du(ing Misfeasance proceedings a director died. The
proceedings can be continued· against his legal representatives.

I AIR (1971) Supreme Court 829

 DIRECTORS 699

But his liability would be limited to the value of the deceased

estate in his hands. Offical Liquidator v. Parlhasarathi Sinha and
others.'
Offences against the Act are cognizable only upon a
complaint in writing by the Registrar, a shareholder, or a person
authorised by the Central Government in that behalf.-Sec. 621.
But if a shareholder makes a frivolous or vexatious complaint
and '.'ny of the accused is acquitted or discharged, the magistrate
may di,ect the complainant to pay compensation. The magistrate
may further order that if default is made in the. payment of
compensation, the complainant shall suffer simple imprisonment
for a term not exceeding two months.-Sec. 625.

III. Unlimited Liability of Directors

The memorandum of association of a company may provide
that the liability of the directors or any director or manager, may
be unlimited.-Sec. 322.
A limited company may. if so authorised by its articles, alter
its memorandum of association by special resolution so as to
render unlimited the liabilities of its directors or any director
or manager.-Sec. 323.
Obligations of Directors etc. on winding up--See in ch. II,
"Contributory". Sec. 427.
EXERCISES
I. What are the modes of appointment of directors of a company.
(Page 667)
2. State the effects of invalid appointment of directors.(Page 672)
3. What are the qualifications for directorship of a company limited
by shares? (Page 672)
4. State how the Managing Director of a Public Limited Company
is appointed and what his duties are. (Page 677)
5. (a) Can a company appoint its directors by proportional represen-
tation? (Page 667)
(b) What are the disqualifications of a managing director?
(Page 679)
(c) Can a director be appointed even if he is an undergraduate?
(Page 672)
(d) What are the rules for the removal of a direclOr?
(Pages 675-676)
lAIR (1983) Supreme C,";r1 188
700 COMPANY LAW

6. Enumerate the cases in which the office of a director may fall

vacant. (Page 674)
7. Are the directors entitled to a remuneration? Can such remuneration
be waived? (Page 683)
8. "Directors are trustees for their company" Discuss. (l'age 687)
9. What is the exact legal position of the Directors of a Public
Company? (Page 687)
10. "Directors are not only agents, but are also in some sense trustee
of the company." Discuss. (Page 687)
II. What are the rules of retirement of directors? (Page 672)
12. State the powers of the Board of directors of a company, and
restriction on them. (Page 689)
13. State the matters that may by transacted only at Board meetings.
(Pages 683-684)
14. State the true position of shareholders and directors and the
relationship between them. (Page 687-688)
15. State what are the disqualifications of directors. (Page 671)
16. Discuss the powers of director of a company under the Companies
Act. (Page 689)
17. State the duties of directors. (Page 694)
18. Can a direClOr resign the post of directorship? What is the law
about resignation of directors? (Page 673)
19. State the powers of directors which cannot be exercised without the
approval of members given in a general meeting. (Page 689)
20. What are the powers of directors of a company under the
Companies Act? (Page 689)
21. What are the disabilities of directors under the Companies Act?
(Page 695)
22 What are the liabilities of directors under the Companies Act.
(Page 697)
23. What are the rights of a director of a Company? (Page 693)
24. Write notes: (a) Alternate Directors; (b) Qualification Shares;
(c) Disqualifications of Directors: (d) Rotation; (e) Vocation;
if) Whole-time Director; (g) Board of Directors; (h) Office of
profit. (Pages 667-676, 686-687)
25. Problems :
(a) A director holds the bearer of a share warrant for share
qualification of his directorship. It is a valid share
qualification? (Pages 696-697)
(b) Mr. X is a director of a company. The Board of Directors
unanimously appoint him as manager on a monthly salary of
Rs. 2,000. The company refuses to pay his salary on the plea
that Mr. X being a director, cannot hold an office of profit.
Decide. (Pages 695-696)
 DIRECTORS 701

(c) A, being aware of his invalid appointment as a director, allots

shares to himself. Can he avoid the allotment subsequently on
the ground of irregularity? Give reasons for your answer.
(Page 666)
26. What are the duties of directors of a company? Discuss the
liabilities of directors. (Page 694)
27. Describe the legal position of the directors of a public limited
company. (Page 687)
28. Objective questions. Give short answers.
(i) State whether an insolvent can become a director of a
company. (Page 672)
29. (a) Explain clearly the true position of a director in relation to
the actual management of a company. (Page 687)
(b) Discuss the different ways a director of a company may be
appointed. (Pages 666-668)
(c) What are the qualifications and disqualifications for being
appointed as the director of a company? (Pages 670-671)
 COMPANY MANAGEMENT

MODES OF MANAGEMENT OF A COMPANY

The usual and normal practice is to entrust the management
of a company to the Board of Directors. The Companies Act
of 1956 formerly recognised and provided for four alternative
forms of management, viz., (i) by Managing Directors or Whole-
time Directors (ii) by Managing Agents (iii) by Secretaries and
Treasurers and (iv) by Managers.
But no company can have at the same time more than Olle
of the above categories of managerial personnel.-Sec. 197A.
The amended Act of 1969 abolished (ii) and (iii) of the
modes from 3rd April, I 970.-Sec. 324A.
Managing Agent
Section 2(25) defines a managing agent as an individual, firm
or body corporate, entitled to the management of the whole, or
substantially the whole, or the affairs of a company by virtue
of an agreement with the company. (Now abolished)

RELATIVE
Section 6 provides that a person shall be deemed to be a
relative of another if, and only if, (a) they are members of a
Hindu undivided family; 01 (b) they are husband and wife; or
(c) the one is related to the other in the manner indicated in'
Schedule IA.
Schedule lA, after the amendment of 1965, contains a list
of 22 items like father, mother, mother's mother, daughter's son,
etc. Previously there were 49 items.

THE SECRETARY
The Secretary' is an officer of the company having specified
duties. The administrative work in a company can be divided
into two parts; management of the business and secretarial work.
The latter includes maintenance of the books and registers
required by the Companies Act, issue of share certificates,

702
 COMPANY MANAGEMENT 703

certification of shares, the recording of transfer of shares etc.

The Secretary is in charge of this branch of administration. His
duties include, in addition to the items mentioned above e.g.,
attending meetings of the company, draftirig the minutes, issuing
notices of meetings, and sending returns to the Registrar, etc.
In some companies the Secretary is also in charge of the accounts.
Section 2(45), as amended in 1974, c.;;,les a Secretary as,
"any individual possessing the prescribed qual ifications appointed
to perform the duties which may be performed by a secretary under
this Act, and any other ministerial or administrative duties."
Section 2(45) of the amending act provides that "Secretary
means a Company secretary within the meaning of Clause C of
sub-Section (I) of Section 2 of the Company Secretaries Act,
1980." It includes any other individual possessing the prescribed
qualifications and appointed to perform the duties which lIlay
be performed by a secretary under this Act, 1988.
Section 2(30) provides that a Secretary is an 'officer'. As
such he occupies a fiduciary position in relation to the company.
A Secretary is a servant of the company and under the full
control of the Board of Directors. The Secretary has no authority
to represent the company, unless expressly authorised. Barnet
Hoars & Co. v. South London Tramways Co. I
The Companies (Amendment) Act, 1974, provides that a
Secretary must be an "individual". Formerly, under the Act of
1956, a Secretary may be an "individual, a firm or a body
corporate" .
Compulsory appoiDtmeDt
Every company having a paid-Up share capital of Rs. 25 lakhs
or more shall have a whole-time Secretary. Where the Board of
directors of any such company comprised only two directors,
neither of them shall be the Secretary of the company.-Sec.
383A(l), Companies (Amendment) Act, 19'4.
Section 383A of the amended Act 1988 provides that every
Company having such paid-up share capital as may be prescribed,
shall have a whole-time secretary and where the Board of
directors of any such Company comprises only two directors,
neither of them shall be the secretary of the Company. If a

'(1887) 18 Q.8.0. 815

704 COMPANY LAW

Company fails to comply with this provisions of sub-Section (1),

the Company and every officer of the Company who is in default
shall be punishable with fine.

MANAGER
Definition
Section 2(24) defires a Manager as an individual (not being
the managing agent) wh I, subject to the superintendence, control
and direction of the BO<Jrd of directors, has the management of
the whole, or substantially the whole, of the affairs of the
company. The term includes a director or any other person
occupying the position of a manager, by whatever name called
and whether under a contract of service or not. It should ·be noted
that M. D. or W. D. is a Director on Board, ·while a manager
mayor may not be a Director on Board. A Director may also
be appointed as Manager.
Provisions of the Act. regarding Managers
The Act of 1956 contains the following rules regarding
Managers:
I. No company can employ a firm, a body corporate or an
association as its manager.-Sec. 384.
2. No company can appoint or employ any person as its.
manager who--
(a) is an undischarged insolvent, or has at any time within the
preceding five years been adjudged an insolvent; or
(b) suspends payment or makes a composition with his
creditors, or has at any time within the proceeding five
years suspended payment or made a composition with his
cred itors; or •
(e) is, or has at any time within the preceding five years been
convicted by a court in India of an offence involving moral
turpitude.-Sec.385(1).
The Central Government may by notification in the official
Gazette remove the disqual ification incurred by any person from
the aforesaid causes either generally or in relation to any
company or companies specified in the notification.-Sec. 385(2).
3. Ordinarily a person can be manager of one company only.
He can be manager of two or more companies under the same
 COMPANY MANAGEMENT 705

conditions under which a person may be manabing director of

two or more companies.-Sec. 386. (See p. 679)
4. Subject to the overall limits laid down for managerial
remunerat.ion, a manager may be given remuneration either by
way of monthly payments or by way of a specified percentage
of net profits. Except with the approval of the Central Government
such remuneration shall not exceed in the aggregate 5% of the
net profits.-Sec. 387.
5. Any change in the regulations of the company or any
agreement by which the remuneration of a manager is increased,
requires the previous approval of the Central Government.-
Sections 310, 311, 388. .
6. A manager cannot be appointed for a term exceeding five
years at a time.-Sections 317, 388.
7. The office of manager cannot be assigned.-Sections 312,
388. .
8. Rules 3 to 7 above do not apply to a private company'
unless it is a subsidiary of a public company.-Sec. 388A.

OFFICER
"Officer" includes any director, manager or secretary or any
person in accordance with whose directions or instructions the
Board of directors or anyone or more of the directors is or are
accustomed to act. For Sections 477, :478, 539, 543,545, 621
625 and 633 an auditor is also taken as an officer. Managing
Agent, Secretaries and Treasurers were also regarded as officers,
but the posts of Managing Agent and Secretaries and Treasurers
were abolished and the question of their inclusion does not
arise.-Sec. 3(30).
The expression "Officer who is in default" means any officer
of the company who is knowingly gUilty of the default, non-
compliance, failure, refusal or contravention or who knowingly
and wilfully authorises or permits such default, non-compliance.
failure, refusal or contravention.-Sec. 3(31) and Sec. 5.
Section 5 of the Companies Act, 1988 has been antended
to revise the definition of 'officer in default'. The expression
'officer 'who is in default' means all the following officers of
'the Company, namely,
_ "(0) the managing director or managing directors,
(6) the whole-time director or whole-time directors •
...
Comml'rcial Law - 45
706 <;<:lMPANY LAW

(c) the manager,

(d) the secretary,
(e) any person charged by the Board with the responsibility
of complying with that 'provision, provided that the person so
charged has given his consent in this behalf to the Board."
(f) where any Company does not have any of the officers
specified in Clause (a) to (c), any director or directors who may
be specified.

CONTRACTS AND DEEDS OF A COMPANY

Contracts which require to be in writing, must be in writing
and must be signed by some person acting under the authority
of the Company, express or implied. Such contracts may be varied
and discharged in the same manner.-Sec. 46(1)(a).
Contracts which may be made orally by private persons, may
be made orally on behalf of Companies by any person acting
under the authority of the Company, express or implied. Such
contracts may be varied and discharged in the same manner.-
Sec. 46( I )(b).
A bill of exchange, hundi or promissory note shall be deemed
10 have been made, accepted, drawn or endorsed on behalf of
a company when so done in the name of, or on behalf or on
account of the company by any person acting under its authority,
express or implied.-Sec.47.
Deeds, on behalf of a Company must be executed by some
person authorised by the Company by a general or special power
of attorney. The common seal of the Company must be affixed.-
Sec. 48.
All investments made by the Company on its own behalf
shall be made and held in its own name, or, where so permitted.
in the name of d nominee. This rule does not apply to a company
whose business is buying 8,Qd selling of securities.-Sec. 49.
Where authentication of documents and proceedings by the
Company is required it may be done by any Director, the
Manager, the Secretary or, other authorised officer of the
company. It is not necessary to use the common seal.-Sec. 54 .
•
SERVICE OF DOCUMENTS
Documents may be served on a Company by sending it to
the registered offICe by registered post or under certificate of
 COMPANY MANAGEMENT 707

posting or by leaving it at the registered omce.-Sec. 5 I. The

same is the procedure for serving a document on the Registrar.-
Sec. 52.
Service of documents on a member may be done personally
or by sending it to him by post to the address supplied by him
to the company.-Sec. 53.

GENERAL PROVISIONS REGARDING REGISTERS

AND RETURNS
Place of keeping
The register and index of members and debenture holders,
and copies of all annual returns together with copies of the
certificates and documents required to be annexed thereto, shall
be kept at the registered office of the company. They may be
kept at any other place within the city, town or village' where
the registered office is situated, prO\ ided (i) the other place is
approved by a special resolution of the members and (ii) the
Registrar has been given in advance a copy of the special
resolution. The Central Government may make ru les for. the
preservation and disposal (by destruction or otllerwise) of such
registers, returns and documents.-Sec. 163( I).
Inspection and copies
The registers, indexes, return and certificates and documents
shall be open to inspection during business hours. The company
may impose reasonable restrictions but not less than two hours
each day must be allowed for such inspection. No inspection "ill
be allowed during the period the register of members and
debenture holders is closed under the previsions of the Act.
The registers etc. may be inspected bv a member or debenture
holder without any fee Others wiil have (0 pay a fee of
Re. I for each inspedlon.
Any pers0n lIlay take extracts from the registers etc., He may
also require a copy of any part on payment of 37 paise for every
100 words or part thereof. The company must send such copy
within ten days after it is required.
If inspection is refused or if a copy is ilOt sent when required,
the company and every officer in default may be fined up to
Rs. 50 for each day of default. The COllrt may direct immediate
inspection, or the taking of extracts and the despatch of copies.-
Sec. 163(2).
708 COMPANY LAW

Registen etc. to be evidence

The registers, annual returns etc. shall be prima facie
evidence of any matters directed or authorised to be inserted
therein by the Act.-Sec. 164.
MANAGERIAL REMUNERATION
The Act of 1956 contains certain rules regarding the total
remuneration payable to Directors, Managers etc. They are as
follows.-Sec. 198.
III the case of a public company or a private company which
is a subsidiary of a public company, the IOlal remuneration
payable by the Company to its Directors, and Manager if any,
shall not exceed II % of its net profits.
. The term 'remuneration' includes expenditure by the company
on rent-free accommodation, other amenities and life insurance
premia.
If, in any financial year, no profits or inadequate profits have
been made, remuneration has to be at par with Part II of Schedule
xm. Company can pay remuneration lower than the ceiling but
not more. It is based on effective capital of the company. Where
a monthly payment is made to managing or whole-time directors,
the Central Government, on the application of the Company, may
sanction a higher amount.
For determining maximum remuneration, net profits are' to
be calculated in the manner laid down in Sections 349-351 of
the Act except that the remuneration of the directors shall not
be deducted from the gross profits.
No Company shall after the commencement of the Act of
195.6 pay any officer, any remuneration calculated free of income
tax or super-tax.-Sec. 200.
There shall be no provision in the articles or in any
agreement relieving a person in the employment of a Company
from the duty of indem!1ifying the Company from damages for
negligence, breach of trust etc., except against any liability
incurred for defending himself in any suit or criminal proceedings,
provided judgment has been given in his favour.-Sec. 20 I.
The Government policy regarding remuneration
Notwithstanding Sections 198, 309 or 637 A, when approval
of the appointment of a person while fixing the remuneration
of the person the Central Government shall have regard to-
 COMPANY MANAGEMENT 709

(a) the financial position of the company.

(b) the remuneration or commission drawn by the individual
concerned in any other capacity, including his capacity
as a sole selling agent;
(c) the remuneration or commission drawn by him from any
other company;
(d) professional qualifications and experience of the individual
concerned;
(e) public policy relating to the removal of disparities in
income.-Sec. 637 AA, Companies (Amendment) Act, 1974.

MANAGEMENT BY UNDESIRABLE PERSONS

_ If an undischarged insolvent acts as director, or discharges
the functions of manager; or directly or indirectly takes part in
the promotion, formation or management of a Company, he may
be sentenced to imprisonment for 2 years or fined up to
Rs. 5,000.-Sec. 202. In this section the term 'company' includes
an unregistered company and a body corporate incorporated
outside India, which has an established place of business within
India.
The Court may prohibit persons found guilty of fraudulent
conduct, from participation in the management or formation of
a company.-Sec.203.

APPOINTMENT OF A BODY CORPORATE

Section 204 provides that a firm or a body corporate (See
p. 546) cannot be appointed to an office or place of profit under
a company for a term exceeding five years at a time. Exceptions-
The rule does not apply to the following cases: (i) appointment
of trustees for debenture holders; (ii) technicians and consultants;
(iii) appointments by a private company which is not a subsidiary
of a public company; and, (iv) reappointment for further terms
of five years.
The Central Government may approve an initial appointment
of ten years.

PAYMENT OF INTEREST OUT OF CAPITAL

A company can pay interest out of its capital, in the
following cases. (Sec. 208) :
710 COMPANY LAW

(I) Where any shares in a Company are issued for the

purpose of raising money to defray the cxpcnses of the
construction of any work or building or the provision of any
plant, which cannot be made profitable for a lengthy period;
(2) the payment of interest out of capital is authorised by
the articles, or by a special resolution; and,
(3) the prior sanction of the Central Government is obtaincd.
Before sanctioning the payment of interest out of capital,
the Ccntral Government may, at the expense of the Company,
appoint a person to enquire into and report to the Central
Government on the circumstances of the case.
The payment of interest shall be made only for such period
as may be determined by the Central Government. The pcriod
shall in no case extend beyond the close of the half year next
after the half year during which the work or building has been
actually completed or the plant provided.
Thc rate of interest must not exceed 4% or such rate as the
Central Government may fix by notification.

WHERE A COMPANY IS Ul'o'DISCLOSED PRINCIPAL

Section 416 of the Companies Act provides that if the
manager or other agcnt of a puhlic company (or of a private
company which is a subsidiary of a public company) enters into
a contract for or on behalf on the company, ill which cOlllrael
"
Ihe compall)' is all undisclosed principal. he shall, at the time
of entcring into the contract. makc a memorandum in writing
of ihc terms of the contract, and specity therein the person with
whom it is entcred into. The memorandum shall be delivered
forthwith to thc company and a copy sent to each of the directors.
The memorandum shall be filed in the office of the company
and laid before the Board of directors at its next meeting.
If default is made in complying with the above
requirements-
(a) the contract shall, at the option of the company, be
voidable as against the company; and
(b) the person who enters into the contract, or eve!)' officcr
of the company who is in default, as the case may be, shall be
punishable with fine which may extend to two hundred rupees.
 COMPANV MANAGEMENT 711

EMPLOYEE'S SECURITIES AND PROVIDENT FUNDS

Moneys and securities deposited with the Company by
employees in pursuance of their contract of service, shaH be kept
or deposited (within 15 days of deposit) (a) in a post office
savings account, or (b) in a special account to Jx: opene,! by the
company for the purpose in the State Bank of In'dia or in Schedule
Bank, or (e) where the company itself is' a Scheduled Bank, in
a special account to be opened either in itself or in the State
Bank of India or in any other Scheduled Bank. No part of such
moneys can be used by the Company for any purpose other than
the purposes agreed to in the contract of service.-Sec. 417.
Moneys contributed, received or accruing to an employee's
provident fund must, within 15 days from the date of contribution,
receipt or accrual, be either--deposited in the institutions mentioned
above (where employees' securities are deposited) or be invested
in trustee securities. Where there are trustees for a provident fund,
all such moneys must be paid to the trustees within 15 days from
the date of collection.-Sec. 418.
An employee is entitled, on request, to see the bank's receipt
for the money or securities referred to in Sections 417 and 418.-
Sec.419.
Any officer of the company a;ld any trustee of a provident
fund who contravenes or authorises or pemlits the contravention
of the aforesaid rules, is punishable with imprisonment up to 6
months or fine, which may extend to Rs. I,OOO.-Sec. 420.
Employees in factories and certain establishments are covered
by the Provident Funds Act (Act XIX 1952). It provides for the
institution of provident funds for employees in factories and other
establishments. Monies of the Provident F\lnd are to be deposited
in the Fund created for th,s purpose. '

DIVIDEND
The term Dividend means the part of profits which is paid
to the shareholders of a company.
Dividend may also be defined as receipt of a part of the
profits of a trading company by the members in proportion to
their respective shares. A trading company is 'formed for the
purpose of earning profits. It can therefore be assumed that the
profits will be distributed among the shareholders. The Act
712 COMPANY LAW

contains no proVISIOn enforcing distribution of profits and no

shareholder can claim tbe declaration of dividends unless the
articles make it compulsory for the directors to declare dividends.
How much of the profit is to be distributed as dividend, is a
matter of internal management and the court will not interfere
with the discretion of the directors and shareholders. Burland
v. Earle. I
Companies Act, Schedule I, Table A, contains certain
Regulations (85-94), regarding dividend.

RULES REGARDING DIVIDEND

I. The Board of directors of the company determines what
portion of the net profits earned by the company ·during its
financial year· is to be distributed to the shareholders.
2. The amount or rate of dividend determined by the Board
must be sanctioned by the members of the company in a general
meeting. The members can reduce the amount determined by the
Board but cannot increase it.
3. A part of the profits may be distributed before the accounts
are finally passed and the declaration of dividends sanctioned
in the general meeting. Such dividends are called Interim
Dividends. An Interim Dividend means dividend paid between
two ordinary general meetings of the shareholders of a company.
Regulation 86 of Table A provides that .the Board may from time
to time pay to the members such interim dividends a appear to
it to be justified by the profits of a company.
4. Dividends may be paid in proportion to the nominal value
of the shares or in proportion to the capital actually paid up on
each share, as the articles provide. If unequal amounts have been
paid on the shares, the. dividends ·may be unequal as among
different shareholders.-Sec.93.
5. Dividend canl!0t be paid out of capital. It must be paid
" out of profits of that year or out ·of the profits of any previous
financial year. "Profits" in this context means profits ar~~d at
after providing for de"preciation in the manner laid down "in'the
Act. In companies, where the Central or the State Government
has given .a guarantee for the payment of a certain rate of

I (1902) A.C. 83
 COMPAl"Y MANAGEMENT 713

dividend, any sum paid by the Govemment in fulfilment to the

guarantee may be paid out as dividend.-Sec. 205.
6. Since dividends are to come out of profits, the rate of
dividend recommended by the Board of directors will depend on
(a) how the profit and loss accounts are made up; (b) the
valuation of assets and the rate of depreciation; and (c) the
percentage of profits transferred to the reserve fund of the
company.
As regards item (a), the profit and loss accounts, the
Companies Act contains certain rules which all companies must
follow. As regards item (b) and (e) the directors have considerable
discretion.
According to Section 205 of the Companies Act, depreciation
must be provided for before dividends are paid. There is,
however, one exception. The Central Government may, if it thinks
necessary so to do in the public interest, allow any company to
pay dividends for any year without providing for depreciation.
7. Reserves
From the commencement of the amendment of 1974, no
dividend shall be declared or paid by a company for any financial
year out of the profits of the company for that year providing
depreciation according to Section 205, except after the transfer
to reserve of the company of such percentage of profits for that
year, not exceeding 10% as may be prescribed. There is nothing
to prohibit the voluntary transfer by a company of a higher
percentage of a profit to reserves, in accordance wit~ rules framed
by the Central Government on this behalf.-Sec. 205 (2A)l
Companies (Amendment) Act, 1974.
If. Dividends are payable in cash G cheque. But the
capitalisation of profits (or reserves) by the issue C?f fully paid-
up bonus shares or paying up any amount unpaid on ariy share
is permitted. '
9. Any dividend payable in cash may be paid by cheque or
'Warrant sent through the post. Hanuman Prasad v, Hiralal. I
Dividend is fully exempt from income-tax at the hands of
shareholders. Domestic company declaring dividend has to pay

I AIR (1971) Supreme Coun 206

714 COMPANY LAW

10% tax. This tax is in addition to income tax chargeable on

income of the company. For the company is not liable to pay
this tax.
10. Dividends are payable only to the registered shareholders,
bearers of share warrants- and their bankers.-Sec. 206.
II. The dividends must be distributed within 42 days after
they are declared. Failure to do so is a punishable offence.-
Sec. 207. .
12. A dividend becomes a debt from the date on which it
is declared and becomes payable. A shao eholder, who is entitled
to get it, can file a suit to recover it.
13. Dividend limitation
On 6th July 1974, the dividends of the companies were
limited by an ordinance (and later by an Act). In May, 1975,
the limitation was relaxed. All these restrictions were abolished
on 6th July, 1977.
14. Unpaid Dividend Account
After the commencement of the Companies (Amendment)
Act, 1974, where a dividend has been declared by a company
but has not been paid or where the warrant in respect thereof
has not been posted within 42 days from the date of declaration,
to any shareholder (entitled to the payment of the dividend), the
company shall within 7 days from the date of expiry of 42 days,
transfer the total amount of unpaid dividend to a special account
to be opened by the company in that behalf in any scheduled
bank. The account is called, "Unpaid Dividend Account..: ....
Company Limited/Company (Private) Limited".
Where the whole or any part of any dividend declared by
the cOmpany before the commencemenJ of the amendment,
remains unpaid within a period of 6 months from the
commencement of the amendment, the company shall transfer the
,mpaid dividend to such account referred to above.
The Articles of a company may give power to its directors
to declare interim dividends, i.e., dividends in between the two
annual general meetings of the company.
Where owing to inadequacy or absence of profit in any year,
any company proposes to declare dividend out of the accumulated
profit earned by a company in previous year and tran~ferred by
 COMPANY MANAGEMENT 715

it to reserves, such declaration of dividend shall not be made

except according to rules as may be made by the Central
Government.
If default is made in transferring the unpaid dividend, the
company shall pay interest at 12% per annum. The interest shall
ensure to the benefit of the members of the company in
proportion to the amount remaining unpaid.
The amount. unpaid or unclaimed for a period of seven years
from th/! date of transfer, shall be transferred by the company
to the general revenue account of the Central Government.
The Reserve Bank of India will give a receipt of the amount
and such receipt is effectual discharge of the company.
Particulars regarding the money transferred 10 the general
revenue are to be sent to the Central Government.
Any person, entitled to get unpaid dividend, can appl)· ,to
the Central Government. The Amended Act provides the
procedure of slich application.
If any of the requirements of this Section is not complied,
the company and evcry officer of the company who is in default
shall be punishable \\ ith fine up to Rs. 50"0 per day.-Secs. 205A
and 205B.
Section 206A of the amended Act, 1988 states that \\ here
any instrument of transfer of shares has been delivered to any
Company for cegistration and the transfer of such shares has not
been registered by the Company. it shall, transfer the dividend
in relation to such shares to the special accollnt referred to in
Section 205A.

EXERCISES
1. Denne the following terms : Relative; Secretary; Manager:
Officer. (Pages 702-705)
2. State the rules relating to managerial remuneration under the
Companies Act. (Pages 708-709)
3. What is dividend? State the rules regarding the payment of
dividends by a public limited company. (Pages 711-715)
4. Obje.ctive Questions :
(a) Can a company pay interest out of Capital? (Page 710)
(b) Can a company pay dividend out of its capital? (Page 712)
 ACCOUNTS AND AUDIT

ACCOUNT BOOKS
Section 209 as amended in 1974, provides that every
company shall keep at its registered office proper books of
account with respect to---all sums of money received and
expended by the company and the matters in respect of which
the receipt and expenditure take place.
Section 209 of the amended Act provides that every Company
must keep proper books of account and such books must give
a true and fair view of the state of affairs of the Company and
such books must be kept on accrual basis and according to the
double entry system of accounting.
The Board of Directors may keep the books at some other
place in India but the address of such place must be notified
to the Registrar.
Where a company has a branch office, whether in India or
outside, proper summarised returns of such branch office made
up to date at intervals of not more than three months are to be
scnt by the branch office to the registered office.
Books up to 8 years previous to the current year must be
kept in good order, together with the relevant vouchers.
The books of account must give a true an4 fair view of the
state of affairs of the company and explain its transactions.
If the books of account are not properly kept, every person
responsible can be ·fined up to Rs. 1,000, and imprisoned up to
6 months.
Right to inspect and take copies
The books of account and other books and papers shall be
open to inspeCtion by any director during business hours.
Sec. 209A of Companies (Amendment) Act of 1974 provides
that the books of account and other books and papers of every
company shall be open to inspection during business hour
(i) by the Registrar, or (ii) by such officer of the Government
as may be authorised by the Central Government in this. behalf.
Such inspection may be made without giving any previous
notice to the company or any officer thereof.

716
 ACCOUNTS AND AUDIT 717

It shall be the duty of every director, other officers and

employee of the company to produce such books, furnish with
any statement, information or explanation, within such time and
such place as -required by the person making the inspection.
It is also duty of every director, other officers or employee
of the company to give all assistance fot the inspection. The
books of account includes, (i) all receipts and disbursement of
money, (ii) all sales and purchases 'of goods by the company,
(iii) the assets and liabilities of the company.-Sec. 202A.
The person, making the inspection may make or cause to
be made copies of books and papers. He may plaee marks of
identification thereon.
The person making inspection is vested with the powers of
a Civil Court, including discovery and production of books and
documents. summoning and enforcing attendance, inspection of
books. registers and documents of the company.
Any officer authorised to make an inspection has the powers
that a Registrar has in relation to making enquiries.
He must also make a report to the Central Government.
If a default is made in complying with above provisions,
every officer is punishable (fine not less than Rs. 5000 and also
imprisonment not exceeding I year.)
If a defaulting director or an officer is convicted, he shall
be deemed to have vacated the office. He shall also be
disqualified for holding such office in any company for a period
of 5 years from such date.
OTHER BOOKS
Statutory Books
Under the CompafJies Act, every company must maintain the
following books: Registers of-Members with an index where
necessary; Debenture Holders with an index when necessary ;
Mortgages and Charges; Directors, Managing Directors. etc.
Directors and Chief Executives' Shareholdings, contracts and
concerns in which directors are interested; Investments showing
investments in companies under the same group as well as
investments not held in the company's name.
Annual Return and Summary of Share Capital.
Minute Books concerning General Meetings & Board
Meetirrgs.
718 COMPANY LAW

Accounts Books.
Duplicate Branch Register for a Foreign branch, if any.
.Statutory books include the following:
I. Register of investments not held coin company's name.
2. Register of charges, 3. Register of members, 4. Index of
member where the number is more than fifty,S. Register of
debenture holders, 6. Index of debenture-holders where the
number is more than fifty. 7. Foreign register of members and
debenture holders, 8. Minute books, 9. Register of contracts, and
companies and firms in whi"'h directors are directly interested,
I O. Register of directors, managing directors. manager and
secretary, II. Register of director's shareholding, 12. Register of
loans made, guarantees given or securities provided to companies
under same management, 13. Register of Investments in shares
and debentures of companies in the same group.
Optional Books
A company may maintain the following books: Allotment;
Call; Share Certificate; Share Transfers; Share Warrants;
Agenda Bock etc.
Accounting Standards
Under Section 211(3A) the accounis should be prepared in
accordance with "accounting standards". When it is not prepared
according to the 'accounting standards' the Company must disclose
the deviation and the reasons behind the deviation from the
'standards'. The auditor has also to mention whether the accounts
have been prepared as per "accounting standards" or not.
U~der Section 211 (3C), the "accountin!\. s~anda~ds" wi!1 be
preSCribed by Central-Government In consultallon WIth NatIonal
Advisory Committee on "Accounting Standards" (NACAS), on
recommendation of the Institute of Chartered Accountants of
India (ICAI) under Section 210A(2). The National Advisory
Committee on Accounting Standards will be constituted by the
Central Government. The Committee will consist of chairperson
who will be an eminent person, one nominee each of ICAI,
ICWAI and ICSI. One representative each of Central Government,
RBI, SEBI and C & AG one University Professor of Accountancy
or Management, Chairman of CBDT or his nominee, and two
representatives from Chamber of Commerce. The te'rms and
 ACCOUNTS AND AUDIT 719

conditions of the appointment of members will b~ fixed by the

Central Government.
Under Section 210A(3) Accounting Standards will be first
recommended by the ICAI. The Advisory Committee will give
its recommendation to the Central Government on matters
relati!,g to the accounting policies, standards and aUditing as per
reference to the Advisory Committee f·'r .dvice from time to
time. After consultation with the Advi ;ory Committee Central
Government will prescribe the 'Accounting Standards'.
ANNUAL ACCOUNTS AND BALANCE SHEET
At every annual general meeting of the company. the Board
of Directors shall lay before the company the balance sheet and
the profit and loss account. In the case of companies not carrying
on business for profit there shall be an income and expenditure
account instead of the profit and loss account.
Period
The period for which the profit and loss account shall be
made shall be as follows :
(0) [n the first annual general meeting-from the date of
incorporation of the company to a date not later than nine months
previous to the date of the meeting.
(b) In the case of any subsequent annual general meeting-
from the date immediately after tlie date of the last accounts to
a date not later than six months previous to the date of the
meeting.
(c) The period of accounts, which is called the financial year
of the company, may be less or more than a calendar year but
it shall not exceed 15 months. With the special permission of
the Registrar, it may extend to 18 months.
Failure to comply with the aforesaid rules may be punished
with fine and also imprisonment, if the default is wilfully
made.-Sec.210.
Form and Contents of Balance Shee!.s
Every balance sheet of a company shall give a true and fair
view of the state of affairs of the company, as at the end of
the financial year and shall be in the form of the Accounting
Standards set out in Part I of Schedule VI to the Act, or as near
720 COMPANY LAW

thereto as circumstances admit or in such other form as the

Central Government may approve.-Sec. 211. Separate forms
have been prescribed for banking and insurance companies.
Profit and Loss Account
The profit and loss account shall be prepared in the manner
set out in Part II of Schedule VI to the Act and must contain
the details mentioned there.
Every profit and 10•• account of a company shall give a true
and fair view of the profit or loss of the company for the financial
year.
The form, set out in Part II of Schedule VI, does not apply
to any insurance or banking company, or to any other class of
company for which a form of profit and loss account has been
specified in or under any Act governing such class of company.
The Central Government may, by notification in the·official
Gazette, exempt any class of companies from compliance with any
of the requirements in Schedule VI (form of Balance Sheet and
requirements ofthe Profit and Loss Account) if, in its opinion, it
is necessary to grant the exemption in the public interest.
The profit and loss account, and the auditor's report must
be annexed to the balance sheet.-Sec.216.
It is punishable offence to issue, circulate or publish the
balance sheet before it is authenticated.-Sec. 218. .
Three copies of the balance sheet and the profit and loss
account together with other documents required to be annexed
to the balance sheet, signed by the manager or secret:!ry or by
a director, shall be filed with the Registrar.-Sec. 220.
Directors of a company were prosecuted under Section
220(3} for wilful default in filing copies of balance-sheet and
·profit and loss account with the Registrar as required by Section
220(1} of the Companies Act. Slale of Bombay v. Bandhan Ram
Bhandari. I
Certain companies (e.g., Banking and Insurance companies)
are required to file a statement of assets and liabilities in the
form prescribed in Table F.
Authentication
The balance sheet and the profit and loss account 'of a
I AIR (1961) Supreme Court 186.
 ACCOUNTS AND AUDIT 721

company must be signed On behalf of the Board by the manager

or secretary, if any, and not less than two directors one of whom
shall be the managing director where there is one. The documents
must be approved by the Board before they are authenticated
and before they are submitted before the auditors for their
report.-Sec.215.
The method of Authentication is done, in case of Banking
Companies, as prescribed by section 29 of the Banking Companies
Act, 1949.
Shareholders' rights in respect of accounts
Section 219 provides as follows :
A copy of every balance sheet (including the profit and loss
account, the auditors' report and every other document required
by law to be annexed or attached. as the case may be, to the
balance sheet) which is to be laid before a company in general
meeting shall, not less than twenty-one days before the date of
the meeting. be sent to every member of the company (and
holders of debentures. except bearer debentures).
Copies need not be sent to members and debenture holders
who are not entitled to receive notice of the general meeting.
Copies may be sent less than 21 days before the meeting
if it is agreed to by all the members entitled to vote at the
meeting.
Any member or debenture holder. whether entitled to have
copies of the balance sheet etc. sent to him or not, shall be given
a copy of the last balance sheet of the company (with annexed
and attached documents) on demand without charge. Any person
from whom the company has accepted a sum of money by way
of deposit shall be entitled to have such copies on payment of
a fee of one rupee. Copies are to be furnished within seven days
of demand. The Court can also direct the sending of copies
forthwith.
Failure to send copies or provide copi~s on demand. is
punishable with a fine.
Section 219 of the amended Act provides that a copy of every
balance sheet which is to be laid before a Company in general
meeting shall, not less than twenty one days before the date of
meeting be sent to every member. every holder of the debentures
and to every trustee for the holders of any debentures issued by
the Company.
Commercial La....- - 46
722 COMPANY LAW

Section 220 of the amended Act states that three copies of

the balance sheet must be filed with Registrar within thirty days
from the date on which the balance sheet was laid at the annual
general meeting of the Company.

BOARD'S REPORT
Section 217 provides that there shall be attached to every
halance sheet laid before a company in general meeting, a report
b~ its noard of directors, with respect to-
(a) the state of the company's affairs;
(hJ the amounts, if any, which it proposes to carry to any
reserves in such balance sheet;
(c) the amount, if any, which it recommends should be paid,
by way of dividend; and •
(if) material changes and commitments, if any, affecting the
financial position of the company which have occurred
between the last date covered by the balance sheet and
the date of the Board's report;
(e) the conservation of energy, technology absorption, foreign
exchange earnings and outgo in the prescribed manner.
Section 2 I 7 of the amended Act provides th.t the Companies
must submit a report containing all information in respect of ' 'the
conservation of energy, technology absorption, foreign exchange
earnings and outgo, in such manner as may be prescribed."
The Board's report shall, (so for as is material for the
appreciation of the state of the company's affairs by its members
and will not in the Board's opinion be harmful to the business
of the company or of any of its subsidiaries) deal with any
changes which have occurred during the financial year-
(a) in the nature of the 'company's business;
(h) in the company's subsidiaries or in the nature of the
business carried on by them; and
(c) generally in the classes of business in which the company
has an interest.
The Board shall also be bound to give the fullest information
and explanation in its report, on every reservation, qualification
or adverse remark contained in the auditor's report.
The amendment of 1974 provides that the Board's report
shall include a statement showing the name of every employee
 ACCOUNTS AND ,'UOIT

who was getting not less than Rs. 36 thousand per year (or when
a part of the financial year) and not less than 3 thousand per
month.
The statement shall also show whether any sllch employee
is relative of any director or manager, and if so the name of
such director. Other particulars may be prescribed.-Sec. 217(2A).
The Board's report and any addendulO thereto shall be signed
by its Chairman if he is authorised, in that behalf by the Bllard :
and where he is not so authorised, shall be signed by such number
of directors as are required to sign the balance sheet and the
profit and loss account of the company.

THE AUDITORS OF A COMPANY

Appointment of Auditors
(Sections n4, 225). The first auditors of a company shall
be appointed by the Board of directors within one month of the
date of registration of the company. The members at a gener:d
meeting may remove all or any of the first auditors so appointeu.
and appoint other persons. Notice of the nomination of any person
proposed to be appointed 3S auditor mllst OP. given not less than
14 days before the date of the meeting. If the first auditors arc
not appointed by the Board, they may be appointed by the
company in a general meeting. The first auditors hold office until
the conclusion of the first annual general meeting. Thereafter,
auditors are appointed at each general meeting to hold office from
the conclusion of that meeting until the conclusion of the n~'1
annual general meeting.
At any annual general meeting a retiring auditor, b)
whatsoever authority appointed. shall be re-appointed, un Icss-
(II) he is not qualified for re-appointed;
(b) h~ has given the compallY notice in writing of hIS
un\\ illin~ncss to be re-appolllted;
(c) a resolution has been passed at that meeting appointing
somebody instead of him or 1"'" iding exprcs,ly that h·.,
shall not be re-appointed; or
(d) where notice has been given of an intended re,olutilln to
appoint some person or persons in the place of a retirjl1~
auditor, . and by reason of the death, incapacity or
disqllal ilication of that persoll or of all these persons. as the
cas~ IllJ) be. the resolution cannot be proceeded "'Ith.
724 COMPANY LAW

The appointed auditor must, unless he is a retiring auditor,

be informed within 7 days and he must, within 30 days, inform
the Registrar whether he accepts or refuses the appointment.
Where at an annllal general meeting no auditors are appointed
or re-appointed, the Regional Director of the Company Law
Board may appoint a person to fill the vacancy. The company
shall within seven days of the power becoming exercisable. give
notice of the fact.
Casual vacancies in the post of auditors may be filled by
the Board till the next meeting. except vacancies caused by
resignation which must be filled by the company in a general
meeting. When there are several auditors and a vacancy occurs.
the remaining auditors can continue to act as auditor.
Special notice shall be required for a resolution at a general
rneeting appointing as auditor a person other than a retiring
auditor or providing expressly that a retiring auditor shall not
be re-appointed. Notice of such resolution must be given to the
auditor concerned and he may ask for the circulation of a
representation regarding the matter to the members. If the
representation is received too late for circulation, it Illay be read
out at the meeting. The auditor shall also be heard at the meeting.
The representation given by him will not be circulated if the
Court, on an application Illade 10 it, is of opinion that the right
conferred on the auditor is being abused to secure needless
publicity for defamatory matter.

New rule regarding appointment of auditor

The amendment of 1974 provides that auditors are not to
be appointed except with the approval of the company by special
resolution in certain cases, namely, in case of a company in which
not less than 25% of the subscribed share capital is held, whether
singly or in a combination by-
(a) a public financial institution or a government company
or Central Government or any State Government, or
(b) any financial or other institution established by any PrO\'incial
or State Act in which a State Government holds not less than
fifty one per cent of the subscribed share capital, or
(c) a nationalised bank or an insurance company carrying on
general insurance business.-Sec. 224A.
 ACCOUi'-'TS Ai'-ll AUDIT 72S

The number of auditors

The Companies (Amendment) Act, 1974 limits the number
of audit which (whether singly Or in combination) any person
does, \'iz.,
(a) in the case of a person or firm holding appointment as
auditor of a number of companies each of which has a
paid-up share capital of less than rupees twenty-five lakhs.
twenty such companies ~
(b) in any other case, twenty companies. out of which not
more than ten shall be companies each of which has a
paid-up share capital of rupees twenty-five I.akhs or more.
A wrilten certificate ilas to be obtained by the company from
the auditor or auditors proposed to be appointed or re-appointed
that it is in accordance with the limits specified above.

Removal of Auditors
The first auditors appointed by the Board can be removed
by the company in a general meeting. In othcr cases, an auditor
can be removed, before the expiry of his term by the company
in a general meeting provided the previous approval of the
Central Government is obtained in that behalf. Special notice of
such a resolution must be given and the procedure laid down
above regarding the non-appointment of a retiring auditor must
be followed. (See last para under. . Appointment of Auditors·.}--
Sections 224-225.

Qualification and Disqualifications of Auditors (Sec. 226)

A person shall not be qualified for appointment as auditor
of a company unless he is a chartered accountant within the
meaning of the Chartered Accountants Act, 1949.
A firm whereof all the partners practising in India arc
qualified for appointment as aforesaid may be appointed b:- its
firm name to be auditor of a company. in which ease any partner
so practising may act in the name of the firm.
None of the following persons shall be qualified for
appointment as auditor of a company-
(a) a body corporate;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment,
of an officer or employee of the company;
726 COMPANY LA',V

(d) a person who is indebted to the company for an amount

exceeding one thousand rupees or who has given any
guarantee or provided any security in connection with the
indebtedness of any th ird person to the company, for an
amount exceeding one thousand rupees.
(e) a person who is disqualified for appointment as auditor
of any other body corporate which is that company's
subsidiary or holding company, or a subsidiary of that
company's holding company.
Rights and Powers of Auditors
Section 227( 1) of the Act provides, that every aud itor of the
company shall have a right of access at all times to the books
and accounts and vouchers of the company, whether kept at the
head office of the company or elsewhere. and shall be entitled
to require from the officers of the company such information and
explanation as the auditor may think necessary for the
performance of his duties as auditor.
Any officer of the company who fails to comply with the
rules mentioned 3hme. may be fined up to Rs. 500.
Section 231 provides' that notice of all general meetings must
be given to the auditors and they can attend and speak on all
matters concerning them a~ auditors.
Remuneration of Auditors
Auditors appointed by the Central GO\'ernment or the
Regional Directors of the Company Law Board get remuneration
as fixed by the Central GOl'ernment or the Regional Director.
The remuneration of auuitors appointed by the Company is fixed
by the company in general meeting or in the manner determined
by the general meeting. An) sum paid to auditors as expenses
is considered part of their remuneration.-Sec. 224 (8).
The Statutory Duties of Auditors. The Report
Section 227(2) lays down the following statutory duties of
an auditor :
The auditor sllall make a report to the members of the
company on the accounts examined by him. and on every balance
sheet and pn)fit and loss account and on every other document
declared by the Companies Act to be part of or annexed to the
oalance sheet or profit and loss account. which are laid before
 ACCOUNTS AND AUDIT 727

the company in general meeting during his tenure of office, and

the report shall state whether, in his opinion and to the best of
his information and according to the explanation given to him,
the said accounts give the information required by this Act in
the manner so required and give a true and fair view-
. (I) in· the case of the balance sheet, of the state of the
. ',: lompany's affair as at the end of its financial year; and
. (2) in the case of the profit and loss account. of the profit
or loss for its financial year.
The auditor's report shall also state-
(a) whether he has obtained all the information and
explanations which to th" best of his knlmledge and belief
were necessary for the purposes of his audit:
(b) whether in his opinion, proper books of accounts as
required by law have been kept by the company so far
as appears from his examination of these books. and
proper returns adequate for the purpose of his audit have
been received from branches Iwt visited by him:
(nn) whcther the report on the accounts of any branch office
audited under Sec. 228 by a persclIl other than lh~
company's auditor has b\!cn fUr\\arded to him as required
and how he has dealt with the same in preparing his r~port :
(c) whether the compan~'s balanc~ sheet and prof!t and Ie)SS
accollnt dealt with by the report are in agrL'cmcllt \\ ith
the books of account and returns.
Where an~ of the matters referred to in clauses (a) and Ie)
or ill clauses (a). (h), (hb) and Ie) above is answcred in the
negative or with a qualification. the auditor's report shall state
the reason for the answer.
According to the clause 2e71 1r\) added b~ the amending Act
of 1965, the auditor shall enquire into the f,)llowing matters :
(u) whether the loans and advances made b) the company
are propen) secured and whether their terms arc not
prejudicial to the interests of the company or its members;
(b) whether transactions represcntcd. merel) by book. entries
not prejudicial to the interests of ,the company;
(c) \\ hcthcr the comp.1I1): is not an illH:suncnl company or
a banking. company. \\. hcther aJ1~ of its assets of the
following lypes : shares. debentures·and other securities.
h3\ e been sold at a price less than its purchase price;
728 COMPANY LAW

(tf) whether loans and advances made by the company have

been shown as deposits;
(e) whether personal expenses have been charged to revenue
account: and,
\!) whether cash has been received for shares shown as
allotted for cash. and if not, whether the position as sho\\n
in the account books and balance sheet is correct, regular
and not misleading.
Clause 227( 4A) IHO\ ides that the Central Government may
direct the inclusion. in the auditor's report. of statements on
ccrtain matters to be specified by notification in the case of
certain classes of companies.
Scction 22313 added by the amending Act of 1965 provides
that where a company is required 10 mhintain cost accounts under
the amended Section 209 (see under the first heading in this
chapter) the Central Government may direct an audit of such cost
accounts by a cost accountant (qualified under the Cost and
Works Accountants Act, 1959) or a chartered accountant ur 'Ill}
person possessing the prescribed qualifications.
The audit of cost accounts. under the above section, shall
be in addition to the regular audit as provided for by the Act.
The auditor of cost accounts has the same powers and duties.
in n:lation to his audit. as the regular auditor under Section 227.
The auditor's report must be signed by the auditor or a
partner of the firm of auditors.-Sec. 229.
If any auditor's report is made, or any document is signed,
otherwise than in conformity with the requirements of Sections
227 and 229. the person concerned shall, if the default is wilful.
be punished with fine which may extend to Rs. 1000.-Sec. 233.
If the Central Government is of opinion that a sufficient
number of cost accountants ""'ithin the meaning of the Cost and
Works Accountants, 1959, are not available for conducting cost
audit the Central Government may by notification in the official
gazette. for a specified period appoint a chartered accountant to
audit cost accounts of a company.-Sec.23313, Companies
(Amendment) Act. 1974.

Special Audit
The Central Government may direct special audit of a
company's accounts of any period if it is of opinion that,
 ACCOUNTS AND AUDIT 729

(a) its affairs are not being managed in accordance with sound
business principles or prudent commercial practices; or
" (b) it is being managed in a manner likely to cause serious
injury or damage to the interests of the trade, industry
or business to which it pertains; or
(c) its financial position is such as to endanger its solvency .. -
Sec. 233A.
L~gal decisions on the duties and responsibilities of auditors
The principles laid down in the leading cases can be
summarised as follows:
I. Must have knowledge of memo and articles: An auditor
is expected to know the provisions of the memo and the articles.
"Auditors are in Illy opinion. bound to see what exceptional duties
are cast upon them by the articles of the compan)' which they
are called upon to audit. Ignorance of the articles or of the
exceptional duties enforced by them would not afford any legal
justification for not observing thelll." Per Lindley L. J. in Re
Kingston COllon Mills Co. I : In re Repuhlic of Bolivia Syndicate.'
2. Should knOll" the terms of engagement: The measure of
an auditors responsibility depend, upon the terms of his
engagement. Re City Equitable nrc IllSurance Co.3 ; Regislrar
v. P AI Hedge. 4
3. Should be call1inus and careful: Per Lopez L. J. : "An
auditor is not bound to be detective, or as was said, to approach
his work with a suspicion or with a foregone conclusion that
there is something wrong. He is a watch-dog but not a blood-
hound" ......... .If there is anything calculated to excite suspicion
he should probe it to the bottom; but in the absence of anything
of that kind, he is only bound to be reasonably cautious and
careful.·' Re Killgston Cotton Mills Co. (See above).
4. Mllst examine the affairs of the company : "The
Companies Act, therefore, provides for the employment of an
auditor who is the servant of the shareholders and whose dllty
it is to examine the affairs of the company on their behalf at
the end of a year and report to them what he has found. That
examination b) an independent agency such as the auditor is
practically the only safeguard which the shareholders have

I {!89G) 2 Ch. 279 '( 1914) I Ch. 139

) (1925) I Ch. 407 'AIR (1954) Mad IOSO
730 COMPANY LAW

against the enterprise being carried on in an unbusinesslike way

or their money being misapplied or misappropriated without their
knowing anything about it." Deputy Secretary v. S. N. Dasgupta. I,
5. Have the pOSition' of quasi-trust: "The auditor holds a •
position of trust and it is his bounden duty to honour that trust
by being candid with the shareholder~ and tailing them frankli
and fully everything with regard to the affairs of the compa!'y
which has come to his knowledge and which it is material "for
the shareholders to know:' (See above p a r a ) . '
6. MuSf act reasonabiv : \Vhenev ~r it is necessary to make
any enquiry. the auditor must do it in the manner in which an
expert in his position would consider it reasonable to make.
7. Must satisfy valuatio1l of assets: The auditor is bound
to satisf) himself that the valuation of assets is reasonably
accurale. Whenever he feels that the assets have been overvalued.
it is his duty to say so in his report. There is no similar duty
in case of undervaluation. because the directors are at liberty to
undervalue the assets as a precautionary meaSure against future
tluctuations .in value.
Seclion 350 of the amended Act provides that the Central
Government shall fix the amount of depreciation at the rate
specified in Schedule XIV.
8_ :\JllSI enquif:V intv its substa11tial accuracy: The auditor
must not confine himself to verifying the arithmetical accuracy
of the balance sheet but must enquire into its substantial accuracy.
Leeds l::stale alld BuHding Co. v. Shepherd'
9. Prutectiull of shareholders is needed: The audit of a joint
stock company is intended for the protection of the shareholders
and the auditor is expected to examine the accounts maintained
by the Directors with a view to informing the shareholders of
the true financial position of the beneficiaries. Institute of
Char/ered ../CCOlllltants v. P K. Mukherjee. 3
10. Personal inspection is nceded: The auditor is not justified
in l)rnitting to make personal inspection of securities in the custody
of the company or any person on its behalf. Whenever an auditor
discovers that securities of a company are not in proper custody,
it is his duty to require that the matter be put right at once

I AIR t (956) Cal 4 I '11887) 36 Ch. D. 787

'AIR 11968) Supreme Court 1104
 ACCOUNTS A.ND AUDIT 731

II. No liability 10 Ihird parties: But his liability would not

extend to third parties with whom no conlractual relationship
exists. Candler v. Cra/lc Chrislmas and Co. I
12. Advice /101 required: The auditor is not r~quircd \0 give
advice to the directors regarding loans and investments. His dllt>
is only to find out the true financial position of Ihe comp"n\
at the time of audit and to disclose it in his report.
13. Liable 10 pay damages The audit,,, is liable to pay
damages if on' account of his breach of the statulory duties or
wrongful acts, the company suffers loss. The auditors arc also
responsible 10 persons who are misled by a false balance sheel
which has been certified by the auditor as correct.
14. There is criminal Iiahilin' : The auditor is crimi nail>
liable for any breach of his stalutory duties, wilfullv mad"-

EXERCISES
1. State the Statutory Books required by the Company Act. (Pag\.:: 717)
2. Describe how the accounts of a company are to be kept. \\ 110 ma)
inspect them. anu under what conditions. if any. What are lhe
shareholders' righls in respecl of such accounts? (Pages 717-719)
3. State the law relating to appointment and rc:muneration of auditors
(Page 7~3)
4. State the rules of the Companies Act relating to the qualificJ.tions.
appointment, remuneration and removal of an auditor.
(Pages 7~4-7.15)
S. "'ihat are Ihe powers and duties of an audilOr of a Comr all) 0
(Pa2CS 726-727)
6. E:-..:p\ain the function of an 'Auditor' \\i1h respect to a COlllpml)
under the Companies Act, 1956. Describe his pO\\crs, duti~s and
liabilities under the Act. (Pages 1'2.3-727)
7. \\"hal are the provisions of the Companies Act. 1956 relating to
the appointment of the first audilOr of a company?
(Pages 7~~-723)
8. State the powers and duties of auditors with reference to leadill~
cases. (Pages 726-727)
9. \Vhat is stated in the Auditor'S report to the members of ;l
Company 0 (Pages 726-729)
10. Should auditors give advice to directors regarding loan \\ ithout
security? (Page 7],7)
II. Write noles 011 (i) Special audll Jnd (ii) Cost audit (Pages 728. 720 I

1 1 1951) 2 K.B 164

 BORROWING POWERS,
DEBENTURES

BORROWING POWERS OF A COMPANY

The powers of a company are determined by the memorandunl
and the articles of association. Therefore a company can borrow
money, and if so to what extent, are matters depending upon the
interpretation of these two documents. The Companies Act does
not contain any section expressly empowering companies to
borrow.
In some cases the memo and the articles provide that the
company shall be entitled to borrow. Sometimes the power to
borrow is given, subject to certain limitations. If so, the
limitations must be strictly complied with. Borrowing in exccss
of the limits laid down or by methods not sanctioned, is ulira
nres the company and not binding on it. Re imroduction Ltd. I
It has been held that a trading company has an implied power
to borrow, because commercial tran~actions necessarily involve
the giving and taking of credit. General Auclivn Eslu/l! Co. v.
Smith. 2 A non-trading company has no impl ied powers to borrow.
If the memo and the articles of such a company contain no
provision empowering the company to borrow. they must be
altered to give slich power before the company can borrow.
Baroness IVenlock v. Rircr Dei?3
Where the memo and the articles give the power to borrow.
loans may be taken in anyone or more of the following ways
(unless any of them is prohibited): mortgage of immovable
properties of the company: hypothecation or mortgage of movable
goods. including stock in trade and, furniture: charge on uncalled
capital: floating charge on all the a55"ts of the company:
mortgage of book debts; promissory notes. hundies and bills of
exchange: debentures and debenture stock: charge on patents.
'iccilces and copyrights and goodwill ~ overdrawing the company's
banking accounts.
A company cannot borrow moncy on the security of its books

'(t968) 2 AER. 1221 2 (1891) 3 Ch. 432

1 {18851 10 A.C, 35-1-

732
 BORROWING POWER$, DEBENTURES 733

of account because such books are required to be kept in the

registered office and they are open to inspection, Also, money
cannot be borrowed on the security of the reserve capital.
Statutory limitations on Borrowing
• l. Sec, 293(1) (d) prohibits the directors to borrow money
beyond the aggregate of the paid-up capital and its reserves,
2, Limitations as contained in the Memorandum or the
Articles ultra-vires Borrowing: Borro\\ ing by a compan~ may
be ultra-vires the Company or intra-vires the company but uhra-
vires the directors,

DEBENTURES
Definition
The issue of debentures is a particular mode of borrowing
money by companies, A debenture is a document which shows
on the face of it, that the compan), has borrowed a certain sum
of money from the holder thereof upon certain terms and
conditions, A debenture is generally issued as a part of a series.
Palmer defines a debentures as "any instrument under seal
evidencing a deed, the essence of it nein", the admission of
indebtedness", Section 2(12) of the Company Act states that a
debenture, "includes debenture stock, bonds and any other
securities of a company, whether constituting a charge on the
assets of the company or not."
Characteristics
1, Each debenture is numbered.
2, Each contains a printed statement of the terms and
conditions, vi:. the rate of interest, the time of payment of
interest, the security against which the debenture is issued and
what steps the debenture holder can take in case of non-payment
of his dues. .
3. A debenture usually creales ajlo{Jlillg charge on the assets
of the companies, e.g.,a charge which is enforceable upon non-
payment of the interest or principal on the due dates.
4. A debenture may create a fixed charge instead of a floating
charge.
5. Sometimes debenture holders are given the right to appoint
a receiver in case of non-fulfilment of the terms of the debentures
by the company.
734 COMPANY LAW

6. Sometimes a series of debentures are issued with a trllst

deed by which trustees are appointed to whom some Or all the
properties of the company are transferred by way of security for
the debenture holders.
•
FLOATING CHARGE AND FIXED CHARGE
Definition
A 'charge' on a property is created when it is made liable
for the payment of money. A charge may be 'fixed' or 'floating'.
A fixed charge is one which creates a legal interest of a
specific property of the company or all the properties of the
company. Thus a fixed charge is equivalent to mortgage. The
company can sell, lease etc. of the property, subject to the right
of the charge holder.
The floating charge does not amount to mortgage. The owner
of such a property can deal with it and the transferee gets it,
free of the charge.
"The term 'floating security' and 'floating charge' means a
security or charge which is not to be put into immediate
operation, but is to float so that the company is to be allowed
10 carry on its business. i\ specific charge fastens on ascertained
and definite property Of property capable of being ascertained.
A floating charge moves with the property which it is intended
to affect, until some event occurs or some act is done which
causes it to settle and faster on the subject of the charge within
its reach and grasp. It is of the essence of a floating charge that
It remains dormant until the undertaking charged ceases to be
a going concern or until the person, in whose favour the charge
is created, intervenes".-Halsbury's Laws oj England, Vol. 6.
Characteristics
A floating charge is an equitable charge. Justice Romer laid
down three characteristics of a floating charge \·i=., (i) it is a
charge on a class of assets of a company present and future.
(ii) in the ordinary course of the business of a company such
assets would be changing from time to time; and (iii) until some
future step is taken by or on behalf of those interested in the
charge, the company may carryon the business in the ordinary
way by this class of assets. Re Yurkshire Woul Cumbers'
Association. I
1 (1903) 2 Ch .. 284
 BORROWING POWERS, DEBENTURES 735

When a noating charge becomes a fixed charge?

A floating, charge becomes a fixed charge when any of the
following things occur: (i) a company is wound up; (ii) a
• receiver of the properties of the company is appointed; (iii) the
company fails to pay the interest and the instalment of the
principal: and, (il') Ihe company ceases ca-rying on ils business,
When Ihe above occurrences or CO! tlllgcncies happen, a
floating charge becomes a fixed charg~, This is known as
crystallization of the floating charge, The crystallization occurs
on the moment of crytallization,

CLASSIFICATION OF DEBENTURES
Debentures may be classified in different ways, S0111e of
which are mentioned below :
I, Redeemable Debemures and Perpe/ual Debell/ures:
Section 120 of the Companies Act provides that debentures may
be issued subject to the condition tllat they are irredeemable or
redeemable only on the happen ing of the contingency, however
remote, or on the expiration of a period however long, Thus
debentures ruay be either Redeemable or Perpetual.
2, Regis/ered Debentures and unregiSTered or Bearer
Debell/ures : The money due on the debentures may be payable
01111' /0 registered holders or may be payable /0 bearers,

3, Debelltllre and Debenture Stock: The difference between

Debenture and Debenture Stock is .similar to the differcnce
between shares and stock, A debenture is a document showing
a particular debt. There may be a series of debentures, If the
entire debt, covered by the dehcnturcs is treated as a single unit,
it is called Debenture Stock, In the case of debenture stock, the
company issues to each creditor a certificate showing what
fraction of the entire debt is owned to him, The certificate is
called the Debenture Stock Certificate,
4, ,!fortgage Debell/lire and .""ukecl Dehell/ure: The former
Iypes of debenture is secured Ily \\ hole or part of the assets of
the company. The latter typcs of debentures are 110/ secured by
any of the assets of the company,
736 COMPANY LAW

CONVERTIBLE DEBENTURES
Debentures may be issued subject to the condition that they
or a specified part of them, will be exchanged for, or converted
into, shares of the company. The remaining part of the issue
continues to be debentures at a stated interest. After a debenture'
is converted into share it does not yield interest but gets dividend
according to the deci~ion of the company.
E.xample :
A reputed corrpany issued 7 lakhs secured convertible debentures
of Rs. ::!OO each for cash at par aggregating nearly Rs. 15 crores.
The highlights of the issue were as follows: 25% conversion in
two stages-first within 6 months of the date of allotment of
debentures and second 2 years after the first conversion. into 5 equity
shares of Rs. 10 each at par; interest of 13.5% per annum payable
half-yearly; review of interest in accordance with Government
guidelines; fully secured; liquidity through listing in Stock
Exchange; and. scheme for purchase by the company at par after
4 years.

Comments
In India this type of debenture has become very popular. It
can be called convertible dcbenture or convertible bonds. The
debenture holders may have an option to get shares in exchange
of debentures. 0"e writer I says that in such debentures the
holders, "have their cake and eat it too".

RULES RELATING TO DEBENTURES

The Companies Act of 1956 lays down the following rules
regarding debentures :
I. No debenture holder is to have any voting rights in
company meetings-Sec. 117. This applies to debentures issued
after the commencement of the Act of 1956.
2. If there is a trust deed securing the issue of debentures,
every debenture holder can have a copy of it on payment of a
small fce.-Sec. 118.
3. The trustees in a trust deed securing the issue of
debentures must exercise due care and diligence in the
performance of their duties. Any provision in the deed exempting
them from liability on this account is void.-Sec. 119.

I Samuelson. Economics, (II th edition), p. 103

 BORROWING POWERS. DEBENTIJRES 737

4. Debenture may be irredeemable, or redeemable on the

happening of a contingency.-Sec. 120.
5. Redeemable debentures can be reissued. unless there is
any provision to the contrary. whether express or implied, in the
articles or in the conditions of the issue of the debentures or
in any contract entered into by the company or when the company
has passed a resolution to that effecl.-Sec. 121.
6. An agreement to take a debenture can be specifically
enforced.-Sec. 122.
7. Debts 01 the company. which by the Act receive
preferential payment in case of winding up, shall have priority
over the claims of the debenture holders. If, by virtue of the
condition of the issue, the debenture holders have taken possession
of the properties of the company or have appointed' a receiver
who has taken possession, the claims of the preferred creditors
shall be paid forthwith out of any assets coming into the hands
of the receiver or other person on behalf of the debenture
holders.-Sec. 123.
8. Full particulars regarding the issue of debentures in series
mu.t be sent to the Registrar.-Sec. 128. The particulars must
include a statement of the commission paid.-Sec. 129.
9. There are certain limits On the amount of commission and
brokerage that can be paid for the sale of debentures. (See under
Commission and Brokerage for the sale of shares in p. 630)
10. Transfer of Debentures. The rules relating to transfer
of shares and share certificates (Sections 108-113) apply to
debentures. (See p. 638)
11. Register and Index of Debenture Holders. Every
company shall keep a Register of debenture holders, entering
therein particulars regarding the name, address, and occupation
of the debenture holder and the dates on which the holding
commenced or ceased.-Sec. 152( 1).
Every company having more than 50 debenture holders shall
keep an Index of debenture holders unless the Register of
debenture holders is itself kept in the form of an index.-Sec.
152(2).
No notice of any trust, express, implied, or constructive, shall
be entered in the Register of debenture holders.-Sec. 153. (But,
see pages 634)
-rhe Register of debenture holders may be closed for not
mOi;e than 45 days in the year and not more than 30 days at
Comm~rcial Law - 47
738 COMPANY LAW

a time, by giving at least 7 <!ay's notice through a local

news'paper.-Sec. 154.
There may be a Foreign Register of debenture holders
analogous to the Foreign. Register of members.-Sections. 157
and 158.

RIGHTS AND REMEDIES OF DEBENTURE HOLDERS

If the Company fails to pay the interest or principal on the
due date or fails to comply with any of the ter,.ms and conditions
under which the debenture was issued, the debenture holder can
adopt any of the following remedial measures :
I. He may file a suit for the recovery of money by sale of
the assets which were charged for the payment of the money.
2. He may file an application for the aPFointment of a
receiver by the court.
3. He may himself appoint a receiver if the terms of the
debenture entitled him to do so.
4. The trustees may sell the properties charged, if such a
power is given to them under the terms of the debenture.
5. He niay apply to the court for the foreclosure of the
company's right to redeem the properties charged for the payment
of the money.
6. He may present petition for the winding up of the
company.

DIFFERENCES BETWEEN SHAREHOLDERS AND

DEBENTURE HOLDERS
I. A shareholder has a proprietary interest in the company.
A debenture holder is only a creditor of the company.
2. Every share is included in the capital of the company.
Debenture is a loan to the company.
3. Debentures generally have a fixed or floating charge upon
the assets of the company. Shares do not have any charge on
the asset of the company because the shareholders are the
proprietors of the company.
4. A debenture holder is entitled to a fixed interest. Equity
shareholder is entitled to dividends depending on and varying
with the profits earned.
5. A shareholder has voting rights. A debenture holder, after
1956. cannot have voting rights.
 BORROWING POWERS. DEBENTURES 739

6. Debentures may be redeemable. Shares (except preference

shares under certain circumstances) are not redeemable. Under
special circumstances the court may direct the purchase of shares
by Ihe company. (Sections 397 and 398. See Ch. 10)
7. Debenture holders get priorily over shareholders when
assets are distributed upon winding up.
LOANS TO COMPANIES UNDER THE SAME
MANAGEMENT
Subject to the exceptions and conditions noled below, no
company shall (a) make any loan to. or (b) give any guarantee,
or provide any security, in connection with a loan made by any
olher person 10, or to any other person by, any body corporatc.~
Sec. 370 :
I. Such a transaction may be entered into if previously
authorised by a special resolution of the lending or guaranteeing
company.
2. No special resolution is necessary in the case of loans
to other bodies corporate nol ,mder the same managemml as the
lending company, where the aggregate of such loans does not
exceed 10% of the aggregate of the subscribed capital of the
lending company and its free reserves.
3. Without the prior approval of the Central Government Ihe
aggregate of loans by one company to other bodies corporale
shall not exceed the aggregate of its subscribed capital and free
reserves by 30% where all such bodies are nol under the same
management, and 20% where they are under the same
management. as Ihe lending company.
4. The restrictions stated above do not apply to any !oan
made (a) by a holding company to its subsidiary : (h) by a
banking or insurance company, in the ordinary course of its
business: (e) by a private company unless it is a subsidiary of
a public company; and (d) by a company established "ith the
object of financial industrial enterprises.
S. The restrictions do not apply to any guarantee given or
security provided (a) by a holding company in respect of a loan
given to its subsidiary; and, (b) by a banking company in the
ordinary course of its business.
6. The restrictions do not apply to a book debt. unless the
transaction was from its. ;iQ~ption in the nature of a loan.
740 COMPANY LAW

Companies uroder the .ame management or same group

Companies are said to be under the same management, or
within the same group, under the circumstances enumerated in
Sec. 370(IB) and Sec. 372(11) respectively. Examples: Majority
of directors same; the same individual or body corporate
exercises one-third or more of the voting power; etc.
Loans etc. coming under this section must be recorded by
the lending company in a separate register. The register is open
to inspection and extracts and copies thereof may be taken.
Definition of 'Group'-See p.547.

INVESTMENTS IN THE SAME GROUP OF

COMPANIES
A company cannot purchase the shares and debentures of
another company if both are under the same management, except
to the extent noted below.-Sec. 372.
A company can invest, in the manner aforesaid, in any other
company wilhin Ihe same grollp. up to 10 per cent of the
subscribed capital of the other company, provided such investment
is sanctioned at a meeting of the Board of directors of the
in,csting company with the consent of a[[ the directors present
and entitled to vote. Notice of such resolution must be given
to a[1 directors. The aggregate investment of a company in other
companies in the same group must not exceed 20 per cent of
the subscribed capital of the investing company. The aggregate
investment of a company in all other bodies corporate must not
exceed 30 per cent of the subscribed capital of the investing
company.
A company can invest more than the amounts mentioned
above, if it is sanctioned by a resolution of the members of the
investing company and approved by the Central Government.
The restrictions on investment, mentioned above do not apply
to the following cases : investments by an investing company,
i. e., one whose principal business is the purchase and sale of
shares, debentures and other securities; investments by a banking
or insurance company; a private company, unless it is a
subsidiary of a public company; investments by a holding
company in its subsidiary; and, investments in rights" shares.
i.e .. purchase of further issue of shares as provided in Section 81.
 BORROWING POWERS, DEBENTURES 741

Particulars of all investments coming within Section 372

must be en\ered in a separate register which shall be open to
inspection by all members of the company, Particulars of the
investment shall also be included in the balance sheet.
Section 372 of the amended Act mentions that a Company
by itself or together with its subsidiaries shall not be entitled
to acquire the shares of any other body corporate except to the
extent, and except in accordance with the restrictions and
conditions sepcified in this Section,
"The Board of directors of the investing Company shall be
entitled to invest in any shares of any other body corporate to
such percentage of the subscribed equity share ca'pital, or the
aggregate of the paid-up equity and preference share capital, of
such other body corporate, whichever is less, as may be
prescribed."
This Section shall not apply-
(a) to any banking or insurance Company;
(b) to a Private Company, unless it is a subsidiary of a
Public Company.
(e) to any Company established in order to finance private
industrial enterprises.
(d) "to investments by a holding Company in its subsidiary,
other than a subsidiary within the meaning of Clause
(a) of sub-Section (I) of Section 4."

REGISTRATION OF MORTGAGES AND CHARGES

List of Mortgages and Charges
The Companies Act (Sec. 125) provides that all charges and
mortgages of the kinds mentioned below, must be registered with
the Registrar of Companies by filing with him all particulars
concerning them together with a copy of the deed by which the
charge or mortgage is created :
I. (a) a charge for the purpose of securing any issue of
debentures;
(b) a charge on uncalled share capital of the company;
(e) a charge on any immovable property, whether situate, or'
any interest therein;
(d) a charge on any book debts of the company;
742 COMPANY LAW

(e) a charge, not being a pledge, on any movable property of

the company;
(I) a floating charge on the undertaking or lny property of
the company including stock-in-trade;
(g) a charge on calls made but not paid;
(h) a charge on a ship or any share in a ship;
(i) a charge on goodwill, on a patent or licence under a patent,
on a trade mark, or on a copyright or a licence under a
copyright.-Sec. 125(4).
2. A charge created OUi of India comprising solely property
situate outside India with particulars and instrument or copy.-
Sec. 125(5).
3. A charge created in India but comprising property outside
India, with verified copy.-Sec. 125 (6).
4. Charges on properties acquired subject to charge.-
Sec. 127.
For registration, the term 'charge· includes 'mortgage'-
Sec. 124.
Time
All the charges listed above must be registered within 3.0
days of its creation (7 days more if there is sufficient cause for
delay).
Particulars
In case of series of debentures entitling holders pari passu
to be filed to the Registrar with the following particulars : -
(a) the total amount secured by the whole series;
(b) the dates of the resolutions authorising the issue of the
series and the date of the covering deed, if any, by which
the security is created or defined;
(c) a general description of the property charged; and
(d) the names of the trustees, if any, for the debenture holders;
together with the deed containing the charge, or a copy
of the deed verified in the prescribed manner, or if there
is no such deed, one of the debentures of the series.-
Sec. 128.
Commission
Particulars in case of commission, etc. on debenture, are to
be filed for registration.-Sec. 129.
 BORROWING POWERS. DEBENTURES 743

Register
Register of charges is to be kept by Registrar, with respect
to each company, containing the following parti,:ulars.-
Sec. 130 ;
(a) in the case of a charge to the benefit of which th, holders
of a series of debentures are entitled, such particulars as
are specified in Sections 128 and 129;
(b) in the case of any other charge-
(i) if the charge is a charge created by the company, the
date of its creation; and if the charge was a charge
existing on property acquired by the company, the date
of the acquisition of the property;
(ii) the amount secured by the charge;
(iii) short particulars of the property charged; and
(iv) the persons entitled to the charge.

Certificate of Registration
The Registrar is to give. a certificate of registration. All
debentures must be endorsed with a copy of the certificate of
registration. The registration may be effected by the company,
or by any person interested. Modification of the terms of the
charge must be notified to the Registrar.-Sec. 132.
The company is to maintain a Register and Index of Charges.
The Registrar also keeps a Register of Charges.-Sec. 13 I.
The company is to give intimation to the Registrar when a
registrable charge or mortgage is satisfied by payment.-Sec. 138.
The Company Law Board may excuse any omission in tiling
particulars etc. which was accidental or due to inadvertence. The
Register may thereupon be recti fied. -Sec. 14 I.
Pending matters will continue to be under the orders of the
Court.
The Register and copies of instruments by which a charge
is created may be inspected by members, creditors etc.-Sec. I·H.
Consequences of failure to register charges
If a charge or mortgage is not registered in accordance with
the aforesaid provisions, the following consequences ensue :
I. The charge becomes void as against other creditors and
the liquidator in case of winding up (i.e., ihe charge holder loses
priority}.-Sec. 125( i).
744 COMPANY LAW

2. The debt becomes immediately payable.-Sec. 125(3).

3. The officers of the company concerned are liable to
punishment.
4. When a charge becomes void for non-registration, no right
of lien can be claimed on the documents of title.
Nothing in the above rules shall prejudice any contract or
obligation for the repayment of the money secured by the
charge.-Sec. 125(2).

EXERCISES
I. Distinguish between a floating charge and a fixed charge. When
does a floating charge crystallize? (Pages 734-735)
2. \\- hat do you understand by debentures? What are the rights of
the debenture holders? (Pages 733, 738)
3. Define a debenture and distinguish it from a share. State the
different classes of debenture. (Pages 733. 738. 735)
4. State and explain the rules regarding the issue of debentures. What
and how can redeemed debentures be re-issued? (Pages 736-738)
5. Enumerate the mortgages and charges which have to be registered
under the Companies Act. Discuss the effects of non-registration.
(Pages 740-744)
6. Write notes on : Convertible Debentures. (Page 736)
(a) What is a Debenture? What are the different kinds of
Debentures? What are the rights and remedies available to
a debenture-holder in the Company Law?(Pages 733. 735)
(b) The company A has offered to buy all the shares in the B
company and the holders of nine-tenth in value of the shares
in the B company have agreed to the sale. The remaining shares
are held by X, who objects to the sale. May the company A
acquire all the shares in the B Company. (Page 740)
 CONTROL OVER COMPANIES

THE ADMINISTRATION OF COMPANY LAW

The Companies Act of 1956 and various amendments
thereafter have enormously increased the functions of the Central
Government in relation to companies. The object of the Act and
the Amendment is to give to the Government powers of control
which will prevent malpractices, protect the interests of the
investing public and ensure social justice. The administration of
company law has been placed under the control of the Company
Law Board. The Board consists of members appointed by the
Central Government up to nine.

REGISTRAR OF COMPANIES
An important official in connection with company la"
administration is the Registrar of Companies. In almost all the
Siaies there is a Registrar, appointed by the Central Government.
In some States ,there are Assistant, Deputy or Joint Registrars.
There are four Regional Directors with headquarters at Calcutta.
Bombay, Madras and Delhi. The States' Registrars work under
the Regional Directors.
Since 1956, the office of the Registrars has been greatly
expanded. Through the administrative organisation mentioned
above, it is expected to secure co-ordination between the different
offices of the Registrars and the Central Government and also
to provide for a machinery through which the obligations and
duties of the Government as regards Company Law may be
carried out.
The Registrars have a number of important functions :
1. The Junction oj registration: All important documents
like the memo and the articles, mortgages and charges must be
registered with the Registrar.
2. The issue oj certificates : The Registrar issues the
certificate of incorporation, certificate of the commencement of
business etc.
3. The ellforcement oj I'etul'lls : The companies are bound

745
746 COMPANY LAW

to send various kinds of returns and reports. It is the duty of

the Registrar to see that the returns and reports and filed in time.
4. Public information : From the office of the Registrar
members of the public can obtain inspection and copies of
documents relating to companies. .
5. Prosecution of delinquent directors and company officials:
It is the duty of the Registrar to prosecute persons guilty of
offences against the Company Law.
6. Enquiry and investigation : The Registrar can under
certain circumstances enquire and investigate into affairs of a
company.

INVESTIGATION OF THE AFFAIRS OF A COMPANY

There are six different types of enquiries and investigations
into the affairs of a company provided for by the Companies
Act of 1956. They are briefly enumerated below :
I. Special Audit
Under certain circumstances the Central Government can
direct a special audit of a company's accounts of any period.
The Central Government may also direct the audit of cost
accounts.-Sec. 233A. (See p.728)
II. The Registrar's Power of Enquiry (Sec. 234)
If on perusing a document which a company is bound to
submit to him under the Act, the Registrar is of opinion that
further information or explanation is necessary he may, by an
order in writing, call upon the company to submit the same within
a fixed date. If the company fails to submit the explanation or
information by the due date, the company and every official
concerned may be fined. The court can, on the application of
the Registrar, direct the company to give inspection of any
required document to the Registrar.
If the information or explanation is not given, or if upon
perusal of the information and explanation given, the Registrar
is of opinion that the document in question discloses an
unsatisfactory state of things or that it does not disclose a full
and fair statement concerning the matter, the Registrar shall make
a report of the matter to the Central Government.
 CONTROL OVER COMPANIES 747

If it is represented to the Registrar on materials placed before

him by a creditor, contributory or a person interested, that the
business of the company is being carried on fraudulently or
unlawfully, he may after giving an opportunity to the ~ompany
of being heard, direct the company to. furnish any information
or explanation on the matter. Thereafter the Registrar shall
proceed with the matter as described above. If upon enquiry the
Registrar is satisfied that the representation on which he took
action was frivolous or vexatious, he will disclose the identity
of the informant to the company. The company can proceed
against him for defamation etc.)
If the Registrar apprehends that the books and papers of a
company may be destroyed, falsified or hidden, he may seize
them after gelling an order from a magistrate of the Ist class
or a Presidency Magistrate.-Sec. 234A.
III. Investigation by Inspectors (Sections 235-246).
The Central Government may appoint one or more competent
persons as inspectors to investigate the affairs of any company
and report thereon, under any of the following circumstances:
I. On the application of a certain number of members of
the Company : If the company is one having a share capital,
the number of members applying must be at least 200 or members
holding not less than one-tenth of the total voting power. If the
company does not have a share capital, the number of members
applying must be not less than one-fifth of the total number of
members. The application must be supported by evidence and
the Government may require the applicants to give security for
costs, not exceeding Rs. 1,000.
2. On the report of the Registrar: If the answer to an
enquiry by the Registrar under Section 234, is considered to be
unsatisfactory, he is to report to the Central Government. On his
report the Central Government may appoint inspectors.
3. If the company passes a special resolution for such
investigation.
4. If the court declares that the affairs of the company should
be so investigated.
5. If the Central Government is of opinion that (i) the
company is being conducted fraudulently or unlawfully or in a
manner oppressive to any of its members or that the company
748 COMPANY LAW

was formed for a fraudulent or unlawful purpose; (ii) the persons

concerned in the formation of the company or the management
of its affairs have been guilty of fraud, misfeasance or
misconduct; and (iii) the members of the company have not been
given all the information with respect to its affairs which they
might reasonably expect.
Section 235 of the Principal Act has been amended and the
amending provision states that the Central Government on the
basis of a report made by the Registrar appoint. one or more
competent persons as inspectors to investigate the affairs of a
Company and to report thereon in such mann.er as the Central
Government may direct.
Section 236 has been amended and the amended section
states that an application by members of a Company under Clause
(a) Or (b) of Section 235 shall be supported by such evidence
as the Company Law Board may require for the purpose of
showing that the applicants have good reasons for requiring the
invest igation.
Section 237 has been amended and amended provision
declares that the Central Government shall appoint one or more
competent persons to investigate the affairs of a Company and
to report thereon and Illay do so if in the opinion of the Company
Law Board there are circumstances suggesting that the business
of the Company is being run with the intent to defraud it
creditors.
IV. Investigation of Ownership (Sec. 247)
Where it appears to the Central Government that there is
good reason so to do, it may appoint one or ..,ore inspectors
to investigate and report on the membership of any company and
other matters relating to the company, for the purpose of
determining the true persons-
(a) who are or have been financially interested in the success
or failure, whether real or apparent, of the company, or
(b) who are or have been able to control or materially to
influence the pol icy of the company.
The Central Government can investigate the beneficial
ownership of shares as to whether the provisions of Sec. 187C
have been complied with regarding to any share.-Sec.187D.
(See p.635)
 CONTROL OVER COMPANIES 749

V. Information about persons having interest in a com pany

(Sec. 248)
Where it appears to the Cenlral Government Ihat there is
good reason to investigate the ownership of any shares in or
debentures of a company or of a body corporate acting as its
managing agents or secretaries and treasurers (now abolished),
it may appoint inspectors for the purpose or may call for the
information from persons who are interested in Ihe shares and
debentures.
VI. Investigation of associatesbip (Sec. 249)
Where any question arises as to whether any person, finn
or body corporate is or is not, or was or was not, 3n associate
of the managing agent or the secretaries and treasurers, the
Central Government may appoint inspectors for the purpose or
call for the relevant information from any person who is in a
position to give information on the point.

INSPECTORS
Powers and duties of the inspectors (Sections 239, 240, 240A)
I. The inspectors appointed by the Government must enquire
into the affairs of the company concerned.
2. The officers of the company and the directors and
managers etc. must preserve and produce before them all books
and documents required.
3. They must also give evidence on oath and answer
questions put to them, by the inspectors. The inspectors may
examine any other person on oath, if so authorised by the Central
Government.
.. 4. If it is considered necessary, the inspectors may also
examine the affairs of the holding company of the company
concerned, any of its subsidiaries, its managing agents, secretaries
and treasurers and their associates and related companies.
5. The inspectors can seize documents and keep them in their
custody for six months.
Report
After the investigation is over, the inspectors must submit
a report to the Government. They may also submit interim reports
if considered necessary.-Sec. 241 .
750 COMPANY LAW

Government action on tbe report

After considering the report, the Government may take the
following steps :
I. Copies of the report may be sent to all interested parties
and published.
2. Officials of the company and diFectors, managing agents
etc. who are found to be guilty of any offence, must be
prosecuted .
• 3. If it is found that the company is entitled to proceed
against any person for damages, recovery of property, or
misfeasance, the Central Government can institute proceeding for
the purpose.
4. If the investigation discloses the existence of circumstances
which would lead the court to direct winding up of the company
on the ground that it is just and equitable to do so, the Central
Government can cause the presentation of a petition for winding
up of the company.
5. The Central Government may cause an application to be
filed before the court for exercise of the discretionary powers
which have been given to the court in cases of mismanagement
and oppression. (Sections 397 and 398. see below.)
6. The expenses of the investigation may be recovered from
the persons guilty of mismanagement or misconduct.
Certain general provisions regarding investigations
Where in connection with any of the investigations mentioned
above, there is difficulty in finding out the relevant facts, the
Central Government may declare that the shares of the company
shall be subject to certain restrictions, e.g., any transfer of the
shares to be void: where the shares are to be issued in the future,
such issues are to be stopped; the holders of the shares not to
have any voting rights etc. If any person acts in violation of the
above restrictions, he shall be punishable.-Sec. 250.
Section 250 of the amended Act provides that the Company
Law Board may impose restrictions upon shares and debentures
and may prohibit transfer of shares or debentures in certain cases.
Investigations of the type described under III to VI above
can be initiated and continued even if (a) an application has been
made for an order under Section 397 or 398 (see below) or
(b) the company has passed a special resolution for voluntary
winding up.-Sec. 250A.
 CONTROL OVER COMPANIES 751

During investigation questions may be asked from any

person, but legal advisers cannot be forced to disclose privileged
communications' from their clients. There is protection for
bankers as regards confidential information.-Sec. 25 I.
Legal Decisions :
I. Investigation under section 237 is neither judicial nor quasi-judicial
nature. Raja Narayan Lal Bansi/al v Afaneck Phiro;,!
2. The inspector's function is equivale" .,J the function of a fact
finding mission. Ashoka .Harketing .,d v. Union of India. 2
3. Unreasonable declaration of dividends is a primd facie ground for
ordering investigation in the affairs of a company. Ashoka Marketing
Ltd. Vs. Union of India. (Ibid).
4. Judicial Review: The power under Sections 235 10 237 has been
conferred on the Central Government on the faith that it will be
exercised in a reasonable manner. (See under Ill, para. 5. ps. 747-
748). The exislencc of the circumstances mentioned in Section
237(b) is a condition precedent to the formation of opinion by the
Government. The existence of circumstances suggesting that the
company's business was being conducted as laid down in sub-clause
(i) or persons mentioned in sub-clause (ii) were guilty of fraud or
misfeasance or other misconduct to\\'ards the company or towards
any of its members is a condition p.ecedent for the Government
to form the required opinion. The eXIstence of the circumstances
in question is open to judicial review though the opinion formed
by the Government is not amenable to review by the Couns. RohJas
Indllstries Ltd v. S. D Agama/-' Hidaytullah and Shelat JJ. In
Barium Chemicals Ltd Y. Colllpany Law Board'
5. When a CourJ can order an enquil)'? The Court exercising its
powers under Section 237 (a) (ii) of the Act on evidence at least
as strong as may be required by the Central Government. In re
Patrakola rea Co. Ltd.'
6. Under S. 235 of the Companies Act, 1956, it is not obligatory for
the Central Government to direct an investigation. It has a discretion
to appoint or not to appoint inspectors for investigating the affairs
of the company. the word used in the section being ·'may". ,\100/
Chand Gupta v. Jaganl1ath Gupta and Co. (P) Ltd"

MISMANAGEMENT AND OPPRESSION BY THE

MAJORITY
Companies are managed by directors elected by the majority.
As regards matters which are to be decided by resolutions passed
"AIR (1961) Supreme Coun 29 2 (1966) C.W.N. 472
'AIR (1969) Supreme Coun 707 , AIR (1967) Supreme Coun 295
'(1966) 70 C.W.N. 971 , AIR (1979) Supreme Coun 1038
752 COMPANY LAW

in general meeting, it is the opinion of the majority which always

prevails. It has been laid down in many cases that the courts
will not interfere in matters which are within the powers of the
majority to decide. Thus the general rule for company
management is that the decisions of the majority bind the
minority. Foss v. Harbollle l ; Macdougall v. Gardiner. 2 ;
Rajahmulldry EleClrir C "pply Company v. Negeshar Rao. 3
The Court will not ,~terfere in the internal management of
the company.and it will leave such matters to the wisdom of
the directors themselves. In re Sulekha Works LId. 4 But the Court
has the discretion to overrule a resolution of the majority if it
finds that the majority are bent upon causing an injustice to the
minority of shareholders. Ramkissendas Dhanuka v. Satya Charon
LmE)
Sometimes it is found that a group of persons or a particular
person obtains control of the majority of the shares and is running
the company in a manner prejudicial to the company or against
the interests of the minority group of shareholders. In such cases
the minority shareholders can adopt the following measures:
(i) apply to the court-for the winding up of the company on
the ground that it is 'just and equitable' to do so; (ii) apply
to the Company Law Boards for appropriate orders giving relief
without directing winding up: and (iii) apply to the Central
Government for relief. The last two remedies are explained
below.
I. Powers of the Court
Section 397 provides that in cases of oppression, the court
may give relief if it is of opinion.
(a) that the company's affairs arc being conducted in a
manner prejudicial to the public interest or in a manner oppressive
to any member Or members; and,
(b) that to wind up the company would unfairly prejudice
such member or members, but that otherwise the facts would
justify the making of a winding up order on the ground that it
was just and equitable that the company should be wound up.

'(1843) 2 Hare 461 1 (1875) 1 Ch. 413

'( 1955) 2 S.C.R. t066 (Supreme Court) 4 AIR (1965) Cal. 98
'77 LA. 128
 CONTROL OVER COMPANIES 753

Section 398 provides that in cases of mismanagement, the

court may give relief if it is of opinion,
(a) that the affairs of the Company are being conducted in
a manner prejudicial to the public interest or the interest of the
Company; or,
(b) that a material change (not being a change brought about
by or in the interest of the creditors or any class of shareholders)
has taken place in the management and control of the Company
(by changes in the Board of Directors or Manager), and that by
reason of such change, the affairs of the Company are likely to
be conducted in a manner prejudicial to the public interest or
the interests of the Company.
Who can apply for relief?
The petitioning member or members must hold not less than
one-tenth of the issued share capital of the Company on which
all calls due have been paid, or must have obtained the consent
in writing of one hundred or one-tenth in number of the members,
whichever is less. [n the case of a company not having a share
capital, the member petitioning must have obtained the consent
in writing of not less than one-fifth in number of the members-
Sec. 399(1)·to (3).
Under Sec. 397 or 398 not only the members having equity
shares but also the persons holding preference shares may apply
for the appropriate relief.
The Central Government may authorise a member or members
to apply even though the above conditions are not fulfilled, if
it considers it just and equitable to do so. [n such cases it may
ask such members to give security for costs.-Sec. 399 (4) and
(5).
The Central Government may itself apply under Section 397
or 398, and authorise any person to apply.-Sec. 401.
Notice of all applications under Sections 397 and 398 must
be given to the Central Government and the court shall take into
consideration the representations of the Central Government, if
any.-Sec. 400.
What orders can be passed?
Under both the sections the court can pass, "such orders as
it thinks fit". So the powers of the court are very wide. Section
402 gives some examples of the type of order which the Court

Commercial Law - 48

•
754 COMPANY LAW

may pass, viz., orders for regulating the future conduct of affairs
of the Company; orders directing the purchase of the shares of
any members by other members or by the Company; reduction
of capital; the termination of any agreement between the
Company and its Manager, Managing Director or any of its other
Directors; orders for the termination or revision of any agreement
between the Company and any other person; and orders for
setting aside any transaction which would in the case of an
individual be deemed in his insolvency to be a fraudulent
preference.
Oppression and Mismanagement
The definition of Oppression and Mismanagement has been
discussed in the Supreme Court and High Courts. The cases are
cited below : •
I. In Shanti Prasad Jain v. Kalinga Tubes Ltd., I the Supreme
Court of India observed that in an application under Sec. 397
it is not enough to show that there is just and equitable cause
for winding up of the company. It must further be shown that
the conduct of the majority shareholders is oppressive to the
minority as members and this requires that events have to be
considered not in isolation but as parts of a consecutive story.
The conduct must be burdensome, harSh and wrongful and mere
lack of confidence between the majority shareholders and the
minority shareholders would not be enough. Such oppression
must involve at least an element of lack of probity or fair dealing
to a member in the matter of his proprietary rights as a
shareholder.
2. The word "oppressive" means burdensome, harsh and
wrongful. Re H. R Harmer Ltd 2
3. In Richardson & Cruddas Ltd., Calcutta High Court
removed the directors and others from the management of the
company. The company was placed under a Special Officer.
L. I. C. of India v. H. D. Mundra & Others. 3
4. The House of Lords said, "whenever a subsidiary is
formed with an independent minority of shareholders, the parent
company must, if it is engaged in the same class of business,
accept as a result of having formed such a subsidiary an
1(1965) I.S.C.A. 556 (Supreme Court) 2 (1958) 3 All E.R. 689
3(1959) 63 C.W.N. 439

•
 CONTROL OVER COMPANIES 755

obligation so to conduct what are in a sense its own affairs as

to deal fairly with the subsidiary". Scottish Co-operative
Wholesale Society Ltd. v. Meyel: I
5. Negligence and inefficiency even assuming such are
proved, do not amount to mismanagement or oppression as
contemplated by the Act. Mohta Bros. v. Calculla Landing &
Shipping Co. Ltd. 2 Needle Industries (India) Ltd.. and others v.
Needle Industries Newey (India) Holdings Ltd. and Others. J
6. On a true construction of Section 397, an unwise.
inefficient or careless conduct of a Director in the perfonnance
of his duties cannot give rise to a claim for relief under that
section. The person complaining of oppression must show that
he has been constrained to submit to a conduct which lacks in
probity, conduct which is unfair to him and which causes
prejudice to him in the exercise of his legal and proprietary rights
as shareholder. Needle Industries (India) Ltd. and others v.
Needle Industries Newey (India) Holdings Ltd.. and others. 4
'Consequences of an order under Sections 397 and 398
If the order of the court makes an alteration of or addition
to the company's memorandum or articles, then (subject to the
provisions of the order) the Company concerned shall not make
any further alteration or addition which is inconsistent with the
order, without the leave of court.
A certified copy of any such order altering or adding to or
giving leave to alter or add to, the memorandum or articles, must
be filed with the Registrar within thirty days and default in
compliance with this requirement renders the Company and every
officer in default liable to a fine which may extend to five
thousand rupees.
Any termination or revision of an)' agreement made by tile
order of court shall not give rise to any claim for damages or
for compensation. Further,. no Director shall, without the leave
of the court, be appotnted or re-appointed or be entitled to act
for and under the Company for a period of five years from the
date of the order, Any contravention of this provision IS
punishable with imprisonment for a tenn which may extend to
one year Or with fine up to Rs. 5000/- or wiih both.
'(1958) 3 A.E.R. 66 '(1969) 73 C.W.N. 425
, AIR (1981) Supreme Court 1298 4 AIR (1981) Supreme Court 1293
756 COMPANY LAW

I. Powers of /he Company Law Board: The Company Law

Board in empowered to end oppression of minority and to prevent
mismanagement. It has the power
(a) to regulate the conduct of company's affairs in future,
(b) to purchase the shares and interests of any members of
the company,
(e) to reduce consequently the share capital of the company,
if the company purchases shares,
(d) to terminate, set aside or modify any agreement between
the company and management upon such terms and
condition which company thinks to be just and equitable,
(e) to set aside any fraudulent preference made within three
months before the date of application,
(f) to provide far any other mailer which Company Law
Board thinks to be just and equitable,
(g) the Company Law Board may order that no change will
be made in the Board of Directors or membership or the
company without securing its prior approval.
II. Powers of the Central Government
A. Under Sec/ions 388B /0 388E. Power /0 remm'e
managerial persollnel.
The above Sections empower the Central Government to
make a reference to the High Court when it is of opinion that
there are circumstances suggesting the following :
(a) any person connected with the management of a company
. is guilty of fraud, misfeasance, persistent negligence or
default in carrying out his obligations and functions under
the law, or breach of trust; or,
(b) the business of the company is not or has not been
managed by such person in accordance with sound
business principles or prudent commercial practices; or,
(e) the management of the company by such person caused
or is likely to cause serious injury or damage to the
interest of the trade, industry or business to which such
company penains; or,
(d) the business of the company has been conducted by a
person with intend to defraud its creditors. members or
any other person or otherwise for a fraudulent or unlawful
purpose or in a manner prejudicial to public interest.
 CONTROL OVER COMPANIES 757

The person against whom the case is referred will be joined

as a respondent. The High Court may pass interim orders, such
as, stopping the respondent from carrying on his duties and
appointing a suitable person in his place.
If the High Court records a decision that the respendent is
not a fit and proper person to take part in the management of
the company, the Government can remove him from office. The
person so removed, cannot hold any office of management in
any company for the next five years. He cannot also receive any
compensation for loss or termination of office.
B. Under Section 408, as amended in 1974. Power to prevent
oppression or mismanagement.
If an application is made by not less than 100 members of
a Company or members holding not less than 1I10th of the voting
power, complaining of oppression and mismanagement and the
Central Government is satisfied that the allegations are true it
can appoint such number of persons as the Central Government
may, by order in writing, specify as being necessary to effectively
safeguard the interests of the company. or its shareholders or the
public interest. Such directors are to hold office of the company
for a specified period, not exceeding 3 years.
The Central Government can issue such orders of its own
motion.
Where any person is appointed by the Central Government
to hold office as director or additional director of a company
in pursuance of the above rule, the Central Government may issue
such direction to the Company as it may consider necessary or
appropriate in regard to its affairs.
The directors or additional directors so appointed, is to report
to the Central Government from time to time with regard to the
affairs of the company.
A person appointed director under the aforesaid provision
need not hold any qualification shares, not is he liable to retire
by rotation. But he may be replaced by another person by the
Central Government any time. So long as such a person holds
office, no change in the Board of Directors has any effect unless
confirmed by the Central Government.
Section 408 of the amended Act provides that "the Central
Government may appoint such number of persons as the Company
Law Board may, by order in writing, specify as being necessary
to effectively safeguard the interests of the Company or its
758 COMPANY LAW

shareholders, as directors thereof for such period, not exceeding

three years on any occasion.
C. Under Section 409. Power to prevent change in board
of directors: If any Director or Manager complains to the Central
Government thai as a result of a change in the ownership of
the shares of the Company, the Board of Directors of the
Company is likely to change in a manner prejudicial to the
Company and the Central Government is satisfied that the
allegation is true, it can direct that no change in the Board shall
have effect until confirmed by the Central Governmen!. This
section does not apply to a private company, unless it is a
subsidiary of a public company.
D. By the amendment of Companies Act in 1974 : The
Central Government has been given power to frame rules
regarding investment and dividends of companies. Sees. I08A
to I08H, provide restrictions upon shares designed to prevent
taking control of companies by groups or combine which will
be prejudicial to public interest. (See pages 641-642 and 740)
"LIFTING T~ VEIL" OF THE,COMPANY
An incorporated Company has a legal personality. llut a
Company, as a legal person, can be distinguished from the
individual persons who own the shares of the comp~U1y. A
company can be used for lawful activities. On the other hand,
the owners and managers of the company can use it as a clock
for fraudulent activities .. The human agency which works a
company can use it as a device or as a veil or as a stratagem
for illegal and unsocial activities.
It is sometimes necessary to find out the ownership of the
shares. It is also necessary to find the persons who control the
company. This is called. "Lifting or piercing of the Corporate
veil". It can be done by the Courts :
I. Relationship: The relationship between holding company
and its subsidiaries can be investigated. According to Sec. 212
of the Companies Act the balance sheet of a holding company
includes the particulars of subsidiaries.
2. Reduction of membership: If the number of membership
is reduced to below seven in a public company and below two
in a private company, the remaining members become liable to
the creditors of the company to an unlimited extent (Sec. 45),
The number of membership and their names can be investigated.
 CONTROL OVER COMPANIES 759

3. Ownership : It is sometimes necessary to find out the

ownership of the shares and the extent of the controlling power
or interest in a company relating to taxes. The Court has power
to disregard Ihe corporate personality if it is used for tax evasion
or to dodge tax obligation. Apthorpe v. Peter SchenhoJen Brewillg
Co. Ltd. I "Though a company has a separate juristic personality,
Income-Tax authorities and Courts are entitled to lift the veil of
corporate entity of a company and pay regard to economic
realities behind legal facade". Commissioner oj Income Tat,
Madras v. Sri Meenakhsi Mills. 2
4. Illegality: If a company.is formed for an improper or
unlawful object, the Court can lift the veil of the corporate entity
so that the guilty person can be punished. Jones v. Lipman. J
5. Abuse oJpower: A Court can enquire into abuse of power
by controlling interest in a company under Sec. 395.
(Mismanagement and Oppression.-See p.751)
6. Trading with enemies: A company can be investigated
if it is carrying on trade with enemy aliens. Daimler & Co. Ltd.
v. Continent Tyre and Rubber C,,·
7. Monopoly: A company can be investigated if it was
creating a monopoly.

MISCELLANEOUS PROVISIONS
InJorlllation 0I1l1 Statistics: The Central Government may,
by order, require companies to furnish infornlation and statistics
regarding their constitution and working.-Sec.615.
Annual Report by Government: The Central Government is
required to prepare an annual report regarding company hw
administration and submit it before the Parliamcnt.-Section 638.
Protection: No suit, prosecution or other legal proceeding
shall lie against officers of Government for anything which is
in good faith done or intended to be done in pursuance of this
Act or any rules made thereunder, or for the publication of any
report Qr paper by the authority of the Government.-Sec. 635A.
Condonatioll oj Delay : If any application to the Central
Government or the filing of any document with the Registrar is

1 (1899) 4 Tax Cas 41 , AIR (t 967) Supreme Court 819

) (11961) I WLR. 483 , (1916) 2 A.C. 307
760 COMPANY LAW

not made within the time prescribed by the Act, the delay may
be condoned by the Central Governinent for reasons to be
recorded in writing.-Sec. 637B.

EXERCISES
I. Explain the jurisdiction of the couns to interfere with the
management of a company at the instance of the minority· of
shareholders. (Page 751)
2. Discuss the powers of the Coun for the prevention of oppression
and mismanagement of a company. (Page 752)
3. Show how the Central Government can remove managerial
personnel of a company. (Page 756)
4. "The conduct must be burdensome, harsh and w~ongful and the
mere lack of confidence between the majority shareholders and the
minority shareholders would not be enough". Discuss.
(Pages 753-758)
5. State the powers of Central Go ,.roment when oppression and
mismanagement is complained of. State who can made such a
complaint to the Central Government. (Pages 753-758)
6. Under what circumstances the law would disregard the legal
personality of a company. (Pages 758·759)
7. What are the powers and duties of an Inspector appointed by the
Central Government to investigate into the affairs of a company?
(Page 749)
8. What are the conditions under which the Central Government may
appoint inspectors for investigation of affairs of a company?
(Pages 749-751)
9. State the provisions of the Companies Act, 1956 for prevention
of oppression and mismanagement in a company. (Page 751)
10. Comment on : 'Majority must prevail' is the principle of company
management. (Page 751)
II. Give an outline of the organisational machinery through which
administration of Companies Act of India is carried out.
(Pages 745-746)
 11 WINDING UP

e...t The winding up or liquidation of a Company means the

termination of the legal existence of a Compan:t by stopping its
b;;5iness, collecti~gJ~assets and distributing the assetSamong
creJiiOrs and shareholders, in the manner laid down 111 the f\ct.
According to Professor Gower winding up ()fa company
represent? the process whereby _its life lSeoOeOan-crlfs property
a<;!ministrated for the be~of its creditors and members.!

MODES OF WINDING UP
There are ~ methods of winding up a Company :
\YCompulsory Winding Up by tbe Co~
,..u:Voluntary Winding Up by the members themselves or by
the creditors) .
Ill. Voluntal)' Winding Up under therl'l~-u-p-en--:'i-'si:-o-n-o-f::-:th-e Cou.[l]

COMPULSORY WINDING UP
kompulsory Winding Up takes place when a Company IS
directed 10 be wound up by an order of Cou~.
Grounds of Compulsory Winding Up (Sec. 433)
A Company may be wound up by the court under the
following circumstances :
(a) Spedal Resolution of the Company
If the Company has, by special resolution resolved that the
Company be wound up by Court.
(b) Default
If default is made in delivering the statuorty report to the
Registrar or in holding the statutory meeting. •
C~mments : In this case the Court may instead of ordering
winding up, direct the holding of the meeting and filling of the
report and order the party responsible for the default to pay the
cost of the proceedings before the court.

761
762 COMPANY LAW

(e) Not Commencing or Suspending the Company

If the Company does not commence its business within a
year from its incorporation, or suspends its business for a whole
year.
Comments: The Court will not direct winding up under this
clause if satisfactory reasons are given for the delay or suspension.
(d) Reduction of Members
If the number of members is reduced, in the case of a public
Company to below seven, and in the case of a private Company
to below two.
(e) Inability to pay debts
If the Company is unable to pay its debts. (See below for
the circumstances under which a company is deemed unable to
pay its debts.]
(f) The just and equitable clause
If the Court is of opinion that it is just and eqUitable that
the Company should be wound up.
The interpretation of 'just and equitable' clause depends on
the facts of each case. The court may order winding up of a
company (I) when the object for which it was incorporated has
substantially fai led or it is impossible to carry on the, business
of the company except at a loss or the existing and probable
assets are inadequate to meet the liabilities, (2) when the majority
of the shareholders are using their powers unfairly or (3) where
there is a deadlock in the management of the company or (4)
where public interest is likely to bE! prejudiced, (5) when the
company was farmed to carry out fraudulent or illegal business,
(6) when the company is a mere bubble and does not carry on
any business.
Comments: The Court may refuse to order winding up under
this clause if it is of opinion that some other remedy is available
to the petitioners and they are acting unreasonably in asking for
winding up, instead of pursuing the other remedies.
"There must be materials to show when 'just and equitable'
clause is invoked, that it is just and equitable not only to the
persons applying for winding up but also to the company and
to all its shareholders.
 WINDING UP 763

A prima facie case has to be made out before the court can
take any action in the matter. Even admission of a petition which
will lead to advertisement of the winding up proceedings is likely
to cause immense injury to the company if ultimately tile petition
has to be dismissed. The interest of the petitioner alone is not
of predominant consideration". Hind Overseas Private Ltd. v.
Raghunath Prasad JhunjhunwaJ/a & another. 1
This clause gives a wide discretion to the Court and
empowers the Court to order winding up in cases not coming
within the previous five clauses.
The following examples will show how the "just and
equitable" clause has been used.
Examples :
(i) Los,f, Winding up may be ordered where a Company is carry'ing
on its business at a loss and where it is totally impossible to make
any profits.
(ii) Loss of substratum of the company. Where the "substratum of the
Company" is gone, a Winding up order will be issued. The
substratum of a Company means its subject-matter or the objects
for which it was incorporated. A company had no title to the mine
and had no prospect of obtaining possession of it. In re Hm'en Gold
~fining Co.2 A Company w¥ formed for working a German patent.
The Gennan patent was not granted but the company purchased a
Swedish patent. It was held that the substratum of the company
failed. Re German Dale Coffee Company3 A company lost its
business through nationalization. Re Eastern Telegraph Co. f.ld. 4
(iii) Deadlock in management. A Company may be wound up where
there is a deadlock in the management. In the case of fenldje
Tobacco Company5 there were two Directors who were not on
speaking terms and so no business could be conducted and winding
up was ordered.
(il') Fraudulenl object. A Company may be wOLnd up under this clause
if the objects of the Company are fraudulent.
(\1) Misappropriation and misconduC'- Where a director misappropriated
the funds of a company an order of winding up will not be 'just
or equitable" because it is a sound concern. But if the rights of
the shareholders are affected and in addition there is misconduct,
the company can be wound up under section 433(1). Rajahmundry
Elee/ric Supply Co. v. A. l\'ageswar Rao. 6

I AIR (1976) Supreme Court 565 220 Ch. 0 151

J 20 Ch. D. 169 4 (1947) 2 A.E.R.104
'(1916) 2 Ch. 426 6 (1955) 2 S.C.R. 1066. 1073
764 COMPANY LAW

Company when deemed unable to pay its debts (Sec. 434)

A company is deemed to be unable to pay its debts under
the following circumstances :
I. If a creditor, entitled to receive a sum not less than
Rs. 500, demands the money in writing and the company does
not pay the money or settle the claim within three weeks of the
date of demand. The notice of demand may be signed by the
creditor or by his duly authorised agent or legal adviser.
If there are valid grounds for disputing the creditor's claim
no order for winding up will be passed.
2. If execution or other process (issued on a decree or order
of any court in favour of a creditor of the company) is returned
unsatisfied in whole or in part.
3. If the court, after taking into account the ·contingent and
the prospective liabilities of the company, is of opinion that the
company is unable to pay its debts.

Who can apply for Winding up? (Sec. 439)

Subject iO the qualifications mentioned below, an application
for the winding up of a company can be made to the court by:
(i) the Company (ii) any creditor or creditors, including any
contingent or prospective creditor or creditors (iii) any
contributory (which means a person liable to contribute to the
assets of the company in the event of winding up) (iv) any of
the aforesaid parties together (v) the Registrar (vi) a person
authorised by the Central Government in cases where the Central
Government can ask for the winding up of a company.
Company: A company can apply to the Court for winding
up after a special resolution was passed in a meeting of the
company.
Contributory : Any contributor can apply for winding up
under ground (d) of Section 433. (See Grounds of Compulsory
winding up). A contributory cannot apply on any other ground
unless he was a registered shareholder for at least 6 months
during the immediately preceding 18 months, or had obtained
the share by the death of a previous hold~r.
All or any of the Prior Parties-under sec. 439(1)(d) all or
any of the prior parties may file a petition to the court for winding
up.
 WINDING UP 765

Registrar : The Registrar is entitled to apply for winding

up under grounds (b) to (f) of Section 433. He must obtain the
previous sanction of the Central Government. If he applies under
ground (c) he mllst be satisfied on perusal of the balance sheet
or the report of an inspector or special auditor that the company
is unable to pay its debts.
Government : The Central Government can apply for
winding up under ground (f) if, such action is considered
necessary after an enquiry into the affairs of the company by
inspectors. (See Ch. 10).
Creditors: Creditors usually apply for winding up on the
ground that the company is unable to pay its debts. The court
will not order winding up if the claim is doubtful or if the
company can show good grounds for non-payment. When a
creditor applies for winding up. leave of the court is necessary.
Leave will not be granted unless a prill(a facie case is made out
and unless security for the courts is given.
Workers: The workers of a Company are entitled to appear
at the hearing of the winding up petition whether to support or
to oppose it so long as no winding up order is made by the Court.
The workers have a locus to appear and be heard. They would
also be entitled to prefer an appeal and contend in the appeal
that no winding up order should have been made by the Company
Judge. Natiollal Textile Workers· Union v. P. R. Ramakrishnan.'
In addition, winding up can also be ordered of the Board of
Industrial Finance & Reconstruction (BIFR) orders the winding up.
~cement of Winding Up
. The winding up of a Company by the Court is deemed to
commence from the time of the presentation of the petition for
winding up.-Sec. 441.
Where. there was a resolution for voluntary winding up,
before the presentation of the petition to Court, the winding up
is deemed to commence from the date of the resolution. But the
Court may direct otherwise in cases of fraud and mistake.

POWERS OF THE COURT

After a winding up petition is filed, noti~e is issued on the
Company to appear and state its case if any. After hearing both
1 AIR (1983) Supreme Court 75
766 COMPANY LAW

sides, the Court may dismiss the petition, adjourn the hearing
conditionally or unconditionally, make any interim order necessary
or pass an order for winding up.-Sec. 443.
If the order for winding up is passed, the Court appoints
a Liqu idator whose function is to take charge of and complete
the winding up proceedings. To. facilitate winding up proceedings
the Companies Act gives the following powers to the Court.
1. Stay
The winding up proceedings may be stayed either altogether
or for a limited period if considered necessary.-466.
2. List of contributories
The Court is to settle the list of contributories, i.e.,
shareholders liable to pay money to the Company, determine how
much is payable by each and direct the payment of the amount
so determined.-Sections 467, 469.
3. Adjustment of the rights of the contributories
The Court adjusts the rights of contributories among
themselves and distributes any surplus among persons entitled
thcreto.--Sec. 475.
4. Delivery to the liquidator
The. Court may direct delivery to the Liquidator of any
money, property or books and papers in the custody or control
of any Contributory, Trustee, Receiver, Banker, Agents, Officer
or Employee of the Company, to which the Company is prima
facie entitled.-Sec. 468.

5. Payment of calls
if any callS' are due, the Court may direct the payment of
the same.-Sec. 470.·
6. Proof of the claims
The Court may fix a time within which creditors are to prove
their claims, and may exclude creditors, not proving within the
time, from the benefit of any distribution made before those debts
and claims are proved.-Sec. 474.
 WINDING UP 767

7. Giving Priority
In case of deficiency of assets, the Court may give priority
to the payment of costs and charges of the winding up
proceedings.-Sec. 476.
8. Summon for questioning
The Court may summon, for questioning, persons suspected
of having in their possession property, b ,~:,s and papers of the
Company, persons indebted to the Comp2 ny, and persons capable
of giving information regarding the formation of the Company
and its dealings and transactions. The Court may direct returns
of property of payment of the moneys due to the liquidator. If
any person summoned fails to appear, he may be arrested.-Sec.
477.
9. Public Examination
If the Liquidator reports that any person concerned with the
formation of the Company or any officer of the Company, is
guilty of fraud, the <;:ourt may direct his public examination. He
can thereupon be publicly questioned in Court by the Courts.
Creditors Contributru-ies and ,he Official Liquidator.·-Sec. 478.
10. Arrest of a contributory
If it is found that a contributory is about to quit India or
to abscond or to remove and conceal any property for the purpose
of avoiding payment or avoiding examination he may be arrested
and the relevant books, papers and movable property may be
seized.-Sec. 479.
11. To con,'ene Meetings
The Court may convene meetings of creditors and
contributories with a view to ascertain their wishes.-Sec. 557.

OFFICIAL LIQUIDATORS
Appointment
The Companies Act provides that in each High Court there
shall be an officer known as the Official Liquidator appointed
by the Central Government. There may also be Deputy or
Assistant Official Liquidators. In High Courts where there is
insufficient work, there may be part-time Official Liquidators.
768 COMPANY LAW

[n District Courts the Official Receiver or such other person as

the Central Government will decide shall be the Official
Liquidator.-Sec. 448.
Upon the presentation of a petition for winding up, the Court
may appoint, the Official Liquidator as the provisional liquidator.
When the winding up order is passed, the Official Liquidator
becomes the Liquidator of tile Company.-Sec. 449.
Duties of the Liquida 'or
I. The liquidator shall conduct the proceedings in winding
up the company.
2. After the winding up order is made, the Liquidator shall
take into his custody and control all the properties, effects and
actionable claims to which the Company appears to be entitled.
3. The Liquidator is to make a list of creditors.
4. The Liquidator is to summon general meetings of creditors
and contributories, in order to find out their wishes.
5. This Liquidator is to pay the claims of the creditors pro
rata. [f the assets are sufficient to pay all the creditors, the left
balance is to be distributed to the shareholders according to their
rights.
6. [n all the above matters, the Liquidator is subject to the
control of the Court and must obtain directions from the Court
whenever necessary.
7. The Liquidator must pay all moneys received by him into
the public account of India in the Reserve Bank of India. He
must submit the prescribed returns and reports to the Court. He
must 'keep the prescribed books of account and they shall be
audited at least twice a year.
8. The liquidators shall keep proper books for making entries
or recording minutes of the proceedings at meetings.
9. The liquidator shaU present to the court an account of
his receipts and payments as liquidator.
10. The liquidator may call a meeting to determine whether
a committee of inspection is to be appointed.
Comments: The Central Government is to keep watch over
the conduct of the Liquidator and is to take suitable action if
he does not carry out his duties faithfully. The-Central Government
may direct a local investigation of the books and vouchers of
liquidators.
 WINDING UP 769

Statement of Affain
After the liquidator has been appoinfed, it ~tatement of the
affairs of the Company is to be made to him in the prescribed
form, verified by an affidavit, and containing particulars regarding
the assets, debts and liabilities, names and addresses of the
creditors etc. The statement shall. be verified by a Director and
the Manager, Secretary or other Chief Officer of the Company.
The Statement of Affairs is required in both Compulsory and
Voluntary Winding up.-Sections 454 and 511 A.
The Statement of Affairs enables the liquidator to ,know the
position of the Company. The Court may dispense with the
submission of the Statement of Affairs.
Report by Ofli~ial Liquidator
As soon as practicable after the receipt of the Statement of
Affairs and within 6 months after the date of the winding up
order (or within such extended time as the Court may allow)
the Official Liquidator shall submit to the Court a preliminary
report. The report shall contain a statement of the amount of
the capital is~ued, subscribed and paid up, the estimated amount
of assets and liabilities, causes of failure of the Company, and
whether iii the liquidator's opinion, fraud and punishable offences
have been committed by directors and others, and further enquiry
is necessary. The Liquidaior may submit other report later on
whenever necessary, particularly as regards evidence of fraudulent
practices.-Sec. 455.
Powen of the Liquidator (Sec. 457)
(1) The liquidator in a winding up by the Court has power
to do the following things with the sanction of the Court-
(a) to institute or defend any suit, prosecution, or other legal
proceeding, civil or criminal, in the name and on behalf
of company;
(b) to carry on the business of the company so far as may
be necessary for the beneficial winding up of the company;
(c) to sell the immovable and movable property and ac\ionable
claims of the company by public auction or private
contract, 'with power to transfer the whole thereof to any
person or body corporate or to sell to the same in parcels;

Commercial Law - 49
770 COMPANY LAW

(d) to raise on the s.ecurity of the assets of the cOlTlpany any

money requisite ;
(e) to do all such other things as may be necessary for winding
up the affairs of the company and distributing its assets ;
(f) to appoint any advocate, attorney or pleader entitled to
appear before the court to assist him in his duties.
With the sanction of the Court, the Liquidator can pay any
class of creditors in full, make any compromise or arrangement
with creditors; and compromise any call or liability.-Sec. 546.
The liquidator can disclaim any onerous property or
unprofitable contract.
(2) The liquidator in a winding up by the Court has power
to do the following things, without takin~ special permission from
the Court- , ,j;
(a) to dO,all acts and to execute, in the name and on behalf of
the company, all deeds, receipts and other documents, and
for that purpose to use, when necessary, the company's seal;
(b) to inspect the records and returns of the company on the
files of the Regi~trar without. payment of any fee; ,
(c) to prove, rank" and claim in the insolvency of any
contributory, for any balance against" his estate, and to
receive dividends in the insolvency; ,
(d) to draw, accept, make and indorse any bill of exchange,
hundi or promissory, note in ,the name and on behalf of
, the company; " .
(e) to take out, in his official name, letters of ad.ministration
to any deceased contributory, and to do in his official name
any other act necessary. for obtaining payment of any
money due from a contrib\ltory or his estate wllich cannot
be conveniently done in'the name of the company;
(f) to appoint an agent to do any business which the liquidator
in unable to do himself. '
The Court can limit or modify the exercise of any of the
powers of the liquidator enumerated under (2) above.
The liquidator can apply to the Court for directions on any
matter.
The liquidator can summon meetings of creditors and
contributories.
No Receiver can be apPointed over assets in the hands of the
Liquidator except by or with the leave of the Court.~Sec. 453.
 WINDING UP 771

The powers given to a liquidator by virtue of provisions of

section 457 must not offend the general law of the land.
Jawanlrai v. The Siale of Bombay. I

DISCLAIMER OF ONEROUS PROPERTY BY

LIQUIDATOR
Where any part of the property of a company, which is being
wound up, consists of (a) land burdened with onerous convenants
(b) shares or stock in companies (c) any property which is
unsalable or not readily saleable, or (d) unprofitable contracts,
the Liquidator may, with the leave of the court, give up such
property. This is known as Disclaimer of Onerous Property.-
Sec. 535.
The Liquidator may disclaim a property even though he may
have taken possession of the property or done someth ing in
relation to it.
The disclaimer must be made in writing signed by the
Liquidator within twelve months after the commencement of the
winding up or such extended time as may be allowed by the
court. But where such property did not come to the knowledge
of the Liquidator within one month of the commencement of the
winding up, he may exercise his right of disclaimer at any time
within twelve months after he has become aware thereof such
extended period as may be allowed by the court.
Any person, interested in a property or a contract may apply
to the Liquidator in writing, requiring him to decide whether he
will or will not disclaim. If the Liquidator does not (within
twenty-eight days of the receipt of the· letter or such extended
time as the court may allow) give notice to the applicant that
he intends to apply to the court for leave to disclaim, he shall
be deemed to have adopted it.
Before gra"ti:lg leave to disclaim the court may also impose
conditions on the disclaimer.
Upon disclaimer, the rights, interest and liabilities of the
company in that property come to an end. The court may direct
delivery of the property to any person entitled thereto.

I AIR (1956) Supreme Court 575

772 COMPANY LAW

Any person injured by the operation of a disclaimer shall

be deemed to be a 'Creditor of the company to the amount of
the compensation or damages payable in respect of the injury.
He may prove the amount as a debt in the winding up.

COMMITTEE OF INSPECTION
The Committee of Inspection is a Joint Committee of
creditors and contributories, consisting of not more than 12
persons. The function of the Committee is to keep a general
watch over the acts of the liquidator for the protection of the
interests of the creditors and contributories. For this purpose the
Committee has the right to inspect the accounts of the liquidator
at all reasonable times.
The court may, at the time of making the winding up order,
or at any time. thereafter, direct that there shall be appointed a
Committee of Inspection. Within two months from the date of
such direction, the liquidator shall convene a .meeting of the
creditors for the purpose of determining who are to be members
of the committee. He shall also call a meeting of the
contributories, within 14 days after the creditors' meeting (or
such further time as may be allowed by the court). The
contributories" are to consider the decision of the creditors as
regards the membership of the committee. If the two gr"oups
agree, the committee shall be formed accordingly. Otherwise th€
Court shall decide how the Committee is to be constituted.
The Committee of Inspection may meet as often as it desires
The liquidator or any member of the Committee can call I
meeting. One third of the" number of members, or two, whicheve
is higher constitutes the quorum. A member may resign. He lose:
membership if he becomes an insolvent or compounds with hi:
creditors or absents himself from five consecutive meetings. l
member may be removed by resolution of the group (creditor
or contributories) from whom he has been selected as membel
(Sections 464, 465).

CONTRIBUTORIES
Definition
The term "Contributory" means every person liable t
contribute to the assets of a Company ir1'"the event of its be in
 WINDING UP 773

wound up. When a limited liability Company is wound up only-

those shareholders who have not paid in full the amount on their
shares are liable to contribute. But the Companies Act includes,
within the term contributory, the holders of fully paid up
shares.-Sec. 428
The reason is that in winding up proceedings it is necessary
to prepare a complete list of all the members of a company so
that the Court can determine, not only who shall contribute to
the assets but also, who will get the surplus assets, if any.
The Iist of contributories is made up of two parts, A and
B. The A list contains the names of persons who are members
of the company on the date of the winding up. The B list contains
the names of persons who were members within a period of one
year previous to the date of winding up.
Rights and Liabilities
The Court settles the list of contributories. The rights and
liabilities of different contributories are determined by the Court
according to the rules laid down in the Act. Section 426 provides
as follows:
(a) A past member shall not be liable to contribute if he has
ceased to be a member for one year or upwards before
the commencement of the winding up;
(b) a past member shall not be liable to contribute in respect
of any debt or liability of the company contracted after
he ceased to be a member;
(c) no past member shall be liable to contribute unless it
appears to the Court that the present members are unable
to satisfy the contributions required to be made by them
in pursuance of this Act;
(Ii) in the case of a company limited by shares, no contribution
shall be required from any past or present member
exceeding the amount, if any, unpaid on the shares in
respect of which he is liable as such member; and
(e) in the case of a company limited by guarantee, no
contribution is required from any past or present member
exceeding the amount undertaken to be contributed by him
to the assets of the company in "the event of its being
wound up.
•
774 COMPANY LAW

The liability of a contributory creates a debt payable by him

at the time specified in calls made on him.-Sec.429 .
. Upon the death of a contributory, his legal representative
becomes a contributory.-Sec. 430. In case of insolvency, the
contribution due can be proved as a debt in the insolvency
proceedings.-Sec. 431. If the contributory is a company which
is being wound up, its liquidator represents it and the amount
of contribution due can be proved as a debt in the liquidation
proceedings of the contributory com\1any.-Sec. 432.
Contributory's right of set-off, where a contributory has been
called upon to pay any money due from him to the company,
the right to set off is allowed in the following cases.
\. In the case of an unlimited company, the court may allow
to the contributory by way of set-off any money due to him by
the company on any independent dealing but not in respect of
any money due to him as dividend or profit.
2. In the case of a limited company the court may provide
the above allowance to any director or manager having unlimited
liability.
3. In the case of any company limited or unlimited where
all the creditors have been paid in full. In such a case any money
due to a contributory may be permitted to be set-off against any
subsequent call.
Obligations of directors and managers whose liability is
unlimited (Sec. 427)
Where according to the Act and the rules of a company the
liability of any director, or manager is unlimited, he shall in
addition to his liability, if any, to contribute as an ordinary
member, be liable to make a further contribution as if he were
at the commencement of the winding up, a member of an
unlimited company. But he shall not be liable to make such
further contributions under the following circumstances.
(a) If he has ceased to hold office for a year or upwards before
the commencement of the winding up;
(b) if the debt or liability for which contribution is required
was contracted after he ceased to hold office; and,
(c) unless, the Court deems it necessary to require the
contribution.
 /'
/ WINDING UP

~ VOLUNTARY WINDING UP
Voluntary winding up means winding up by the
themselves without the intervention of the court.
Section 484 of the Act provides that a com pan:' ~411 ue
wound up voluntarily under the following circumstan,:es':
I. By an Ordinay Resolution of the members passed in a
general meeting in the' following cases-
(a) where the duration of the company was fixed by the
articles and the period has expired; and
(b) where the articles provided for winding up on-the'
occurrence of any event and the specified event has
occurred.
2. By a Special Resolution passed by the members in all
other cases.
When a resolution is passed for voluntary winding up, it must
be notified to the public by an advertisement in the Official
Gazette and in a local newspaper,-Sec. 485.
A voluntary winding up is deemed to commence at the time
when the 'resolution for the winding up is passed.-Sec, 486,

TYPES OF VOLUNTARY WINDING UP ,

There are two types of voluntary winding up. If the company
is, at the time of winding up, a solvent company, i.e" able to
pay its debts and the directors make a declaration to that effect,
it is called a Members' Voluntary Winding Up. If the company
is not in a position to pay its debts and the directors make no
declaration of solvency it is ~alled a Creditors' Volur.:ary
Winding Up.
The Declaration of Solvency (Sec. 488)
The Declaration of Solvency is to be made by all the
directors (when there are only two directors) or by the majority
of the directors (when there are more than two directors). The
declaration must be to the effect that they have made a full
enquiry into the affairs of the company and that they have formed
the opinion that the company has no debts, or that it will be
able to pay its debts in full within a specified period (not
exceeding three years). The declaration must be verified by an
affidavit and must be made at a meeting of the Board.
 COMPANY LAW

The declaration must', be made within the five weeks

immediately preceding the date of the passing of the resolution
for winding up and must be delivered to the Registrar for
registration before that date. The declaration must be accompanied
by a copy of the auditors' report on the profit and loss account,
the balance sheet and a statement of the assets and liabilities
of the company as at the latest practicable date before the making
of the declaration.
Any director making a declaration, of solvency without
, reasonable grounds, may be punished with imprisonment up to
six months and/or fine up to Rs. 5,000. If the company is wound
up in pursuance of a resolution passed within the period of five
weeks after the making of the declaration but its debts are not'
paid or provided for in full within the specified period, it shall
be presumed until the contrary is shown, that the director did
noi have reasonable grounds for his opinion.

DIFFERENCES BETWEEN MEMBERS' VOLUNTARY

AND CREDITORS' VOLUNTARY WINDING UP
I. The former applies to solvent companies and a declaration
of solvency is necessary. The latter applies to insolvent companies
and no declaration of solvency can be made.
2. In the former, it is not necessary to have a creditors'
meeting. In the latter there must be a creditors' meeting
immediately following the members' meeting.
3. In the former, the liquidator is appointed by the members.
In the latter both the members and the creditors may appoint
a liquidator but if they nominate different persons, the creditors'
nominee becomes the liquidator.
4. In the former, there is no Committee of Inspection. In
the latter there may be one.

PROCEDURE OF A VOLUNTARY WINDIN<O UP

The voluntary winding up of a company is done by following
successive states.
In a Members' Voluntary Winding Up : (I) Declaration of
Solvency. (2) Statutory Declaration to the Registrar. (3) A
Resolution in a general meeting of the Company within 5 weeks
of Declaration of Solvency. (4) Appointment of Liquidator.
 WINDING UP 777

(5) CoUecting the company's assets, pay the liabilities of the

company and pay the balance of the proceeds to the contributories.
In a Creditors' Voluntary Winding Up : (1) A Resolution
for the winding up of the company in a general meeting of the
Company. (2) On the same day or the following day there must
be a meeting of the creditors. In the meeting of creditors the
directors must state the p.osition of the company and the list of
creditors. (3) A liquidator or liquidators are appointed by the
meeting of members and the meeting of the creditors. The
nominees of the creditors are preferred. (4) A Committee of
Inspection. (5) The work of winding up according to Statute.
Rules applicable to a Members' Voluntary Winding Up
I. The' company in general meeting appoints one or more
liquidators and fixes their remuneration. Vacancies in the office
of liquidators are filled by the company in general meeting.
2. On the appointment of liquidators, the powers of the Board
of directors, managing or whole time directors and managhs,
come to an end.
3. Notice of the appointment of the liquidator is to be given
to the Registrar.
4. The liquidator must call a general meeting of the company
at the end of every year and lay before it an account of his acts
and dealings. If the liquidator finds that the company is actually
insolvent he must immediately call a meeting of the creditors
of the company. .
5. As soon as the affairs of the company are fully wound
up, the liquidator shall call a meeting of the company (by
.advertisement) and lay before it accounts showing how the
winding up has been conducted. This meeting is called the Final
Meeting of the Company.
6. Within one week after the final meeting, the liquidator
shall send to the Registrar and the Official Liquidator a copy
each of the account, and shall make a return to each of them.
If the final meeting is not held for want of quorum, the return
shall state so.
7. The Registrar, on receiving the accounts and the returns,
shall register them.
8. The Official Liquidator, on receiving the accounts and
returns, shall as soon as may be, make a scrutiny of the books
778 COMPANY LAW

and papers ()f the company and upon ~uch scrutiny, if lie finds
that the affairs of the company have not been conducted in a
manner prejudicial to the interests of the members or to public
interest, he shall report to the court to that effect. From the date
of the· submission of the report to the court the company shall
be deemed to be dissolved.
9. If the Official Liquidator finds and reports that the affairs
of the company have been conducted in a manner prejudicial to
the interests of the members or the public interest, the Court shall
direct the Official Liquidator to make a further investigation.
After the result of the further investigation is reported to the
Court, it can direct dissolution of the company or order such
further steps as may be necessary under the circumstances.-
Sec. 497.
Rules applicable to a Creditors' Voluntary Winding Up
I. The company shall call a meeting of the creditors to be
held on the day or the day following the date on which the
company will hold a general meeting of the members to pass
the resolution for winding up. The noticc of the creditors'
meeting must be sent by post (simultaneously with the notice
of the members' meeting) and must also be advertised in the
Official Gazette and at least two local newspapers.
2. The Board of directors shall cause a full statement of the
affairs of the Company and a list of creditors to be prepared
and laid before the creditor's meeting. A Director is to be
nominated to preside over the creditors' meeting. Copies of all
resolutions passed in the creditors' meeting are to be sent to the
Registrar.
3. The members and the creditors, in their respective
meetings, can nominate a liquidator. In case the two groups
nominate different persons as liquidator, the creditors' nominee
shall be the liquidator. But the Court may, on an application made
to it, appoint some other person (including the Official Liquidator)
as tho: liquidator.
4. The creditors may, in a meeting, appoint a Committee of
Inspection consisting of not more than five persons. The members
of the Company m.ay thereafter appoint not more than five
members to the Committee from among themselves. If the
creditors object to the persons nominated by the members, some
 WINDING UP 779

other persons must be appointed, unless the Court, on an

application made to it, decides otherwise. The functions of the
Committee are the same as those of a Committee of Insf'ection
appointed in a Compulsory Winding up. (See ante)
5. The remuneration of the liquidator is to be fixed by the
Committee of Inspection or if there is no such Committee, by the
creditors. If they fix no remuneration, the Court is to do it.
6. On the appointment of a liquidator, the powers of the Board
of directors come to an end except in so .far as the Committee
of Inspection or, if there is no such Committee, the creditors in
a general meeting may sanction the continuation thereof.
. 7. In the event of the winding up continuing for more than
one· year, the liquidator shall call at the end of each year a
meeting of members and a meeting of the creditors. The
liquidator shall place before the meetings an account of his acts
and dealings and of the conduct of the winding up during the
preceding year.
8. When the affairs of the Company are fully wound up the
liquidator shall call a final meeting of the members and creditors
and place before them final accounts.
9. Within one week after the holding of the above meetings,
the liquidator shall send a return of the meeting and a copy· of
the final accounts to the Registrar and the official liquidator. If
no meeting is held, the return shall state so. Thereafter the
procedure is the same as in Members' Voluntary Winding up.
(See items, 5 to 9 'under provisions applicable to Members'
Voluntary Winding Up.)--Sec. 509.
Rules applicable to both types of Voluntary Winding Up
I. A body corporate cannot be appointed as liquidator. The
\lse of corrupt inducements for the appointment of a person as
liquidator is a punishable offence. When a liquidator has been
appointed he shall within 30 days, inform the Registrar and
advertise the same in the Official Gazette. If no liquidator is
acting the Court can appoint the Official Liquidator or any other
person as liquidator. The Court can remove a liquidator on a
cause shown.
2. The liquidator or any contributory or creditor can apply
to the Court for direction on any matter arising out ofthe winding
up proceedings.
780 COMPANY LAW

3. The liquidator may apply to the Court for an order

directing the public examination of any promoter, director or
officer of the Company where there is reason to believe that fraud
has been committed.
4. An arrangement entered into between the company and
its creditors is binding if it is sanctioned by a special resolution
of the company and agreed to by three-fourths of the number
of creditors and by persons entitled to three-fourths of the claims.
5. The costs of winding up, including the remuneration of
the liquidator, are payable out of the assets of the company in
priority to all other claims.
6. Powers of the liquidator: The liquidator in a voluntary
winding up has all the powers which a liquidator in a compulsory
winding up has. The powers which the latter can exercise with
the sanction of the Court, the former can exercise with the
sanction of a special resolution of the Company in the case of
a members' voluntary winding up and in the case of a creditors'
voluntary winding up, with the sanction of the Court, of the
Committee of Inspection, or (where there is no such Committee)
of the creditors in a general meeting.
In addition to the aforesaid, the liquidator in a voluntary
winding up has the following powers :
(a) to settle the list of contributories and adjust the rights of
contributories among themselves;
(b) to make calls upon contributories;
(e) to call general meetings of the company; and
(d) to enter into schemes of arrangement or compromise with
creditors with the sanction of a special resolution of the
company (or the Court or the Committee of Inspection)
and accept shares and properties of another company as
part of such schemes. .

WINDING UP SUBJECT TO THE SUPERVISION OF

COURT
Definition
At any time after a company has passed a resolution for
voluntary winding up, the Court may make an order that the
voluntary winding up shall continue but subject to the supervision
of the Court.-Sec. 522.
 WIND1Nl; ur 781

A supervision order is usually made for the protection of

the creditors and contributories of the company. In Re Prince
of Wales State Quarry Co. 1, it was held that such an order may
be passed if (0) the Liquidator under voluntary liquidation is
partial or is negligent in collecting the assets (b) the rules relating
to winding up are not being observed, or (c) the resolulion for
winding up was obtained by fraud.
Effeets
A supervision order has the foHowing effects :
1. It gives jurisdiction to the court over suits and legal
proceedings against the company to the same extent as in a
winding up directly by the court.-Sec. 523.
2. The court can appoint an additional liquidator or
liquidators. The court can remove any liquidator and fill any
vacancy caused by removal, death or resignation. The Official
Liquidator may be appointed ·Iiquidator in such cases.-Sec. 524.
3. Powers of the Liquidator: The liquidator in a winding
up under the supervision of the Court can exercise all the powers
of a liquidator in voluntary winding up. But the Court can modify
or limit the powers and can also give him additional power.-
Secs. 525, 526( I).
4. After a supervision order is passed the court can exercise
all powers which it might have exercised if an order had been
made for winding up by the court.-Sec. 526(2). The powers
of the court include the power to make calls and to stay suits
and proceedings.

COMPULSORY WINDING UP PENDING VOLUNTARY

WINDING up.
Where a company is being wound up voluntarily or subject
to the supervision of court a petition for its compulsory winding
up may be presented by any person entitled to apply for winding
up or the Official Liquidator. Upon the making of such a petition,
the Court may pass an order for compulsory winding up, if it
is of opinion that such a course of action is necessary in the
interest of the creditors or contributories.-Sec. 440. However,
under Section 433 winding up i,s not mandatory even if any of
1(1868) 18 L.T 77
782 COMPANY LAW

the aforesaid circumstances exist. The Court has disretion in the

matter. The Court must see that the winding up is not opposed
to public interest or interest of the company as a whole. Even
if BIFR issues order for winding up, winding up is not mandatory.
In V. R. Ramarajn v. UOJ (1997) 89 Compo Case 609(SC), the
Supreme Court held that even if BIFR issues order for winding
up under SICA, High Court should not automatically order
winding up. High Court should consider the BIFR order but must
decide the issue on merits of the Case. High Court cannot abdicate
its own function of detennining the question of winding up.
CONSEQUENCES OF WINnING UP
The consequenc@5 which follow from winding up proceedings
can be classified under three heads (a) those which follow all
types of winding up; (b) certain other consequences in a
compulsory winding up; and. (c) other consequences of a
voluntary winding up.
I. Consequences which follow all types of Winding Up
I. The Board '~f Directors of the Compimy ceases to have
any powers (except in certain special cases in a voluntary winding
up).
2. The property and effects of the company come under the
custody of the liquidator who has to realise the assets and
distribute them according to the rules laid down in the Act.-
Sec. 4 5 6 . ' .
3. Every invoice, order for goods or business letters issued
on behalf of the company by the liquidator and others and in
which the .name of the company appears, shall contain a statement
that the company is in liquidation.-Sec. 547.
4. Fraudulent Preference: All transactions of the company,
made within six months previous to the commencement of the
winding up, which amount to fraudulent preferences, are
invalid.-Sec. 53!.
Fraudulent preference means any transfer of money or
property to a creditor which has the effect of giving him an undue
preference as compared with other creditors. (See p. 463)
S. Avoidance of Voluntary Transfer: The tenn 'voluntary
transfer' in this context means any transfer of property or' delivery
of goods by a company, not in the ordinary course of bl!siness
,.(,
 WINDINO UP 783

and not in favour of a purchaser or encumbrancer in good faith

and for valuable consideration. All such transfers, made within
a period of one year before the presentation of a petition for
winding up (by or under the supervision of the Court) or the
passing of a resolution for voluntary winding up, are void as
against the liquidator.-Sec. 531A.
6. Any transfer or assignment by a company of all its
properties to trustees for the benefit of all its creditors, becomes
void upon the winding up order beinr jJdSsed.-Sec. 532.
7. A floating charge ~reated withi.l 12 months previous to
the commencement of winding up is invalid except to the extent
of the cash actually paid to the company plus interest at 5 per
cent or such other rate as may be notified by the Government.
This rule will not apply if it can be shown. that the company
was in a solvent position immediately after the creation of
charge.-Sec. 534.
8. Persons guilty of offences antecedent to or in course of
winding up are liable to prosecution and punishment .. Some
examples: . failure to give information' or statement to the
liquidator regarding assets of the company; falsification of
books; failure to keep proper accounts; frauds committed in
course, of formation or working of the Company.-Sec. 538.
9. Delinquent directors eic. : If in the course of the winding
up of a company it appears that any. person who has taken part
in the promotion or formation of ,the company or any past or
present director, ~anagirtg agent, secretaries and treasurers,
manager, liquidator or officer of the company,-
(a) has misapplied, or retained, or become liable or
a~countabl\: for any money or property of the company; Or
(b) has been gUilty of any misfeasance or breach of trust
in relation to the company; .
the Court may, on the application of the liquidator, or of
any creditor or contributory, examine the conduct of such person
and compel him to repay or restore the money or property or
make him pay compensation for the misapplication, retainer,
misfeasance, or breach of trust.-Sec. 543( I) ..
An napplication under the above rule shall be made within
five years from the date of the order for winding up or the date
of the first appointment of the liquidator or of the misapplication,
misfeasance etc., whichever is longer.-Sec. 543.(2).
784 COMPANY LAW

Action under Section 543 may be taken notwithstanding that

the liable matter is one for which the person is criminally liable.
-Sec. 543(3).
II. Certain other consequences of Compulsory Winding Up
I. When a winding up order is passed the court has to send
intimation thereof f"i,'1with to the Official Liquidator and the
Registrar.-Sec. 444.
2. A certified copy of the winding up order must be sent
to the Registrar by the petitioner and the company within one
month of the date of the order. Failure to do so is a punishable
offence.-Sec. 445.
3. The winding up order operates as notice of discharge to
the officers and employees of the company, except where the
business of the company is continued according to the provisions
of the Act.-Sec. 445(3).
4. After the winding up order is passed or the official
liquidator is appointed as 'the provisional liquidator, no suit or
proceeding can be commenced against the company, 'and pending
suits and matters cannot be proceeded with, except by the leave
of the winding up court and subject to such terrris as the court
may impose. The court which has passed the winwng up order
can entertain and dispose of suits and 'claims by or against the
company and questions of priorities in winding up. It can also
transfer to itself suits and proceedings pending in other courts
except those pending in appeal before the Supreme Court or a
High Court.-Sec. 446.
5. In the case of a' winding up by the court or under
supervision of the court, the following transactions are void :
any dispositions of property or actionable claims or transfer of
shares or alteration in the status of a member made after the
winding up order, unless the court otherwise declares; and, any
attachment, distress or execution and sale of ·the company's
properties without the leave of the court.-Sections 536 (2),537.
III. Additional consequences in a Voluntary Winding Up
I. The company shall, from the commencement of the
winding up, cease to carry on its business except so far as may
be required for the beneficial winding up of such business, But
 WINDING UP 785

the corporate state and corporate powers of the company shall

continue until it is dissolved.-Sec. 487.
2. Any transfer of shares and alteration in the status of any
member made without the leave of the liquidator, is void.-Sec.
536(1).
Thus the con$equences of winding up may be summed up :
I. Consequences as to shareholders-A shareholder is liable
to pay the full amount up to the face value of the shares held
by him.
2. Consequences as to creditors-Where a solvent company
is wound up, all claims of its creditors, when proved, are fully
met. In the case of an insolvent company the same rules prevail
as in the case of law of insolvency.
3. Consequences regarding preferential payments~Some
unsecured debts are paid in preference to all other debts.--{Sec.
530).
4. Consequence as to servants and officers-An order of
winding up is considered to be notice of discharge to the officers
and employees of the company, except when the business of the
company is carried on.
5. Conseguences as to proceedings against the company-
When an order of winding up is issued or an official liquidator
is appointed, no suit against the company can be made except
by the leave of the court.
6. Consequences as to costs-If the assets are inadequate
to satisfy liabilities the court may order for payment for the costs,
charges and expenses of the winding up out of assets.

MODE OF DISTRIBUTION OF ASSETS

Preferential Payments (Sec. 350)
The costs of the winding up proceedings are to be paid first
out of the assets. Next in order of priority comes the following
debts:
I. All revenues, taxes, ceases and rates due to the Central
or a State Government or a local authority. The debts must be
. 'due at the relevant dale. having become due and payable within
the 12 months next before that date. "Relevant Date" means, in
a compulsory winding up--date of appointment or first
appointment of the provisional liquidator or (where no liquidator

Commercial Law - 50
786 COMPANY LAW

was appointed) the date of the winding up order; and, in other

cases--date of resolution for voluntary winding up.
2. Wages and salary of any employee for a period not
exceed ing 4 moths within the 12 months before the relevant date,
and, subject to certain limits, the compensation payable to any
workman under the Industrial Disputes Act. For anyone claimant
priority shall not be given for any sum exceeding Rs. 1000,
except where the claimant is an agricultural labourer.
3. All accrued holiday remuneration to an employee becoming
payable on account of the termination of service by the winding
up order.
4. The company's contribution as an employer under the
Employees' State Insurance Act (or any other law for the time
being in force) during the 12 months next before the relevant
date, unless the winding up is for the purpose of reconstruction
or amalgamation.
S. Payments due to a workman under the workmen's
Compensation Act, for death or disablement.
6. All sums due to an employee from a provident fund,
pension fund, gratuity fund or any other fund maintained for the
welfare of the employees.
7. Expenses of enquiries and investigations, payable by
companies.
The debts mentioned above rank equally among themselves
and must be paid in full if there are sufficient assets. They have
priority over the claims of debenture-holders under any floating
charge, and over the claims of landlords and others in goods
distrained by them within three months next before the winding
up order. But if the assets are insufficient, the preferential
payments shall abate proportionately.
Payment to Creditors
If any money remains after meeting the costs and the
preferential payments, it is used to pay the creditors of the
company. All debts payable by the company and claims, whether
certain or contingent and whether present or futu.re, can be proved
in the winding up proceedings and payment claimed from the
liquidator (Sec. S28). As regards proof of claims and the
respective rights of secured and unsecured creditors the rules
applied are those applicable to insolvency proceedings under the
 WINDING UP 787

lsolvency Acts. (Sec. 529). From this it follows that in case

f insufficiency of assets the claims of the creditors are reduced
ro rata. The creditors are paid at a time or by instalments as
ssets are realised. (See p.474)
The effect of a winding up order is that except for certain
referential payments provided in the Act the property of the
ompany is to be applied in satisfaction of its liabilities pari
assu. The undertaking and the assets of the company pass under
Ie control of the liquidator whose statutory duty is to realise
lem and to payout of the sale proceeds to its creditors. J. K.
'rivale Ltd. v. New Kaiser-I-Hind Sp, & Wvg. Co. 1
'ayment to Contributories
If any money remains after paying the costs, the preferential
,ayments and the creditors in full, it is paid to the contributories
ccording to their rights. They may be paid at different times
'y instalments as assets are available for distribution. Such
,ayments are also called dividends.

MISCELLANEOUS PROVISIONS
)issolution of tbe Company
When the affairs of the company have been completely
vound up (assets collected and distributed etc.) the court shall
nake an order that the company be dissolved. From the date of
he order the company is dissolved. (The same order may be
lassed if the court is of opinion that the liquidation cannot
lroceed for want of funds or other reasons.)
Jooks and Papers of the Company (Sec. 550)
When the affairs of the company have been completely
vound up. its books and papers shall be disposed of in the
ollowing "ay :
(a) in a members' voluntary winding up--as the company
Iy special resolution directs;
(b) in a creditor's voluntary winding up--as the Committee
If Inspection or, in its absence, as the c'reditors direct; and
(c) in all other cases-as the court directs.

I AIR (t 970) Supreme Court 1041

788 COMPANY LAW

After the expiry of 5 years from the date of dissolution, no

responsibility shall rest on the liquidator or any other person to
produce the books, unless the Central Government otherwise
directs.
Unclaimed Dividends and Undistributed Assets (Sec. 555)
If any money payable to a creditor or contributory remains
unclaimed or undistributed for six months after the date on which
it became payable, the Liquidator shall deposit it into the public
account of the Government ofIndia in the Reserve Bank ofIndia.
The same thing is to be done with other moneys lying in the hands
of the Liquidator at the date of the dissolution of the company.
In the case of a voluntary winding up, with or without a
supervision order, the Liquidator shall pay undistributed assets
into the Company's Liquidator Account of the Reserve Bank of
India.
Any person claiming any money lying in the above account
may apply to the court or the Central Government for an order
directing payment to him.
Moneys which remain unpaid in the Company's Liquidation
Account for a period of 15 years shall be transferred to the
General Revenue Accounts of the Central Government. But
orders may be passed for payment to any person who can prove
his claim for any sum originally lying in the Company's
Liquidation Account.
Declaring dissolution to be void
The Court may, at any time within two years of the date
of dissolution of a company, declare the dissolution to be void.
Such orders may be passed on the application of the liquidator
or any other person interested. After the order such proceedings
may be taken as might have been taken if the company had not
been dissolved.-Sec. 559.
Defunct Companies
A defunct company means a company which is not carrying
on business or is not in operation. Section 560 provides as
follows:
When the Registrar has reasonable cause to believe that a
company is a defunct company, he shall send a letter to the
 WINDING UP 789

company asking whether it is so. If no reply is received within

one month, the Registrar shall within another fourteen days, send
a registered letter referring to the first letter. If no ~.nswer is
received to the second letter within one month a notice is to
be published in the Official Gazette and a letter is tt be sent
to the company informing it that its name shall be struck off
the Register within three months, unless cause is shown to the
contrary. If no such cause is shown within three months, the
Registrar shall strike off tH'e name of the company from the
Register.
A similar procedure is to be followed when in the case of
a company in liquidation, the Registrar believes that there is no
liquidator or that the liquidator is not acting.
The court may restore the name of the company to the
Register if sufficient cause is shown.
Winding Up of Unregistered Company
For the purposes of winding up, the expression, "unregistered
Company"--{a) shall not include-{i) a railway company
incorporated by any Act or Parliament of the United Kingdom;
(ii) a company registered under this Act; or (iii) a company
registered under any previous companies law and not being a
company the registered office whereof was in Burma, Aden or
Pakistan immediately before the separation of that country from
India and
(b) save as aforesaid, shall include any partnership,
association or company consisting of more than seven members
at the time when the petition for winding up the partnership,
association or company, as the case may be, is presented before
the Court.-Sec. 582.
An unregistered company can be wound up under the
Companies Act. The procedure applicable is, with certain minor
exceptions, the same as in the case of a compulsory winding
up. Such companies cannot be wound up voluntarily or under
the sUl'ervision of the court. If a foreign company carrying on
business in India, ceases to do so, it can be wound up according
to the procedure applicable to unregistered companies.
790 COMPANY LAW

EXERCISES
I. What are the modes of winding up? Discuss the circumstances
in which a company may be wound up by court.
(Pages 761-763)
2. Under what circumstances will a Court order winding up of a
company 1 What are the consequences of such an order?
(Pages 761-763, 765-766)
3. When is a company deemed unable to pay its debts?
(Page 764)
4. On what grounds could a creditor present a petition for the winding
up of a company by the Court'! (Pages 765-766)
5. What is the distinction between voluntary liquidation and
compulsory liquidation? What are the powers of the liquidator
regarding payment of dividends to (a) creditors, and (b)
contributories? (Pages 761, 787·788)
6. What are the powers of the Court in the winding up proceedings
of a company? (Pages 765-767)
7. When is it necessary to state a 'declaration of solvency' ? What
conditions must be fulfilled for its validity? (Pages 775-776)
8. Discuss fully the powers of an Official Liquidator in a case of:
(a) Compulsory liquidation: or (b) Voluntary liquidation.
(Pages 769-770)
9. Who is an Official Liquidator? How is he appointed? What are
the duties and powers of the Liquidator?
(Pages 767, 767, 768-770)
10. Define the term "Contributory" in the context of the Companies
Act? What are the rights and liabilities of the contributories?
(Pages 772-774)
II. State the procedure of Members' Voluntary winding up of •
company. (Pages 776-777)
12. What are the consequences of winding up? (Pages 781-783)
13. What is the method of distribution of assets of a company undet
winding up? What payments are preferred under winding up 1
(Pages 785-787)
14. Write explanatory notes : The just and equitable clause; The
Substratum of the company; Public examination; Disclaimer 01
onerous property by liquidator: Committee of inspection:
Fraudulent preference; Delinquent director; Dissolution of the
company; Unclaimed dividends and undistributed assets; Defunct
companies. (Pages 762; 763; 767; 771 ; 772;
782 : 783; 787; 788; 788)
 BOOK XII
MONOPOLISTIC AND
RESTRICTIVE' TRADE
PRACTICES ACT

CHAPTER I MRTP Ad 792 - 803

Background of the MRTP Act 792 ; MRTP Commission 794 ;
Concentration of Economic Power 796; Monopolies and
Restrictive Trade Practices 80 I.

791
 MRTPACT
(Monopolistic and Restrictive Trade Practices Act)

1. BACKGROUND OF THE MRTP ACT

The planning process and the weak licensing system gently
helped the growth of economic giants in India. In due course
they have come to command over the. scarce resources and to
control over the means of production. Consequently, they have
adapted discriminately and restricted trade practices. Any welfare
state cannot be rest contended with this trend of economic affairs.
It, therefore, called for such legislation which would check
concentration of economic power in the common interest. The
idea of such legislation has been implicit in Article 39 of the
Indian Constitution, under the Directive Principles of the State
Poli£y. It enunciates that the ownership of and control of the
material resources of the community are so distributed as best
to subserve the common good. Moreover, the state must ensure
that the operation of the economic system does not result in the
concentration of wealth and the means of production to the
common detriment. This spirit has been reiterated by the Industrial
Policy Resolution, 1956 which seeks to reduce disparities in
income and wealth, to prevent private monopolies and the
concentration of economic power in the hands of a small number
of individuals. It was also observed that since 1960 the operation
of the economic policy over the years led to concentration of
economic power in a group of large industrial houses. The
Mahalanobis Committee on distribution ofincome and Levels of
Living appointed by the Planning Commission in 1960 warned
against this trend of economic development. In its report the
Committee observed that concentration of economic power in the
private sector is more than what could be justified as necessary
on functional grounds and it exists both in generalized and specific
firms. The Hazari Committee appointed earlier on industrial
licensing procedure observed that the existing licensing system
has led to the disproportionate growth of industries in India.
In pursuance of all these a five-member Monopolies inquiry
Committee under Justice Sengupta of the Supreme Court of India
 MONOPOLISTIC AND RESTRICTIVE TRADE PRACTICES ACT 793

was appointed in April, 1964 to study the extent and effect of

concentration of economic power in private hands and the
prevalence of monopolies and restrictive practices adapted by
them and the factors responsible for such concentration and Ihe
factors leading to monopolistic and restrictive practices and their
social and economic consequences and thereby suggest measures
to protect the public interest.
Among the various measures, the commission recommended
a new legislation-the Monopolistic and R.estrictive Trade
Practices Act. It also recommended a case for setting up of
a permanent independent commission to look into monopolistic
and restrictive trade practices, and mergers and expansion of
dominant undertakings. The report of the commission was
accepted by the government. The Government of India through
a resolution adapted on 5th September, 1966 proposed for the
establishment of a permanent statutory MRTP C;ommission with
mandatory judicial powers in respect of restrictive trade practices
and with advisory powers in respect of matters relating' to
concentration of economic power. Consequently, the Monopolistic
and Restrictive Trade Practices Act, 1969 was passed and the
Act came into force on June I, 1970.
During the process of the implementation of the Act several
difficulties cropped up. To remove these defects a high power
committee headed by Justice K. S. Hedge of the Supreme Court
of India and subsequently by Justice Rajinder Sacher of Delhi
High Court was set up to study:
1. What improvements were r~quired to be made in the
prevailing administrative structure and procedures regarding the
• enforcement of the provisions of the MRTP Act?
2. What charges were required to be made in the MRTP
Act in the light of the experience gained in the administration
and operation of the Act?
3. Any other matters incidental or ancillary to the
administration of the Act, having regard to the grow1h and
development of trade, commerce and industry.
These recommendations have resu Ited in a series of
amendments to the MRTP Act in 1982, 1984, 1988 and finally,
under the New Economic Policy in 1991.
 MRTP ACT

Objects
The objects behind the MRTP Act are-
(I) To control concentration of economic power which In
detrimental to common interest.
(2) To control monopolistic trade practices.
(3) To control certain restrictive trade practices.
Scope of the Act
The Act extends. to the whole of India except the state of
Jammu and Kashmir. The provisions of the Act are applicable
in addition to any other law for the time being in force. The
Act is not, however, applicable to companies which are
incorporated under the laws of England and do not carry on any
kind of activity or business in India or even elsewhere. As a
matter of government pol icy, the government-owned or
government-controlled undertakings are exempted from the
purview of the MRTP Act as in Section 3.
It has been the declared policy that the activities of the public
sector shall grow in size and assume significant control in their
spheres.
Administration of the Act
The MRTP Act provides for a dual machinery for the
implementation of its provisions-the Central Government on the
one hand and the MRTP Commission on the other. It is for the
Central Government to ensure that the operation of the economic
system does not resu It in the concentration of economic power
to the common detriment and to control the monopolistic
undertakings and monopolistic practices. The rule of the
Commission in these areas is only of advisory nature. But the
Commission has independent power to enquire into restrictive •
trade practices.
2. MONOPOLIES AND RESTRICTIVE TRADE
PRACTICES COMMISSION
The follow up action on the Report of the Monopolies Enquiry
Commission culminated in the passage of the Monopolies and
Restrictive Trade Practices Act in 1969. Under this Act, a
permanent statutory Commission, known as Monopolies and
Restrictive Trade Practices Commission, has been set up to
investigate, case by case, the effects of such practices on the
public interest and recommend suitable corrective measures.
 MONOPOLISTIC AND RESTRICTIVE TRADE PRACTICES ACT 795

The MRTP Commission consists of a Chairman and not less

than two and more than eight members to be appointed by the
Central Government. The Chairman must be a persor: who is
or has been or is qualified to· be a judge of the Suprer,le Court
or of the High Court. The other members of the Commission
must be persons of ability, integrity and standing in dealing with
problems related to economics, law, commerce, accountancy,
industry, public affairs or administration. Members are appointed
for a period of S years subject to extehsion up to 10 years or
the attainment of 6S years, whichever is earlier.
The Central Government may remove from office any
member, (i) who has been adjudged an insolvent or (ii) has been
convicted of an offence involving moral turpitude or (iii) has been
physically or mentally incapable of acting as member or (iv) has
acquired such financial or other interests affecting prejudiciously
his functions or (v) has so abused his PQSition as to render his
continuance in office prejudicial to the public interest. No member,
however, can be removed on the last two grounds mentioned
above unless the Supreme Court so opined.
Powers of the Commission
The Commission can make, by notification regulations for
the effective performance of its various functions. The powers
of the Commission may be exercised by Benches formed by the
Chairman from among the members of the Commission. The
Commission is empowered to regulate (a) the procedure and
conduct of its buisness, (b) procedure of the Benches of the
Commission, and (e) the delegation to one or more members of
such powers and functions as the Commi;sion may specify.
The Commission has powers to regulate the procedure and
.conduct of its business regarding inquiry. The Commission is
vested, with certain powers of a Civil Court for enforcing
production of documents, attendance of witnesses for examination ..
The Commission is vested with certain original powers in
respect of restrictive and unfair trade practices. The MRTP Act
also provides for a reference by the Central Government to the
Commission and report in regard to cases of substantial expansion
of undertakings, setting up of new undertakings, mergers,
amalgamation or takeover and division of undertakings. Similar
796 MRTP ACT

power of enquiry and report is also vested with Commission in

relation to a reference regarding monopolistic trade practices.
However, the Commission is vested with full regulatory power
in regard to restrictive trade practices and unfair trade practices.
It has also the power to cause investigation to find out whether
or not orders made by it have been complied with.
The Committee has also the power to impose temporary
injunctions. Besides, where as a result of the monopolistic or
restrictive trade practices, carried on by any undertaking or any
perso", any loss or damage is caused to the Central Government
or any State Government or any trader or class of traders or
any consumer, such government or, as the case may be trade
or class of traders or consumer may, without prejudice to the
right of such government, traders or class of traders or consumer,
to institute a suit for.,the recovery of any compensation for the
loss or damage so caused, make an application to the Commission
for an order for the recovery from that undertaking or owner
thereof or as the case may be, from such person, of such amount
as the Commission may determine as compensation for'the loss
or damage so caused.
The Commission, however, suffers from some inherent
defects. First, there has been a general reluctance and delay in
referring matters to the MRTP Commission. It cannot be denied
that the Commission is an autonomous body. But it cannot by
itself came to know the nature of certain monopolistic and
restrictive trade practices and start the process of enquiries into
various monopolistic or restrictive practices. Secondly, the
Commission has not been empowered with mandatory power in
dealing with specific cases and take necessary action there~y.
Thirdly, although there is provision for appointing up to 9 members,
the government had appointed, over the years, a limited number
of members only. Naturally, in such a big country like India,
without increasing the number of members and creating several
!>.:nches of the Commission it is difficult to enquire into the
prevalence of various restrictive and unfair practices in different
industries in different parts of the country.

3. CONCENTRATION OF ECONOMIC POWER

The monopolistic and restrictive practices are the two likely
instruments with the help of which economic power gets
 MONOPOLISTIC AND RESTRICTIVE TRADE PRACTICES ACT 797

concentrated. The MRTP Commission has highlighted the

existence of two kinds of concentration of economic powers in
the industrial field. The first is known as productive concentration.
The second type of concentration is known as country-wise
concentration. The first one occurs when in respect of production
and distribution of any particular commodity or service, the
controlling power whether by reason of ownership of capital or
otherwise, is in a single concern or comparatively a limited
number of concerns themselves are controlled by one family or
a few families or buisness houses. Where lhe concern is engaged
in the manufacture of one product, it may be called industry-
wise concentration. The country-wise concentration occurs where
a large number of concerns engaged in the production or
distribution of different commodities are in the controlling hands
of one individual or family or group of persons connected closely
by financial or other business interests.
It cannot be denied that the concentration of economic power
leads to higher industrial development and development of skill,
quality and managerial technique. But at the same time it has
the risk of emergence of monopoly with attendant evils like high
prices. deterioration of quality and extinction of small industrialists.
The intention of the MRTP Act is not to prevent concentration
of economic power. The aim is just to control and prevent
concentration of economic power wherever it becomes prejudicial
to common good and public interest. The exact connotation of
'concentration of ecoAomic power' has not been defined in the
Act. The Act has only adopted the criterion of size' in terms
of assets and any increase in size beyond the prescribed level
will result in concentration of economic power. Buisness may
be carried on either indiv!dually or together with inter-connected
undertakings. Any increase in the size of the undertaking or
control by the undertaking of assets beyond the prescribed limit
is subject to scrutiny and is permitted only when it satisfies the
test of public interest.
Undertakings
Under the Act, undertaking means an enterprise which is,
or has been -or is proposed to be engaged in the production,
storage, supply, distribution, acquisition or control of articles or
goods or the provision of services of any kind, either directly
•
798 MRTP ACT

or through one or more of its units or divisions, whether such

unit or division is located at the same place where the undertaking
is located or at different places. The definition calls for three
essentials-
(I) there must be an undertaking,
(2) the undertaking must be engaged in buisness activity, and
(3) the activity may relate to production, supply, distribution or
control of goods or provision of service of any kind.
Dominant Undertaking
An undertaking becomes a dominant undertaking when it
fulfils anyone of the following four situations.
(i) An undertaking which has all the following three
features : (a) it is an undertaking within the purview of the
Industries Act, (b) it has a licensed capacity for the production
of goods of any description, and (c) its licensed capacity for the
production of such goods or the aggregate of its licensed capacity
and of the licensed capacity of inter-connected undertakings for
the production of such goods is not less than one-fourth of the
total installed capacity in India for the production of such
goods, as-
(ii) An undertaking which has all the three functions: (a) it
is an undertaking within the purview of the industries Act, (b) it
by itself or along with inter connected undertakings produces,
supplies, distributes or otherwise controls nof less than one-fourth
of the total goods of any description that are produced, supplied
or distributed in India or any substantial part thereof, and (c)
it has no Iicensed capacity for the production of such goods, or
(iii) An undertaking which has both the following features:
(a) it is not an undertaking within the purview of the
Industries Act, and (b) it, by itself or along with inter-connected
undertakings produces supplies, distributes or otherwise Controls
not less than one-fourth of the total goods of any description
that are produced, supplied or distributed in India or any
substantial part thereof, or
(iv) An undertaking which produces or otherwise controls
not less than one-fourth of any services that are rendered in
India or any substantial part thereof.
For the clauses (ii) and (iii) the goods produced by an
undertaking, which employs (a) less than fifty workers on any
 MONOpOLISTIC AND RESTRICTIVE TRADE PRACTICES ACT m
day of the relevant period and in any part of which a
manufacturing process is being carried on wi:h the aid of power,
or (b) less than one hundred workers on any day of the relevant
period and in any part of which a manufacturing process is being
carried on without the aid of power, shall not be taken into
account.
In determining the question as to whether an undertaking
is or is not a dominant undertaking in elation to any goods
supplied, distributed or controlled in IndIa, regard shall be had
to the average annual quantity of such goods supplied, distributed
or controlled in India by the undertaking during the relevant
period. Moreover, domination of an undertaking is determined with
reference to tile Iicensed capacity or market 'Share of the
undertaking.
Inter-connected Undertakings
'Inter-connected Undertakings' means two or more
undertakings which are inter-connected with each other. Inter-
connection between undertakings is determined by the MRTP Act
on the basis of ownership, control or management. Unless any
of these tests is satisfied by legal evidence, inter-connection
cannot be established. Undertaking may be owned by a single
individual group of persons or firms or bodies corporate. Although
ownership is, synonymous with control, control may be exercised
independently of ownership. The promoter of a company used
not necessarily control or manage its affairs or own the majority
or even a substantial quantity of shares.
Control
Control as contemplated by the MRTP Act is not defined
in the Act itself. Leaving aside the case of complete or majority
ownership of the share capital, control can be exercised in two
broad ways, (1) by possessing an effective block of equity holding
with which it is possible, having regard to the dispersion of the
remaining shares, among a larger number, to get resolution passed
at the shareholders' meetings by a combination of the available
voting strength and control of the proxy gathering machinery
(2) by management control.
800 MRTP ACT

Management
Two undertakings are inter-connected if one manager controls
the other or if one or more individuals together with their relatives
or partners own or manage both the undertakings. Two
undertakings are inter-connected if they are owned by bodies
corporate and are under the same management or- where one
undertaking is owned by a body corporate and another by a firm
in which partners are be dies corporate and they are under the
same management.
Chapter III of the MRTP Act seeks to regulate primarily
substantial expansion, establishment of new undertakings and
amalgamation, merger or take over of undertakings. The provisions
of the chapter are applicable only to those undertaking, which either
by themselves or together with inter-connected undertakings hold
assets of the val ue of not less than Rupees 100 crores and to
the dominant undertakings which either by themselves or together
with their inter-connected undertakings hold assets of the value
of not less than one crore of rupees. The scheme of this chapter
envisages prior approval to be obtained by the registerable
undertakings from the Central Government before embarking on
substaniial expansion, establishment of new undertakings. Where
the Central Government feels it expedient, the proposal may be
referred to the MRTP Commission, for an enquiry and after the
receipt of the report from the Commission, the Central Government
may pass such orders as it may think fit.
During any approval of the proposal under Section 21
(expansion of an undertaking), Section 22 (establishment of new
undertaking) and Section 23 (merger, amalgamation or take over)
the guidelines to be. followed by the Central Government are
found in Section 28. Matters to be considered by the Central
Government before providing approval are as follows :
(a) to achieve the production, supply and distribution, by most
efficient and economic means, of goods of such types and
qualities, in such volume and at such prices as will best
meet the requiremems of the defense of India and home
and overseas markets ;
(b) to have the trade organized in such a way that its efficiency
is progressively increased;
(c) to ensure the best use and distribution of men, materials
and industrial capacity in India;
 MONOPOLISTIC AND RESTRICTIVE TRADE PRACTICES ACT 11)\

(d) to effect technical and technological improvements in trade

and expansion of existing markets and the opening up of
new markets; .
(e) to encourage new enterprises as a countervailing force to
the concentration of economic power to the common
detriment;
if) to regulate the control of the material resources of the
community to sub serve the common good; and
(g) to reduce disparities in development between different
regions and more especially in relation to areas which have
remained markedly backward.

4. MONOPOLIES AND RESTRICTIVE TRADE

PRACTICES
The monopoly concerns require the surveillance ahd control
of their activities in accordance with socially desirable priorities
and '. towards this and the MRTP Act aims at restraining
monopolistic trade practices which are detrimental to public
interest. Under the Act, where it appears to the Central
Government that the owners of one undertaking are including
in any practice which is, or may be, a monopOlistic trade practice
and as a result the trade practice operates or is likely to operate
against the public interest, the Central Government may, pass such
orders as it may think fit to remedy or prevent any mischiefs
which result or may result from such trade practice.
The Monopolies and Restrictive Trade practices Act has
drawn a destination between monopolistic and restrictive trade
practices, Accordingly, monopolistic trade practices can better be
described as dominant firm practices. They refer to the behaviour
of an individual firm or an oligopolistic grollp of not more than
three firms which have attained such a dominant position in the
industry that" they are able to control the market by regulating
prices or output or eliminating competition".
Restrictive trade practices refer to concerned action
undertaken by a group of two or more firms to avoid competition
regardless' of whether the market share of the member firm is
or is not dominant.
Produce's and distributors may report to restrictive trade
practices which have the effect of preventing, distorting or

Commercial Law - S I
 MRTP ACT

restricting competition in some manner. These practices are

"deemed to be prejudicial to public interest". .
If they raise costs to other unreasonably, or the prices and!
or profits unreasonably, or if they restrict competition or if they
had to lowering of quality, that may to against public interest.
Wherever such trade practices are adopted, the same mar be
referned to. the MRTP Commission whose decision on the matter
is binding on all parties concerned.
More precisely, when the Commission has m:eived a
complaint of facts, which constitutes an unfair trade practices,
from any trader or consumers' association having a membership
of not less than twenty-five persons or more consumers, the
commission must .order an investigation to be. made by the
Director General to satisfy itself as to whether the complaint
requires to be enquired into. Then the Commission may enquire
into any unfair trade practice on the basis of the report of the
Director General. If after such inquiry, the Commission is of the
opinion that the practice is prejudicial to public interest or to the
interest of any consumer it may direct by order that-
. (a) the practice must be discontinued or shall not be repeated,
and
(b) any agreement rlrlating to such unfair. trade practices shall
be void or shall stand modified in'Tespect thereof in such
manner its may be specified in theotder.
Thus the Commission can make a "Cease and desist' order
in relation to the unfair trade practices as void or order a
modification to the agreement mollifying the terms or clauses
constituting, in the agreement, the unfair trade practices.
AMENDMENT TO THE COMPANIES ACT, 1956
In tbe Companies Act, 1956. some new Sectioni-I08-A
to 1011-1 bave been inHrted-
10SA (i) It imposes restriction on acquisition' of certain
shares. It provides that without prior approval of the Central
Government, no firm, group, body corporate or bodies c<;lrporate
under the same management shall jointly or severally acquire imy
equity shares in a public company or a private company which
is a subsidiary of a public company, if the total nominal value
of the equity shares to be so acquired exceed twenty-five per
cent· of the paid-up equity share capital of such company.
 MONOPOLISTIC AND RESTRICTIVE TRADE PRACTICES ACT Inl

Article 108B imposes certain restriction on transfer of shares.

Article 108C imposes restriction on the transfer· of shares
of foreign companies.
Article 1080 specifies that if the Central Government is
satisfied that any transfer of shares of a company leads to a
change in the controlling interest of the company and such
changes would be prejudicial to the interest of the company or
to the public interest, the Central Government may direct the
companies not to give effect to the transfer.
Article 108E declares that the Central Government must
within a period of sixty days from the date of receipt of such
request, communicate to the person by whom the request was
made that the approval ·prayed for cannot be granted.
Article I 08F provides that nothing in Sections \oSA to 1080
shall apply to government companies.
Article 10S-1 specifies penalty for acquisition or transfer of
share in contravention of Sections 108A to 1080. Any person
who acquires anywhere in contravention of such sections shall
be punishable with imprisonment for a term which may extend
to 3 years or with fine which may ext~nd to 5000 rupees or
with both.
Every body-corporate which acquires any share in
contravention of such section shall be punishable with fine which
may extend to 5000 rupees.
The Amendment Act inserts a new Schedu Ie xv.

EXERCJSFS
I. Discuss the Monopolistic and Restrictive Trade Practices.
(Page 801)
2 What are the objects behind the MRTP Act? (Page 793)
. 3. Discuss about the fommation of MRTP Commission. (Page 794)
4. State the powers of the MRTP Commission. (Page 795)
5. Discuss about the Concentration of Economic Power. (Page 796)
6. Write shon notes :
(a) Administration MRTP Act; (b) Dominant Undenaking;
(c) Management; (d) Inter-Connected Undenaking; (e) Under-
takings. [(a) 794 ; (b) 798 ; (c) 799 ; (d) 799 ; (e) 797)
 BOOK XIII
INDUSTRIAL LAW

Introduction 808 - 810

Objective and Scope 808 ; The need for Industrial Legislation
808 ; A Classification' for Indian Industrial Law 809; State
Legislation on Labour 8 I O.

CHAPTER I The Factories Act 811 - 876

Object 8 I I ; Application ofthe Act 8 I I ; Definitions under the
Factories Act : Factory 8 I I ; Manufacturing Process 8 I 3 ;
Worker 814; Power 815 ; Prime mover 8 I 6; Transmission
Machinery 816; Machinery 816; Adult 816; Adolescent
816; Child 816; Young Person 816; Calendar Year 816; Day
816; Week 817; Shift and Relay 817; Occupier 817;
Approval, Licencing and Registration 818; The Inspection
Staff 8 I9 ; Cenifying Surgeons 82 I ; Provisions Regarding the
,Health of Workers 822 ; Safety of Workers 828 ; Welfare of
,Workers 845; The Working Hours of Adults 849; Rules
Regarding Employment of Adults 850 ; Restrictions on the
Employment of Women 852 ; Employment of Young Persons
853; Child-Labour 856; Holidays and Leave 857; Extra
Wages for Ovenime 860 ; Unfair Labour Practice 862 ; Wages
and Salary 865 ; Obligations of Workers 866 ; Other Provisions
of the Factories Act 866 ; Penalties and Procedures 870.

CHAPTER 2 Employees' State Insurance Act 877 - 917

Solical Insurance 877; Application of the' Act 878;
Definitions under The Employees' State Insurance Act 879 ;
Powers of the Central Government 884 ; Duties of Employer
884 '; Who is an Insurable Workman? 885; Registration
885 ; The Employees' StB!" Insurance Corporation 885 ; The
Standing Committee 890'; Medical Benefit Council 890;
RUlenegarding membership 891 : Employees' State Insurance
Fund 892; Inspectors 894: Contributions 894; Rules
regarding Contribution 895 ; Benefits 896 ; Sickness Benefit
896 ; ,Maternity Benefit 898; Disablement 1Jenefit 899 ;
[lependants' Benefit 904:' Medical Benefit 906; Funeral
Benefit 906; Rules Regarding Benefits 907; Employees'
Insurance Coun 909; Table: First Schedule 91 I ; Penalties
911; Transfer of Establishment 914.

805
806 INDUSTRIAL LAW

CHAPTER 3 Indian Fatal Accidl;lll$ Act 918 - 919

Object 918; Application §18; Interpretation Clause 919;
Calcularion of Damages 919.
CHAPTER 4 Employers Liability Act 9;10-921
CHAPTER 5 Workmen's Compensation Act 922 - 947
Object l!Dd Scope 922; Definitions under Workmen's
Comj>ensation Act 924; Rules Regarding Workmen'S
Compensation 930; Occupational Diseases 933; Other
Provisions Regarding Compensation 939; Conlinissioners
944.
CHAPTER 6 Trade Unions Act 948 -962
Object and Scope 948 ; Definitions under the Trade Unions
Act 948; Legal Status of a Registered Union 950;
Registration of Trade Unions 950; Rights and Privileges
954; Duties and Liabilities 956.
CHAPTER 7 Payment of Wages Act 963 - 977
Object and Scope 963 ; Scope of Payment 963 ; Definitions
under the Payment of Wages Act 964; Rules for Payment
of Wages 966 ; Authorised Deductions 967 ; Enforcement of
the Act 971 ; Miscellaneous 973.
CHAPTER 8 Minimum Wages Act 978 - 991
Object and Scope 978 ; Definitions under Minimum Wages
Act 978; Fixation and Revision of Minimum Wages 981 ;
Payment of Minimum Wages 983 ; Enforcement of the Act
985 ; Inspectors and their Powers 985 ; Claims 986 ; Penalties
987; Miscellaneous 988.
CHAPTER 9 Industrial Disputes Ad 992 - 1067
Application and Objects 991 ; The Amendment of 1982 992 ;
Industry 993; Industrial Disputes 1000; Workmaa 1003;
Employer 1005; Wages 1006; .»onus 1008; Differences
hetween Wages and Bonus 1011 ; Gratuity 1011 ; Authorities
under the Act 101j; Works Comminee 1014; Conciliation
Officers 1014; Board of Conciliation 1016; Court of
Enquiry 1017; Labour Courts 1017; Industrial Tribunals
1019; National Tribunals 1019; Reference to Arbitration
1021 ; Reference of Disputes 1022; Procedure and Powers
1025; Award and Settlement 1025; SOIfte Cases regarding
Powers of Tribunals 1029 ; Confidential Maners 1030 ; Lock-
out 1030; Strike 1031; Public: Utility Servic:e 1033;
 INDUSTRIAL LAW 801

Cf/AP'T£R 10 Tbe Insustries (Development and

Regulation) Act, 1951 1068- 1018
Establishment and Constitution of The Central Alivisory
Council and Development Councils 1068; Development
Councils 1069; Functions of The Development (ouneil
1070; Registration of Existing Industrial Undertakings 1012 ;
Revocation of Registration 1012 ; Licensing of New Industrial
Undertakings 1072; Procedure for The Grant .of Licence or
Permission 1073; Revocation and Amendment of Licence
1013 ; Present Position of Licensing and Registration 1073 ;
Basic Features of Present Licensing Policy 1073; List of
Industries in Respect of Which Industrial Licensing will be
Compulsory 1014 ; Power to Cause Investigation to be Made
in to Scheduled Industries or Industrial Undertakings 1014 ;
Power of The Central Government 1075; Management or
Control of Industrial Undertakings by Central Government
1076; Power to Take Over Industrial Undertakings Without
Investigations 1076; Effects of Notified Order 1077.
 INTRODUCTION

OBJECTIVE AND SCOPE

Definition
The term Industrial Law is used to denote laws passed for
the purpose of regulating the conditions under which work is
carried on in factories and other establishments and the
relationship between employers and employees.
Objective
Industrial legislation has a two-fold objective : (i) the
preservation of the health, safety and welfare of workers, and
(ii) the maintenance of good relations between employers and
empl"yees. All laws dealing with these matters come within the
scope of Industrial Law.
Labour Laws, Vio/ation of: Labour laws are enacted for
improving the conditions of workers and the employers cannot
be allowed to buy off immunity against violation of labour laws
by paying a paltry fine which they would not mind paying.
because by violating the labour laws they would be making profit
which would far exceed the amount of fine.
They would remain merely paper tigers without any teeth
or claws. Violations of labour laws must be viewed with strictness
and whenever any violations of labour laws are established the
errant employers should be punished by imposing adequate
punishment. People s Union for Democratic Rights and others
v. Union of India and others. I

THE NEED FOR INDUSTRIAL LEGISLATION

Industrial legislation is necessary for following reasons.
I. Workers in factories, mines etc. are exposed to certain
risks. For example, a worker may be injured by moving parts
of machines if protective measures are not adopted. Th~refore,
laws are necessary for the health, safety and welfare of workers.
It has been found that employers do not makeadequate provisions
for these things unless compelled to do so by law.

I AIR (1982) Supre",e Court 1473

808
 lNTR JDUCTION 809

2. Legislation for the protection of labour is needed because

the individual worker is economically weak. If the relationship'
between employers and employees is left to contract, the
employers are able to impose harsh and oppressive terms (e.g.,
long hours and low wages).
q 3. Legislation is necessary to encourage and facilitate the
formation of workers' associations or Trade Unions. Such
associations increase the bargaining power of workers and
provide the channel through which the grievances of labour can
be made known.
4. Legislation is necessary for dealing with industrial disputes
which arise between employers and employees. Industrial disputes
lead to strikes and lock-outs which are damaging not only to
the parties involved but also to the economy of the country. Laws
are needed for securing the quick settlement of the industrial
disputes.
5. An important branch of industrial legislation is Social
Insurance. Owing to their low level of earnings, workers find
themselves in great difficulty when faced with sickness, accident,
unemployment and old age. Government action is needed for
providing some measure of security against these risks.

A CLASSIFICATION OF INDIAN INDUSTRIAL LAW

Indian Industrial Law can be classified under the following
headings :
I. Laws regulating conditions of work in factories and
establishments. There are two types of such laws :
(a) General laws applicable to all establ ishmcnts not
otherwise provided for.
Examples:
The Factories Act of 1948 and the Industrial Standing Orders Act
of 1946.
(b) Specific laws applicable to particular industries.
Examples:
The Indian Mines Act of 1952, the Plantations Labour Act of 1951,
the Dock Workers [Regulation of Employment) Act of 1948 etc.
2. Laws relating to industrial disputes, e.g.. the Trade Union
Act of 1926.
,.
810 INDUSTRIAL LAW

3. Laws relating to associations of workers, e.g., the Industrial

Disputes Act of 1947.
4. Law relating to wages and emoluments, e.g., the Payment
of Wages Act of 1936, the Minimum Wages Act of 1948, the
Provident Funds Act of 1952, Payment of Bonus Act, 1965, etc.
5. Laws relating to Social Insurance, i.e., laws which provide
security against risks like accident, maternity etc.
Examples:
The Workmen's Compensation Act of 1923, the Maternity Benefit
Acts of the different States, the Employees' State Insurance Act
of 1948.

STATE LEGISLATION ON LABOUR

The States of India possess power to pass laws relating to
labour. A large number of such Acts have been passed, e.g.,
Maternity Benefit Acts. They have been passed in all States.
Laws have been passed in Maharashtra and Gujarat regarding
industrial disputes. There may be local· amendments to Central
Acts. For example, the Payment of Wages Act has been modified
in certain respects by several States. Many States have passed
laws for the regulation of work in shops and commercial
establishments.
 THE FACTORIES ACT

OBJECT
The object of the Factories Act is to regulate the conditions
of work in manufacturing establishments coming within. the
definition of the term "factory" as used in the Act.
The first Act, in India relating to the subject was passed
in 1881. This was followed by new Acts in 1891, 1911, 1922,
1934 and 1948. The Act of 1948 is more comprehensive than
the previous Acts. It contains detailed provisions regarding the
health, safety and welfare of workers inside factories, the hours
of work, the minimum age of workers, leave with pay etc. The
Act has been amended several times.
The Act of 1948 is based on the provisions of the Factories
A.ct of Great Britain passed in 1937.
The Act was amended extensively in 1976 and 1987. The
provisions of the Amendment have been quoted and summarised
at the .appropriate places in this chapter.
APPLICATION OF THE ACT
The Factories Act of 1948 came into force on I st April 1949.
It applies to factories, as defined in the Act, all over India,
including the State. of Jammu and Kashmir. I
Unless otherwise provided, the Factories Act applies to factories
belonging to the Central or any State Government.-Sec. 116.

DEFINITIONS UNDER THE FACTORIES ACT

Factory
The term Factory is defined in Section 2(m) of the Act as
follows : .. Factory means any premises including the precincts
thereof--
(/). whereon ten or more workers are working, or were working
on any day of the prelleding twelve months, and in any
I The Factories Act and certain othei similar Acts were extended to this
State by the Central Labour Laws (Extension to Jammu and Kashmir)
Act. 1970 (No. 3t of 1970).

811
812 INDUSTURAL LAW

part of which a· manufacturing process is being carried on

with the aid of power or is ordinarily so carried on, or
(ii) whereon twenty or more workers are working, or were
working on any day of the preceding twelve months, and
in any part of which a manufacturing process ;is being
carried on without the aid of power, or is ordinarily so
carried on,- . .
but does not include a mine subject to the operation of the Indian
Mines Act, 1952 (Act XXXV of 1952), or a mobile unit
belonging to the armed forces of the Union, a railway running
shed or a hotel, restaurant or eating place.
Explanation: For computing the number of workers for the
purposes of this clause all the workers in different groups and
relays in a day shall be taken into account.
[Clause 2(m) as amended in 1976.]
Further. far the purposes of Sec. 2(m), the mere fact that
an Electronic Data Processing Unit or a Computer Unit is
installed in any premises or part thereof, shall not be construed
to make it a factory if no manufacturing process is being carried
on in such premises or part thereof. [Expl. 2 to Sr. 2(m) as
introduced by the Amendment Act of 1987.]
Under Section 85, the State Government is empowered to
declare any establishment carrying on a manufacturing process
to be a factory for the purposes of the Act even though it employs
less than the prescribed minimum number of workers, provided
that the manufacturing process is not being carried on by the
owner only with the aid of his family.
Summary
From Sec. 2(m) of the Act it follows that an establishment
comes within the definition of a Factory if the conditions stated
below are satisfied :
1. It is a place where a "manufacturing process" is carried on.
2. It employs the prescribed minimum number of "workers"
viz, ten if "power" is used, and :t:Y(enty if no "power" is used.,
It is sufficient if the prescribed number of workers were employed
on any day of the preceding twelve months.
3. It is not a mine coming within the purview of the Indian
Mines Act of 1952, a railway running shed, mobile unit belonging
to the armed forces of the Union, a hotel. restaurant or eating place.
 THE FACTORIES ACT 813

Case Law
1. Pre",ises : "The word 'premises' has now (.ome to refer to either
land or buildings or to both. depending on the contex!." "The word
premises is a generic term meaning open land or land with buildings
or buildings alon .... Ardeshir H Bhiwandiwala v. Slale of Bombay 1
2. Precincis : The words "premises including precincts" have been
used in a wide sense. Th. term 'precincts' means a space enclosed
by the walls or fences of the factory. Under English law it has been
held that the walls and the fences built around the factory fixes
the boundaries of the premises. Back v. Dock. Kerr Co. LId. 2
Mauufacturiug Process
This tenn is defined in Sestion 2(k) in a very wide sense.
In includes :
(i) making, altering, ornamenting, finishing, packing, oiling,
washing, cleaning, breaking up, demolishing, or otherwise
treating or adopting any article or substance with a view
to its use, sale transport, delivery or disposal; or
(il) pumpinj! 'oil, water, sewage or any other substance; or
(iiI) generatmg, transfonning or transmitting power; or
(iv) composing types for printing, printing by leiter press,
lithographY, photogravure or other similar processes or
book binding; or
(v) constructing reconstructing, repairing, refitling, finishing or
breaking up ships or vessels; or
(vi) preserving or storing any article in cold storage.
(Clause 2(k) as amended in 1976]
For the corresponding section of the English Act, it was held
that the different processes enumerated in the clauses are 'merely
illustrative so that laundries, carpet beating, or bottle washing
works come within the Act, if mechanical power is used.
Patterson v. Hunt. 3 .
The following undertakings have been held to be
manufacturing processes bid i-making ; conversion of raw-films
into finished products; the preparation of eatables in the kitchen
of a restauQlfIt ; use of a refrigerator for adapting any article with
a view to ils sale.
The scraping out of salt and grading them, even though
done by manual labour, is a manufacturing process.
1 AIR' (1962) Supreme Court 29 2 (1960) A.C. 325
'(I9()9) 73 J. P. 496
814 INDUSTURAl LAW

The work of composition in printing business, the use of

electric mot<lr forthe purpose of lifting or pumping water; process
of moistening, stripping and packing of tobacco leaves, activities
of a petrol pump come within the purview of manufacturing
process.
Worker
"Worker means a person employed, directly or by or through
any agency (including a contractor) with or without the knowledge
of the Principal employer, whether for remuneration or not in
any· manufacturing process, or in cleaning any part of the
machinery or premises used for- a manufacturing process, or in
any other kind of work incidental to, or connected with, the
manufacturing process, ()r the subject of t~e manufacturing
proces.s but does not include any member of" the armed forces
of the Union."-Sec. 2(1), as amended in ,1976.
Explanation : Worker means any person engaged in any
work connected with or incidental -to a ·manilfact\lJ'ing process.
Thus the definition is wide. The term includes pbrsons engaged
directly and also those who are engaged through an agency
(including a contractor with or without the knowledge of the
principal employer). . '
The term includes clerical workers and persons paid by piece
rates in a factory.
The term 'worker' does not include any member of the armed
forces of Union. .'
In case of a factory worker there must be a relationship
between the employer and the employed. .
Apprentices, whether remunerated or not, are workers within
the meaning 'of the Act. .
Obligations of workers-See p.~66.
Case· Law:
(i) A technical institute, whe", pupils are trained in wood work, is not
a faciory because the... is nO relationship of employer and employed
between the organisers and the popils. Weston v_ Londo;" Couniry
Cmmcil'
(ii) The words "directly or th'1'ugh any agency". used in the definition of
the tenn Worker, indicate that employment is by the management.

'(1941) 1 K. B. 608
 THE FACTORIES ACT SIS

There should be a contract of employment between the management'

and the person employed. Chinlaman Roo v. Stale of Madhya Pradesh. I
(iii) Mere selling agents through occupying a room in the factory are
not workers within the meaning of the Act. Prag Narayan v, Crown.'
But persons selling manufactured articles in the factory premises
are workers. Local Governmen, v. Nusanl'anji. 3
Section III of the Act refers to obliVtions of workers. Under
the Section III a worker in a factory shall not-
(a) wilfully interfere with or misuse any ap?liance, convenience
or other thing provided in the factory for the purpose of
securing the health, safety or welfare of the workers therein;
(b) wilfully and without reasonable cause do anything likely to
elldanger himself or others, and
(c) wilfully neglect to make use of any appliance or other thing
provided in the factory for the purposes of securing the health
or safety of the workers therein [Sec. 111(1)].
If any worker employed in a factory violates any of the
provisions of Sec. III or any rule made thereunder he shall be
punishable with imprisonment for a term extending three months
or with fine upto one hundred rupees or with both [Sec: 111(2)].
Section III-A as introduced by the Amendment Act of 1987
refers to rights of worker, under section III-A every worker
shall have the right to--
(i) obtain from the occupier, information relating to workers'
health. and safety at work;
(il) get trained within the factory wherever possible, or to get
himself sponsored by the occupier for getting 'traihed at
a training centre or institute, duly approved by the Chief
Inspector, where training is imparted for workers' health
and safety at work;
(iii) represent to the Inspector directly or through his
representatives in the matter of inadequate provision for
ptotection of his health or safety in the factory.
Power
"Power means electrical energy, or any other form of energy
which is mechanically transmitted and is not generated by human
or animal agency. "--Sec. 2(g).
I (1958) S.c.J. 753 (Supreme Court) '(1928) Lah. 78
, (1933) Nag. 283
816 INDUSTURAL LAW

Prime mover
"Primelllover means any engine, motor or other appliance
which generates or otherwise provides power."-Sec. 2(h).
TraBsmissioD machiDery
"Transmission machinery means any shaft, wheel, drum
pulley, system of pulleys coupling, clutch, driving belt or other
appliance or device by "'lich the motion Of a prime mover is
transmitted to or received by any machinery or appliance".-
Sec. 2(i).
Machinery
"Machinery includes prime movers, transmission machinery
and all other appliances whereby power is generated, transformed,
transmitted or applied."-Sec.20).
Adult
"Adult means a person who has completed his eighteenth
year of age."-Sec. 2(a).
Adolescent
"Adolescent means a person who has completed his fifteenth
year of age but has not completed his eighteenth year."-Sec. 2(b).
Child
"Child means a person who has not completed his fifteenth
year of age. "-Sec. 2( c).
Youug }enoD
"Young Person means a person who is either a child or an
adolescent."-Sec. 2( d).
Calendar year
"Calenllar Year means the period of twelve months beginning
with the first day of January in any year."-Sec ..2(d).
Day
"Day means a peri~ of twentyfour hours beginning at
midnight." Sec.2(e).
• References to the time of the day in the Act are to the Indian
Standard Time. In areas where the I. S. T. is not observed, the State
Government can by rules define the lotal mean. time.-Sec. 3.
 THE FACTORIES ACT 817

Week
"Week means a period of seven days beginning at midnight
on Saturday night or such other night as may be approved in
writing for a particular area by the Chief Inspector of Factories."
-Sec. 2(1).
Shift and Relay
Where work of the same kind is carried out by two or more
sets of workers working during different periods of the day, each
of such sets is called a "relay" and each of such periods is called
a "shift."-Sec.2(r).
Occupier
"Occupier" of a factory means the person who has ultimate
control ove< the affairs of the factory, and where the said affairs
are entrusted to a managing agent, such agent shall be deemesl
to be the occupier of the factory.-Sec. 2(n).
In case of a ship, which is being repaired or on maintenance
work'is being carried out in dry dock which is available for hire,
the following persons for certain section of the Act will be
deemed to be occupier (i) the owner of the dock, and (il) the
owner of the ship or his agent or master or other officers-in-
charge in the ship or any person who contracts with such owner,
agent or master or other officers-in-charge to carry out the repair
or maintenance work.-Sec.2(n) added by The Factories
(Amendment) Act, 1976. The Amendment Act of 1987 has
enlarged the definition of occupier to a considerable extent.
Section 2(n) of the amended Act 1987 provides that,
"(I) in the case of a firm or other association of individuals.
anyone of the individual partners or members thereof shall
be deemed to be the occupier.
(II) in the case of a Company, anyone of the directors shall
be deemed to be the occupier.
(11\) in the case of a factory owned or controlled by the Central
Government or any· State Government, or any local
authority, the person or persons appointed to manage the
affairs of the factory by the Central Government, the State
Government or the local authority as the case may be, shall
be deemed to be the occupier".
The Act imposes several duties and responsibilities qn the
occupier of the factory. (See next page.)
Industrial Law - 52
818 INDUSTURAL LAW

An Oi;Cupier of factory may be an owner, a lessee or a mere

licensee but he must have the right to occupy the property. He
should also control the management.

APPROVAL, LICENCING AND REGISTRATION

It is necessary to obtain a licence before a factory is started.
Section 6 provides that the State Government may mAke rules
requiring, for the purposes of this Act, the submission of plans
or any class or description of factories to the Chief Inspector
or the State Government, and the plans and specifications of a
factory and its location.
The Amendment of 1976 provides that any replacement and
addition to the factory will not be allowed if it does not reduce
the minimum clear space required for safe working around the
plant or machinery or adversely affect the environmental
conditions from the evolution or emission" of steam, heat or dust
or fumes injurious to health.
Noti"e by o""upier.
Section 7 provides that the occupier of a factory must, at
least 15 days before he begins to occupy or use any premises
as a factory, send to the Chief Inspector of Factories a written
notice containing the following particulars :
(I) the name and situation of factory ;
(2) the name and address of the occupier;
(3) the name and address of the owner of the premises or
building (including the precincts thereof);
(4) the address to which communications relating to factory
may be sent;
(5) the nature of the manufacturing process to be carried on
in the factory during the next twelve months;
(6) the total rated horse power installed or to be installed in
the factory, which shall not include the rated horse power
or any separate stand-by plant;
(7) the name; of the manager of the factory for the purposes
of this Act;
(8) the number of workers likely to be employed in the
factory ;
(9) such other particulars as may be prescribed.
 THE FACTORIES ACT 819

The niles stated above are enforced because the plans and
specifications of the factory must insure proper measures of
health, safety and welfare of the wotkers.
The Amendment Act of 1987 prescribes the general duties
of the occupier in regard to the health, safety and walfare of
the workers in his factory, (Sec. 7-A). In accordance with Sec.
7-A(I), every occupier shaH ensure, as far as reasonably possible,
the health, safety and welfare of aH workers while they are at
work in the factory.
Every occupier shaH prepare a statement in respect of the
health and safety of the worker and bring the statement to the
notice of all workers. [Sec. 7A(3)]
Section 7B provides that, "Every person who designs,
manufactures, imports or supplies any article for use in the
factory shall ensure so far as ~reasonably practicable that the
article is so designed and constructed as to be safe and without
risks to the health of the workers when property used".
He must provide adequate information in connection with
the use of the article and about the use for which it is designed
and tested.
For the purpose of this section, article shall include plant
and machinery.
THE INSPECTION STAFF
The Factories Act empowers the State Government to appoint
Inspectors, Chief Inspectors of Factories, Additional Chief
Inspectors, Joint Chief Inspectors and Deputy Chief Inspectors.
Every District Magistrate is an Inspector for his district. No
person can act as an Inspector if he is or becomes directly or
indirectly interested in a factory or in 'any process or business
carried on therein or in any patent or machinery connected
therewith. '
Powers of Inspectors
Section 9 provides that subject to any rules made in this
behalf, an Inspector may exercise the following powers within
the local limits for which he is appointed-
(0) enter, with such assistants, being persons in the service of
the Government or any local or other public authority, as
he thinks fit, and place which is used, or which he has
reason to believe is used, as a factory ;
820 INDUSTURAL LAW

(b) make examination of the premises, plant and machinery ;

(c) require the production of any prescribed register and any
other document relating to the factory, and take on thl1 spot
or otherwil!e statements of any person which he may
consider necessary for carrying out the purposes of the
Act; and
(d) exercise such other powers as may be prescribed for
carrying out the purposes of this Act;
(e) seize or take copies of any register; record or other
document as he may consider necessary in respect of any
offence committed under this Act;
(f) direct the occupier that any premises or any part thereof
shall be left undisturbed for so long as is necessary for
the purpose of any examination;
(g) take measurements and photographs and make such
recordings as he considers necessary for the purpose of
any examination under Glause (b) ;
(h) in case of any article or substance found in any premises
which appears to him as having caused or is likely to cause
danger to the health or safety of the workers, direct it to
be dismantled or subject it to any process or test and take
possession of any article or substance and detain it for
necessary examin~ti,?n;
(i) exercise such other powers as may be prescribed.
No person shall be compelled under this section to answer
any question or give any evidence tending to incriminate himself.
Under Section 91, an Inspector may take a~ sample of any
substance, used or intended to be used in a factory. for the
purpose of finding out whether the substance is injurious and
if the factory is violating any of the provisions of the Act.
Obstructing an Inspector
Whoever wilfully obstructs an Inspector in ,the exercise or
any power conferred on him by or under this Act, or fails to
produce on demand by an Inspector any registers or other
documents in his custody kept in pursuance of this Act or of
any rules made thereunder,' or conceals or prevents imy 'wor~er
in a factory from appearing before, or being' examined by, an
Inspector, shall be punishable with imprisonm'ent for a term
which may extend to six months or with fine which may extend
to Rs. 20.000 or with both.-':"Sec. 95.
 TIlE FACTORIES ACT 821

The onus is 011 the prosecution to show th'al a person has

obstructed an inspector. '
Duties of Inspector
It is the duty of faclory inspectors to enforce the provisions
of the Factories Act and other industrial laws, For this purpose
they inspect factories periodically. If any rule is violated they
take steps like prosecuting the guilty persons etc.

CERTIFYING SURGEONS
Section 10 provides that the State Government may appointed
qualified medical practitioners to be certifying surgeons for the
purposes of the Act for specified local areas or for specified
factories or class of factories.
No person can be a certifying surgeon for a factory or industry
in which he is interested directly or indirectiy-Sec, 10(3).
The State Government may by order in writing and subject
to specified conditions, exempt any person of class of persons
from the provisions of this sub-section in respect of any factory
or class or description of factories,
Duties
The certifying surgeon has the following duties under the
Act and the ru les framed under it.
1. The examination and certification of young persons.
2, The examination of persons engaged in factories in
dangerous occupations or processes.
3, Medical supervision of factories in cases where such
supervision had been prescribed owing to the dangerous nature
of the work carried on or for any other reason, viz.,
(i) cases of illness have occurred which it is reasonable to
believe are due to the nature of the manufacturing process
carried on, or other conditions of work prevailing therein;
(ii) by reason of any change in the manufacturing process
carried on or in the substance used therein there is a
likelihood of injury to the heahh of workers employed in
Ihal manufacturing process;
(iii) young persons are, or about to be, employed in any work
which is likely to cause injury to their health,-Sec. 10(4).
822 INDUSTURAL LAW

PROVISIONS
. REGARDING . THE HEALTH OF WORKERS
Sections II to 20 of the Act contain certain provisions
. intended to ensure that the conditions undjlr which work is carried
on in factories do not affect the health of the workers injuriously.
The provisions are explained below :
1. Cleanliness (Sec. 11, as amended in 1976)
Every factory shall be kept clean and free from effluvia (or
outflow of bad smelling gases) from any drain, privy or other
nuisance. The following other measures must also be adopted :
(a) Accumulations of dirt and refuse shall be removed daily
from workrooms. staircases and passages.
(b) The floor of every 'workroom shall be cleaned at least
once in every week by washing. using disinfectants etc.
(c) Where the floor is liable to get wet. means of drainage
must be provided.
(d) All inside walls and partitions and ceilings. when painted
othelWise than with washable water-paint. must be
repainted or revarnished at least once in every five years.
Where they have smooth impervious surfaces. they must
be cleaned at least once in fourteen months. In imy other
case, they must be whitewashed or colour-washed at least
once in fourteen months.
(e) Where they are painted with washable water paint. must
be repainted with at least one coat of such paint at least
. once in every period of three years and wahsed at least
once in every period of six months.
(j) All doors and window frames and other wooden or metallic
framework and shutters shall be kept painted or varnished
and the painting or varnishing shall be carried out at least
once in every period of five years.
Where the nature of the operations of a factory (or class
or description of factories or part of factories) is such that all
the aforesaid rules cannot be complied with. the State Government
can grant exemptions and specify alternative methods of keeping
the factory clean.
2. Disposal or wastes and emuents (Sec. 12, as amended in 1976)
Effective arrangements shall be made in every factory for
the disposal of wastes and effluents due to the manufacturing
 · THE FACTORIES ACT 823

process carried on therein, so as to render them innocuous, and

for their disposal. The arrangements must be approved by the
authority under the rules. The state government may formulate
rules prescribing the arrangements· to be made in this respect.
Sec. 12(2).
3. Veutilatiou aud Temperature (Sec. 13)
Effective and suitable provisions shall be made in every
factory for securing and maintaining in every workroom-
(a) adequate ventilation by the circulation of fresh air, and
(b) such temperature as will secure to workers therein
reasonable comfort and prevent injury to their health.
The walls and the roof must be of such material and of such
design as to keep the temperature low. The hot parts of machines
and processes must be separated and insulated. The State
Government may make rules providing for the keeping of
thermometers in specified places and the adoption of methods
which will keep the temperature low.
Seotion 13(2) provides that the State Government may
prescribe a standard of adequate ventilation and reasonable
te;"perature for any factory and direct that "proper measuring
instruments at such places and in such positIon as may be
specified, shall be provided and such records as may be
prescribed. shall be maintained."
Section 13(3) provides that if it appears to the Chief
Inspector that excessively high temperatures in any factory can
be reduced by the adoption of suitable measures, he may issue
an order in writing specifying measures to be adopted and may
order to carry out the measures before a specified date.
4. Dust aud Fume (Sec. 14)
If the manufacturing process gives off dust or fume which
is injurious or offensive, measures shall be adopted to prevent
its inhalation and accumulation. If a stationary internal
combustion engine is used, steps must be taken to conduct its
exhaust outside. In other cases, steps must be taken to prevent
the accumulation of the exhaust fumes.
S. Artificial humiditication (Sec. 15)
In respect of all factories in which· the humidity of the air
is artificially increased, the State Government may make rules
 824 INDUSTURAL LAW

. regarding the following : (a) the standards of humidification,

(b) the methods used for artificially increasing humidity, (e) tests
for determining the humidity, and (d) the methods to be adopted
for securing adequate ventilation and cooling of the 'air in the
workrooms.-Sec.15(\).
The water used for humidification shall be taken from a
public supply 'or other source of drinking water and must be
effectively purified before use.-Sec. 15(2).
The· inspector of factories may, if necessary. specify the
measures necessary for purifying the water.-Sec. 15(3).
6. Over~l'9wding (Se~. 16)
No room in any factory shall be overcrowded to an extent
i,uurious to the health of the workers, [Sec. 16(1)]. In factories
existing before the ·commencement of the Ad, there must be at
least 55 cubic metres (350 c.R) of space r,'r every worker
employed therein. In factories built after the Act, there must be
at le\lst 75 cubic metres (500 c.ft.) of space per worker. In
calculating the amount of space, no account shall be taken of
any space which is more than 5 metres (14 ft.) above the floor
of the room. If the Chief Inspector so requires, there shall be
posted in every room a notice specifying the maximum number
of worker who may be employed in the room in accordance with
the above rules. The Chief Inspector may, by order in writing,
exempt a workroom from the operation of the above rules if in
hi~ opinion it is unnecessary in the interest of health.
According to Section 16(2) there shall be in every workroom
of a factory in existence on the date of the commencement of
this Act at least 9.9. cubic meters and of a factory built after
the commencement o(,this Act at least 14.2 cubic meters of space
for every worker employed therein.
7. Lighting (Se~. 17)
In every part of a factory where workers are working or
passing there shall be provided and maintained sufficient and
suitable lighting, natural or artificial or both. Glazed windows
and skylights shall be kept clean on both sides and free from
obstruction. Effective provision shall be made, so far as is
practicable, to prevent glare and the formation of shadows to
such an extent as to cause eye-strain or the risk of accident. The
State Government may prescribe standards of suitable lighting.
 THE FACTORIES ACT 825

8. Drinking water (Sec. 18)

In every factory effective arrangements shall be made to
provide and maintain at suitable points conveniently situated for
all workers employed therein a sufficient supply of wholesome
drinking water. All such points sl)all be legibly marked "drinking
water" in the language understood by the majority of the workers.
Section 18(2) of the amending Act provides that the place of
drinking water shall not be situated within six meters of any
• washing place, urinal, latrine, spitt'on, open drain carrying sullage
or emuent or any source of contamination. A shorter distance can
be approved in writing by the Chief Inspector. In every factory
wherein more than 250 workers are ordinarily employed, provision
shall be made for cooling drinking water durin~ hot weather by
etTective means and for distribution thereof. The State Governments
may make rules regarding above provisions. [Sec. 18(3»)
9. Latrines aod Urinals (Sec. 19)
In every factory sufficient latrine and urinal accommodation
of prescribed types shall be provided conveniently situated and
accessible to workers at all times while they are at the factory.
Separate enclosed accommodation shall be provided for male and
female workers. Such accommodation shall be adequately lighted
and ventilated. No latrine or urinal shall, unless specially
exempted in writing by the Chief Inspector, communicate with
any workroom except through an intervening open space or
ventilated passage. All such accommodation shall be maintained
in a clean and sanitary condition at all times. Sweepers shall
be appointed whose primary duty would be to keep clean latrines,
urinals and washing places. [Sec. 19(1)]
Certain additional measures are to be taken in factories where
more than 250 workers are ordinarily employed. The latrines and
urinals shall be of the prescribed sanitary types. The floors,
internal walls up to the height of 90 cms. (3ft.) and the sanitary
blocks shall be laid in glazed tiles or otherwise finished to
provide a smooth polished impervious surface. These parts and
sanitary pans shall be thoroughly washed and cleaned at least
on.ce every 7 days with suitable detergents or disinfectants or
both [Sec. 19(2»). The state Government may prescribe the
number of latrines and urinals to be provided in proportion to
the number of workers. Other rules regarding sanitation may be
made, including the obligations of the workers in this regard.
826 INDUSTURAL LAW

10. Spittoons (Sec. 20)

A sufficient number of spittoons must be provided at
convenient places. They must be maintained in a clean and
hygienic condition. The State Government may make rules
regarding. their number, location and maintenance. No person
shall spit except in the spittoons. If a person does so he may
be fined up to Rs. 5.
Summary
Summary of the provisions of the Factories Act relating to
the health of workers are stated below. •
1. Cleanliness
Every factory shall be kept clean and free from dirt, and the
outflow of drains etc. The floors must be cleaned. Drainage shall
be provided. Inside walls, partitions and ceilings must be repainted
at least once in five years. When washable waterpaint is used
they must be painted once every three years and washed at least
every period of six months.-Sec. II, as amended in 1976.
2. Disposal of wastes and emuents
The waste' materials produced from the manufacturing process
must be effectively disposed of.-Sec. 12.
3. Ventilation and Temperature
There must be provision for adequate ventilation by the
circulation of fresh air. The temperature must be kept at a
comfortable level. Hot parts of machines must be separated and
insulated.-Sec. 13.
Section 13(2) provides that the State Government may
prescribe a standard of adequate ventilation and reasonable
temperature for any factory and direct that "proper measuring
instruments at such places and in such position as may be
specified, shall be provided and such records as may be
prescribed, shall be maintained."
Section 13(3) provides that if it appears to the Chief
Inspector that excessively high temperatures in any factory can
be reduced by the adoption of suitable measures, he may issue
an order in writing specifying measures to be adopted and may
order to carry out the measures before a specified date.
 THE FACTORIES ACT 827

4. Dust and Fume

If the manufacturing process used gives off injurious or
offensive dust and fume steps must be taken so that they are not
inhaled or accumulated. The exhaust fumes of internal combustion
engines must be conducted outside the factory.-Scc. 14.
5. Artilidal humidilitation
The water used for this purpose must be pure. It must be
taken from some source of drinking water supply. The State
Government can frame rules regarding the process of
• humidification etc.-Sec. 15.
6. Overtrowding
There must be no overcrowding in a factory. In factories
existing before the commencement of the Act there must be at
least 350 c.ft. (or 55 cubic metres) of space per worker. For
fac~ories built afterwards, there must be at least 500 c.ft. (or 1.5
cubic metres) of space. In calculating the space, an account is
to be taken of space above 14ft. (or 5 metres) from the floor.-
Sec. 16.
According to Section 16(2) there shall be in every workroom
of a factory in existence on the date of the commencement of
this Act at least 9.9 cubic meters and of a factory built after
the commencement of this Act at least 14.2 cubic met~rs of space
for every worker employed therein.
7. Lighting
Factories must be well lighted. Effective measures must be
adopted to prevent glare or fonnation of shadows which might
cause eyestrain.-Sec. 17.
8. Drin king water
Arrangements must be made to provide a sufficient supply
of wholesome drinking water. All supply points of such water
must be marked "drinking water." No such points shall be within
20 ft. (or 7.5 metres) of any latrine, washing place etc. Factories
employing more than 250 workers must cool the water during
the hot weather.-Sec. 18.
Section 18(2) of the amending Act provides that the place
of drinking water shall not be situated within six meters of any
washing place, urinal latrine, spitton, open drain carrying sullage
828 INDUSTURAL LAW

or effluent or any source of contamination. A shorter distance

can be approved in writing by the Chief Inspector.
9. Latrines and Urinals
Every factory must provide sufficient number of latrines and
urinals. There must be separate provision for male and female
workers. Latrine and urinals must be kept in a clean and sanitary
condition. In factories employing more than 250 workers, they
shall be of prescribed sanitary types.-Sec. 19. •
10. Spittoons
A sufficient number of spittoons must be provided at
convenient places, in a clean and hygienic condition.-Sec. 20.

PROVISIONS REGARDING THE SAFETY OF WORKERS

Sections 21 to 40A, 408 and 41 of the Act lay down rules
for the purpose of securing the safety of workers. They are
explained below.
1. Fencing of machinery (Sec. 21, as amended in 1976)
The following machinery must be securely fenced by
safeguards of substantial construction which shall be constantly
maintained and kept in position while the parts of machinery are
in motion or in use; moving parts of prime movers and flywl1eels
connected to a prime mover; the headrace and tailrace of every
water-wheel and water turbine; any part of a stock·bar which
projects beyond the head stock of a lathe.
The following machinery must be fenced in a similar fashion
unless they are in such position or of such construction as to
be safe : every part of an electric generator, a motor or rotary
converter; every part of transmission machinery; and, every
dangerous part of any other machinery. [Sec.21(I») .
The State Government may by rules provide for further
precautions. It may also exempt any particular machinery or part
thereof from the provisions of this section [Sec. 21 (2»)
Case Law:
The machinery must be securely fenced. Caral/ v. AndreII' Barclay
and Sons LId. I : Supdl. and Remembrancer. WB. ,,'. P. Sen. 2

I (1949.50) I F. J. R. I 2 AIR (1949) CaL 604

 THE FACTORIES ACT 829

2. Work on or near machinery in motion (Sec. 22, as

amended in 1976)
It may be necessary in a factory to examine a machine
referred to in Sec. 21 wh,ile in motion and to work on it (e.g.,
for slipping of belts or for lubrication). Such exmination or work
must be carried out by a. specially trained adult male worker
whose name has been recorded in a specially prescribed register.
He must wear tightly fitting clothes which shall be supplied by
the occupier.
Such worker shall not a handle a belt at a moving pulley unless-
(i) the belt is not more than fifteen centimetres in width;
(ii) the pulley is normally for the purpose of drive and not
merely a fly-wheel or balance wheel (in which case a belt
is not permissible) ;
(iii) the belt joint is either laced or flush with the belt ;
(i\') the belt, including the joint and the pulley rim, are in good
repair;
(v) there is reasonable clearance between the pulley and any
fixed plant or structure;
("i) secure' foothold and, where necessary, secure handhold, are
provided for the operator; and
(\"ii) any ladder in use for carrying out any examination or
operation aforesaid is securely fixed or lashed or is firmly
held by a second person.
Na woman or youhg person shall be allowed to clean,
lubricate or ,adjust any part of the machinery while the prime
mover or transmission machinery is in motion or to work between
moving parts, or between fixed and moving parts. of any
machinery which is in motion. '
. The State Government may prohibit in any specified factory
or class or, description of factory, the cleaning. lubrication or
adjustment of specified parts of a moving machinery by <lily person.
The Maharashtra Factory Rules provide that the following
machines are dangerous-{i) Power presses other than hydraulic
presses: (ii) Milling machines used in the metal trades;
(iii) Guillotine machines; (i\') Circular saws; (\") Plating Printing
machines.
3. Emplo~'ment ofYQungpersons on dangerous machines (Sec. 23)
No young person shall w.ark at any dangerous machine 'unless
he has been fully instructed as to the dangers arising in
830 INDUSTURALLAW

connection with the machine and the precautions to be observed,

and (a) has received sufficient training in work at the machine
or (b) is under adequate supervision by a person who has a
thorough knowledge and experience of the machine. The State
Government is to prescribe what machines are dangerous for the
purpose of this section.
4. Striking gear and devices for cutting off power (Sec. 24,
as amended in 1976)
hi every factory suitable striking gear or other efficient
mechanical appliances shall be provided and maintained and used
to move driving belts to and from fast and loose pulleys which
form part of the transmission machinery. Such gear or appliances
shall be so constructed, placed and maintained as to prevent the
belt from creeping back on the fast pUlley. Driving belts when
not in use shall not be allowed to rest or ride upon shafting in
motion.
In every factory suitable devices for cutting power in
emergencies from running machinery shall be' provided and
maintained in every workroom. For' factories which were in
operation before the commencement of the Act, the maintenance
or devices for cutting off power is required only for workrooms
in which electricity is used for power.
When a device, which can inadvertently shift from "off' to
"on" position is provided in a factory to cut off power, arrange-
ment shall be provided for locking the device in safe position
to prevent accidental starting of the transmission machinery or
other machines to which the device is fitted.
5. Self-acting machines (Sec. 25)
No traversing part of a self-acting machine in any factory
and no material carried thereon shall, if the space over which
it runs is a space over which any person is liable to pass, whether
in the course of his employment or otherwise, be allowed to run
on its outward or inward traverse within a distance of 45 cms.
(or 18 inches) from any fixed structure which is not part of the
machine.
The Chief Inspector may permit the continued use of a
machine" not complying with the above requirement, if it was
installed before the 'commericerilent of the Act. He may, however,
impose conditions for ensuring safety.
..
 THE FACTORIES ACT 831

6. Casing of new machinery (Sec. 26)

In all machinery installed after the commencement of the Act,
(a) every set s~rew, bolt or key on any revolving shaft, spindle,
wheel or pinion shall be so sunk, encased or otherwise
effectively guarded as to prevent danger;
(b) all spur, worm and other toothed or friction gearing which
does not Pl"quire frequent adjustment while in motion shall
be comple\ely encased unless it .~ <() situated that it is safe
without encasement. [Sec. 26(' l]
The State Government may make rules specifYing further
safeguards.
It is a punishable offence to sell or let out on hire, either
directly or as an agent, any machine which does not comply with
the provisions of this section or of any rules made by the State
Government on the subject. (The offender may be punished with
imprisonment up to three mohths andlor fined' up to Rs. 500.)
7. Women and children near cotton-openers (Sec. 27)
No woman or child· shall be employed in any part of a factory
for pressing cotton in which a cotton-opener is at work.
If the feed-end of a cotton-opener is in a room separated
from the delivery-end by a partition extending to the roof or to
such height as the Inspector may in a particular case specifY
in writing women and children may be employed on the side
of the partition where the feed-end is situated.
8. Hoists and lifts (Sec. 28)
( I) In every factory-
(a) every hoist and lift shall be-
(i) of good mechanical construction. sound material and
adequate strength;
Oi) properly maintained, and shall be thoroughly examined
by a competent pcr!\On at least once in every period of
six months, and a register shall be kept containing the
prescribed particulars of every such examination;
(b) every hoistway and liftway shall be sufficiently protected
by an enclosure fitted with gates, and the hoist or lift, and
every such enclosure shall be so constructed as to prevent
any person or thing from being trapped between any part
of the hoist or lift and fixed structure or moving part;
832 INDUSTURAL LAW

(c) the maximum safe working load shall be plainly marked

on every hoist or lift, and no load greater than such load
shall be carried thereon;
(<I) the cage of every hoist or lift used for carrying persons
shall be fitted with a gate on each side w,hich access is
afforded to a landilg; . ,
(e) every gate referred ) in clause (b) or clause (<I) shall be
fitted with interlocking or other efficient device to secure
that the gate cannot De opened except when the cage is
at the landing and that the cage cannot be moved unless
the gate is closed.
(2) The following additional requirements shall apply to
hoists and lifts used for carrying persons and installed or
reconstructed in a factory after the commencement of this Act,
namely:
(a) wher~ the cage is supported by rope or chain, there shall
be at least two ropes or chains separately connected with
the cage and balance weight, and' each rope or chain with
its attachments shall be capable of carrying the whole
weight of the cage together with its maximum load;
(b) efficient devices shall be provided and maintained capable
of supporting the cage together with its maximum load in
theoevent of breakage o(the ropes, chains or attachments;
(e) an efficient automatic device shall be provided and
maintained to prevent the cage from over-running.
(3) The Chief Inspector may permit the continued use of a
hoist or lift installed in a factory before the, commencement of
this Act which does not fully comply with the provisions of sub-
section (I) upon such cond,itions for ensuring safety as he may
think fit to impose,
(4) The State Government may, if in respect of any class
or description of hoist or lift, it is of opinion that it would be
unreasonable to enforce any requirement of sub:-sections (i) and
(ii) by order direct that such requirement shall not apply to such
class or description of hoist of lift.
For the purposes of Sec. 28, no lifting machine or appliance
shall be deemed to be a hoist or lift unless it has a platform
or cage, the direction or movement of which is restricted by a
guide or guides,
 THE FACTORIES ACT 833

9. Lifting macbines cbains, ropes and lifting tackles (Sec. 19)

In any factory the following provisions shall be complied
with in respect of every lifting machine (other than a hoist and
lift) and every chain, rope and lifting tackle for the purpose of
raising or lowering persons, goods or materials :
(a) all parts, including the working gear, whether fixed or
movable, of every lifting machine and every chain, rope
or lifting tackle shall be---
(i) of good construction, sound material and adequate
strength and free from defects;
(ii) properly maintained; and
(iii) thoroughly examined by a competent person at least once
in every period of twelve months, or at such intervals
as the Chief Inspector may specify in writing, and a
register shall be kept containing the prescribed particulars
of every such examination;
(b) no lifting machine and no chain, rope or lifting tackle shall,
except for the purpose of test, be loaded beyond the safe
working load which shall be plainly marked thereon
together with an identification mark and duly entered in
·the prescribed register; and where this is not practicable,
a table showing the safe working loads of every kind
and size of lifting machine or chain rope of lifting tackle
in use shall be displayed in prominent positions on the
premises;
(c) while any person is employed or working on or near the
wheel track of a travelling crane in any place where he
would be liable to be struck by the crane, effective
measures shall be taken to ensure that the crane does not
approach within twenty feet (or 7.5 meters) of that place.
Section 29( I) provides that every lifting machine (other than
a hoist and lift) and every chain, rope and lifting tackle for the
purpose of raising or lowering persons, goods or materials shall
be of good construction, sound material and adequate strength
and free from defects. These must be properly maintained and
thoroughly examined by a competent person at least once in every
period of twelve months or at such intervals as the Chief
Inspector may specify in writing. A re!:lister must be maintained
containing the particulars of every such examination.

<,ldu.trial Law - 53
 834 INDUSTURAl LAW

The' State Government may by rules prescribe further

requirements or exempt from compliance any of the requirements
if it considers it unnecessary or impracticable.
10. Revolving macbinery (See. 30)
(I) In every room in a factory in which the process of
grinding is carried on there shall be permanently affixed to or
placed near each machine in use a notice indicating the maximum
safe working peripheral speed of every grindstone or abrasive
wheel, the speed of the shaft or spindle and the diameter of the
pulley upon such shaft or spindle and such speeds shall in no
case be exceeded.
11. Pressure plant (See. 31)
If in any factory any operation is carried on at a pressure
above atmospheric pressure. effective measures shall be taken to
ensure that the safe working pressure is not exceeded. The State
Government may make rules for the examination and testing of
machinery and prescribe safety measures. The State Government
may exempt part of the provisions of this section.
12. Floors, stairs and means of aeeeS5 (Sec. 32, as amended
in 1976)
In every factory all floors, steps, stairs, passages and
gangways shidl be of sound construction and properly maintained
and shall be kept free from obstructions and substan~es likely
to cause persons to slip.
Section 32(c), as amended in 1987, provides that "When any
person has to work at, a height from where he is likely to fall.
provision shall be made, so far as is reasonably practicable, by
fencing or otherwise, to ensure the safety of the person so working:'
Where it is necessary to ensure safety they shall be provided
with substantial handrails. Safe means of access must be provided
and maintained to every place at "hich any person is at any time
required to work.
When any person has to work at a place from where he is
likely' to fall a distance exceeding two metres. then, unless the
place is one which provides secure foothold and, where necessary,
secure handhold, provision shall be made, so far as is reasonably
practicable, by fencing or otherwise, to ensure the safety of the
~" persons so working. .
 THE FACTORIES ACT 835

Case Law:
The plaintiff was injured because of'accumulation of rain water in
a small depression in the concrete of the passage. Damages were
given. Davies v. De HO"iII & Aircraft Co. Ltd'
13. Pits, sumps, openings in floors etc. (Sec. 33)
Every fixed vessel, sump. tank, pit or opening in the ground
or in a floor which by reason of its depth, situation, construction
or contents is or may be a source of danger, shall be either
securely covered or securely fenced. The State Government may
exempt compliance in any particular case.
14. Excessive weights (Sec. 34)
(I) No person shall be employed in any factory to carry or
move any load so heavy as to be likely to cause him injury.
(2) The State Government may make rules prescribing the
maximum weights which may be lifted, carried or moved by
adult men, adult women, adolescents and children employed in
factories or in any class or description of factories or in carrying
on any specified process.
Factory Rules of the different States have prescribed the
maximum weights to be carried in the factories. Some examples
are mentioned below :
Mumbai West Bengal
Adult female 30 kgs. 651bs.
Adolescent male 30 65
" "
Male child 16 35
" "
Female child 13 30
" "
15. Protection of eyes (Sec. 35)
In respect of any such manufacturing process carried on in
any factory as may be prescribed, being a process which
involves-
(a) risk of injury to the eyes from particles or fragments
thrown off in the course of the process, or
(b) risk to the eyes by reason of excessive light.-
the State Government may by rules require that effective screen
or suitable goggles shall be provided for the protection of persons
employed on, or in the immediate vicinity of, the process.

'(1050) 2111 F R. 582

836 lNDUSTURAL LAW

Case Law:
Workers musl be informed aboul Ihe place where the goggles are
oblainable. It is nol enough to say Ihal Ihe goggles were hung up
in the office room. Finch v. Telegraph Construction and Maintenance
Co. LId'

16. Precautions against dangerous fumes (Sec. 36)

(I) In any factory no person shall enter or be permitted to
enter an) lhamber, tank, vat, pit, pipe, flue or other confined
space in which dangerous fumes are likely to be present to such
an extent as to involve risk of persons being overcome thereby,
unless it is provided with a manhole of adequate size or other
effective means of egress.
(2) Omitted by the Amendment of 1976.
(3) No person in any factory shall enter or be permitted to
enter any confined space such as is referred to in sub-section
(i) until all practicable measure have been taken to remove any
fumes which may be present and to prevent any ingress of fumes
and unless either-
(a) a certificate in writing has been given by a competent person,
based on a test carried out by himself that the space is free
from dangerous fumes and fit for persons to enter, or
(b) the worker is wearing suitable breathing apparatus and a belt
securely attached to a rope, the free end of which is held by
a person standing outside the confined space. [(Sec. 36(2»)
(4) Suitable breathing apparatus, reviving apparatus and belt
and ropes shall in every factory be kept ready for instant use
beside any sud confined space as aforesaid which any person
has entered. All such apparatus shall be periodically examined
and certified by a competent person to be fit for use. And a
sufficient number of persons employed in every factory shall be
trained and practised in the use of all such apparatus and in the
method of restoring respiration.
(5) No person shall be permitted to enter in any factory, any
boiler furnace, boiler flue, chamber, tank, vat, pipe or other
confined space for the purpose of working or making any
examination therein until it has been sufficiently cooled by
ventilation or otherwise to be safe for persons to enter.

'(1945) All. E. R. 452

 THE FACTORIES ACT 837

(6) The State Government may make rules pescribing the

minimum dimensions of manholes and may also grant exemptions
in particular cases.
In any factory-
(a) no portable electric light or any other electric appliance of
voltage exceeding twenty-four volts shall be permitted for
use inside any chamber, tank, vat, pit, pipe, flue or other
confined space unless adequate safety devices are provided
under Sec. 36A of 1987 and
(b) if any inflammable gas, fume or dust is likely to be present
in such chamber, tank, vat, pit, pipe, flue or other confined
space, no lamp or light other than that of flame-proof
construction shall be permitted to be used therein.-Sec. 36A
added by Factories (Amendment) Act, 1976.
17. Explosive or inflammable gas etc (Sec. 37)
(I) Where in any factory any manufacturing process produces
dust, gas, fume or vapour of such character and to such extent
as to be likely to explode on ignition, all practicable measures
shall be taken to prevent any such explosion by-
(a) effective enclosure of the plant or machinery used in the
proceS!; ;
(b) removal or prevention of the accumulation of such dust,
gas, fume or vapour ; .
(e) exclusion or effective enclosure of all possible sources of
ignition.
(2) When the plant is not so constructed as to withstand the
probable pressure which an explosion would produce, all
practicable measures shall be taken to restrict the spread and
effects of the explosion by providing chokes, baffles, vents or
other effective appliances.
(3) Where any part of a plant or machinery contains
explosive or inflammable gas or vapour at a pressure greater than
the atmospheric pressure, the part shall not be opened except
under the following conditions :
(a) The flow of gas or vapour must be effectively stoppc:d by
a stop valve or other means;
(hi All practicable measures must be taken to reduce the
pressure· to the atmospheric pressure; and
838 INDUSTURAL LAW

(c) Where the fastening of such part has been loosened or

removed, the fastening must be secured or securely replaced.
The aforesaid provisions do not apply to plant or machinery
installed in open air.
(4) The container of explosive or inflammable substances
shall not be subjected to any operation which involves the
application of heat unless adequate measures have been adopted
to remove the substance or its fumes or to render the substance
or fumes non-explosive or non-inflammable. The substance shall
be allowed to re-enter the container only after the latter has been
sufficiently cooled.
(5) The State Government may by rules allow exemptions
from the provisions of this section.
18. Precaution in case of fire (Sec_ 38, as amended in 1987)
For Sec. 38. of the Act, the Amendment Act of 1987 has
replaced a new Sec. 38. The new section provides :
(I) In every factory, all practicable measures shall be taken
to prevent outbreak of fire and its spread, both internally and
externall y.
(2) In every factory there shall be providen such means of
escape in case of fire as may be prescribed.
(3) In every factory the doors affording exit from any room
shall not be locked or fastened so that they cannot be easily and
immediately opened from the inside while any person is within
the room. All such doors. unless they are of the sliding tipe,
shall be constructed to open outward.
(4) In every factory, every window_ door or other exit affording
a means of escape in case of fire, other than the means of exit in
ordinary use, shall be distinctively marked in a language understood
by the majority of the workers and in red letters of adequate size
or by some other effective and clearly understood sign.
(5) There shall be provided in every factory effective and
clearly audible means of giving warning in case of fire to every
person employed in the factory. Safe means of escape for all
persons in the event of a fire, and section 38(1) provides that
in every factory all practicable measures shall be taken to prevent
outbreak· of fire or its spread and to provide and maintain safe
means of escape for all in the event of a fire and Jbe necessary
facilities for extinguishiJ)g fire. .
 THE FACTORIES ACT 839

Effective measures shall be taken to ensure that in ever~}'

factory all the workers are familiar with the means of escape
in case of fire and have been adequately trained in t~e routine
to be followed in such cases. [Sec. 38(2)]
The State ",wemment may make rules. in res pc, t of any
factory or class or description of faclories. requiring thc measures
to be adopted to give effect to the above provisions. [Sec. 38(3)]
If the Chief Inspector, having regard to the nature of the
work carried on in any factory, the construction of such factory.
special risk to life or safety or any other circumstances is of
the opinion that the measures pro'ided in the faclory. whether
as prescribed or not, are inadequate, he l11ay, by order in writing.
require that such addilional measures as he mily consider
reasonable and necessary be provided in the faclory before such
date as specified in the order. [Sec. 38(4)]
(6) A free passage-way giving access to each means of escape
111 case of fire shall be maintained for the use (If all workers
III every room of a factory. •
(7) Eff<'ctive measures shall be taken to ensure that in ever)
factory-
(a) where morc. than twenty workers are ordinarily employed
in any place above the ground floor. or
(b) wherein explosive or highly inflammable materials are used
or stored.
all the workers are familiar with the means of escape in case
of fire and have been adequately trained in the routine to be
followed in such case.
(8) The State Government may make rules prescribing. in
respect of any factory or class or description of factories. the
means of escape to be provided in case of fire and the nature
and amount of fire-fighting apparatus to be proy;ded and
maintained.
(9) Additional meallS of escape: Notwithstanding anything
contained in sub-section (I) or sub-section (7). the Inspect,,,,
having special regard to the nature of work carried on the factory.
construction of the factory, special risk to life or safety or an}
other circumstance may think that the prescribed means of escape
is not adequate for safe, easy or quick exit of th~ workers in
case of fire. If so. then he may. by order in writing require that
such additional means of escape or other measures as he rna}
840 INDUSTURAL LAW

consider reasonable and necessary be provided in the factory. A

date should be specified in the order before which the Inspector's
order will have to be followed.
(10) Reference to Chief Inspector : If any question arises
whether or not the means of escape provided in the factory is
adequate to permit safe, easy or quick exit of the workers in
case of fire. the same shall be referred to the Chief Inspector.
The Chief Inspector shall. after giving the persons concerned a
reasonable opportunity to represent their views, decide the same.
(II) Appeal: Any person aggrieved by the decision of the
Chief Inspector under sub-section {9) may. before the expiry of
the thirty days from the date on which. the decision is
communicated to him prefer an appeal to the State Government.
The State Government shall after giving the appellant a reasonable
opportunity to represent his views, make such order in relation
to the appeal as it thinks fit.
19. Power to require specifications of defective parts or tests
of stability (Sec. 39)
If it appears to the Inspector that any building or part of a
building or any part of the ways, machinery or plant in a factory
is in such a condition that it may be dangerous to human life or
. safety, he may serve on the occupier or manager of the factory or
both an order in writing requiring him before a specified date--
(a) to furnish such drawings, specifications and other
particulars as may be necessary to determine wheth~r such
bUildings, ways, machinery or plant can be used with
safety, or
(b) to carry out such tests in such manner as may be specified

,.
in the order, and to inform the Inspector of the results thereof.
20. Safety of buildings and machinery (Sec. 40)
(I) If it appears to the Inspector that any building or part
of a building or any part of the ways, machinery or plant in
a factory is in such a condition that it is dangerous to human
life or safety, he may serve on the occupier or manager of the
factory or both an order in writing, specifying the measures which
in his opinion should be adopted, and requiring them to be carried
out before a specified date.
(2) If it appears to the Inspector that the use of any building
or part of a building or any part of the ways. machinery or
 THE FACTORIES ACT 841

plant in a factory involves imminent danger to human life or

safety, he may serve on the manager of the factory an order in
writing prohibiting its use until it has been properly repaired or
altered.
21. Maintenance of buildings (Sec. 40A)
Wherein in the opinion of the Inspector, any bulding or part
of a building in a factory is in such a state of disrepair that
it may prove dangerous to the health and we Ifare of the workers.
the Inspector may serve on the occupier or manager or both of
the factory an order in writing specifying the proper measures
and requiring the same to be carried out before such date as is
specified in the order. [Added by the Amendment of 1976.]
22. Safety Officers (Sec. 408)
(l) In every factory-
(i) wherein one thousand or more workers are ordinarily
employed, or
(ii) if according to the opinion of the State Government, any
manufacturing process or operation which is being carried
on involves any risk of bodily injury, poisoning or disease,
or any other hazard to health to the workers of the factory,
the occupier shall, if so required by the State Government
by notification in the Official Gazette, employ such number
of Safety Officers as may be specified in that notification.
(2) The duties, qualifications and conditions of service of
Safety Officers shall be such as may be prescribed by the State
Government.
[Added by the Amendment of 1976].
23. Power to make rules to supplement thir Chapter (Sec. 41)
The State Government may make rules providing for the use
of such further devices and measures for safety as may be
necessary.
According to Section 41 A( I) the "State Government may,
for the purposes of advising it to consider applications for grant
of pemiission for the initial location of a factory involving of
hazardous process or the expansion of any such factory, appoint
a Site Appraisal Committee." The commmittee shall include :
(a) the Chief Inspector of the state who shall be its chairman.
842 tNDUSTIJRAL LAW

(b) a representative of the Central Board for the prevention

and control of water pollution appointed by the Central
Government.
(c) a representative of the Central Board for the prevention
and Control of Air Pollution.
(d) a representative of the State Board appointed under Section
4 of the Water (Prevention and control of pollution) Act,
1974.
(e) a representative of the State Board for the prevention and
control of Air Pollution.
(j) a representative of the Department of Environment in the
State.
(g) a representative of the Meteorological Department of the
Government of India.
<II) an expert in the field of occupational health.
(i) a representative of the Town Planning Department of the
State Government. •
Five other members will be coopted by the State Government
including a scientist having specialized knowledge of the
hazardous process involved in the factory and a representative
of the local authority within whose jurisdiction the factory is to
be established.
Under Section 41 (A)(2J of the amending Act, the Site
Appraisal Committee shall examine an application for the
establishment of a factory involving hazardous process and
submit its recommendation to the State Government within a
period of ninety days of the receipt of slIch application.
Summary
Summary of the provisions of tbe Factories Act regarding
the safety of the workers are stated below: (Sections 21 to 41).
I. Fencing of mllchinery : All dangerous machinery must
be securely fenced e.g.. moving parts of prime movers and
flywheels conne'ctcd to every prime mover, electric generators,.
etc.-Sec. 21.
2. Work 011 or near machinery in molion: Work on or near
machinery in motion must be carried out only by specially Irained
adull male workers wearing tightly fitting clothes.-Sec. 22.
3. Employmell/ of young persons on dangerous machines:
No young person shall work at any dangerous machine unless
he has been specially' instructed as to the dangers and the
 THE FACTORIES ACT 843

precautions to be observed, has received sufficient training about

the work, and is under the supervision of some person having
thorough knowledge and experience of the machine-Sec. 23.
4. Strikillg gear alld devices for cUlling off power: In every
factory suitable devices for cUlling offpower in emergencies from
running machinery shall be provided and maintained in every
workroom.-Sec. 24.
5. Self-acting machines : Moving parIs of a self-acting
machine must not be allowed to come within 45 cms. of any
fixed struclure which is not part of the machine.-Sec. 25.
6. Casillg of new machinery: In all machinery installed after
the commencement of the Act, certain parts must be sunk.
encased or otherwise effectively guarded. e.g., set screw, bolt.
loothed gearing etc.-Sec. 26.
7. Women alld children Ileal' col/on opellers : Women and
children must nol be allowed to work near col/on openers, except
in certain cases.-Sec. 27.
8. Hoists, lifts, chaills etc. : Every hoist and lift must be
so constructed as to be safe. There are detailed rules as to how
such safety is to be secured. There are similar provisions
regarding lifting machines, chains, ropes and lifting tackle.-
Sees. 28, 29.
9. Revolving machinery: Where grinding is carried on, the
maximum safe working speed of every revolving machinery
connected therewith must be notified. Steps must be taken to see
Ihat the safe speed is not exceeded.-Sec. 30.
10. Pressure plmll : Where any operation is carried on at
a pressure higher than the atmospheric pressure, steps must be
taken to ensure that the safe working pressure is not exceeded.-
Sec. 31.
II. Floors. stairs and means of access : All floors, steps,
stairs, passage and gangways shall be of sound construction and
properly maintained. Handrails shall be pro\'ided where necessary.
Safe means of access shall; be provided to the place where the
worker will carry on any work.~Sec. 32.
12. PilS, sumps, openings in floors etc. : Pits, sumps,
openings in floors etc. must be securely covered or fenced.-
Sec. 33.
13. Excessive weights : No worker shall be made to carry
a load so heal}' as to cause him injury.-Sec. 34.
844 lNDUSTURAL LAW

14. Protection of eyes: Effective screen or suitable goggles

shall be pro\' ided to protect the eyes of the worker from
fragme-nt' thrown off in course of any manufacturing process and
fronl (,cessive . light if any.-Sec. 35.
15. Precautions against dangerous fumes: No person shall
be :tllowed to enter any chamber, tank etc. where dangerous
(I "lies are likely to be present, unless it is equipped with a
manhole or other means of going out. In such space no portable
elecrtic light of more than 24 volts shall be used. Only a lamp
or light of flame proof construction can be used in such space.
For people entering such space suitable breathing apparatus,
reviving apparatus etc. shall be provided. Such places shall be
cooled by ventilation before any person is allowed to enter.-
Secs. 36 and 36A.
16. Explosive or inflammable gas etc. : Where a
.manufacturing process produces inflammable gas, dust, fume, etc.
steps must be taken to enclose the machine concerned, prevent
the accumulation of substances and exclude all possible sources
of ignition. Extra precautionary measures are to be taken where
such substances are worked at greater than the atmospheric
pressure.-Sec. 37.
17. Precaution in case of fire : Fire escapes shall be
provided. Windows and doors shall be constructed to open
outwards. The means of exit in case of the fire shall be clearly
marked in red letters. Arrangements must be made to give
warning in case of fire-Sec. 3S.
IS. Specifications of defectives etc. and safety of buildings
and machinery: If any building or machine is in a defective
or dangerous condition. the inspector of factories can ask for
the holding of tests to determine how they can be made safe.
He can also direct the adoption of the measures necessary to
make them safe. In case of immediate danger, the use of the
ouilding or machine can be prohibited.-Secs. 39, 40.
19. Maintenance of BUildings: If the Inspector of Factories
thinks that any building in a factory, or any part of it, is in such
a state of disrepair that it is likely to affect the health and welfare
of the workers, he may serve on the occupier or manager or both
in writing specifying the measures to be done before the specified
date.-Sec. 40A.
 THE FACTORIES ACT 845

20. Safety Officers : The State Government may notify to

the occupier to employ a number of Safety ?!IIcers in a factory
(i) wherein one thousand or more workers are ordinarily
employed, or (ii) wherein any manufacturing process or operation
which involves the risk of bodily injury, poisoning, disease or
any other hazard to health of the persons employed in the
factory.-Sec. 40B.
21. Rules: The State Government may make rules providing
for the Use of such further devices for safety as may be
necessary.-Sec. 41.
PROVISIONS REGARDING THE WELFARE OF
WORKERS
Sections 42 to 50 of the Act contain provisions regarding
the welfare of workers. They are explained below.
1. Washing facilities (Sec. 42)
In every factory-
(a) adequate and suitable facilities for washing shall be
provided and maintained for the use of the workers therein;
(b) separate and adequately screened facilities shall be provided
for the u'se of male and female workers;
(c) such facilities shall be conveniently accessible and shall
be kept clean, The State Government may make rules
prescribing adequate standards of facilities for washing.
2. Facilities for storing and drying clothing (Sec. 43)
The State Government may make rules requiring the provision
of suitable places for keeping clothing not worn during working
hours and for the drying of wet clothing.
The State Government can frame rules providing for keeping
cloth ing with safety.
3. Facilities for sitting (Sec. 44)
(I) In every factory suitable arrangements for sitting shall
be provided and maintained for all workers obliged to work in
a standing position, in order that they may take advantage of
any opport1.mity for rest which may occur in course of work,
(2) If 'n the opinion of the Chief Inspector workers in a
particular room are able to do their work efficiently in a sitting
position, he may by an order in writing direct the occupier of the
factory to provide sitting arrangements before a specified date.
846 )JoIDUSTURAL LAW

(3) p!emrnelnt may by notification in the official

Gazette afo~esaid provisions shall not apply to
specified
4. First-aid appliances (Sec. 45)
(I) First-aid boxes or cupboards equipped with the prescribed
contents must be provided in every factory. They must be readily
accessible during working hours. the number of such boxes shall
not be less than one for every I SO workers employed.
(2) The boxes or cupboards must not contain anything other
than the prescribed contents.
(3) Each box or cupboard shall be kept in charge>'of a
separate responsible person who holds a certificate in first-aid
treatment recognised by the State Government and who shall
always be readily available during the working hours.
(4) In every factory wherein more than 500 workers are
ordinarily employed there shall be provided and maintai'ned an
ambulance room of the prescribed size. The ambulance room will
contain the prescribed equipment, it will be in the charge of such
medical and nursing staff as may be prescribed and those
'facilities shall always be made readily availabe during the
working hours of the factory. '
5. Canteens (Sec. 46, as amended in 1976)
(I) The State Government may make rules requiring that in any
specified factory wherein more than two hundred and fifty workers
are ordinarily employed, a canteen or canteens shall be provided
and maintained by the occupier for the use of the workers.
(2) Without prejudice to the generality of the foregoing
power. such rules may provide for-
(a) the date by which such canteen shall be provided;
(b) the standards in respect of construction, accommodation,
furniture and other equipment of the canteen;
(c) the foodstuffs to be served therein and the charges which
may be made therefor;
(d) the constitution of a managing committee for the canteen
and representation of the workers in the management of
the canteen;
(dd) the items of expenditure in running 'If the capteen which
are not to be taken into account in fi"ing the cost of food·
stuffs and which shall be borne "y the employer.
 THE FACTORIES ACT 847

(e) the delegation to the Chief Inspector, subject to such

conditions as may be prescribed, of the power to make rules
under clause (e).
6. Shelters, rest rooms and lunch ... vms (Sec. 47)
(1) In every factory wherein mOr< th:.n one hundred and fifty
workers are ordinarily employed, adequate and suitable shelters
or rest rooms and a suitable lunch room, with provision for
drinking water, where workers can eat meals brought by them,
shall be provided and maintained for the use of the workers.
A canteen maintained in accordance with Sec. 46 is regarded
as part of the requirements of this sub-section. Where a lunch
room exists no worker shall eat any food in the work room.
(2) The shelters or rest rooms or lunch rooms to be provided
under sub-section (I) shall be sufficiently lighted and ventilated
and shall be maintained in a cool and clean condition.
(3) The State Government may-
(a) prescribe the standards in respect of shelters, rest rooms etc. ;
(b) by notification in the official Gazette, exempt any factory
or class or description of factories from the requirements
of this section.
7. Creches (Sec. 48)
(I) In every factory wherein more than thirty women workers
arc ordinarily employed there shall be provided and maintained
a suitable room or rooms for the use of children under the age
of six years of such women.
(2) Such rooms shall provide adequate accommodation, shall
be adequately lighted and ventilated, shall be maintained in a
clean and sanitary condition and shall be under the charge of
women trained in the care of children and infants. .
(3) The Government may make rules-
(a) prescribing the location and the standards of such rooms;
(b) requiring the provision of additional facilities for the care
of children;
(e) requiring the provision in the factory of free milk or
refreshment or both for such children;
(d) requiring that facilities shall be given in any factory for
the mothers of such children to feed them at the necessary
intervals. '..
848 INDUSTURAL LAW

8. Welfare officen (See. 49)

(I) In every factory wherein five hundred or more workers
are ordinarily employed the occupier shall employ in the factory
such number of welfare officers. as may be prescribed.
(2) The State Government may prescribe the duties
qualifications and conditions of service of officers employed
under sub-section (I). Ev~n if a factory employs over five
hundred workers only for I few months in the year and not
continuously throughout the year, the occupier must employ the
specified number of welfare officers. [Employers' Association of
Northern India v. Secretary of Labour, AIR (/952).]
9. Power to make rules to supplement this Chapter (Sec. 50)
The State Government may make rules-
(a) exempting, subject to compliance with such alternative
arrangements for the welfare of workers as may be prescribes'
any factory or class or description of factories from compliance
with any of the provisions of this Chapter;
(b) requiring in any factory or class or description of
factories that representatives of the workers employed in the
factory shall be associated with the management of the welfare
arrangements of the workers.
Summary
Summary of the provisions of the Factories Act regarding
the welfare of workers are stated below :
I. Washing; In every factory adequate and suitable facilities
for washing shall be provided and maintained. They shall be
conveniently accessible and shall be kept clean. There must be
separate provisions for male and female workers.-Sec. 42.
2. Storing and drying : The State Government may tnake
rules requiring the provision of suitable facilities for storing and
drying clothing.-Sec. 43. .
3. Sitting ; Sitting facilities must be provided for workers
who have to work in a standing position. so that they may take
rest when possible. When work can be done in a sitting position
efficiently, the Chief Inspector may direct the provision of silting
arrangements.-Se'c. 44. ..
4. First aid; Every faclory must provide first aid boxes or
cupboards. They must contain the prescribed materials and they

•
 THE FACTORIES ACT 849

must be in charge of persons trained in first aid treatment.

Factories employing more than 500 persons must maintain an
ambulance room containing the prescribed equipment and. in
charge of the prescribed medical and nursing staff.-,-Sec. 45.
5. Canteens: Where more than 250 workers are employed,
the State Government may require the opening of canteen or
canteens for workers. Rules may be framed regarding the. food
served; its management etc.-Sec. 46.
6. Shelters : In every factory where more than 150 workers
are employed there must be provided adequate and suitable
shelters or rest rooms and a lunch room (with drinking water
supply) where workecs may eat meals brought by them. Such
rooms must be sufficiently lighted and ventilated and must be
maintained in a cool and clean condition. The standards may be
fixed by the State Government.-Sec. 47. .•.
7. Creches : In every factory where more than 30 women
. are employed, a room shall beprovidedfor the use of the children
(below 6 years) of such women. The room shall be ,adequate
size, well lighted and ventilated, maintained in a clean and
sanitary condition and shall be in charge of a woman trained
in the care of children and infants. The standards shall be laid
down by the State Government.-Sec. 48.
8. Weljare officers : Welfare officer.s ~ust be appointed in
every factory where 500 or more workers are employed. The State
Government may prescribe the duties, qualifications etc. of such
officers.-Sec. 49.
9. Rules: The State Government may make rules regarding
the welfare of workers.-Sec. 50.

THE WORKING HOURS OF ADULTS

Adult
For definition, see page 816.
Weekly Hours
No adult worker shall be required or !lllowed to work in
a factory for more than forty-eight hours in any week.-Sec. 51.
Daily Hours
. No adult worker shall be required or allowed to work in
a factory for more than nine hours in any working day. The daily

Industrial Law - 54
850 INDUSTURAL LAW

maximum may be exceeded with the previous approval of the

Chief Inspector, to facilitate change of shifts.-Sec. 54.
Intervals for Rest
The periods of work of adult workers in a factory each day
shall be so fixed that no period shall exceed five hours and that
no worker shall work for more than five hours before he has had
an interval for rest of at least half an hour. The State Government
or the Chief Inspector may, by order in writing, and for reasons
stated therein, increase the work period to six.-Sec. 55.
Spreadover
•
The periods of work of an adult worker in a factory shall
be arranged that inclusive of his intervals for rest under section
55, they shall not spread-over more than ten and half hours in
any day. The Chief Inspector may for specified reasons increase
the spreadover up to twelve hours.-Sec.56.

RULES REGARDING EMPLOYMENT OF ADULTS

Night Shifts
Where a worker in a factory works on a shift which extends
beyond midnight, (a) his weekly holiday and compensatory
holiday means a period of holiday for 24 consecutive hours
beginning when his shift ends and (b) the following day for him
shall be deemed to be the period of 24 hours beginning when
such shift endslInd the hours he has worked after midnight shall
be counted in thF, previous day.-Sec. 57.
Overlappiag SIlins
Work shall hot be carried on in any factory by means of·
a system of shifts so arranged that more than one relay of workers
is ~ Nl.»'ork of the same kind at the same time. The State
Government or the Chief Inspector may grant exemption from
this rule.-Sec. 58.
Double Employment
No adult worker shall be requ ired or allowed to work in
any factory on any day on which he has already been working
in any other factory, save in such circumstances as may be
prescribed.~Sec. 60.
 THE FACTORIES ACT 851

Notice of Periods of Work

There must be displayed in every factory a notice showing
periods of work of adults, classification of workers in groups
according to nature of their work, shifts and relays etc. Change
made in the system of work must be notified to the Inspector
before change. The manager of every factory must maintain a
Register of Adult Workers showing the name of each worker,
the nature of his work, the group in which he is, included, the
relay in which he is allotted etc. The hours of work of an adult
worker must correspond with the notice referred to above and
the Register.-Sections 61, 62, 63.
No adult worker shall be required or allowed to work in
any factory unless his name and other particulars have been
entered in the register of adult workers.-Sec. 62( I A) added by
the Factories (Amendment) Act, 1976.
Exemptions
By sections 64 and 65, the State Government has been given
power to exempt for limited periods certain factories from
compliance with some of the provisions relating to hours of work
and employment.
Such exemptions are necessary in special cases, for example
in the case of workers engaged in urgent repairs or in preparatory
and complementary work. In some industries work if of an
intermittent character and the enforcement of all the rules stated
above will create hardship. The nature of the work in certain
industries requires exceptional treatment, e.g., workers engaged
in engine rooms and boilers or in the printing of newspapers.
The State Government may exempt persons holding positions of
supeMiision and management or in confidential positions in a
factory from the operation of the rules regarding working hours
(except the rule against the employment of women at night).
Confidential Position: The State .Government may empower
the C~ief Inspector to declare a person other than any person
defined by such rules, as a person holding position of supervision
or management or employed in a confidential position in a factory,
if, the Chief Inspector is of opinion that he can be employed.
If any such person does not get more than Rs. 750 p.m. as
wages, he will be entitled to extra wages for overtime work.-
Sec. 65(1), added by The Factories (Amendment) Act, 1976.
852 INDUSTURAL LAW

Hours and Spreadover : Any exemption granted under Sec.

65(2) Shall be subject to the following conditions, namely :
(i) the total number of hours of work in any day shall not
exceed twelve;
(ii) the spread over, inclusive of intervals for rest, shall not
exceed thirteen hours in anyone day;
(iii) the total number of hours of work in any week, including
overtime, shall not exceed sixty;
(iv) no worker shall be allowed to work overtime, for more
than seven days at a stretch and the total number of hours
of overtime work in any quarter shall not exceed seventy-
five-Sec. 65(3), Factories (Amendment) Ac(, 1976.
Quarter : This is a period of three consecutive months
beginning on the 1st January, the 1st of April, the 1st of July
or the I st of October.-Sec. 64.

RESTRICTIONS ON THE EMPLOYMENT OF WOMEN

By section 66 the following restrictions have been imposed
to women workers;
(a) Maximum daily work is 9 hours: No exemption from the
provisions of Section 54 (which lays down that the
maximum daily hours of work shall be nine hours) can
be granted in respect of any women.
(b) Prohibition of night work :No women shall be required
or allowed to work in any factory except between the hours
of 6 a.m. and 7 p.m. The State Government may by
notification in the official Gazette vary the limits for any
factory or group or class or description of factories. But
such variation must not authorise the employment of
women between the hours 10 p.m. and 5 a.m.
(c) Change of shift only after holiday: There shall be no
change of shifts for women except after a weekly holiday
or any other holiday.
Exception: There is an exceptional case. The State Govern-
ment may make rules providing for the exemption from the
aforesaid restrictions (wholly or partially or conditionally) of
women working in fish-curing or fish-<:anning factories. In
factories. inent.ioned above: the employment of women beyond
the hours specified is necess'ary to prevent damage to or
 THE FACTORIES ACT 853

deterioration in any raw material. But such rules shall remain

in force for not more than three years at a time.
Other restrictions : There are other restrictionr on the
employment of women ~orkers :
I. Work on or near machinery in motion : No ,,"oman or
young person shall be allowed to clean, lubricate or adjust any
part of the machinery while the prime mover or transmission
machinery is in motion or to work between moving parts, or
between fixed and moving parts of any machinery which is in
motion.-Sec. 22(2). (See p. 829).
2. Cotton openers : No woman or child shall be employed
in any part of a factory for pressing cotton in which a cotton
opener is at work.
If the feed-end of a cotton opener is in a room separated from
the delivery-end by a partition extending to the roof or to such
height as the Inspector may in a particular case specify in writing,
women and children may be employed on the side of the partition
where the feed-end is situated.-Sec. 27. (See p. 831).
3. Excessive weights: The State Gov!'rnment may make rules
prescribing ihe maximum weights which may be lifted, carried, or
moved by adult men, adult women, adolescents and children
employed in factories or in any class or description of factories
or in carrying on any specified process.-Sec. 34. (See p.835).
4. Creches: In every factory wherein more than thirty women
workers are ordinarily employed there shall be provided and
maintained a suitable room or rooms for the use of children under
the age of six years of such women.-Sec. 48. (See p. 847).
5. Dangerous operations : The State Government is
empowered to make special rules for the purpose of controlling
and regulating factories which carry on operations exposing
women, young persons and other workers to a serious risk of
bodily injury, poisoning or disease.-Sec. 87(b) (See p.867).

EMPLOYMENT OF YOUNG PERSONS

Definition of Young Persons-See page 816.
Employment of Children
No child who has not completed his fourteenth year shall
be required or allowed to work in any factory.-Sec. 67.
854 INDUSTURAL LAW

Certificate of Fitness and Token

A child who has completed his fourteenth year or an
adolescent shall not be required or allowed to work in any factory
unless (0) he has been granted a certificate of fitness, which is
in the custody of the manager, and (b) such child or adolescent
carries a token giving a reference to such cer.tificate-Sec. 68.
The Certificate of Fitness is a certificate granted to a child
or adolescent by a CertifYing Surgeon after examination. The
Certificate is given to a child if the surgeon is satisfied that he
has completed his fourteenth year and has attained the prescribed
physical standards. The certificate is granted to an adolescent
if the surgeon is satisfied that he has completed his fifteenth year
and is fit for a full day's work in a factory. The certifYing
surgeon must have personal knowledge of the intended place of
work and of the manufacturing process involved. The certificate
is valid only for a period of 12 months. It may be granted subject
to conditions (e.g., that of periodical reexamination). The
certificate may be renewed and, if necessary, revoked. Any fee
payable for the certificate must be paid by the occupier of the
factory and must not be recovered from the young person or his
parents or guardian.-Sec. 69.
An adolescent who has been granted a certificate of fitness
and who carries a token is deemed to be an adult for the purposes
of Chs. VI and VllI of the Act. (Ch. VI deals with the hours
of work of an adult and Ch. VIII deals with annual leave). But
no adolescent who has not attained the age of seventeen years
shall be employed or permitted to work in any factory during
night. "Night" means a period of at least 12 consecutive hours
which shall include an interval of at least seven consecutive hours
failing between 10 p.m. and 7 a.m. An adolescent who has not
been granted a certificate of fitness, shall be deemed to be a
child for the purposes of the Act.-Sec. 70.
Section 70( 1A) provides that no female adolescent or a male
adolescent who has not· attained the age of seventeen years but
who has been granted a certificate of fitness to work in a factory
as an adult. shall be required or allowed to work in any factory
except between 6 a.m. and 7 p.m.
The State Government may grant exemption from the
provision of this sub section in case of serious emergency where
national interest is involved.
 TIlE FACTORIES ACT 855

Working bours for Cbildren

The law regarding working hours for children are stated
below-Sec. 71 :
1. No child shall be employed or permitted to work in any
factory-
(a) for more than four and a half hours in any day;
(b) during the night.
Explanation : For the purpose of this sub-section"night"
shall mean a period of at least twelve consecutive hours which
shall include the interval between 7 p.m. and 8 a.m.
2. The period of work of all children employed in a factory
shall be limited to two shifts which shall be not overlap Or spread-
over more than five hours each, lmd each child shall employed
in only one of the relays which shall not, except with the previous
permission in writing of the Chief Inspector, be changed more
frequently than once in a period of thirty days.
3. The provisions of section 52 shall apply also to child
workers, and no exemption from the provisions of that section
may be granted in respect of any child. (Sec. 52 relates to weekly
holidays. See next Section).
4. No child shall he required or allowed to work in any
factory on any day on which he has already been working in
another factory.
Section 71 (5) states that no female child shall be required
or allowed to work in any factory except between 8 a.m. and
7 p.m.
Notice and Register
A notice must be displayed showing clearly the periods of
work of children.-Sec. 72.
The manager of every factory must maintain a Register of
child workers showing the name of each child worker, the nature
of his work, the group (if any) in which he is included, the relay
to which he is allotted and the number of his certificate of
fitness.-Sec. 73.
No child worker shall be required or allowed to work in
any factory unless his name and other particulars have been
entered in the register of child workers.-Sec. 73 (IA), Factories
(Amendment) Act, 1976.
The hours of work ofachild must correspond with the Notice
and the Register.-Sec.74.
856 INDUSTURAL LAW

Medical Examination
Where an Inspector is of opinion that a person working as
an adult is a young person, or that a young person is not fit
to work, he may direct the manager of the factory to have the
person medically examined by a certirying surgeon.-Sec. 75.
Other rules regarding the employment of young persons
No young person shall work at any dangerous machine unless
he has been fully instructed as to the dangers arising in
connection with the machine and the precautions to be observed,
and (a) has received sufficient training in work at the machine
or (b) is under adequate supervision by a person who has a
thorough knowledge and experience of the machine. The State
Government is to prescribe what machines are dangerous for the
purpose of this section.-Sec.23.
Certain restrictions on adolescents and children are stated
in Sections 22(2), 27, 34 and 87(b). (See page 852).
The State Government may make rules regarding the forms
of the Certificate of Fitness, the procedure relating to their issue,
and the physical standards to be attained by children and
adolescents.-Sec. 76.
The provisions relating to the employment of young persons
shall be in addition to and not in derogation of, the provisions of
the Children Act of 1938,1960 and 1978.-Sec. 77. (see beiow).

CHILD-LABOUR
Rules regarding child-labour are contained in the Factories
Act, Mines Act etc. There are also two general Acts on the
subject. The Children (pledging of Labour) Act (Act 11 of 1933)
proh ibits the making of agreements to pledge the labour of
children and the employment of children whose labour has been
pledged. Thre Children Act of 1938, 1960 and 1978 prohibit the
employment of a child who has not completed his fifteenth year
. of age in any occupation connected with the transport of
passengers, goods or mails by railway or connected with a port
authority within the limits of any port. The Act also prohibits
the employment of a child, who has not completed his fourteenth
year of age, in the processes set forth in the schedule to the
Act. Children between IS and 17 can be employed subject to
certain restrictions as regards their periods of rest etc.
 THE FACTORIES ACT 857

HOLIDAYS AND LEAVE

The Factories Act provides for the following holidays, viz.,
Weekly hblidays, Compensatory holidays and Annual leave with
wages according to certain rules. The provisions are explained
below.
Weekly Holidays
Section 52 provides that an adult worker shall have a holiday
on the first day of the week. But the manager of the factory
may fix the holiday on any other day which is within three days
before or after the first day of the week. In case of such
substitution, notice must be given to the Inspector of Factories
and displayed in the factory. No substitution can be made which
will result in any worker working for more than ten days
consecutively without a holiday for a whole day. The State
Government may make rules providing for exemption from the
above section in certain cases, e.g., for urgent repairs.
The Weekly Holidays Act (Act XVIII of 1942) provides for
the grant of weekly holidays to persons employed in shops,
restaurants and theatres. The Act can be applied to a State by
notification of State Government.
Compensatory Holidays
Where as a result of the exemption of a factory from the
operation of the rule regarding weekly holidays, a worker is
deprived from any weekly hoi idays he shall be allowed within
the month in which the holidays were due, or within two months
immediately following that month, compensatory holidays of
equal number to the holidays lost.-Sec. 53.
Annual Leave with Wages
Sections 78 to 84 provide for the grant of a certain period
Qf leave with wages to workmen.
Every worker who has worked for a period of 240 days or
more in a factory during a calendar year shall be allowed during
the subsequent calendar year, leave with wages for a number of
days calculated at the rate of-
(i) if an adult, one day for every twenty days of work
performed by him during the previous calendar year;
(ii) if a child, one day for every fifteen days of work performed
by him during the previous calendar year.
858 INDUSTURAL LAW

Rules
Rules regarding the Annual Leave are summarised below :
I. When counting the number of days of work perfonned
by a worker, the following are to be included : (0) days of lay
off, (b) maternity leave to a female worker, not exceeding twelve
weeks, and (c) the leave earned in the previous year. But the
worker shall not earn leave for these days.
2. The leave admissible under the aforesaid rule shall be
exclusive of all holidays whether occurri:1g during or at either
end of the period of leave.
3. A worker whose service commences otherwise than on
the first day of January shall be entitled to leave with wages
at the rate laid down above if he has worked for two-thirds of
the total number of days in the remainder of the calendar year.
4. If a worker is discharged or dismissed from service or
quits his employment or is superannuated or dies while in service,
during the course of the calendar year, he or his heir or nominee,
as the case may be, shall be entitled to wages in lieu of the
quantum of leave to which he was entitled immediately before
his discharge, dismissal, quitting of employment, superannuation
or death calculated at the rates specified in sub-section (1), even
if he had not worked for the entire period specified in sub-section
(1) or sub-section (2) making him eligible to avail of such leave.
Such payment shall be made-
(i) where the worker is discharged or dismissed or quits
employment-before the expiry of the second working day
from the date of such discharge, dismissal or quitting; and
(ii) where the worker is superannuated or dies while in
service-before the expiry of two months from the date
of such superannuation or death. (Amended by the Act
of 1976.)
5. In calculating the leave period, fraction of leave for half
a day or more shall be treated as one day and fractions of less
amount shall be omitted.
6. Leave earned, but not taken, can be carried forward' to
a succeeding year subject to a limit of thirty days in the case
of an adult and forty days in the case of a child. But earned
leave not allowed because of any scheme for leave in operation,
can be carried forward without limit.
 THE FA':TORIES ACT 859

7. Application for leave must be submitted to the manager

not iess than IS days before the date of commenc"ment of leave.
In the case of public utility service it must be made not less
than 30 days before such date. If a worker becomes ill and wants
to avail himself of the annual leave during the period of illness,
he shall be granted leave even though the application is not made
before the period specified above.
8. The application for leave may be for the' whole of the
leave due of part of it. But earned leave cannot be taken more
than three times during the same year.
9. For the purpose of ensuring the continuity of work, the
occupier or· manager of the factory may draw up a Scheme for
regulating the grant of leave. The Scheme must be agreed to by the
Works Committee, if any, or the representatives of workers. It must
be lodged with the Chief Inspector and displayed in the factory.
10. An application for leave submitted in proper time shall
not be refused unless the refusal is in accordance with any leave
scheme in operation.
11. The unavailed leave of a worker shall not be taken into
consideration in computing the period of any notice required to
be given before discharge or dismissal.
12. The State Government may exempt a factory from the
operation of the above rules if it is satisfied that its own leave
rules provide benefits (the totality of benefits) which are not less
favourable to the workers than the statutory leave rules.
13. Where by virtue of any award, agreement (including
settlement) or contract of service the worker is entitled to a longer
period of leave than that provided by the aforesaid rules, he will
be entitled· such longer leave.
14. The rules contained in these sections do not apply to
railway factory administered by the Government which are
governed by leave rules approved by the Central Government.
I S. If an award, agreement (including settlement) or contract
of service provides for a longer annual leave with wages than
provided in this chapter, the quantum of leave, which the worker
shall be entitled to, shall be in accordance with such award,
agreement or contract of service, but in relation to matters not
provided for in such award, agreement or contract of service or
matters which are provided for less favourably therein, the
provisions of sections 79 to 82, so far as may be, shall apply,
(Added by the Amendment of 1976.)
860 lNDUSTURAL LAW

Wages during Leave Period

For the period of leave allowed to a worker according to
rules, he shall be paid at a rate equal to the daily -average of
his total full-time earnings for the days on which he actually
worked during the month immediately preceding his leave. The
average rate is to be calculated, exclusive of any overtime and
bonus, but inclusive of dearness allowance and the cash equivalent
of the advantage accruing through the concessional sale to the
worker of food-grains and other articles. The cash equivalent,
referred to above, is to be computed according to the method
used when calculating the extra wages payable for IIvertime work.
(See post)---Sec. SO.
If the employment of a worker who is entitled to leave is
terminated by the occupier of the factory before he has taken
the entire leave to which he is entitled, he must be paid wages
for the leave period not taken and such wages must be paid before
the expiry of the second working day after such termination.
Simila.rly, if the worker quits his service after having applied for
and obtained leave, he must be paid wages for the leave period
and such wages mllst be paid on or before the next pay day.
The amount of wages payable is to be calculated according to
the provisions of Section SO.-Sec. 79(11).
A worker who has been allowed leave for not less than four
days in the case of an adult and five days in the case of a child,
shall before his leave begins, be paid the wages due for the period
of leave allowed.-Sec. SI.
Wages for the leave period, if not paid by an employer, shall
be recoverable as delayed wages under the provisions of the
Payment of Wages Act, 1936.-Sec. 82. (See Ch. 7).
EXTRA WAGES FOR OVERTIME
(I) Where a worker works in a factory for more than nine
hours in any day or for more than 48 hours in any week, he
shall in respect of overtime work, be entitled to wages at the
rate of twice his ordinary rate of wages.-Sec. 59( I).
(2) For the purpose of sub-section (I), "ordinary rate of
wages" means the basic wages plus such allowances, including
the cash equivalent of the advantage accruing through the
concessional sale to workers of (oodgrains and other articles, as
the worker is for the time being entitled to, but does 110t include
a bonus and wages for overtime work.-Sec. 59(2).
 THE FACTORIES ACT 861

(3) Where any workers in factory are paid on a piece rate

basis, the time rate oftheir work will include the following rules :
(i) if the workers had been paid on the same or identical job
during a month immediately preceding a month during
which overtime work was done, the time rate shall be
deemed to be equivalent to the daily average of their
fulltime earnings for the days of the overtime work. Also
such time rates shall be deemed to be the ordinary rates
of wages of those workers.
(;i) In the case of a worker who had not worked in the
immediately preceding calendar month on the same or
identical job, the time rate shall be deemed to be equivalent
to the daily average of the earning of the worker for the
days on which he actually worked in the week in which
the overtime work was done.
Explanation : For the purposes of this sub-section in
computing the earnings for the days on which the workers
actually worked, the allowimces include the cash equivalent in
order to buy food grains and other articles through concessional
sale as the wprker is for the time being entitled to.
Exception : But any bonus or wages for overtime work
payable in relation to the period with reference to which the
earnings are being cOinputed shall not be included.-Sec. 59(3).
[Clauses (2) and (3) Were substituted from the old Act by
the Amendment of 1976].
(4) The cash equivalent of the advantage accruing through
the concessional sale to a worker of foodgrains and other articles
shall be computed as. ofte'n as may be. prescribed on the basis
of the maximum quantity of foodgrains and other articles
admissible to a standard family.
Explanation: 1. "Standard family" means a family consisting
of the worker, his or her spouse and two children below the age
of fourteen years requiring in all three adult consumption units.
2, "Adult consumption unit" means the consumption unit
of a male above the age of fourteen years ; and the consumption
unit of a female above the age of fourteen years and that of
a child below the age of fourteen years s1Iall be calculated at
the rates of 0.8 and 0.6 respectively of one adult consumption
unit Sec. 59(4).
(5) The State Government may make rules prescribing-
(0) the manner in which the cash equivalent of the advantage
862 INDUSTURAL LAW

accruing through the concessional sale to a worker of food-

grains and other articles shall be computed; and .
(b) the registers that shall be maintained in a factory for the
purpose of securing compliance with the provisions of this
section.-Sec.59(5) .

•
Definition
UNFAIR LABOUR PRACTICE

"Unfair Labour Practice" means any of the practices specified

in the Fifth Schedule.-Section 2(a).
Prohibition of unfair labour practice
No employer or workman or a trade union, whether registered
under the Trade Unions Act, 1926 (16 of 1926) or not, shall
commit any unfair labour practice.-Section 25T.
Penalty for committing unfair labour practices
Any person who commits any unfair lab()Ur practice shall
be punishable with imprisonment for a term which may extend
to six months or with fine which may extend to one thousand
rupees or with both,-Section 25U.
Comments·
"There is at present no Central Law specifYing unfair labour
practices on the part of employers, workmen and the trade unions
of employers and workmen and for imposing any penalty for
resorting to such undesirable practices. Certain State-laws as well
as voluntary Codes of Discipline laid down by the Indian Labour
Conference specifY certain practices as unfair labour practices.
The National Commission on Labour which examined this aspect
in detail suggested a list of such unfair practices. It is proposed
to make suitable provision in the Act to specifY certain practices
as unfair labour practices on the part of employers, workmen
and trade unions and to provide for penalties for those including
in such practices."
The Fifth Schedule
[See Section 2(ra), above.) Unfair Labour Practices.
I-On the part of employers and trade unions of employees
I. To interfere with, restrain from, or coerce, workmen in the
exercise of their right to organise, form, join or assist a trade union
I Statement a/Objects and Reasons. The Industrial Disputes (Amendment
Act. 1982.
 THE FACTORIES ACT 863

or to engage in concerted activities for the purposes of collective

bargaining or other mutual aid cir protection that is to say-
(a) threatening workmen with discharge or dismissal, if they
join a trade union;
(bY threatening a lock-out or closure, if a trade union is
organised;
(c) granting wage increase to workmen at crucial periods of
trade union organ isation, with a ,;~w to undermining the
efforts of the union at organ is, tion.
2. To dominate, interfere with or contribute support, financial
or otherwise, to any trade union, that is to say-
(a) an employer taking an active interest in organising a trade
union of his workmen; and
(b) an employer showing partiality or granting favour to one
of several trade unions attempting to organise his workmen
or to its members, where such a trade union is not a
recogn ised trade union.
3. To establish employer sponsored trade unions of workmen.
4. To encourage or discourage membership in any trade union
by discriminating against any workman, that is to say-
(a) discharging or punishing a workman, because he urged
other workmen to join or organise a trade union;
(b) discharging or dismis~ing a workman for taking part in any
strike (not being a strike which is deemed to be an illegal
strike under this Act);
(c) changing seniority rating of workmen bacause of trade
union activities;
(d) refusing to promote workmen to higher posts on account
of their trade union activities.
(e) giving unmerited promotion to certain workmen with a
view to creating discord amongst other workmen, or to
undermine the strength of their trade union.
(j) discharging office-bearers or active members of the trade
union on account of their trade union activities.
5. To discharge or dismiss workmen-
(a) by way of victimisation ;
(b) not in good faith, but in the colourable exercise of the
employer's rights;
(c) by falsely implicating a workman in a criminal case on
false evidence or on concocted evidence;
864 INDUSTURAL LAW

(d) for patently false reasons;

(e) on untrue or trumped up allegations of absence without
leave;
(f) in utter disregard of the principles of natural justice in the
conduct of domestic enquiry or with undue haste;·
(g) for misconduct of a minor or technical character, without
having any regard to the nature of the particular misconduct
or the past recor"; or service of the workman, thereby
leading to a disprol0rtionate punishment.
6. To abolish the work of a regular nature be.ing done by
workmen, and to give such work to contractors as a measure
of breaking a strike.
7. To transfer a workman mala fide from one place to
another, under the guise of following management policy.
8. To insist upon individual workmen, who are on a legal
strike to sign a good conduct bond, as a precondition to allowing
them to resume work.
9. To show favouritism or partiality to one set of workers
regardless of merit. .
10. To employ workmen as 'badlis', casuals or temporaries
and to continue them as such for years, with the object of
depriving them of the status and privileges of penn anent workmen.
II. To discharge or discriminate against any workman for
filing charges or testifying against an employer in any enquiry
or proceeding relating to any industrial dispute.
12. To recruit workmen during a strike which is not an illegal
strike.
13. Failure to implement award, settlement or agreement.
14. To lndulge in acts of force by violence.
15. To refuse to bargain collectively, in good faith with the
recognised trade unions. ~
, 16. PrQposing or continuing a lock-out deemed to be illegal
under this Act.
II-On the part of workmen and trade unions of worlfmen.
I. To advise or a'ctively support or instigate any strike
deemed to be illegal under this Act.
2. To coerce workmen in the exercise of their right to self
organisation or to join a trade union or refrain from joining any
trade union, that is to say'-
 THE FACTORIES ACT 865

(a) for a trade union or its members to picketing in such a

manner that non-striking workmen are physically debarred
from entering the work places.
(b) to indulge in acts of force or violence or to hold out threats
of intimidation in connection with a strike against non-
striking workmen or against managerial staff.
3. For a recognised union to refuse to bargain collectively
In good faith with the employer.
4. To indulge in coercive activities against certification of
a bargaining representative.
5. To stage, encourage or instigate such forms of coercive
actions as wilful 'go slow', squatting on the work premises after
working hours or 'gherao' of any of the members of the
managerial or other staff.
6. To stage demonstrations at the residences of the employers
or the managerial staff members.
7. To incite or indulge in wilful damage to employer's
property connected with the industry.
8. To indulge in acts of force or violence or to hold out
threats of intimidation against any workman with a view to
prevent bim from attending work.

WAGES AND SALARY

Both these terms are used to denote payment made for
service. In Stroud's Judicial Dictionary, the following comments
are made; "Where the engagement is for a period, is permanent
or substantially permanent in character, and is for other than
manual or relative unskilled labour, the remuneration is generally
called a salary." " ..... in general, the word 'salary' is used for
payment of services of a higher class, and 'Wages' is confined
to the earnings of labourers and artisans." .
The High Court of Madras was of opinion- that if the'
remuneration is to be paid daily or weekly it can be called
Wages; but where there is monthly payment and is fairly high,
considering the general standard of payment, it is to be called
Salary. According to the Payment of Wages Act any amount over
Rs. 200 (now Rs. 1000) may be consi~ered as. Salary for the
purposes of Factories Act. Re Gemini Studio'. (See ch.7)
I L.U. (1953) (Jan. p. 29)

Industrial Law - 5S
866 INDUSTURAL LAW

"Conceptually there is no difference between salary and

wages both being a recompense for work done or services
rendered, though ordinarily the former expression is used in
connection with services of non manual type while the latter is
used in connection with manual services." Gestelner Duplicators
PVI. LId. v. The Commissioner of Income Tax. w.n. I In this
judgment the following cases were cited and approved,
Mohli,cdalli v. Union of Illdia 2: Gordon v. Jennings).
In the cases mentioned above, and also in Stroud's dictionary,
it was held that th'ere is no basic difference between salary and
wages.
OBLIGATIONS OF WQRKERS
Section 111 lays down that no worker in a factory-
(a) shall wilfully interfere with or misuse any appliance,
convenience or other things provided in a factory for the
purpose of securing the health, safety or welfare of the
workers therein;
(b) shall wilfully and without reasonable cause do anything
likely to endanger himself or others; and
(c) shall wilfully .neglect to make use of any appliance or
other thing provided in the factory for the purposes of
securing the health Or safety of the workers therein.
If any worker contravenes any of the provisions of this
section or of any rule or order made thereunder he shall be
punishable with imprisonment which may extend to 3 months
or with fine which may extend to Rs. 100 or with both.

OTHER PROVISIONS OF THE FACTORIES ACT

A brief summary is given below of the other provisions of
the Factories Act.
Departments as Factories
The State Government may, upon application, declare that
for the purposes of the Act, different departments Or branches
of a factory shall be treated as separate factories or that two
or more factories of the occupier shall be treated as the same
factory-Sec. 4.
I AIR (1979) Supreme Court 607 2 AIR (1964) Supreme Court 1980
3(1882) 51 LJQB 417
 THE FACTORIES ACT 867

Exemption during Publi~ Emergen~y

Factories or any class of factories may be exempted from
the operation of any of the provisions of the Act during a public
emergency (except that of Sec. 67, employment of children) for
such periods and subject to such conditions as the Government
may think fit. The exemption is to be made by notification in
the official Gazette for a period not exceeding three months at
a time.-Sec.5.
o Explanation : For the purpose of this section"public
emergency" means a grave emergency whereby the security of .
India or of any part of the territory thereof is threaten~d, whether
by war 'or external aggression or internal disturbance.-
Amendment of 1976.
Exemption of Publi~ Institutions
The State Government may exempt subject to such conditions
as it may consider necessary, any workshop or workplace where
a manufacturing process is carried on and which is attached to
a public institution maintained for the purposes of education,
training, research or reformation from all or any of the provisions
of the Act. But no exemption is to be granted from the provisions
relating to hours of work and holidays unless there is a scheme
relating to such matters containing rules not less favourable to
the workers than the provisions of the Act.-Sec. 86.
Dangerous Operations
The State Government is empowered to make special rules
for the purpose of controlling and regulating factories which carry
On manufacturing process or 'operation exposing workers to a
serious risk of bodily injury, poisoning or disease.-Sec. 87.
Rules have been made providing for medical examination
protection of workers; restricting dnd controlling the ....use of
particular materials and processes; payment of fees for medical
examination" by the occupier; welfare amenities; sanitary
amenities; measures to avoid imminent danger of poisons or
toxicity. .J. ' ", 0'.1. \' ,"

Section 87 A (I) provides. that where it appears to the

Inspector that conditions in a factory may cause serious hazard
by way of .inju.ry or death to the persons employed therein, or
868 INDUSTURAL LAW

to the genreral public in the vicinity, he may by order in writing

prohibit the occupier of the factory from employing any person
in the factory other than the minimum number of persons
necessary to attend to the minimum tasks till the hazard is
removed.
According to Section 87 A (2) these orders will be effective
for three days unless it is extended by the inspector.
Section 87 A (3) states that any person aggrieved by an order
of the Inspector under sub-Section (I) and the Chief Inspector
under sub-Section (2) shall have the right to appeal to the High
Court.
Section 87A (4) provides that any person whose employment
has been affected by an order issued under sub-Section (I) shall
be entitled to wages and other benefits and the occupier must
provide alternative employment to him whenever possible and
in the manner prescribed.
Section 87A(5) states that the provision of sub-Section
(4) shall be without prejudice to the rights of the parties under
the Industrial Disputes Act (1947).
Notifiable Accidents
(I) The manager of a factory must send a notice to the
authorities whenever an accident occurs which causes death or
which causes bodily injury preventing the worker from working
for a period of 48 or more hours or other types of injury which
may be specified by rules.
(2) Where a notice given under sub-Section (I) relates to
an accident causing death, the authority to whom the notice is
sent shall make an inquiry into the ·occurrence within one month
of the receipt of the notice or, if such authority is not the
Inspector, cause the Inspector to make an inquiry within the said
period.
(3) The State Government may make rules for regulating the
procedure at inquities under this section.-Sec. 88.
[Paras 2 and 3 had been added by the Amendment of 1976].
'"
Notice of certain dangerous occurrences
Where, in a factory any dangerous occurrence of such nature
as may be prescribed occurs, whether causing any bodily injury
or disability or not, the manager'bf the factory shall sendllOtice
 THE FACTORIES ACT 869

thereof to such authorities, arid in such form and within such

time, as may be prescribed.-Sec. 88A, Factories (Amendment)
Act, 1976.
Notifiable Diseases
The manager of a factory must send notice to the authorities
whenever a worker contracts of the any diseases mentioned in the
Schedule to the Act. Section 89( I) provides that for the word "The
Schedule" shall be substituted for the word, "The Third Schedule."
Section 89 (4) provides that "if any medical practitioner fails
to comply with the provisions of sub-Section (2), he shall be
punishable with fine which may extend to one thousand rupees."
Examples:
These are known as Occupational Diseases. Poisoning by lead.
mercury, phosphorus etc.; anthra.x; silicosis; cancer of the skin;
toxic anaemia or jaundice; etc .
. The medical parctitioner attending the person, if any, shall
without delay send a report to the Chief Inspector in writing, stating
the name of the person affected and other particulars.-Sec. 89.
Enquiry into Accidents and Diseases.
The State Government may appoint a competent person to
enquire into the causes of any accident occurring in a factory
or of a notifiable disease, and may also appoint one or more
persons possessing legal or special knowledge to act as assessors
in such enquiry. The person appointed to enquire can call
witnesses like a Civil Court and exercise any of the powers of
an Inspector. He must submit a report to the State Government,
together with his observations. The report or extracts therefrom
may be published.-Sec. 90.
Safety and Occupational Health Survey
The State Government or the Director General of Factory
Advice Service and Labour Institutes etc .. can employ the Chief
Inspector and certain other persons to undertake safety and
occupational health surveys. The occupier and manager and all
other persons shall afford all facilities for such survey, including
examination, testing of plant and machinery, collection of samples,
other data, medical examination of persons, calculation of wages
and extra wages for overtime work.-Sec. 91 A, added by The
Factories (Amendment) Act, 1976.
870 INDUSTURAL LAW

PENALTIES AND PROCEDURES

Sections 92 to 106 lay down the rules regarding penalties
for offences against the Act.
Owner : The owner of any premises, let out for use as
different factories, is responsible for the provision and
maintenance of common facilities and services, e.g., approach
roads, drainage, water supply, latrines etc.
Occupier : In most cases the occupier of the factory is
responsible for offences committed against the Act. But the
occupier is exempted from liability if he can show. that he has
used due diligence to enforce the execution of the Act and that
some other person committed the offence without his knowledge,
consent or connivance.
Penalties : The penalties for some of the offences are
mentioned below.
Offence Imprisonment Fine
Obstructing Inspector Up to 6 months and/or up to Rs. 10.000
Wrongfully disclosing results
of analysis of sample Up to 6 months and/or up to Rs. \(1.000
Using false certificale of
fitness Up to 2 months and/or up to Rs. 1.000
Pennitting double employ.
ment of child nil Rs. 1.000
Cases not otherwise
provided for Up to 3 months and/or up to Rs. 2,000
Second offence for above Upto 3 years and/or up to minimum Rs. 10.000
maximum Rs. 2,00,000
Where contravention of any of the provisions of Chapter IV
or any rule made thereunder or under Section 87 has resulted
in an accident causing death or serious bodily injury, the fine
shall not be less than one thousand rupees in the case of an
accident causing death, and five hundred rupees in the case of
an accident causing serious bodily injury.
Section 92 of the amending Act provides that subject to the
provision of Section 93 if in respect of, any factory there is any
contravention of any of the provisions of this Act, the occupier
and manager of the factory shall each be guilty of an offence
and punishable with imprisonment for a term which may extend
to two years or with fine which may extend to one lakh rupees
or with both. If the contravention is continued after conviction
 TIlE FACTORIES ACT 871

the fine may be extended to one thousand rupees for each day
on which the contravention is so continued.
If any such contravention has resulted in an accidelJt causing
death or serious bodily injury, the fine shall not be less than
twenty five thousand rupees in the case of an acciden: causing
death and five thousand rupees in the case of an accident causing
serious bodily injury.
Section 95 of the amending Act provides that who willingly
obstructs an Inspector in the exercise of any power conferred
on him by or under this Act, shall be punishable with imprison-
ment for a term which may extend to six months or with fine
which may extend to ten thousand rupees or with both.
Section 96A( I) states that who fails to comply with any of
the provisions of Sections 418, 41 C or 41 H or the rules made
thereunder, shall in respect of such failure be punishable with
imprisonment for a term which may extend to seven years and
with fine which may extend to two lakh rupees. In case the
contravention continues additional fine may be imposed. The
additional fine may extend to five thousand rupees for every day
during which such failure or contravention continues after the
conviction for the first such failure.
If the failure continues beyond a period of one year after
the date of conviction, the offender shall be punishable with
imprisonment for a term which may extend to ten years.
Section 97( I) of the amending Act, provides that subject to
the provision of Section III, if any worker employed in a factory
contravenes any provision of this Act, and any rules made under
the Act, imposing any duty or liability on workers, he shal! be
punishable with fine which may extend to five hundred rupees.
Section 99 of the Act states that, if a child works in factory
on any day on which he has already been working in another
factory the parent or guardian of the child or the person having
custody of or control over him or securing any direct benefit
from his wages, shall be punishable with fine which may extend
to one thousand rupees unless it seems to court that the child
so worked without the consent of such parent, guardian or person.
Explanation : In this section and in section 94 "Serious
bodily injury" means an injury which involves, or in all
probability will involve, the permanent loss of the use of, or
permanent injury to, any limb or the permanent loss of, or injury
872 INDUSTURAl LAW

to sight or hearing, or the fracture of any bone, but shall not

include, the fracture of bone or joint (not being fracture of more
than one bone or joint) of any phalanges of the hand or foot.-
Sec. 92 added in the Amendment of 1976.
Cognizance : No court can take cognizance of an offence
under the Act except on a complaint" by or with the previous
sanction of an Inspector in writing. Only a Presidency Magistrate
or a Magistrate of the first class can try offences under the Act.
The complaint must be filed within 3 months of the date when
the commission of the offence came to the knowledge of an
Inspector. For disobeying a written order of an Inspector,
complaint may be filed within 6 months of the date when the
offence was committed.
Section 104A states that in any proceeding for an offence
for the contravention of any provision of this !\ct or rules made
under it consisting of a failure to comply with a duty, it Shall
be for the person who is alleged to have failed to comply with
such duty, to prove that it was not reasonably practicable or all
practicable measures were taken to satisfy the duty.
Section 106A provides that for the purpose of conferring
jurisdiction on any Court in relation to an offence under this
Att, the place where the plant is situated shall be deemed to
be the place where such offence has been committed.
Presumption : A person found in the factory when the
factory is going on or the machinery is in motion, except during
the time of meal or rest, is presumed to be employed in the
factory until the contrary is proved.
When in the opinion of the Court a person is prima facie
under-age, the burden shall be on the accused to show that such
person is not under-age.
Appeals
The·manager or the occupier of a factory on whom an order·
in writing has been served by an Inspector can appeal against
it to the prescribed authority within thirty days.-Sec. 107.
Notice
In certain cases (prescribed by the rules) abstracts of the Act
and the rules are required to displayed in the factory. All notices
under the Act must be displayed in English and in a language
 THE FACTORIES ACT 873

understood by the majority of 'the workers employed therein.

They must be displayed in a conspicuous and convenient place
at or near the main entrance of the factory and must be
maintained in a clean and legible condition. The Chief Inspector
may require the display of posters relating to the health, safety
and welfare of workers.-Sec. 108.
Returns
The owners, managers and occupiers of factories are required
by rules to submit various returns and reports.-Sec. 110.
Section III A provides that every worker shall have the right
to-
(I) obtain from the occupier, information relating to workers'
health and safety at work.
(2) get trained within the factory when possible, Or at a
training centre duly approved by the Chief Inspector where
training is imparted for workers' health and safety at work.
(3) represent to the Inspector in the matter of inadequate
provision for protection of his health or safety in the factory.
Power of the Central Government
The Central Government may give directions to a State
Government as to the carrying into execution of the provisions
of the Act.-Sec, 113. .
Section 115( I) states that all rules made under this Act shall
, be published in the official Gazette.
Section 115 (2) provides that every rule made by the State
Government under this Act shall be laid before the State
Legislature.
Abolition of Contract Labour
The provisions of this Act shall have effect notwithstanding
a'lything inconsistent therewith contained in the Contract Labour
(Regulation and Abolition) Act, I 970.-Sec. 119, added by the
Factories (Amendment) Act, 1976.
874 INDUSTURAl LAW

EXERCISES
l. State the meaning of the following terms as defined in the Factories
Act of 1948
(a) Factory. (Pages 811-812)
(b) Worker. (Pages 814-815)
(c) Adult. (Page 816)
(d) Prime Mover. (Page 816)
(e) Manufacturing Process. (Pages 813-814)
(j) Adolescent. (Page 816)
(g) Child. (Page 816)
(h) Young Person. (Page 816)
(i) Wages and Salary. (Page 865)
2. Does the Factories Ac, apply to factories belonging to the Central
Governmen' ? (Page 866)
3. Can the State Government exempt from all provisions of the
Factories Act an institution of education in a work-place or
reformation? (Page 812)
4. Discuss the circumstances under which the occupier or the manager
may be exempted from liability under the Factories Act, 1948.
(Page 870)
5. Arc book-binding and constructing ships manufacturing processes?
(Pages 812-813)
6. Enumerate briefly the provisions of the Factories Act, 1948, relating
to the health of workers. (Page 822)
7. Briefly mention the provisions laid down in the Factories Act for
the purpose of securing the safety of young persons, women and
children. (Pages 852-857)
8. Discuss the provisions of the Factories Act, 1948 relating to
(i) employmen, of Young Persons on dangerous machines and
(ii) artificial humidification. (Pages 829; 838)
9. Enumerate the provisions relating to safety of workers under the
Factories Act, 1948. (Pages 828-842)
I D. Briefly summarise the different provisions of the Factories Act,
1948, for the welfare of workers in a factory. (Pages 845-848)
II. What are 'he provisions on the Factories Act regarding the fencing
of machinery for the safety of workers? (Page 828)
12. Discuss the provisions in the Factories Act, regarding precautions
in case of fire. (Pages 838-840)
13. Discuss the safety meaures provided for in the Factories Act, 1948,
relating to dangerous machines. (Pages 829-830)
14. What are the precautions stipulated against dangerous fumes in a
Factory? (Pages 836-837)
 THE FACTORIES ACT 875

15. What are the obligations of the employer regarding; (i) Dust and
Fumes (ii) Overcrowding (iii) Creche? (Pages 823; 824; 847)
16. Discuss the provisions of the Factories Act relating to artificial
humidification. (Pages f23-824)
17. Define the term Certifying Surgeons. What are the duties of
Certitying Surgeons? (Page 821)
18. State the effect of certificate of fitness granted to the adolescent.
(Page 854)
19. Discuss the rules relating to Approval, Licensing and Registration
of factories. What is notice by occupier 0 State the contents of the
notice by occupier. (Page 818)
20. State the rules regarding annual leave with wages.
(Pages 857-859)
21. What are the working hours for children in a factory 0
(Page 855)
21. What arc provisions in the Factories Act, 1948, regarding the
payment of extra wages for overtime? (Pages 860-862)
23. Is it compulsory on the employees to do overtime work? Vihcn
can it be claimed? (Pages 860-862)
24. What are the rules regarding the powers of the Inspector of
Factories to require medical examination of young person?
(Page 852)
25. Discuss the provisions of the Factories Act regarding employment
of women and children in factories. (Pages 853-856)
26. State the provisions regarding employment of young persons.
27. State the law relating to working hours of adults and children
employed in a factory. (Pages 849. 855)
~8. Explain the provisions relating to notice of periods of work for
adults. (Page 851)
29. What is the consequence of double employment of a child under
the Factories Act? (Page 855)
30. What are the restrictions in the Factories Act. 1948, relating to
employment of women workers? (Pages 852-853)
31. What are the restrictions in the Factories Act, 1948, relating to
employment of child and women workers? (Pages 852-853)
32. Problems :
(I) The working hours (including the rest interval) of a woman'
employed in a factory has been fixed tram 2 p.m. to II p.m.
Is this working hour valid? Give reasons. (Page 852)
(2) The manager of a factory asks a worker to work for seventy
hours (including overtime) in a perticular week. Discuss with
reasons whether the worker is bound to work for such long
hours in a week. (Page 849)
876 INDUSTURAL LAW

33. State the provisions of the Factories Act, 1948, relating to

registration of factories. (Pages 818-819)
34. Objectives questions. Give short answer :
(i) Who is a CertifYing Surgeon as defined in the Factories Act,
1948? (Page 821)
(il) State the circumstances when compensatory holiday will be
granted to the workers. (Page 857)
(iii) State whether a person under 15 years of age can be appointed
in a factory. (Page 853)
Uv) Does the Factories Act apply to factories belonging to the
Central Government? (Page 811)
(v) What are the working hours for children in a factory?
(Page 853)
(vi) Mention the time within which the notice will be sent to the
Inspector of Factories in case a new manager is appointed in
the factory. (Page 819)
(ViI) State with reason whether a child of 13 years can be employed
in the factory. (Page 853)
(viii) Define manufacturing process. (Page 813)
 THE EMPLOYEES' STATE
INSURANCE ACT

SOCIAL INSURANCE
The Employees' State Insurance Act represents a landmark
in the sphere of social-welfare legislations in India. The object
of the Employees' State Insurance Act is to ensure social
insurance by offering certain benefits to employees in case of
sickness, maternity, employment injury, disablement etc.
Reasons
Persons who can earn income from work (for example,
industrial and agricultural workers) find themselves in great
difficulty when their earning power is affected by sickness,
disablement, maternity, old age or unemployment. It is not
possible for workmen individually to make an adequate provision
against these risks. Hence they suffer from economic insecurity.
The system of social insurance has been developed to eliminate
the economic insecurity of the working classes.
Social insurance can be described as a system under which
specified groups of people are compulsorily insured against
certain specified risks like sickness, disablement or maternity.
Whenever any of these contingencies occur, the insured person
is paid certain benefits (by cash or otherwise) out of a fund
created by contributions from the insured person, his employer,
and the State. The coverage, i. e., the persons insured and the
contingencies insured against, the rates of contribution and the
methods of administering the system, differ from country to
country.
As a method of eliminating economic insecurity, socialO

insurance has been found to be highly successful. With a view,

to adopting the system in India, the Employees' State Insurance
Act of 1948 was pa~sed. The Act has been extensively ai'nended
in 1966' imd 1975. ' 0

Object.,
The objcct;of tile Employees~ State Insurance Act, 1948 is
to introduce social insurance in India by 'gradual stages. The Act
creates a statutory corporation, called the Employees' State

877
878 ,
INDUSTRIAL LAW

Insurance Corporation which is in charge of the scheme of

Insurance.
The objective of S. 72-See p.908, para 8.

APPLICATION OF THE ACT

The Employees' State Insurance Act extends to the whole
of India, including the State of Jammu and Kashmirl.-Sec. 1(2).
The Act will come into force on such date or dates as the
Central Government may decide and different dates may be
apppointed for different provisions of the Act and for different
States or for different parts thereof.-Sec. 1(3).
The Act shall apply, in the first instance, to all factories
(including factories belonging to the Government) other than
seasonal factories.-Sec. 1(4).
The appropriate Government may, in consultation with the
Corporation and (where the appropriate Government is a State
Government, with the approval of the Central Government), after
giving six months' notice through the official Gazette, extend
the provisions of this Act or any of them to any other
establishment or class of establishments industrial, commercial,
agricultural or otherwise.-Sec. 1(5)."
The insurance scheme contained in the Act has, up til) date,
been applied to a few selected industries in certain selected
localities.
The Act of 1948 was amended by the Amendment Acts of
1966, 1975 and 1984.
Exemptions
I. A factory or establishment or a class of factories or
establishments can be exempted from the operation of the Act.
This can be done by the appropriate Government by notification
for one year at a time.-!?ec. 87.
The following seasonal processes have secured exemption
under section 87 of the Act : (i) Redrying unmanufactured leaf
tobacco, (ii) Salt manufacture, (iii) Rice milling, (iv) oil mills
(provided the process of oiling is subsidiary to any other
manufacturing process, and· mill has employed, less than 50
, employees, (v) Ice manufacture and (vi) wool processing with
or without cotton pressing and ginning.
I Applied to Jammu and Kashmir by an Act of 1970. See p. 5, footnote.
 THE EMPLOYEES' STATE INSlJRANCE ACT 879

2. The appropriate Government can similarly exempt any

persons or class of persons employed in a factory or class of
factory from the operation of the Act.-Sec. 88.
3. The appropriate Government may by notification in the
official Gazette, and subject to conditions, exempt factories or
establishments belonging to the Government or any local authority
from the operation of the Act if the employees there are in receipt
of benefits substantially similar or supc' _c., to the Act.-Sec. 90.
4. The appropriate Government mly ~xempt any employee
of any factory, establishment or class of factory and establishment
from the operations of the Act, with the consent of the
Corporation and notification in the official Gazette.-Sec. 91.

DEFINITIONS UNDER THE EMPLOYEES'

STATE INSURANCE
Factory
"Factory means any premises including the precincts thereof
whereon twenty or more persons are employed or were employed
for wages on any day of the preceding twelve months, and in
any part of which a manufacturing process is being carried on
with the aid of power or is ordinarily so carried on but does
not include a mine subject to the operation of the Mines Act,
1952, or a railway running shed."-Sec 2(12) para 1.
Seasonal Factory
"A seasonal factory means a factory which is exclusively
engaged in one or more of the following processes, namely,
cotton ginning, cotton or jute pressing, decortication of
ground nuts, the manufactur~ of coffee, indigo, lac, rubber, sugar
(including gur) or tea or any manufacturing process which is
incidental to or connected with any of the aforesaid processes."-
Sec. 2(12), para 2.
The term Seasonal Factory, "includes a factory which is
engaged for a period not exceeding seven months in a year-
(a) in any process of blending, packing or repacking or tea
or coffee; or
(b) in such other manufacturing process as the Central Govern-
ment may. by notification in the official Gazette. specit~·.··
880 INDUS TRIAL LAW

Employee
"Employee" means "any person employed for wages in or
in connection with the work of a factory or establ ishment to
which this Act applies." The term includes (i) persons directly
employed by the principal employer, (ii) persons employed by
or through an immediate employer, and (iii) persons whose
services are temporarily :~nt or let on hire to an employer.-
Sec. 2(9).
The term Employee includes, "any person employed for
wages on any work connected with the administration of the
factory or establishment or any part, department or branch
thereof, or with the purchase of raw materials for, or the
distribution or sale of the products of, the factory or
estab Iishmen t."
The term Employee does not include, "(a) any member of
the Indian naval, military or air forces; (b) any person-whose
wages (excluding remuneration for overtime work) exceed
Rs. 1,600 a month." If a person's wages are within the aforesaid
limits at the beginning of the contribution period, he will be
deemed to be an employee till the end of the period, even if
his wages exceed the limit in the meantime.
Case Law :
The Supreme Court has held that the partner of a firm is not an
employee of the firm for the purposes of the Act, merely because
he gets salary or other remuneration.
Empl.yees' State Insurance Corporation v: Ramanuja Match
Industries. I
Apprentices : When under the terms and conditions of
agreement under which apprentices are engaged by a company,
they are mere trainees for a particular period for a distinct
purpose and the company is not bound to employ them in their
work after the training period is over, such apprentices cannot
be said to be employed in the work of the ,company or in
connection with the work of the c()mpany, more so when they
are not given wages within tJu:. meaning of. that term as defined
in Sec. 2(22). Thus.an apprentice is not an employee within Sec.
2(9) of the Act. .
,
) L, L. N, 249 (.1985) • ,. "J J ,.
 THE EMPWYEES' STATE INSURANCE ACT 881

") 'i
IAIR (1976) Supreme Cowt 66 2 "'IR 01117) ..Cal 165',
) AIR (1917) Cal 258 'AIR (1978) Suprell)e Court 256
. . I- ~...: , : .•
'AIR (1978) Supreme Court 1478

Industrial Law.,. 56
 8112 INDUSTRIAL LAW

Act and who is, by reason thereof, entitled to any of the benefits
provided by this Act."-Sec. 2( 14).
Maaaging Agent
"Managing Agent means any person appointed or acting as
the representative of another person for the purpose of carrying
on such other person's trade or business, but does not include
an individual manager subordinate to an employer."-Sec. 2( 14A).
Wages
"Wages means all remuneration paid or payable in cash to
an employee, if the terms of the contract of employment, express
or implied, were fulfilled ancf,~includcos any payment to an
employee in respect of any period of authorised leaves, lock-
out, strike which is not illegal or layoff and other additional
remuneration, if any, paid at intervals not exceeding two months
but does not include-
(a) any contribution paid by the employer to any pension fund
or provident fund, or under this Act ;
(b) any travelling allowance or the value of any travelling
concession ;
(c) any sum paid to the person employed to defray special
expenses entailed on him by the nature of his employment;
or
(d) any gratuity payable on discharge."-Sec. 2(22).
The term wages, as defined in this Act, includes compensation
for lay-off and also bonus. Wages must be a payment for service,
given or to be given to .the employee by the employer.
c ••• Law :
Incentive bonus could be wages within the third part of wages under
S. 2 (22) of the Act. The house rent allowance paid by the employer
to its workmen under the settlement would constitute 'wages- within
the meaning of S. 2 (22) of the. Act. Employe.s· Stal. Insurance
Corp". Hydarabad v. Andlrra Pradesh Paper Mill. LId..
Rajalrfllundry. I

" Priaeipai Employer

Principal. ~mployer means-
(a) in a factory, the owner or occupier of the factory and
includes the managing agent of such owner or occupier.
I AIR (1978) ..(P. 18 (Full Bench)
 TIlE EMPLOYEES' STATE INSURANCE ACT 883

the legal representative ,of a deceased owner or occupier,

and where a person has been named as the manager of
the factory under the Factories Act, 1948, the person so
named ;
(b) in any establishment under the control of any department
of any Government in India, the authority appointed by
such Government in this behalf or where no authority is
so appointed, the head of the department;
(c) in any other establishment, any person responsible for the
supervision and control of the establishmnet.-Sec. 2( 17).
Case Law :
The director of • Company, by virtue of being a din:c:tor is not
principal employer. He is therefore not personally liable to pay
employer's contribution under the Act. Suresh v. C011ector of
Bombay.'
Immediate Employer
Immediate Employer, in relation to employees employed by
or through him, means a person who has undertaken the
execution, on the premises of a factory or an establishment to
which this Act applies or under the supervision of the principal
employer or his agent, of the whole or any part of any work
which is ordinarily part of the work of the factory or establishment
of the principal employer or is preliminary to the work carried
on in, or incidental to the purpose of any such factory or
establishment, and includes a person by whom the services of
an employee who has entered into a contract of service with him
are temporarily lent or let on hire to the principal employer.-
Sec. 2(13).
Cas. La.. :
"Work is undertaken by contractors through their labour in their
factory, forming preliminary pan of the work ofthe principal factory.
Both factories were on the same leased land. Contractors held
Immediate Employers" B. M Laksmanamurthy v. The Emplayees'
Slale lnsu;ance Corporation, Banga/ore. 2

Appropriate Goveniment •
Appropriate Government means, in respect of establishments
under' the control of th~Central Government or 'I! railway
I Lab. I. C. 1615 (1984) 'AIR (1974) Supreme Coun 759
884 INDUSTRIAL lAW

administration or a major port or a mine or an oil field, the

Central Government, and in all other cases the State Government.
-Sec. 2(1).
Rules of the different States and also the Central Regulations
provide for the following-Declaration· Form; Temporary
Identification Certificate ; Allotment of Insurance Number
Contribution Cards ; and Identity Card.

POWERS OF THE CENTRAL GOVERNMENT

The Central Government can give directions to the State
Governments as to the carrying into execution of this Act in any
State.-Sec. 92.
The Central Government may order such provision and
direction, not inconsistent with the Act, to remove difficulties.
The order must be published in the official Gazelte.-Sec. 99A.

DUTIES OF EMPLOYER
I. lfhe employer must keep the Contribution Cards under
his safe custody. In case of destruction, loss or mutilation, it must
be replaced through the Regional Office.
2. The employer must produce all books, Returns, Registers
and cards for inspection by an Inspector.-·Sees; 44, 45,
3. The employee mus( be allowed to inspect his card at
reasonable hours.
4. The employer must pay employer's and employees'
contributions to the local office of State Insurance.
Cas. Law:
The Corporation itself should, in a case where there is omission
on the pan of the employer to maintain records in accordance with
S. 44 of the Act, ~etermine the amo~nt of contributions on the
strength of such information as it may collect and can then make
the demand under S. 45A. If the. employer refuses to comply with
the demand so maae, the maner can come up before the Employees'
Insurance Court under S.75 of the Act. The Court sllould give the
Corporation a direction to perform its duty where it considers that
this should be performed by the Corporation.; It cannot decli~llo
perform its own duty because the Corporation has failed to discharge
its function. The E: S / Corporation: ··jjitophl iI. The Ceniritl Press
and ano/he!:' <Jill ";;;' ~ '.~r;; ";!;

I AIR (1977) Supreme Court 1351

 THE EMPLOYEES' STATE INSURANCE ACT 885

WHO IS AN INSURABLE WORKMAN 1

Section 38 of the Act states that, "Subject to the provisions
of this Act, all employees in factories or establishments to which
this Act applies shall be insured in the manner provided by this
Act." So every "employee" of a "factory or establish 11ent" to
which the Act applies is an insurable workman. Definitions of
the terms employee and factory have been given above. On the
basis of these definitions it can be concluded that an insurable
workman is one who is employed directly or through an
intermediate employer or is let on hire to an employer. The
factory or establishment must be one to which the Act applies.
It also follows that the following persons are not insurable and
the Act confers no benefit on them :
I. Workers in seasonal factories.
2. Workers in mines, subject to the Mines Act, 1952.
3. Workers in railway running sheds.
4. Members of the naval, military and air forces of the
Government.
5. Workmen whose total monthly wages (excluding overtime
remuneration) exceed Rs. 1600.
Seasonal factories, mines and railway running sheds [items
I, 2 and 3 above] are not included within the term factory as
defined in the Act. Workmen coining under the last two items
[4 and 5] are not included within the term employee as defined
in the Act.
REGISTRATION
The amending Act of 1966 provides that every factory or
establishment to which this Act applies shall be registered within
such time and in such manner as may be specified in the
regulations made in this behalf.-Sec. 2A.

THE EMPLOYEES' STATE INSURANCE CORPORATION

Administration
The administration of the scheme of insurance contained in
the Act is vested in the Employees' State Insurance Corporation
created by Sec. 3 of the Act. The Corporation is a body co~rate
having perpetual succession and a common seal. It can sue and
be sued by its name.
886 INDUSTRIAL LAW

Member's .' I , ,.;

According to Sec. 4 of the Act, the Corporation consists of

the following members :
(I) a Chairman to be nominated by the Central Government;
(2) a Vice-Chairman to be nominated by the Central
Government;
(3) not more than five persons to be nominated by the Central
Government;
(4) one person each representing each of the States in which
this Act is in force to be nominated by the State Government
concerned;
(5) one person to be nominated by the Central Government
to represent the Union territories;
(6) five persons representing employers to be nominated by
the Central Government in consultation with such
organisation of employers as may be recognised for the
purpose by the Central Government;
(7) five persons representing employees to be nominated by
the Central Government in consultation with such
organisation of employees as may be recognised for the
purpose by the Central Government;
(8) two persons representing the medical profession to be
nominated by the Centtal Government in consultation with
such organisation of medical practitioners as may be
recognised for the purpose by the Central Government;
(9) three members of Parliament of whom two shall be
members of the Lok Sa:bha and one shall be a member
of the Rajya Sabha elected respectively by the two houses;
and
(10) the Director General of the Corporation, ex-officio.
The term of office of members is ordinarily 4 years but
nominated members hold office during the pleasure of the
Government nominating them.-Sec. 5.

Autbentication
Orders and decisions of the Corporation are to be
authenticated by the signature of the Director General; other
instruments by the signature of the Director General or any other
authorised officer of the Corporation.-See. 7.
 THE EMPLOYEES' STATE INSURANCE ACT 887

Principal Officers
!
The Principal Officers of the Corporation are : (a) a Director
General of Employees' State Insurance; (b) an Insurance
Commissioner; (c) a Medical Commissioner; (d) a Chief
Accounts Officer; and (e) an Actuary. The Director General is
the Chief Executive Officer of the Corporation.-Sec. 16.
The officers are whole'time officers and cannot undertake
any work u~connected' with' their office without the sanction of
the ':::entral Government. or of the Corporation.
Meetings
Meetings of the Mem'" the Standing Committee and the
Medical Benefit Council,: ··;hust be held according to the
Regulations.-Sec. 20.
Supersession
The Central Government may supersede the Corporation or the
Standing Commitee if it persistently makes default in performing
its duties or abuses. its powers. After supersession the Central
Government may appoint new members or create an agency to
exercise the powers and functions of these bodies.-Sec. 21.
Delegation
The Corporation may appoint Regional Boards, Local
Committees and Regional and Local Medical Benefit Councils
in such areas and in such manner and delegate to them such
powers and functions as may be provided by the regulations.-
Sec. 25 and Sec. 94A.
Status
All Officers and the Servants of the Corporation shall be
deemed to be public servants within the meaning of Section 21
of the Indian Penal C~e.-Sec. 93.
Powers
I. Staff-
(i) The Corporation may employ such other staff of officers
and servants as may be necessary for the efficient
transaction of its business provided that the sanction of
the Central Government shall be obtained for the creation
of any post the maximum monthly salary of which
exceeds Rs. 1200.
888 INDUSTRIAL LAW

(ii) The Corporation shall, with the approval of the Central

Government, make regulat.ions regarding the method of
recruitment, pay and allowimces, discipline, superannuation
benefits and other conditions of service of the members of
its stalf.-Sec. 17.
2. Measures for health. etc.: The Corporation may, in
addition to the scheme of benefits specified in this Act, promote
measures for the improvement of the health and welfare of
insured persons and for the rehabilitation and re-employment of
insured persons who have been disabled or injured and may incur
in respect of such measures expenditure from the funds of the
Corporation within such limits as may be prescribed by the
Central Government.-Sec. 19. .
~. Holding of property: The Corporation may, subject to
such conditions as may be prescribed by the Central Government,
acquire and hold property both movable and immovable, sell or
otherwise transfer any movable or immovable property which
may have become vested in or have been acquired by it and .do
all things necessary for the purposes for which the Corporation
is established.-Sec. 29( I).
. 4: Investments: Subject to such conditions as may be
prescribed by the Central Government, the Corporation may from
time to time invest any moneys which are not immediately
required for expenses properly defrayable under this Act and may,
subject as aforesaid, from time to time re-invest or realise such
investments.-Sec. 29(2).
5. Loans: The Corporation may, with the previous sanction
of the· Central Government and on such tenns as may be
prescribed by it, raise loans and take measures for discharging
such 19AJls.-Sec. 29(3).
6. Benefits of staff: The Corporatton may constitute for the
benefit of its staff or any class of them, such provident or other
benefit fund as it may think fit.-Sec.29(4).
7. It may appoint such persons as Inspectors, as it thinks
fit, for the purposes of this Act.
8. It may, under Section 45 A, on the basis of infonnation
available to it, by order, determine the amount of contributions
payable in respect of employees of a factory or establishment
in respect of which no particulars, registers or records are
submitted or maintained.
 THE EMPLOYEES' STATE INSURANCE ACT 889

Duties
J. Budget estimates : The Corporation shall in each year
frame a budget showing the probable receipts and the expenditure
which it proposes to incur during the following year and shall
submit a copy of the budget for the approval of the Central
Government before such date as may be fixed by it in that behalf.
The budget shall contain provisions adequate in the opinion of
the Central Government for the discharge of the liabilities
incurred by the Corporation and for the maintenance of a working
balance.-Sec. 32.
2. Accounts: The Corporartion shall maintain correct accounts
of its income 'and expenditure in such form and in such manner
as may be prescribed by the Central Governmenl.-Sec. 33.
3. Audit :
(i) The accounts of the Corporation shall be audited, at such
times and in such manner as may be prescribed, by
auditors appointed by the Central Government.
(ii) The auditors shall at all reasonable times have access to
the books, accounts and other documents of the
Corporation and may, for the purposes of the audit, call
for such explanation and information as they may require
or examine any principal or other officer of the
Corporation.
(iii) The auditors shall forward to the Central Government a
copy of their report together with an audited copy of the
accounts of the Corporation.
(iv) The cost of the audit as determined by the Central
Government shall be paid out of the funds of the
Corporation.-Sec. 34.
4. Annual report: The Corporation shall submit to the Central
Government an annual report of its work and activities.-Sec. 35.
5. Placement to Parliament: The annual report, the audited
accounts of the Corporation, and the budget as finally adopted
b~ the Corporation shall be placed before and published in the
official Gazette.-Sec. 36.
6. Valuation of assets and liabilities: The Corporation shall,
at intervals of five years, have a valuation of its assets and
liabilities made hy a valuer appointed with the approval of the
Central Government: Provided that it shall be open to the Central
Government to direct a valuation to be made at such other times
as it may consider necessary.-Sec.37.
890 INDUSTRIAL LAW

THE STANDING COMMITTEE

Constitution
Section 8 provides for the creation of a Standing Committee
from among the' members of the Corporation. The Standing
Committee is constituted as follows: a Chairman, nominated by
the Central Government; 3 members of the Corporation
nominated by the Central Government; representatives of 3 of
the State Governments; 3 members from the employer's
representatives; 3 members from the emrloyees' representatives;
one member from the medical representatives; one member from
the representatives elected by the Parliamen~; and the Director
General of the Corporation, ex-officio.
Powers and Duties
Section 18 provides that subject to the general superinten-
dence and control of the Corporation, the Standing Committee
shall administer the affairs of the Corporation and may exercise
any of the powers and perform any of the functions of the
Corporation.
The Standing Committee shall submit for the consideration
and decision of the Corporation such cases and matters as may
be provided by regulations made in this behalf. The Committee
may submit any other case or matter to the Corporation at its
discretion.

MEDICAL BENEFIT COUNCIL

Constitution
Section 10 provides for the creation of a Medical Benefit
Council constituted as follows: (a) the Director General,. Health
Services, ex-officio chairman; (b) a Deputy Director General,
Health Services to be nominated by the Central Government;
(c) the Medical Commissioner of the Corporation, ex-officio;
(d) one member from each State in which the Act is in force,
to be nominated by the State Government concerned; (e), (/) ,
and (g) nine members to be nominated by the Central Government
in consultation with the appropriate organisations--3 to represent
employers, 3 the employees and 3 the medical profession (one
of the medical members must be a woman). The Deputy Director
General, Health Services and the representatives of the State hold
 THE EMPLOYEES' :iTATE INSURANCE ACT 891

office during the pleasure of the Government. The other members

hold office for a term of four years.
Powers and Duties
The powers and duties of the Medical Benefit Council are
laid down in Section 22. The Council may
(a) advice the Corporation and the Standing Committee on
Illatters relating to the administration of medical benefit,
the certification for the purpose of the grant of the
benefits, and other connected matters;
(b) have such powers and duties of investigation as may be
prescribed in relation to complaints against medical
practitioners in connection with medical treatment and
attendance; and
(c) perform such other duties in connection with medical
treatment and attendance as may be specified in the
regulations.

RULES REGARDING MEMBERSHIP

Certain general provisions regarding the Corporation, the
Standing Committee and the Medical Benefit Council are
enumerated below :
I. Eligibility: Outgoing members eligible for re-election or
re-nomination.-Sec. 6.
2. Resignation: A member may resign, by notice in writing
to the Central Government. It will be effected when the
resignation is accepted.-Sec. I \.
3. Cessation of membership: A member ceases to be a
member if he fails to attend three consecutive meetings. But he
may be reappointed. A member ceases to re a member if he
ceases to represent the persons he was nominated to represent.
A member elected by the Parliament ceases to be a member when
he ceases to be a member of the Parliament.-Sec. 12.
4. Disqlll1lifications: A person is disqualified for being
chosen or being a member if (a) he is declared to be of unsound
mind by a competent court; (b) he is an undischarged insolvent;
or (c) if he has directly or indirectly by himself or by his partner
any interest in any subsisting contract with, or any work being
done for, the Corporation except as a medical practitioner or as
shareholder (not director) of a company; or (d) if before or
892 INDUSTRIAL LAW

after commencement of this Act, he has been convicted of an

offence involving moral turpitude.-Sec. 13.
5. Remuneration: Members are entitled to receive such fees
and allowances as may be fixed by the Government.-Sec. 15.

EMPLOYEES' STATE INSURANCE FUND

Insurance Fund
All contributions paid and mOl)eys received by the Employees'
Stale Insurance Corporation are to be paid into a fund called the
Employees' State Insurance Fund. The Corporation is entitled to
receive (i) contributions from employers, (ii) contributions from
employees and (iii) donations from the Central Government, the
State Governments, local authorities etc.-Sec. 26.
Purposes for which the Fund may be expended
Section 28 of the Act provides that subject to the provisions
of the Act and of the rules framed under it, the Employees' State
Insurance Fund shall be expended only for the following purposes-
(i) payment of benefits and provision of medical treatment
and attendance to insured persons and, where the medical
benefit is extended to their families, the provision of such
medical benefit to their families, in accordance with the
provisions of this Act and defraying the charges and cOSots
in connection therewith;
(ii) payment of fees and allowances to members of the
Corporation, the Standing Committee and the Medical
Benefit Council, the Regional Boards, Local Committees
and Regional and Local Medical Benefit Councils;
(iii) payment of salaries, leave and joining time allowances,
travelling and compensatory allowances, gratuities and
compassionate allowances, pensions contributions to
provident or other benefit fund of officers and servants
of the Corporation and meeting the expenditure in respect
of offices and other services set up for the purpose of
giving effect to the provisions of this Act;
(iv) establishment and maintenance of hospitals, dispenSaries
and other institutions and the provisions of medical and
other ancillary sevices for the benefit of insured persons
and, where the medical benefit is extended to their
families, their families;
 THE EMPLOYEES' STATE INSURANCE ACT 893

(v) payment of contributions to any State Government, local

authority or any private body or individual, towards the
cost of medical treatment and attendance provided to
insured persons and, where the medical benefit is extended
to their families, their families including the cost of any
building and equipment, in accordance with' any agreement
entered into by the Corporation;
(VI) defraying the cost (including all expenses) of auditing the
accounts of the Corporation and of the valuation of its
assets and liabilities;
(vii) defraying the cost (including all expenses) of the
Employees Insurance Courts set up under the Act;
(viii) payment of any sums under any contract entered into for
the purposes of this Act by the 'Corporation or the
Standing Committee'or by any officer duly authorised by
the Corporation or the Standing Committee in that behalf;
(ix) payment of sums under any decree, order or award of
defending any civil or criminal proceeding out of any of
its offi~ers or servants for any act done in execution of
his dutY' or under a compromise or settlement of any suit
or other legal ,proceeding or claim instituted or made
aga inst the Corporation;
(x) defraying the cost and other charges of instituting or
, defending any Civil or criminal proceeding out of any
action taken under this Act; , ,
(xl) defraying expenditure, within the Iimits;'on measures for
the improvement of the health and welfare of insured
persons and for the rehabilitation and re-employment of
ins\ffild persons who have been disabled or injured; and
(xii) such other, purposes as may be authorised by the
Corporation with the previous approval of the Central
Goverriment. '

EDita,DcemeDt of beDefits
, At any time when its funds so permit, the Corporation may
enhance the scale of any benefit admissible under the Act and
~'period for which such benefit may,be given and provide or
contribute towards the cost, of medical care for th.e families of
insured peti;Orls.-Sec.99.
894 INDUSTRIAL LAW

INSPECTORS
Inspectors may be appointed under Sec. 45. They shall
exercise such functions and perform such duties as may be
authorised by the Corporation or as may be specified in the
regulations. Inspectors and ·other authorised officers of the
Corporation may exercise the powers stated below for the purpose
of checking the correctness of any return submitted to the
Corporation or for the purpose of ascertaining whether any of
the provisions of the Act has been complied with :
(a) Require any principal or immediate employer to furnish
necessary information.
(b) Enter the relevant office, establishment etc. and examine
account books, documents etc.
(c) Examine the employer, his agents, servant etc. with
respect to any relevant matter.
(d) Make copies of or take extracts from registers, account
books e t c . '
(e) Exercise such powers as may be prescribed.
Every principal employer must maintain the Inspection Book.
He must produce the book on demand by an Inspector.

CONTRIBUTIONS
Definition
The term Contribution means the sum of money payable by
the principal employer in respect of an employee and includes
any amount payable by or on behalf of the employee in
accordance with the provisions of this Act.-Sec.2(4).
Time and Period
Insured workers and their employers are required to pay
contributions to the Corporation on a weekly basis. The sum
payable by the employer is called the Employer's contribution
and the sum payable by the employee is called the Employee's
contribution.
The period during which contributions aCe paid is called the
Contribution Period. Its length is fixed by tbe rules framed under
tbe Act. According to the Act, the Contribution Period must be
between 25 and 27 consecutive weeks. or 6 consecutive month$!
In the case of the first Contribution Period; a longer or shorter
period may be fixed by the regulations.--:-Sec. 2(5).
 THE EMPLOYEES' STATE INSURANCE ACT 895

Rate of Contribution
, The amount of weekly contribution payable in respect of an
employee is calculated with reference to his average daily wage.
The period in respect of which wages are ordinarily payable, by
contract express or implied, or otherwise, is called the Wage Period.
Where the wage period is a day, the average daily wage is
the amount of wages earned during tl ~ week divided by the
number of'days worked in that week. For other wage periods,
the average daily wage means the total wages earned in the period
divided by the number of days worked. Where the employee
works on any other basis, the average daily wages means the
wages paid on the day the contribution falls due or such day
as may be specified.
For the purpose of calculating the rates of contribution,
employees are divided into nine classes., The rate of contribution
for each class is given in The First Schedule to the Act, e.g.
workmen earning between Rs. 3 and Rs. 4 per day have to
contribute 50 paise per week. The employer's contribution is
approximately twice that of the employee (See Table, p.911).
RULES REGARDING CONTRIBUTION
I. The Employer is responsible for contribution: The
employer is required to transmit to the Corporation both the
employer's and the employee's contribution in the manner
prescribed by the rules. The contribution payable by the employee
can be deducted from his wages by the employer. But the
contribution payable by the employer cannot be deducted from
the wages of the erriployee.-Sec. 39(1) & (2).
2. Time ofpaying the contribution ': Contributions ordinarily
fall due on the last day of the week. Other days may be prescribed
for workers employed part of the week or employed under tWo
or more employers during the same week.-Sec. 39(4).
3: Principal employer to pay the dues of an immediate
employer: Where there is a principal employer and an immediate
employer under him, the former is rf"luired to pay the contribution
in the first instance. He may later on recOVer the money from
the laner.-Sees. 40, 41.
4. The limit of contribution; No. contribution is payable by
the employee if his average daily wage is less than Rs. 6.-S",c.
42(1). (Amendment Act of 1984,)
896 . INDUSTRIAL LAW

5. Liabilities of principal employer: Contributions, both

employer's and employee's are payable by the principal employer
for each week in respect of the whole or part of which wages
are payable to the employee and not otherwise.-Sec. 42(2).
Where wages are payable for a portion of the week, the
employer is Iiable to pay the full contribution for the week, but
can recover the employee's contribution from his wages.-
Sec. 42(3).
6. Framing Regulttions: The Corporation can frame
regulations regarding the method of payment of contributions.-
Sec. 43. .
7 .. The Certificate Procedure: Any contribution payable
under this Act may be recovered as an arrear of land revenue.-
Sec. 45B.
8. Priority of Contribution: Contribution and other payments
due under this Act are deemed to be included in the list of debts
which have priority over other debts in case of insolvency or
winding ilp.-Sec. 94.

, . BENEFITS
~ • , • • ~ • II'

The Act provides for six types of benefits to insured

workmen : (a) Sickness. Benefit (b) Maternity Benefit (c)
Disablement Benefit (d) Dependant's Benefit (e) Medical Beriefi't
and if) Funeral Benefit.-Sec .. 46.
. Ben'efits are receivable duri~g the Benefit Periorl; 'which is
defined Ili (ollows. Benefit Peri~d means such period,being not
less than 25 but J,lot ,more than 27 consecutive weeks or .6
consecutive months corresponding to the contribution period as
may be specified in the regulations frllmed under the Act. For
the fi~st Benefit P~riod a 'shorter or longer period may be fixed.~
Sec. 2(2). . . .'
The rules regarding each of the aforesaid benefits are ,stated
.below. ". •.
SICKNESS BENEFIT
. -' .
Definition of Sickness
.' Sickness means a condition which requires medical treatment
and atfernf'aricifimd necessitates abstention from work on medical
grounds.-Sec. 2 ( 2 0 ) . '
 THE EMPLOYEES' STATE INSURAi'iCE ACT 897

Coaditions for Sic\utess benefit

The recipient of sickness and disablement benefit must
observe the following conditions. (Sec. 64) :
I. He must carry out the instructions of the medical officer
or of the medical attendant and mllst be under medical treatment
at a dispensary, hospital, clinic or other institution provided under
the Act.
2. While under treatment, he must not do anything which
will aggravate, or prejudice the chances of, recovery.
3. He must not leave ·the area where the medical treatment
is provided under the Act.
4. He must allow himself to be examined by any duly
appointed officer or a sick visitor authorised by the Corporation.
When person eligible for sickness benefit
A person shall be qualified to claim sickness benefit for
sickness occurring during any benefit period, if during the
corresponding contribution period, weekly contributions in respect
of him were payable for not less than thirteen weeks;
Provided that a person shall be qual ified to claim sickness
benefit for sickness occllrring during the fir~t benefit period, if
during the corresponding contribution period weekly contributions
in respect of him were payable for not less than half the number
of weeks of that contribution period, ending in that period.-
Sec. 47.
The claim for sickness benefit mllst be certified by a duly
appointed medical practitioner or by any other person possessing
such qualifications and experience as the Corporation may, by
regulations specify in this behalf.-Sec. 46( I )(a).
The rate of sickness benefit
The rate of sickness benefit is laid down in Sec. 49 and
the first Schedule, to the Act. In a Chart given in the First
Schedule, employees have been classified into nine groups
according to the wages earned. Against each wage group is laid,
down what is called the Standard Benefit Rate. For example, for
an employee earn ing between Rs. 8 and Rs. 12 dai Iy the Standard
Benefit Rate is Rs. 5 per day. He will receive this amount for
sickness, if otherwise qualified. Sec. 49 further provides as
follows : An insured person shall not he entitled to sickness
benefit for the first two days of sickness except in the case of

Industrial Law - 57
898 INDUSTRIAL LAW

a spell of sickness following, at an interval of not more than

fifteen days, the spell of sickness for which sickness benefit was
last paid. Also sickness benefit shall not be paid to any person
for more than fifty-six days in any two consecutive benefit
periods. (See Table, p. 911).
New Sickness Benefit Rates
With effect from I st April 1976, the sickness benefit rate
has been increased by 25% from the standard benefit rate. This
rate is 'admissible to all caseS of this category which arise on
or after that date.
From 1978, the Corporation has taken up a number of steps
to provide medical facilities to workers. The sickness benefit
period has been raised from 56 days to 91.
Sick Leave: •
Scheme of benefits admissible under the Employees' State Insurance
Act cannot be said to cover the workmen's demand for sick leave.
S 61 of the Act cannot thus be said to be applicable. Alembic Glass
Industries Ltd.. Baroda v. The Workmen'.

MATERNITY BENEFIT
Definition
Maternity Benefits are periodical payments to an insured
woman in case of confinement or miscarriage or sickness arising
out of pregnancy, confinement, premature birth of child or
miscarriage, such woman being certified to be eligible for such
payments by an authority specified in this behalf by the
regulations.-Sec.46(I)(b).
"Confinement" means labour resulting in the issue of a living
child, or labour after 26 weeKs of pregnancy resulting in the issue
of a child, whether alive or dead.-Sec.2(3). The term
"miscar{iage" as defined in this Act does not include any
miscarriage, the causing of which is punishable under the Indian
Penal Code.-Sec.2(14B).
Claim
An insured woman shall be qualified to claim maternity
benefit for a confinement occurring or expected to occur in a
benefit period if during the corresponding contribution period,
, AIR (1976) Supreme Court 2091
 THE EMPLOYEES' STATE INSURANCE ACT 899

weekly contributions in respect of her were payable for not less

than 13 weeks. But benefit can be claimed during the benefit
period, if contributions were payable for half the number of
weeks of the corresponding contribution period.-Sec. 50(1)
To obtain maternity benefit, the insured woman must get
certificates of pregnancy, of the expected date of confinement
and of actual confinement and send them to the Local Office
to which she is attached.
Rate and Amount
The daily rate of maternity benefit is twice the Standard
Benefit Rate as given in the Chart in the First Schedule. Thus
an insured woman in the wage group Rs. 8 to Rs. 12 will get
Rs. 10 daily.-First Schedule, para 5. (See Table, p.911.)
The insured woman is entitled to receive benefit for all days
on which she does not work for remuneration during a period
of twelve weeks of which not more that six shall precede the
expected date of confinement. If the insured woman dies during
her confinement or within six weeks thereafter, leaving the child,
maternity benefit shall be paid during the whole of the period.
If the child dies, maternity benefit up to and including the date
of the death of the child shall be paid to a person nominated
by the woman for the purpose. If there is no nominee, the money
is to be paid to her legal representative.-Sec. 50(2).
In case of miscarriage, the insured woman will get, on
production of necessary proof, maternity benefit at the usual rate
for all days during which she does not work for remuneration
during a period of six weeks immediately following the date of
her miscarriage.-Sec.50(3).
In case of sickness arising out of pregnancy, confinement,
premature birth or miscarriage maternity benefit is payable,
subject to the usual rules, for an additional period not exceeding
one month.-Sec. 50(4).

DISABLEMENT BENEFIT
When an insured person is disabled by an injury suffered
during employment, he is entitled to receive benefits. The rate
of benefit differs according to the nature of disablement.
Definitions of the terms used in this connection and the rules
relating to disablement benefit are given in the next page.
900 INDUSTRIAL LAW

Employment Injury
Employment Injury means a personal injury to an employee
caused by accident or an occupational disease arising oUl of and
in the course of his employment I , being an insurable employment,
whether the accident occurs or occupational disease is contracted
within or outside the territorial limits of India.-Sec. 2(8).
Presumption: For the purposes of this Act, an accident
arising in the Course of an insured person's employment shall
be presumed, in the absence of evidence to the contrary, also
to have arisen out of that employment.-Sec. 51 A.
Actions in breach of regulations etc. : Accidents happening
while the insured worker is acting in breach of regulations, or
contrary to the law applicable to him or without instructions,
come within the definition of the term Employment Injury, if
(a) the accident would have been deemed to have arisen had the
act not been done in contravention as aforesaid or without
instructions from his employer and (b) the act is done for the
purpose of and in connection with the employer's trade or
business.-Sec. 51 B.
Accidents while travelling in employer s transport : If an
accident takes place while an insured person, with the implied
or express, pennission of his employer, is travelling as a
passenger by any vehicle to or from his place of work shall be
deemed to arise out of and in the course of his employment,
not withstanding the fact that he is under no obligation to his
employer to travel by tIlat vehicle. But this rule shall be applied
under such conditions, if,
(a) the accident would have been deemed so to have arisen
had he been under such obligation, and
(b) at the time of the accident, the vehicle (I) is being operated
by or on behalf of his employer or some other person by
whom it is provided in pursuance of arrangements made
with,Alis employer, and (ii) is not being operated in the
ordinary course of public transport service. The term
Vehicle includes also a vessel and an aircraft.-Sec. 5 J C.
Accidents while meeting emergency: If an accident happens
to an insured person in or about any premises at which he is
I See Ch. 5, Workmen's Compensation Act, for case laws regarding the
phrases "out of" and "in the course" of employment.
 THE EMPLOYEES' STATE INSURANCE ACT 901

for the time being employed for the purpose of his employer's
trade or business he shall be deemed to arise out of and in the
course of his employment. provided it happens, while he is taking
steps on an actual or supposed emergency at those premises,
(i) to rescue, succor or protect persons who are, or are
thought to be or possibly to be, injured or imperilled, or,
(ii) to avert or minimise serious damage to property.-
Sec. SID.
Occupational Diseases: Some employments tend to produce
particular kind of diseases. For example, cancer of the skin occurs
to workers handling tar, pitch etc. Such diseases are called
Occupational Diseases. They are considered employment injuries
and the sufferers are given disablement benefits. The Third
Schedule to the Act contains a list of employments and the
corresponding occupational disease. Sec. 52A provides for
additions to the list by notification.
Tern pora ry Disablement
Temporary Disablement means a condition resulting from an
employment injury which requires medical treatment and renders
an employee as a result of such injury, temporarily incapable of
doing the work which he was doing prior to or at the time of
injury.-Sec.2(21).
Permanent Partial Disablement
This means such disablement of a permanent nature, as
reduces the eaming capacity of an employee in every employment
which he was capable of undertaking at the time of the accident
resulting in the disablement. Every injury specified in Part II of
Second Schedule to the Act shall be deemed to result in
permanent partial disablement. (Example: Loss of one eye, the
other being normal).-Sec.2(15A).
Permanent Total Disablement
T!is means such disablement of a permanent nature as
incapacitates an eo1\ployee for all work which he was capable
of performing at the time of the accident resulting in such
disablement.-Sec. 2( 15B).
Part I of the Second Schedule to the Act contains a list of
injuries which are deemed to produce permanent total disablement
e.g., loss of both hands or both eyes. Part II of the same Schedule
902 INDUSTRIAL LAW

contains a Jist of injuries which are deemed to result in permanent

partial disablement. In the case of Part II injuries the Schedule
lays down what is the percentage loss of earning capacity in each
case of injury. For example if one eye is lost, the other being
normal, the employee will be deemed to have lost 40% of his
earning capacity. If, however, the employee suffers from two or
more injuries and the slim total of the loss of earning capacity
amounts to 100% or more, he is deemed to have permanent 10101
disablement. For example, loss of one eye (40% loss) together
with loss of a hand (60% loss) amounts to permanent total
disablement, although either of these injuries by itself would only
be permanent partial disablement.

The Rates of Disablement Benefit

The First Schedule to the Act states what is the daily
Standard Benefit Rate for each wage group of workers. For
example, Rs. 5 daily is the Standard Benefit Rate for workers
in the wage group Rs. 8 to Rs. 12 (See Table, p. 911). Twentyfive
per cent more than the Standard Benefit Rate (rounded off to
next highest 5 P.) is the Full Rate of Disablement Benefit. Thus,
for the wage group mentioned above, the Full Rat~ of Disablement
Benefit is Rs. 5 plus 25% of Rs. 5 = Rs.6.25.
For temporary disablement and for permanent total
disablement, the insured person gets benefit at the Full Rate as
defined above. For permanent partial disablement, the rate of
benefit is proportional to the degree of disablement or loss of
earn ing capacity. Thus, loss of one eye is deemed to produce
40% loss of earning capacity and the rate of benefit in this case
is 40% of the Full Rate. If two or more injuries are sustained,
the percentage losses are to be added together and benefit given
on the basis of the total loss of earning capacity. But the insured
person will not in any case get more than the Full Rate. For
injuries not mentioned in the Second Schedule, the loss of earning
capacity is to be calculated according to the regulations framed
under the Act.

Disablement -Benefit
Benefit for temporary disablement is payable only when the
disablement is for not less than 3 days, excluding the day of
accident.-Sec. 5!.
 THE EMPLOYEES' STATE INSURANCE ACT 903

Disablement Benefit is payable from the first day of

disablement. In case of pennanent disablement, the payment
continues for life. In cases of temporary disablement it continues
so long as the disablement lasts. There is no condition of previous
contribution.
Notice of injury must be given to the employer by the injured
employee or any of his friends or relatives. The employer is
required to record the notice in an Accident Book to be kept
by him and to send a report of the accident to the nearest Local
Office of the Corporation and the nearest dispensary. The injured
employee must obtain a medical certificate from the Medical
Insurance Officer who attends him for treatment.
The rate of disablement benefit can be reviewed subsequently
because the degree of disablement may change in COurse of
time.-Sec. 55.

Increase of pensi"n rates in 1978

The Employees State Insurance Corporation has increased
the pension by 20% of those permanently disabled, and to the
dependents of those insured, who had died owing to injuries
received while on duty on or before March 31, 1974. It has also
enhanced the pension by 10% if disablement or death has
occurred between April I, 1974 and March 31, 1976. These
payments are payable from October I, 1977.

Disablement Question. Any question-

(a) whether the relevant accident has resulted III permanent
disablement; or
(b) whether the extent of loss of earning capacity can be
assessed provisionally or finally; or
(c) whether the assessment of the proportion of the loss of
earning capacity is provisional or final; or
(<I) in the case of provisional assessment, as to the period for
which such assessment shall hold good;
shall be determined by a medical board constituted in
accordance with the provisions of the regulations and any
such question shall hereafter be referred to as the
"disablement question".-Sec. 54.
The case of any insured person for permanent disablement
benefit shall be referred by the Corporation to a medical board
904 INDUSTRIAL LAW

for determination of the disablement question and if, on that or

any subsequent reference, the extent of loss of earning capacity
of the insured person is provisionally assessed, it shall again be
so referred to the medical board not later than the end of the
period taken into account by the provisional assessment.-
Sec·. 54A( I).
If the insured person or the Corporation is not satisfied with
the decision of the medical board. the insured person or the
Corporation may appeal in the prescribed manner and within the
prescribed time to--
(a) the med ical appeal tribunal constituted in accordance with
the provisions of the regulations with a further right of
appeal in the prescribed manner and within the prescribed
time to the Employees' Insurance Court, or
(h) the Employees' Insurance Court directly.-Sec. 54A(2).

DEPENDANTS' BENEFIT

Definition of Dependant
Dependant means any of the following relatives of a
deceased insured pcrson.-Sec.2(6A) :
(a) a widow, a minor legitimate or adopted son, unmarried
legitimate or adopted daughter or a widowed mother; and
(b) if wholly dependent on the earnings of the insured persons
who· ha;; attained the age 18 years and is infirm;
(e) if wholly or in part dependent on the earnings of the
insured person at the time of his death,-(i) a parent other
than a widowed mother, Oi) a minor illegitimate son, an
unmarried illegitimate daughter or a daughter legitimate or
adopted illegitimate if married and a minor or if widowed
and a minor, (iii) a minor brother or an unmarried sister
of a widowed sister if a minor, (iv) a widowed daughter-
in-law, (v) a minor child or a pre-deceased son, (vi) a minor
child of a pre-deceased daughter where no parent ·of the
child is alive, or (vii) a paternal grandparent if no parent
of the insured person is alive.
Rules regarding Dependant's Benefit
If an insured person dies as a result of an employment injury
his dependants are entitled to get benefit, whether the deceased
 THE EMPLOYEES' STATE INSURANCE ACT 905

was getting disablement benefit or not. The benefit given to the

dependants is equal to what the employee would haye got had
he been alive with a temporary disablement. This money is
distributed among the dependants in the following manner :
(0) To the widow during her life or until remarriage an amount
equal to 3/5ths of the full rate. If there are two or more
widows, the benefit is 'equally divided among them.
(b) To each legitimate or adopted son an amount equal to
2/5ths of the full rate until he attains I I years of age. If
a'ny such son is infirm and wholly dependent on the
earnings of the deceased, the benefit shall continue to be
paid while the infirmity lasts.
(c) To each legitimate or adopted unmarried daughter an
amount equal to 2/5ths of the full rate until she attains
18 years of age or is married whichever is earlier. If any
such daughter is infirm and wholly dependent on the
earnings of the deceased, the benefit shall continue to be
paid while the infirmity lasts and she continues to be
unmarried.
If the sum-total of the benefits to the dependants distributed
as above exceeds the full rate, the share of each dependant will
be proportionately reduced, So that the total payment does not
exceed the full rate of temporary disablement benefit.
In case the decreased person does not leave a widow or
legitimate or adopted child, dependants' benefit shall be payable
to the other dependants as follows :
(0) to a parent or grandparent for life at an amount equivalent
to three-tenths of the full rate and if there are two or more
parents or grandparents, the amount payable to them shall
be equally divided among them ;
(b) to any other male dependant, until he attains 18 years of
age, and female dependant, until she attains 18 years of
age or until marriage whichever is earlier or if widow until
she attains 18 years of age-at an amount equivalent to
two-tenths of the full rate. But if there are more than one
female dependant under this clause, the amount payable
shall be equally divided among them.
The aforesaid rules regarding dependants' benefit are
contained in Sec,:n. and paras 8 and 9 of the First Schedule
to the Act.
906 INDUSTRIAL LAW

For obtaining dependants' benefit, a claim must be submitted

to the appropriate Local Officer, either jointly or severally by
the dependants, in the prescribed form, together with the Death
Certificate from the Medical Insurance Officer.
Any decision awarding dependants' benefit under the Act
may be reviewed subsequently and the benefit given may be
continued, increased, reduced or discontinued. The grounds of
review are non-disclosure or misrepresentation of a material fact,
any birth, death, marriage, remarriage, attainment of the age of
18 years by a claimant etc.-Sec. 55A.
MEDICAL BENEFIT
Sections 46(1)(e) and 56 to 58 of the Act provide that
medical benefit may be given to an insured employee in the form
of outpatient treatment (in a hospital, dispensary, clinic or any
other institution) or by a visit at his home or as in-patient in
a hospital or any other institution. Medical benefit may be
extended to the family of an insured person. (Definition of
Family-See p. 881).
Arrangement for the provision of medical benefit under the
Act will be made by the State Governments and the standard
and scale of such benefits will be determined by agreement
between the Corporation and the State Governments.
An insured person will be entitled to claim medical benefit
during any week for which contributions are payable by him or
in his behalf or for which he is qualified to claim sickness benefit
or maternity benefit or during which he is in receipt of
disablement benefit for temporary disable~lent. For obtaining
medical benefit an employee must present himself at the
appropriate dispensary with his identity card. Scale of medical
benefit. An insured person and his family (where medical benefit
is extended to his family) shall be entitled to get medical benefit
only of such kind and on such scale as may be provided by the
State Government or the corporation.-Sec. 57.
Sec. 59 makes provision for the establishment and
maintenance of hospitals. dispensaries and other medical and
surgical services by the Corporation.
FUNERAL BENEFIT
The amending Act of 1997 provides f()r the payment of a
Funeral Benefit. When an insured person dies the Corporation
 THE EMPLOYEES' STATE INSURANCE ACT 907

will contribute towards his funeral expenses a sum not exceeding

Rs. 1000. The claim for such payment must be made within three
months of the death of the person or within such extended time
as may be allowed. 'The payment will be made to the eldest
surviving member of the family of the deceased. Where the
deceased had no family or was not living with his family at the
time of his death the payment will be made to the person who
actually incurs the funeral expenditure.-Sec. 46 (2)(f).
RULES REGARDING BENEFIT
There are certain general provisions regarding benefits. They
are enumerated below :
1. Review
The decisions of the Medical Board and the Medical Appeal
Tribunal can be reviewed.-Sec. 55.
2. Transfer or assignment
The right to receive any payment of any benefit is not
transferable or assignable. No cash benefit is liable to attachment
or sale in execution of a decree or order.-Sec.60.
3. Double Benefits
(a) A person entitled to receive benefit under this Act shall
not be entitled to receive benefit under any other Act.-
Secs. 61 and 53.
(b) No person is entitled to receive sickness, maternity or
disablement benefit for any day on which he works and
receives wages.-Sec. 63.
(e) Benefits of the following kinds cannot be combined :
(I) sickness benefit and maternity benefit (2) sickness
benefit and temporary disablement benefit, and (3) maternity
benefit and temporary disablement benefit. If a person is
entitled to receive more than one of the above benefits he
must choose which to receive.-Sec. 65.
4. Arrears
Arrears of employers' contribution can be recovered as arrears
of land revenue, with penalties in certain cases.-Sec. 68.
5. Excessive Sickness
Where the incidence of sickness among insured persons is
excessive because of the neglect or non-observance of health
908 INDUSTRIAL LAW

regulations by the owner of a factory or of the residential place

of the worker, the Corporation is entitled to receive compensation
from such owner. The amount of such compensation is determined
by a summary procedure under the regulations.-Sec.69.
6. Repayment of benefit
Benefits improperly received by an insured person are
repayable and recoverable.-Sec. 70.
7. Death of insured person
Cash benefits payable to a person who has died are to be
paid to the person's nominee, or if there is no nominee to the
person's legal representative.-Sec. 71. Benefit is payable up to
and including day of death.
8. Bar to reduction of wages or discontinuance of benefit
An employer must not reduce, directly, or indirectly the
wages of a workman on the ground that he is paying an insurance
contribution. He must not reduce or discontinue any benefit
which ihe workman was receiving under the contract of service
except in cases provided for in the regulation.-Sec. 72.
Objective: The object of S. 72 Employees' State Insurance
Act is evidently to discourage employers from using the benefits
provided under the E.S.1. Act as an excuse or justification for
reducing or discontinuing the benefits available to the workmen
under their Conditions of service on the ground of similarity
between the two types of benefits.
Under the proviso to Regnlation 97 the employer can deduct
wages of those days only from the employees' sick leave wages
for which the workman has actually availed of the sickness
benefits. A workman cannot use the benefits under the E.S.1. as
substitutes for the benefits which he already avails out of the
conditions of his service. Bareilly Holdings Ltd. v. Their
Workmen. I
9. Dismissals etc. are invalid
No employer can dismiss, discharge, reduce or otherwise
punish an employee during the period he is receiving sickness
benefit, maternity benefit or a temporary disablement benefit.-
Sec. 73.
1 AIR (1979) Supreme Court 1211
 THE EMPLOYEES' STATE INSURANCE ACT 909

EMPLOYEES' INSURANCE COURT

The Act empowers the State Governments to establish Courts
for the purpose of deciding questions and disputes arising from
the insurance of workmen. Such courts are kRown as Employees'
Insurance Courts.-Secs.74-83
Constitution of Employees' Insurance Court: The State
Government, by notification in the Official Gazette, shall appoint
the judges of the Employees' Insurance Court and their
jurisdiction.-Sec. 74.
Mailers to be decided by Employees' Insurance Court
(Sec. 75): The Court shall decide any question or dispute
regarding the following :
(a) Whether any person is an employee within the meaning
of this Act or whether he is liable to pay the employee's
contribution, or
(b) the rate of wages or average daily wages of an employee
for the purposes of this Act, or
(c) the rate of contribution payable by a principal employer
in respect of any employer, or
(d) the person who is or was the principal employer in respect
of any employee, or
(e) the right of any person to any benefit and as to the amount
and duration thereof, or
(ee) any direction issued by the Corporation under Section 55A
on a review of any payment of disablement or dependants'
benefits;
(j) the actual present value of the periodical payment referred
to in Section 66, or
(g) any other matter which is in dispute between a principal
employer and the Corporation, or between a principal
employer and an immediate employer, or between a person
and the Corporation or between an em ployee and a
principal or immediate employer, in respect of any
contribution or benefit or other dues payable or recoverable
under this Act.
The Employees' Insurance Court shall decide the following
claims:
(a) claim for the recovery of contributions from the principal
employer;

•
910 INDUSTRIAL LAW

(b) claim by a principal employer to recover contributions from

any immediate employer;
(c) claim under Section 66 or 67 made by the Corporation
against the employer or other person liable thereunder :
(d) claim against a principal employer under Section 68;
(e) claim under Section 70 fo.r the recovery of the value or
amount of the benefits received by a person when he is
not lawfully entitled thereof; and
(/) any claim for the recovery of any benefit admissible under
this Act. [Sec. 75(2)].
Institution ofproceedings. etc. : The State Government shall
make rules regarding the proceedings of the Court. The
proceedings before the Court shall commence by application.
Such an application shall be in such form and shall contain such
particulars and accompanied by such fee as may be prescribed
by rules framed by State Government.-Secs. 76 and 77.
Powers of Employees' Insurance Courts: The Employees'
Insurance Court has al\ the powers of a Civil Court. It shall
follow such procedure as may be prescribed by rules framed by
the State Government. An order of the Court shall be enforceable
as if it was a decree of the Civil Court.-Sec.78(u).
Appearance : Legal Practitioner or an office of a Registered
Trade Union can appear or act, before an Employees' Insurance
Court authorised in writing by the applicant.-Sec. 79.
Benefit : A benefit under the Act is not admissible unless
he has made a claim for such benefit in accordance with the
regulations made in this behalf, within 12 months after the claim
beca[De due. The Court can allow claim after the time is over,
if the Court is satisfied that there was reasonable excuse for the
delay.~ec. 80.
Reference: An Employees' Insurance Court may submit any
question of law for the deciS'ion of the High Court.-Sec. 81.
Appeal: An appeal shall lie to the High Court from an order
of an Employees' Insurance Court if it involves a substantial
question of law. No other appeal shall lie from an order of an
Employees' Insurance Court. The ·period of limitations for an
appeal under this section shall be 60 days. The- provisions of
Sections 5 and 12 of the Indian Limi!ation Act, 1908. shall apply
to appeals under this section.-Sec. 82.

•
 THE EMPLOYEES' STATE INSURANCE ACT 911

Stay : Where the Corporation has presented an appeal

against an order of the Employees' Insurance Court, that court
may, and if" so directed by the High Court shall, pending the
decision of the appeal, withhold the payment of any sum directed
to be paid by the order appealed against.~Sec. 83.
Table : First Schedule
(See pp. 894, 896, 898, 90 I -902)
Employee's Empl()yer's
Average Daily Wages weekly weekly Total Con- Corresponding
Above Below contribu- contribu- tribution daily standard
lions lions Col. 2+3 benefit rate
2 3 4 5
Rs. Rs. Paise Paise Paise Paise
I. Below 2 nil 75 75 100
2. 2 3 40 80 120 130
3. 3 4 50 100 150 175
4. 4 6 70 140 210 250
5. 6 8 95 190 285 350
6. 8 12 125 250 375 500
7. 12 16 175 350 525 700
8. 16 24 275 550 825 1000
9. 24 and above 375 750 1125 1500

PENALTIESi
Punisbment for false statement (Section 84)
Whoever, for the purpose of causing any increase in payment
or benefit under this Act, or for the purpose of causing any
payment or benefit to be made where no payment or benefit is
authorised by or under this Act, or for the purpose of avoiding
any payment to be made by himself under this Act or enable
any other person to avoid any such payment, knowingly makes
or causes to be made any false statement or false representation
shall be punishable with imprisonment up to three months, or
fine up to Rs. 500 o~ both.

I In 1975, The Employees' State Insurance Act was' amended, adding

the penal clauses of Section 85 and new sections 85A, 858, 85C and
93A. By the same amendment·a para was added to the Section 405
of the Indian Penal Code.
912 INDUSTRIAL LAW

Punishment ror raiJure to pay contributions etc. (Section 85)

If any person-
(a) fails to pay any contribution which under this Act he
is liable to pay, or
(b) deducts or attempts to deduct from the wages of an
employee the whole or any part of the employer's contribution, or
(e) in contraventiuh ~f Section 72 reduces the wages or any
privileges or benefits an nissible to an employee, or
(d) in contravention of Sectiol1 73 or any regulation dismisses,
discharges, reduces or otherwise punishes an employee, or
(e) fails or refuses to submit any return required by the
regulations, or makes a false return, or
(j) obstructs any inspector or other official of the corporation
in the discharge of his duties, or
(g) is guilty of any contravention of or non-compliance with
any of the requirement of this Act or the rules or the regulations
in respect of which no special penalty is provided, he shall be
punishable-
(1) where he commits an offence under clause (a), with
imprisonment for a term wh ich may extend to six months
but-
(a) ",hich shall not be less than three months in case of
failure to pay the employees' contribution which has
been deducted by him from the employee's wages:
.. (b) which shall not be less than one month, in any other
case, and shall also be liable to fine which may extend
to two thousand rupees;
Provided that the court may, for any adequate and special
reasons to be recorded in the judgment, impose a sentence
of imprisonment for a lesser term or of fine only in lieu
of imprisonment;
(2) where he commits an offence under any of the clauses (b)
to (g) (both inclusive), with imprisonment for a term which
may extend to six months, or with fine which may extend
to two thousand rupees, or with both,
Enhanced punishment in certain cases after previous
conviction (Section 85A)
Whoever, having been convicted by a court of an offence
punishable under this Act. commits the same offence shall, for
 · THE EMPLOYEES' STATE INSURANCE ACT 9\3

every such subsequent offence, be punishable with imprisonment

for a term which may extend to one year, or with fine which
may extend to two thousand rupees or with both :
Provided that where such subsequent offence for failure by
the employer to pay any contribution which under this Act he
is liable to pay, he shall, for every such subsequent offence, be
punishable with imprisonment for term which may extend to one
year but which shall not be less than three months and shall also
be liable to fine which may extend to four thousand rupees.
Power to recover damages (Section 858)
(I) Where an employer fails to pay the amount due in respect
of any contribution or any other amount payable under this Act,
the Corporation may recover from the employer such damages
not ex~eeding the amount of arrears as it may think fit to
impose: .
Provjded that before recovering such damages, !pe employer
shall be gi~en a reasonable opportunity of being heard.
(2) Any damages recoverable under sub-section (I) may be
recovered as an arrear of land revenue. .
Power to Court to make orders (Section 8SC)
(1) Where an employer is convicted of an offence for failure
to pay any contribution payable under this Act, the court may,
in addition to awarding any punishment, by order, in writing
require him within a period specified in the order (which the
court may if it thinks fit and on application in thai behalf, from
time to time, extend), to pay the amount of contribution in respect
of which the offence was committed.
(2) Where an order is made under sub-section (I) the
employer shall not be liable under this Act in respect of the
contribution of the offence during the period or extended period,
if any, allowed by the Court. Where on the expiry of such period
or extended period, as the case may be, the qrders of the Court
have not been fully complied with, the employer shall be deemed
to have committed a further offence; According to the law. he
shall be punishable with imprisonment in respect thereof under
Section 85 and shall also be liable to pay fine which may extend
to one hundred rupees for every day after such expiry on which
the order has not been complied with.

Industrial Law - 58
914 INDUSTRIAL LAW

Prosecutions (Section 86)

(I) No prosecution under this Act shall be instituted- except
by or with the previous sanction of the Insurance
Commissioner or of such other officer of the corporation
as may. be authorised in this behalf by the Central
Government.
(2) No court inferior to that of a Presidency Magistrate or a
Magistrate of the first class shall try to any offence under
this Act.
(3) No court shall take cognizance of any offence under this
Act except on a complaint made in writing in respect
thereof, within 6 months of the date on which the offence
is alleged to have been committed.
Amendment of Section 405 of the Indian Penal Code
A person, being an employer, whP deducts the employees'
contribution from the wages payable to the employee for credit
to the Employees' State Insurance Fund held and administered
by the Employees' State Insurance Corporation established under
the Employees' State Insurance Act, 1948 shall be deemed to
have been entrusted with the amount of the .contribution so
deducted by him if he makes default in the payment ·of such
contribution to the said Fund in violation of the said Act, shall
. be deemed to have dishonestly used the amount of the said
contribution in violation of a directi.on of law aforesaid .

. TRANSFER OF ESTABLISHMENT
Liability in case of transfer of esbbIishment (Section 93A)
Where an employer, in relation to a factory or establishment
transfers that factory or establishment in whole or in Part. by
sale, gift, leas~ or license or in any other manner whatsoever,
the employer and the person to whom the factory or establishment
is so transferred shall jointly anI! severally be liable. to pay the
amount dl\e in. respect of any contribution or any other amount
payable under this Act in respect of the period up .to the date
of such -transfer : .
'. Provided that the liability of th.e transfers shall. pe limited
. to the value of the assets obtaill¢ by him by such transfer. .
 THE EMPLOYEES' STATE INSURANCE ACT 915

EXERCISES
I. Explain the following terms as used in the Employees' State
Insurance Act, 1948 :
(a) Seasonal Factory. (Page 819)
(b) Employee. (Page 880)
(e) Family. (Page 881)
(d) Employment injury. (Page 900)
(e) Dependant. (Page 904)
(j) Immediate employer. (Page 883)
(g) Principal employer. (Page 882)
(h) Insurance Fund. (Page 892)
(,) Disablement benefit. (Page 899)
(j) Dependant's benefit. (Page 904)
(k) Factory. (Page 819)
(I) Insured person. (Page 881)
2. What do you mean by Employees' State Insurance Fund and how
is it constituted? What are the purposes for which the said fund
may be expended? (Pages 892-894)
3. State the purposes of the Employees' State Insurance Fund.
(Pages 892-893)
4. State what is meant by "insurance fund" as mentioned in the
Employees' Suite Insurance Act. What are the purposes for which
the fund may be expended? (Pages 892-893)
5. Give an outline of the composition and functions of the Employees'
State Insurance Corporation. (Pages 885-889)
6. What is the term of office of members of the Corporation?
. (Pages 886)
7. State the rules in the Employees' State Insurance Corporation
regarding the fol\owing-'-<:onstitution, Term of office of the
members and Re-election and Eligibility for Re-riomination.
. (Pages 885-890)
8. How the Medical Benefit Council is constituted? (Page 890)
9. How the Employees' State Insurance Corporation and the standing
committee are constituted? (Page 890)
10. What are the different typeS of benefits provided by the Employees'
State Insurance Act, 1948? (page 896)
II. Is the right to roceivepayment of any benefit under the ACt
transferable or assignable? (Page 906)
12. Are any of the benefits' payable under the Employees' State
Insurance. Act liable to 'attachment in execution of any decree of
_ a Court? "; . . (Pages 909-91\)
13. If the injured employee dies, are his depertdants -entitled to
benefits? (Pages 904-906)
916 INDUSTRIAL LAW

14. Who are entitled to get dependanl's benefi) in case of death arising
out of employment injury? (Page 904)
15. When maya person become eligible for sickness benefit under the
Employees' Siale Insurance ACI? (Pages 896-898)
16. What are the provisions of Ihe Employees' Stale Insurance Acl,
1948 regarding disputes and claims? (Pages 909-911)
17. To whom is disablement benefit payable under Employees' State
Insurance Act? (Page 899)
18. Who are entitled to get dependants' benefit in case of death arising
out of employment injury? (Pages 899)
19. What are the Medical and Maternity benefits to which the insured
persons are entitled under the said Act? (Pages 898, 906)
20. Can an insured woman be entitled to sickness benefit and maternity
benefit together for the same period 0 (Pages 896, 898)
21. What are the different kinds of benefits to which injured persons
are entitled under the Employees' States Insurance Act, 1948.
(Page 896)
.22. State the rules regarding payment of contribution under the Act.
. Is an employee earning Rupee one per day liable to pay contribution
under the said Act 0 (Pages 895-897)
23. Discuss the powers of Employees' Insurance Court under the
Employees' State Insurance Act, 1948. What matters can this Court
decide? (Pages 909-911)
24. Describe the benefits available to an employee in case of sickness
or disablement under the Employees' State Insurance Act, 1948.
(Pages 896-898, 899)
25. Under Section 46-(a) Who are entitled to certain benefits and
(b) what are these benefits? (Page 898)
26. State the purposes for which the Employees' State Insurance Fund
can be expended. (Pages 892-893)
27. (a) Enumerate the matter to be decided by Employees' Insurance
Court. (Pages 909-911)
(b) Discuss the condition to be observed by the recipients of sickness
or disa!;>lement benefit. (Pages 896-899)
28. Discuss the provisions of the Employees' State Insurance Act, 1948
relating to sickness benefit. (Pages 896-898)
29. How is the Employees' State Insurance Corporation constituted?
(Page 885)
30. State the circumstances under which the Corporation can claim from
the owner of the fi.clory the amount of extra expenditure incurred
by the Corporation as sickness benefit under the Employees' State
Insurance Act. 1948. (Pages 896-898)
 THE EMPLOYEES' STATE INSURANCE ACT 917

31. Objeclive questions. Give shon answers.

(l) Whal is meant by "Iota I disablement" as per Employees' State
Insurance Act, 1948 (Pages 901-902)
(ii) State the exact number of persons to be sent from the Parlia-
ment : to act as members of the Employees' State Insurance
Corporation. (Page 885)
(iii) What is meant by "Occupational disease" as per Employees'
Stale Insurance Act, 1948? (Page 869)
(iv) What is the tenn of office of members of the Corporation?
(Page 886)
(v) Are any of the benefits payable under the Employees' Stale
Insurance Act liable to attachment in execution of any decree
of a Coun? (Pages 909-910)
(Vi) Can an insured woman be entitled to sickness benefit and
maternity benefit together for the same period?
(Pages 907-908)
(vii) Who is an insured person according to be the Employees' State
Insuranee Act? (Pages 881-882)
 INDIAN
FATAL ACCIDENTS ACT

Object
Under the English Common Law a suit for damages for a
'Personal injury can only be brought by the person injured. If
he dies as a result of injury, the right to sue does not pass on
to his heirs or legal representatives. This principle is known as,
"actio personalis moritur cum persona" ("A personal action dies
with the person injured~'). This rule resulted in much hardship
to poor persons dying from accidents. This rule was modified
in England by the Fatal Accidents Act of 1846. The Indian Act
is based on the English Act. This enables certain heirs of the
deceased person to sue for damages when death is caused by
an actionable wrong.
Application
The Fatal Accidents Act, (Xlll of 1855) applies to the whole
of India, including Jammu and Kashmirl.-Sec. I.
Suit for compensation 10 the family of a person for loss
occasioned. to it by his death by actionable wrong : Whenever
a death of a person is caused by wrongful act, neglect or default
a suit for damages can be brought by the executor, administrator
or legal representative of the deceased. Such a suit must be for
the benefit of wife, husband, parents and child, if any, of the
deceased. In every such action the Court may give such damages
as it may think proportional to the loss resulting from such death
to the parties respectively. The amount so recovered, after
deducting all costs and expenses, shall be divided amongst the
parties as the Court will decide.-Sec.IA.
·The measure of damages is the actual pecuniary loss suffered,
but reasonable expectation Of a pecuniary benefit must be taken
into account. TafTVafe Railway Company v. Jenkins 2 ; Secretary
of State v. Gopaf Singh J In estimating the amount of damages
the Court must take into account the chances of life, the chances
of any improved conditions, and the standard of living of the
dependent family. Nanibala v. Auckland Jute Company". No
I See p. 5, footnote '(1913) A. C.
320 I. C. 425 4 52 Cal. 602

918
 INDIAN FATAL ACCIDENTS ACT 919

compensation can be allowed for mental sufferings. No sum can

be awarded for ceremonial or funeral purposes. Narayan Jefha
v. Commissioners and Corporations of Bombay. I ..
Not more than one suit to be brought. Claim for loss to the
estate may be added: Not more than one action or suit shall
be brought for, and in respect of the same subject matter of
complaint.-Sec. 2.
Plaintiff shall deliver particulars etc. : The plaintiff shall
give full particulars for the person or persons for whom and on
behalf of the action or suit shall be brought and of the nature
of the claim in respect of which damages shall be sought to be
recovered.-Sec. 3.
Interpretation clause : The terms used above are interpreted
as follows-"person" includes bodies politic and corporate ;
"parent" include father and mother; "child" includes son, daughter,
grandson, grand daughter, step son and step daughter.-Sec. 4.
Calculation of damages : As a mode of calculation of
damages in favour of the parents on account of the death of their
minor child in a motor (truck) accident, the guiding principles
are : Firstly, the parents are entitled to recover the cash value
of the services of the deceased minor. Secondly, they are further
entitled to ha,ve compensation for the loss of pecuniary benefits
that can reasonably be expected after the child might have
attained the majority.
The capitalised value of the reasonable services rendered to
the dependants can be given under Section I·A, while the award
can be made for the loss of fairly happy and healthy life under
Section 2. The conditions in a given family of the child should be
taken note of. The judicial approach to the death of a child below
the age of ten upon proof of normal family conditions is to assess
damages within the range of Rs. 5000/· to Rs. 6000/· during the
period till about 1970. That is how reasonable desideratum on
quantum itself is furnished and once basic facts are established.
that would constitute fair quantification. Every case may have,
however, its own facts either requiring increase or decrease in
this ratio.
Under the scheme of the Fatal Accidents Act the life that
is lost has to be treated as "an economic unit". Shriram Hari
Tambey v. Diwakar Ramchandra Kharabe and others.2
I 16 Bom. 254 1 AIR (1915) Bom. 221
 EMPLOYERS LIABILITY ACT

Object and reasons

Under the Common Law of England, in civil suits for
damages for injuries sustained by workmen, it is open to the
employer to plead: (/) the doctrine of common employment, by
which the employer is not normally liable to pay damages to
a workman for an injury resulting from the default of another
workman; and (ii) the doctrine of assumed risk, by which an
employee is presumed to have accepted risk if it is such that
he ought to have known it to be part of the risk of his occupation.
The Employers' Liability Act (Act XXIV of 1938) declares
that thll above defences of the employers shall not be raised in
suits for damages in respect of injuries sustained by workman.
Defence of common employment barred
• Section 3 of the Act provides that the defence of Common
Employment cannot be pleaded when personal injury is caused
under any of the following circum~tances :
(a) the omission ofthe employer (or of anybody in his service)
to maintain in good and safe condition any way, works,
machinery or plant connected with or used in his trade or
business;
(b) the negligence of any person in the service of the employer
who has been entrusted with any superintendence;
(c) iIle negligence of any person in the service of the employer
to whose order and direction the workman had to conform
and did conform; or
(d) any act or omission of any person in the service of the
employer dOlle or made (I) in the normal performance of
his duties (ii) in obedience to any rule or bye-law of the
employer, or (iiI) in obedience to any particular instructions
given by any person to whom the employer has ·delegated
authority in that behalf.
Contracting out
Section 3A makes void any agreement by which the
provisions of Section 3 are contractoo .out.

920
 EMPLOYERS LIABILITY ACT 921

Risk not to be assumed

Section 4 provides that in any suit for damages, the workman
shall not be deemed to have undertaken any risk attaching to
his employment unless the employer proves that the risk was fully
explained to and understood by the workman and that the
workman voluntarily undertook the same.
According to Section 3(a) the employer is bound to maintain
good and safe condition of any way, works etc. Some examples
are given below: A staircase, Pegram v. Dixon I ; workshop floor,
Willets v. Wall & CO.,2 a 'horse' in the plant, Yarmonth v. France J

1(1886) 55 L.1.0.B. 447 2 (1892) 2. O.B. 92

'(1887) 19 O.B.D. 647
 WORKMEN'S
® COMPENSATION ACT

OBJECT AND SCOPE

Application
The Workmen's Compensation Act (Act VIII of 1923) came
into force from I st July, 1924. It applies to the whole of India,
including the State of Jammu and Kashmir.' The Act provides
for the payment of compensation by certain classes of employers
to their workmen, for injury by accidents.
The Workmen's Compensation Act does not apply to factories
covered by the Employees' State Insurance Act.
The Amendment of 1976. The Workmen's Compensation
(Amendment) Act, 1976, was passed with the object of providing
suitable scales of compensation for the higher wage levels bey.nd
Rs. 500. The reason is that all wages have been increased. Before •
the amendment, the Act covered workmen whose wages did not
exceed Rs. 500 per month. (See, Schedule, pp. 928-929).
The latest amendment to the Act was made in 1984.
Defences of the Employer
Prior to the passing of this Act, the employer was Iiable to
pay compensation only if he was guilty of negligence. Even in
case of proved negligence, the employer could get rid of his
liability by using any of the following defences:
I. The Doctrine of Assumed Risks : If the employee knew
the nature of the risks he was undertaking when working in a
factory, the employer had no liability for injuries. The court
assumed in such case that the workman had voluntari Iy accepted
the risks incidental to his work. The doctrine followed from the
rule Volenti Non Fit Injuria, which means that one, who has
volunteered to take a risk of inj ury, is not entitled to damages
if injury actually occurs. •
2. The Doctrine of Common Employment: Under this rule,
when several persons work together for a common purpose and

I See p. S, footnote

922
 WORKMEN'S COMPENSATION ACT 923

one of them is injured by some act or omission of another, the

employer is not liable to pay compensation for the injury.
3. The Doctrine of Contributory Negligence : Under this
rule, a person is not entitled to damages for injury if he was
himself guilty of negligence and such negligence contritmted to
the injury.
The three aforesaid defences and the rule "no negligence no
liability" made it almost impossible for an employee to obtain
relief in cases of accident. The Workmen's Compensation Act
of 1923 radically changed the law. According to this Act, the
employer is liable to pay compensation irrespective of negligence.
The Act looks upon compensation as relief to the workman and
not as damages payable by the employer for a wrongful act or
tort. Hence contributory negligence by the employee does not
disentitle him from relief. For the same reason, it is not possible
for the employer to plead the defence of common employment
or assumed risks for the purpose of avoiding liability. Thus the
Act makes it possible for the workman to get compensation for
injuries, unimpeded by the legal obstacles set up by the law of
Torts.
Two ways of claiming compensation
An injured workman may, if he wishes, file a civil suit for
damages against the employer. Section 3(5) of the Workmen's
Compensation Act, however, provides that if such a suit is filed,
compensation cannot be claimed under the Act and if
compensation has been claimed under the Act, or if an agreement
has been entered into between the employer and the workman
for the payment of compensation, no suit can be filed in the civil
court. Thus the workman has to choose b~tween two reliefs
(i) civil suit for damages and (U) claim for compensation under
the Act. He cannot have both.
In a civil suit for damages, it is open to the employer to
plead all the defences provided by the law of Torts. Therefore,
a civil suit is a risky procedure for a workman and is rarely
adopted. The legal position of workmen has, however, been
improved by two Acts, viz., The Indian Fatal Accidents Act of
1855 and the Employers' Lia!>ility Act of 1938. The provisions
of these Acts were summarised in the previous chapters.
924 INDUSTRIAL LAW

DEFINITIONS UNDER WORKMEN'S

COMPENSATION ACT
Dependant
Section 2( d) gives a list of persons who come within the
category of "dependant" of a workman. In ordinary language the
dependant of a person is one who lives on his earnings. Under
Section 2(d) there are three categories of dependants.
I. The following relations are dependants, whether actually
so ('r not-widow, minor legitimate son, unmarried legitimate
daughter, a widowed mother.-Sub-sec. (i). .
2. The following relations come within the category if any
were wholly dependant on the earnings of the deceased workman
at the time of his death-a son or daughter who has attained
the age of 18 years and who is infirm.-Sub-sec. (ii).
3. The following relations are dependants if they were wholly
or partially so at the time of the workman's death-widower;
parent, other than widowed mother; minor illegitimate son;
unmarried illegitimate daughter~r a daughter legitimate or
illegitimate if married and a minor or if widowed and a minor,
a minor brother or an unmarried sister or widowed sister if
. minor; a widowed daughter-in-law, a minor child from a
predeceased son; a minor child from a predeceased daughter
where no parent or child is alive; or a paternal grand parent
if no parent of the workman is alive.-Sub-sec. (iii).
Parent, other than widowed mother: Calcutta High Court
held that the term 'step-mother' does not include this phrase.
Manada Devi v. Bengal Bone Mill. I But Nagpur High Court held
that the 'term includes an adoptive widowed mother. Additional
Dy. Commissioner Simbhum v. Smt. Lakhmibai Naidu. 2
Minor
Minor means a person who has not attained the age of 18
years.-Sec. 2(m.
Employer
Sec. 2(e) provides that the term Employer "includes" the
following : (I) any body of persons, whether incorporated or not
(il) any managing agent of an employer (iii) the legal representa-
tives of a deceased employer, and (iv) any person to whom the
I AIR (1940) Cal 28S 2AIR (1945) Nag. 238
 WORKMEN'S COMPENSATION ACT 925

services of a workman are temporarily lent or let out, while the

workman is working for him. The definition is not· exhaustive.
Examples:
(i) The Government hired out some lorries with drivers to a contractor.
Held, the contractor was the employer of the lorry drivers witlt the
meaning of the Act. Krishna Aiyar v. The Superintending Engineer.
P WD .. Madras.'
(U) The owner of a boat hired it out to another. The latter engaged
the crew. One of the crew died while on duty. The widow of the
deceased claimed compensation from the owner of the boat. Held,
he was not the employer and not liable to pay compensation. Malenll
v. Narasama. 2
Partial Disablement
. Disablement, in ordinary language, means loss of capacity
to work or move. Such incapacity may be partial or total and
accordingly there are two types of disablement. partial and total.
In the Act both types of disablement are further subdivided into
two classes, temporary and permanent. By Section 2(1)(g)
Temporary Partial Disablement means such disablement as
reduces the earning capacity of a workman in any employment
in which he was engaged at the time of the accident, and
Permanent Partial Disablement means such disablement as reduces
his earning capacity in evelY employment he was capable of
undertaking at that time. The Act is not limited only to physical
capacity of disablement, but extends to the reduction of earning
capacity as well. Sukkai v. Hukum Chand Jute Mills Ltd. )
In a case of Partial Disablement it is necessary that
(a) there should be an accident, (b) as a result of the accident
the workman should suffer injury, (c) which should result 'in
permanent disablement and (d) as a result whereof his earning
capacity must have decreased permanently. In the proportion in
which his earning capacity has been decreased permanently he
is entitled to compensation.
The medical evidence showing loss of physical capacity
is a relevant factor but it is certainly not the decisive factor as
to the loss of earning capacity. It is the loss of earning capacity
that has to be determined. Commrs. for Port of Cal. v. A. K..
Ghosh.'
, I.L.R. (1949) Mad. 578 2 (1951) M. W. N. 807
.' AIR (1957) Cal 601 '( 1972) 76 C.W.N. 639
926 INDUSTRIAL LAW

The type of disablement suffered is to be determined from the

facts of the case. But it is provided that every injury specified in
Schedule I to the Act shall be deemed to. result in permanent partial
disablement. The schedule also mentions the· percentage loss of
earning capacity which is to be presumed in each such case.
Examples : (From Schedule 'I)
Description 0/ I'!i1ll'Jl Percentage loss 0/
earning capacity
Loss of both hands 100
Severe facial disfigurement 100
Absolute deafness 100
Loss of thumb 30
Loss of one eye 40
Middle finger of left hand (whole) 14
(There are 54 items listed in tbe Schedule with percentage loss of
earning capacity for each item mentioned.)
Total DisablemeDt
According to Section 2( I) total disablement means such
disablement, whether of a temporary or permanent nature, as
iricapacitatc;s a workman for all work which he was capable of
performing at the time of the accident resulting in such
disablement, provided that permanent. ,
total disablement shall be
deemed to result from the permanent total loss of the sight of
both eyes or from any combination of injuries specified in
Schedule I, where the aggregate percentage of the loss of earning
capacity as specified in that schedule against those injuries,
amounts to one hundred per cent.
Cas.·Law :
There was a personal injury to a carpenter in course of the
employment. His left hand was amputated al!ove the elbow. The
Supreme Court of India beld that since a carpenter cannot work
with one hand his disablement is total and noipartial. Pratap Narain
Singh Deo'v. Srinivas Sabata and anoth.. I
Wages
Wages include any privilege or benefit which is capable of
being estimated in mOney, other than a travelling allowance or
the value of any travelling concession ora contribution paid by
I AIR (1976) Supreme Court 222
 WORKMEN'S COMPENSATION ACT 927

the employer of a workman towards any pension or provident

fund or a sum paid to a workman to cover any special expenses
entailed on him by the nature of his employment.-Sec, 2(IXm).
The definition of wages is important because an employee
whose monthly wages exceed Rs. 1000 is not a workman for the
purpose of the Act. The Amendment Act of 1984 has abolished
this limit.
The defmition of wages is not ext austive. Wages include
all payment which can be calculated in terms of money, e.g.,
ordinary wages, extra payment for overtime, bonus and other
inducements in the shape of payment for idle time, free meals,
allowances for grain and clothing, free or cheap housing, etc.,
offered to the workman to enter into a contract with the employer.
Godavari Sligar Mills v. Sakunla/a. I But travelling expenses or
employer's provident fund contributions are excluded. Local
allowance to a workman for cost of living in a particular place
forms part of wages. Share of profit or bonus under a. profit
sharing scheme is wages. Chillra Tanti v. Tata Iron & Steel Co.2
This sub-section read with section 5 indicates that payments made
by a third party, e.g., tips by customers to boys in restaurants
are not wages. Tips may be included within the terms wages if
they were received by the workman with the knowledge of the
employer. Pennv. Spiers & Pond. l .

Montbly Wages -
Section 5 of the Act defines "monthly wages" and states the
methods of calculating it. "Monthly" wages means the amount
of wages deemed to be payable for a month's service (whether
the wages are payable by the month or by whatever other period
or at piece rate). Monthly wages are calculated as follows:
, (0) Where the workman was in service for a continuous
periOd of i:2 months immediately preceding the accident monthly
wages s!Ui1l be one-tWelfth of the total wages dlie for the last
twelve itionths of the ~riod: ., ." . .'
, (b) Wh'ere the who'le of the periOd of continuous service was
less than one month, month Iy wages shall be the average monthly
amolint wliich-durlng the twelve months immediately preceding
the' accident wasbein'g earned by a wOrkman employed on the
,IAIR (1948.) Born. 158 'AIR (1946) Pal 437
3(1908) I. K. B. 766
928 INDUSTRIAL LAW

same work by the same employer, or if there was no workman

so employed, by a workman employed on similar work in the
same locality.
(c) In other cases, including cases in which it is not possible
for want of necessary information to calculate the monthly wages
under clause (b) the monthly wages shall be thirty times the total
wages earned in respect of the last continuous period of service
immediately preceding) ie accident from the employer who is
liable to pay compensation divided by the number of days
comprising such period.
A period of service is deemed to be continuous which has
not been interrupted by a period of absence exceeding 14 days.
Workman
The definition of the term workman is important because
only a person coming within the definition is entitled to the reliefs
provided by the Workmen's Compensation Act. "Workman" is
defined in Section 2(1)(n) read with Schedule 11 to the Act.
In Schedule II, a list (consisting of 32 items) is given of persons
who come within the category of workmen. Examples: Persons
employed otherwise than in a clerical capacity or in a railway to
operate or maintain a lift or a vehicle propelled by steam, electricity
or any mech ... ical power; person employed otherwise than in a
clerical capacity in premises where a manufacturing process is
carried on ; seamen in ships of a certain tonnage; persons employed
in constructing or repairing building or electric fittings; persons
employed in a circuS or as a diver; etc. .
Subject to the exceptions noted below, the term workman
means:
(a) a railway servant as defined in Section 3 of the Indian
Railways Act of 1890 who is not permanently employed in any
administrative, district or sub-divisional office of a railway and
not employed in any capacity as is specified in Schedule II or
(b) employed in any such capacity as is mentioned in
Schedule II. .
From I st April 1976, the limit of monthly wages for purposes
of this Act, was raised from Rs. 500 to Rs. 1000. (The
Amendment of 1976. See p. 922).
The contract of employment may be expressed or implied,
oral or in writing.
 WORKMEN'S COMPENSATION ACT 929

The Act provides that the following categories of persons

are not to be deemed as workmen for the purposes of the Act:
(a) Persons working in the capacity of a member of the Armed
Forces of the Union,
(b) A person whose employment is of a casual nature and who
is employed otherwise' than for the purposes of the
employer's trade or business.
The. exercise and performance of the powers and duties of
a local authority or of any department acting on behalf of the
GovernlDent $hall, for the purposes ()f the Act, unless a c,ontrary .
intention appears, be deemed to' be the trade or business of such
authority or department. .
TIle State Government has been given power to add to the
list in Schedule II any hazardous occupation or specified injuries
in such an occupation. The addition may be made by notification
in the. official Gazette, with not less than 3 months' notice.
There are legal decisions regarding the question who is a
workman. The general rule is that there must be the relationship
of master and servant between the employer and the workman.
Smith' y. General Motor Cab Co. ~ Workman is a persoll" whom
the employer can command and control in the manner of
performing the work. Yewen v. Noakes. 3 According toWilIs•.4 the
following points are to be taken into considerati'on in determining
the question whether a person is a workman : (a) the term of
engagement (b) the payment of wages (c) the power of control
over the work (d) the power to dismiss. ..
What is employmeut of a casual nature?
Employees of a casual nature, if not employed in the
employer's trade or business, do not come within the definition
of the tenn workman as used in the Act.
Generally speaking, casual work is one which is not regular
.' or continuous. A person doing odd jobs was employed by the
occupier of a private premises to clean wi!ldows. Held, his work
was' of a casual nature. Hill v.' Begg. l A person officiating in
a leave vacancy is not a casual worker. In the matter of Alam
Singh.6
I AIR (1938) Born. 110 . 2 (1911) A. C. 188
l (1880) 6 'Q. B. D. S30 4 Wills, Workmen:S ComJHnsation Act
, (1908) 2. K. B. 802. 6 AIR (1936) All 690

Industrial Law - 59
930 INDUSTRIAL LAW

Whether the employment is for the purpose of the employer's

trade or business depends on whether the contract of service
entered into by the employer was in his capacity as businessman
or in a private capacity. When a coal mine employs workers to
dig for coal it is for his trade or business. But a mine owner
engaging workers for building his residence, is not engaging tJ!em
for his trade or business. '
.A person who does service which is illegal and void cannot
be a workman and cannot claim compensation. Kemp v. Lewis.'
RULES REGARDING WORKMEN'S COMPENSATION
When i. emplo.yer liable to pay compeautioa ?
Section 3( I) lays down that if personal injury is cAused to
a workman by accident arising out of and in course of
employment, his employer shall be liable to pay compensation.
From the above it follows that the employer is liable when
(a) injury is caused to a workman by oeci'ent and (b) the accident
arises out of and in cOlII"se of employment. An occupational
difease is deemed to be an injury by accident and the employer
is liable to pay compensation. The section itself provides that
in certain cases of injury, no compensation is payal*.
What Is lUI accldeat 1
Lord Macnaughten in Fenton v, Thorley & CompanY defined
an accident as "an unlooked for mishap or untoward event which
is not expected or designed". Thus a self-inflicted injury is not an
accident ordinarily. In Grime v. Fletcherl a person became insane
as a result of accident and then committed suicide. It was held that
death w~ the result of the accident and compensation was
awarded. But where insanity was not the direct result of the
accident compensation cannot be awarded, e.g., where suicide was
due to brooding over ~ accidenl. Withers v. L. B. & S. C.
Railways. 4 A series of tiny accidents, each producing some
unidentifiable result and ope1l!ling cumulatively to produce the
final condition of injury, would constitute together an accident to
furnish ....~roper foundation for a claim under the Act. Chillu Kahar
v. Burn & Co. Ltd. S following BI/I"rel/ & Sons Ltd. v. Silvage. 6
1(1914) 3 K. B. 543 , (1903) A. c. 443
3(1915) I K. B. 734 • (1916) 2 K. B. 772 .
'AIR (1953) Cal 516 6126 L.T.R. 49 H. L.
 WORKMEN'S COMPENSATION ACT 931

Personal Injury
A personal injury is not necessarily confined to physical or
bodily injury. Injury includes psychological and physiological
injury such as nervous shock, insanity etc. Yates v, South Kirlcby
Collieries. I The injury must be personal. An injury to the
belongings of a workman does not come within the Act.
A workman had to go into a heating room and from there
to a cooling plant. The changes of temperature caused pneumonia
and the workman died, Held, the death was due to personal injury.
The Indian News Chronicle Ltd. v. Mrs, Luis Lazarus.2 Death
was the result of heat-stroke. Held that dependant was entitled
to compensations. Santon Femandez v, B, P. (India) Ltd. 3
Arising out of and in the coune of employment
This phrase has been copied from the English Act on the
subject, The phrase has been interpreted in a large number of
cases, English and Indian, But difficulties still remain. .
In the course of employment: This part of the phrase covers
the period of time during which the ernployment continues.
Compensation is payable if the accident occurs within the period
of employment. Generally speaking employment commences when
the employee reaches his place of work and ceases when he leaves
the place. But there are several exceptions to the above' rule.
(I) When the workman uses transport provided by the
employer for the purpose of going to and from the place of work,
the time during which he uses the transport, is included in the
course of his employment. Holmes v. Great Northern Railway. 4
(2) The time during which the workman is upon the premises
of the employer should be included in the period of employment.
An employee of the E. I. Railways was knocked down and killed
by a train while returning from duty by crossing the platform
area. Held, the accident arose out of and in course of employment.
Ranibala Seth v. East Indian Railway. S
(3) If the workman reaches the place of employment before
the time when the employment begins, if it was necessary and
not too early, or if at the time of accident he was doing something
to equip himself for the work, he is in course of employment.
Sharp v. Johnson. 6
1(1910) 2 K. B. 538 2 (1951-52) 3 F. J. R.o 190
l 8 Born. L. R. '149 • (1900) 2 Q. B. 409
, AIR (1951) Cal. 501 • (1905) 2 K. B. 139
932 INDUSTRIAL LAW

(4) If the workman with the knowledge and permission of

the employer lives at some distance from the place where he
is called upon to work and if in the course of proceeding at a
reasonable time and in a reasQnable manner from his place to
the place of work, he meets with fatal accident then his accident
must be held to arise out of and in course of empl()yment.
Vishram v. Dadabhoy. I
(5) The period of rest during the period of employment is
in the course of employment. But if the workman goes outside
the employer's premises during the rest period and meets with
an accident, it is not in course of employment. Pruce v. D~ey. 2
Arising out of the employment: In Dennis v. White,' it was
observed that, "When a man runs a risk incidental to his
employment and is thereby injured, then the injury arises out
of the employment." In L & Y Railway v. Highley,4 Lord Summer
set·the test as follows: "Was it a part of the injured person's
employment to hazard, to suffer or .10 do that which caused his
injury? If yea, the accident arose out of his employment, if nay,
it did not." The dictum of Lord ~ummer was followed in several
Indian cases e.g., Sheikh Nawab ~Ii v. Sree HanumanJute Mills.s
A worker was stabbed to death on the way to work. The
accident arose out of the employment. Bhayabb'ai v. Central Rly.,
Bombay.,6 A boy served tea in his usual round. While returning
to the factory canteen he was struck by a bullet and died. The
death of the boy was held to be an accident arising out of and
in the course of employment.
Notional Extension: "As a rule the employment of a workman
does not commence until he has reached the place of employment
and does not continue when he has left the place of employment,
the journey to and from the place of employment being excluded.
It is now well settled, however, that this is subject to the theory
or notional extension of employer's premises so as to include an
area which the workman passes and repasses in going to and in
leaving the actual place of work." SaurashTra Salt Mfg. Co. v.
Bai Valu Raja and others.' In order to prove that injury arises
out of employment, two conditions must be ·fulfilled.

I AIR (1942) Born; 175 2 (1926) 20 B. W. C. C. 237

3(1917) A. C. 479 '(1917) A.C. 352
s AIR (1933) Cal. 513 'AIR (1955) Born. 105
, AIR (1958) Supreme Court 881
 WORKMEN'S COMPENSATION ACT 933

(i) Injury must have resulted from some risk incidental to

the duties of the s~rvice, or inherent in the nature or condition
of employment, and
(ii) The worker at the time of injury must have been engaged
in the business. of the employer and must not engage in any work
for his personal benefit.
Occupational Diseases
Persons employed in certain occupations are liable to be
attacked by certain diseases, For example, a person engaged in
an employment involving exposure to dust containing silica is
liable to contract silicosis, telegraph operators are liable to have
what is called Telegraphist's Cramp. Such diseases are known
as Occupational Diseases. Schedule III to the Workmen's
Compensation Act contains a list of occupational diseases divided
into three parts, Part A, Part B and Part C. Part A includes
Anthrax, Compressed Air Sickness, Poisoning by lead,tetra-ethyl
and nitrous fumes. Part B includes poisoning by lead compounds,
phosphorus, mercury etc., cancer of the skin, telegraphist's cramp
etc. Part C includes Silicosis, Asbestosis etc.
Section 3(2) of the Act provides that an occupational disease,
"shall be deemed to be an injury by accident within the meaning
of this section and, unless the contrary is proved, the accident
shall be deemed to have arisen out of, and in the c'ourse of, the
employment. "
For diseases included in Part A of Schedule III, the employer
is liable to pay compensation when a workman employed by him
contracts the disease. For the diseases included in Part B, the
employer is liable if a workman contracts it while in, his service
and if the workman has been in his service for a continuous
period of six months, which period shall not include a period
of service under any other employer in the same kind' of
employment. For diseases included in Part C of Schedule 11 I,
the workman is entitled to compensation if he has been in the
service of one or more employers for such continuous period '
as the Central Government may specify. In these cases, the
compensation is to be paid by all the employers in such
proportions as the Commissioner of Workmen's Compensation
may deem just.-Sec. 3(2A).
This list of occupational diseases and the employments
producing them as contained in Schedule III may be extended
934 INDUSTRIAL LAW

(by notification) by the State Government in the case of Parts

A arid B and by the Central Government in the case of Part C.
Section 3(4) lays down that save as provided above, no
compensation shall be payable to a workman in respect of any
disease unless the disease is directly attributable to a specific
injury by accident arising out of, and in the course of his
employment.
When is employer not liable to pay eompeDsation ?
Section 3 of the Act provides that the employer is not liable
to pay compensation in the following cases :
(a) in respect of any injury which does not result in the total
or partial disablement of the workman for a period
exceeding three days,
(b) in respect of any injury not resulting in death, caused by
an accident which is directly attributable to--
(i) the workman having been at the time thereof under the
influence of drink or drugs, or,
(ii) the wilful disobedience of the workman to an order
expressly given, or to a rule expressly framed, for the
purpose of securing the safety of wC'rkmen, or,
(iii) the wilful removal or disregard by the workman of any
safety guard or other device which he knew to have
been provided for the purpose of securing the safety
of workmen.
As regards exception clause (b)(ii) a workman would not
lose his right to compensation only by reason of the fact that
he had acted thoughtlessly or foolishly. Urmila Dosi and another
v. Tata Iron and Steel Co. Ltd I
From sec. 3 it follows that the employer is not liable to pay
compensation under the Workmen's Compensation Act, in the
cases also :
(i) when the accident did not arise out of or in the course
of the employment;
(ii) when the workman filed a suit for damages in the Civil
Court; and
(iii) where disablement lasted 3 days or less (that is, injuries
were not significant).

I AIR (1928) Palna 528

 WORKMEN'S COMPENSATION ACT 935

The Amount 01 Compensation

The Act provides for compensation for-( I) .Death,
(2) Permanent total disablement, (3) Permanent partial
disablement, and (4) Temporary disablement.
For determining the amount of cOmpensation payable under
the Act, Section 4 has to be read with Schedule IV to ;he Act.
In Schedule IV, there is a table having four columns, The first
, column gives the possible monthly wages earned by the injured
workman, divided under 13 heads. The amount payable for death
or permanent total disablement to workmen of each group is
mentioned in the corresponding entry in column 2 and c')lumn
3 respectively. Column 4 gives the amount of half monthly
payment to be made, for temporary disablement. Schedule IV'
is reproduced below :
SCHEDULE IV
(See Section 4)
COMPENSATION PAYABLE IN CERTAIN CASES
Amount of compensation for Half-monthly
Monthly wages of the payment as
workman injured Death Permanent compensation
total for temporary
disablement disablement
2 3 4
More than But not more than
Rs, Rs, Rs. Rs, Rs. P.
Half "is
o 60 7,700 10,080 monthly wages
60 90 9,720 14,608 3&.00
90 120 11,520 16,128 42,00
120 ISO 13,500 18,900 48.15
150 200 16,800 25,520 60,00
200 300 18,000 25,200 82,50
300 400 19,200 26,880 100,00
400 500 21,600 30,240 118.75
500 600 21,000 29,400 135.00
600 700 23,100 32,340 148.75
700 800 24,000 33,600 . 160,00
800 900 27,000 37,800 168,75
900 1000 30,000 42,000 175.00

I Schedule IV was changed by the Workmen's Compensalion (Amend-

ment) Act, 1976 (No. 6S of 1976)
936 INDUSTRIAL LAW

The rules regarding the amount of compensation, as laid

down in Section 4, are stated below: .
For Death: The employer must pay the amount mentioned
in column 2 of Schedule IV.
For Permanent Total Disablement: The employer must pay
the amount mentioned in column 3 of Schedule IV.
For Permanent Partial Disablement: Schedule I to the Act
contains a list of injuries deemed to result in permanent partial
disablement together with the percentage loss of earning capacity
which is presumed to occur in each case. When permanent partial
disablement occurs from an injury specified in Schedule I, the
amount of compensation is to be calculated by finding out from
Schedule IV the compensation payable for permanent total
disablement to the workman concerned and multiplying it with
the percentage loss of earning capacity as stated in Schedule I.
Thus, suppose that there is an injury· which, according to
Schedule I, causes a 30% loss of earning capacity. Suppose that
the monthly wage of the workman· is Rs. 50. From Schedule IV
it ls seen that for permanent totai disablement he would have
obtained Rs. 10,080. Hence for the permanent partial disablement
he would get 30% of Rs. 10,080, i.e., Rs.3,024.
In the case of an injury not specified in Schedule I, the
percentage loss of earning capacitY permanently caused must be
found out. This figure multiplied by the amount of compensation
for permanent total disablement gives the amount of compensation
.payable for the partial disablement.
Where more injuries than one are caused by the same
accide,», the amount of compensation payable under this head
shall be aggregated but not so in any case as to exceed the amount
which would have been payable if permanent total disablement
had resulted from the injuries.
For Temporary disablement: Where as a result of the injury
there is a temporary disablement, total or partial, the employer
is required to make a half-monthly payment to the workman. The
rate of half-monthly payment is given in column 4 of Schedule
IV. (There are different rates for different wage groups.)
Rules regarding Half-monthly Payment : The first half-
monthly payment is to be made on the sixteenth day (i) from
the date of the disablement, where such disablement lasts for
a period of 28 days or more, or (ii) after. the expiry of a waiting
 WORKMEN'S COMPENSATION ACT 937

period of three days from the date of the disablement, where

such disablement lasts for a period of less than 28 days.
Thereafter the payments must be made half-monthly during the
disablement or during a period of five years, whichever period
is shorter.
From any lump sum payment made for compensation and
from any half-monthly payment, any sum which the workman
has received from the employer, prior to the receipt of the lump
sum or half-monthly payment, may be deducted. But any sum
received for medical treatment, cannot be so deducted.-
Sec.4(I)(a).
No half-monthly payment shall in any cases exceed the
amount, if any, by which half the amount of the monthly wages
of the workman before the accident exceeds half the amount of
such wages which he is earning after the accident.-Sec. 4(1)(b).
On the ceasing of the disablement before the date on which
any half-monthly payment falls due, there shall be payable in
respect of that half month a sum proportionate to the duration
of the disablement in that half-month.-Sec. 4(2).
Any half-monthly payment payable to a workman may be
reviewed by the Commissioner on the application of either the
employer or the workman on the ground that there has been a
change in the condition of the workman. The payment may upon
review, be continued, increased, decreased or ended or (in case
the injury has resulted in a permanent disablement) converted
into a lump sum.-Sec. 6.
A right to receive half-monthly payment may, by agreement
or by order of the Commissioner, be redeeoed by the payment
of a lump sum. This is called commutation of half-monthly
payments.-Sec. 1.
Distribution of Compensation
Section 8 lays down the following rules regarding the
distribution of compensation :
\, Compensation for death and lump sum payment due to
a woman or to a person under a legal disability must be deposited
with the Commissioner.
2. But in the case of a deceased workman, an employer may
make to any dependant advances on account of compensation
not exceeding an aggregate of one hundred rupees. So much of
'IJIS INOUS'I'RIAL LAW

such aggregate as docs not exceed the compensation payable to

that dependant sbali be deducted I!y the Commissioner ftom such
compensation and repaid to the employer.
3. Any other sum amounting to not less than Rs. 10 which
is payable as compensation may be deposited with the
Commissioner on behalf 'of the person entitled thereto.
4. The receipt of the Commissioner shall be sufficient
discharge in respect of any compensation deposited with him.
5. After the deposit of the compens~lion, the Commissioner
shall deduct ther~from the actual cost of the workman's funeral
expenses to an amount not exceeding Rs. 50 and pay the same
to the person by whom the expenses were incurred.
6. The Commissioner may serve notices calling upon the
dependants to appear before him for the purpose of determining
the distribution of the compensation.
7. If the Commissioner is satisfied that no dependant exists,
he shall repay the balance of the money to the employer.
S. The Commissioner shall on application by the employer,
furnish a statement showing in detail all disbursements made.
9. The compensation money is to be distributed among the
dependants in such proportions as the Commissioner thinks fit.
The whole of it may be given to one person.
10. Except in the case of a woman or a person under a legal
disability, the compensation money is to be paid to the person
entitled thereto.
II, Money payable to a woman or a person under a legal
disability may be invested or otherwise dealt with as the
Commissioner thinks fit. Half-monthly payments payable to a
person under a legal disability may be paid to a dependant of
the workman or to any other person whom the Commissioner
thinks best fitted to provide for the welfare of the workman.
12. The orders of the Commissioner regarding the distribution
of compensation may be varied later if necessary.
13. Notice must be given to the parties affected.
14. Where under the previous para, the Commissioner varies
an order on the ground that the payment of compensation to any
person has been obtained by fraud. impersonation or other
improper means, any amount so paid may be recovered by the
procedure laid down for the recovery of arrears of land revenue.
 WORKMEN'S COMPENSATION ACT 939

OTHER PROVISIONS REGARDING COMPENSATION ,

Payment of Compensation [Sec, 4AJ
Compensation shall be paid as soon as it falls due. Where
the employer dOes not accept the liability to the extent claimed,
he must make provisional payment based on the extent ofliability
which he accepts. This is without prejudi.ce to the right of the
workman to make any further claim.
If an employer fails to pay the compensation within one
month of the daie on which it fell due, the Commissioner may
direct the payment of simple interest thereon at 6%.
If the Commissioner thinks that there is no justification for
the delay, he may direct, the payment of a further sum, not
exceeding 50% of the sum due, by way of penalty.
Protection of Compensation
Save as provided by this Act, no lump sum or half-monthly
payment payable under the Act shall in any way be capable of
being assigned or charged or be liable to anactment or pass to
any person other than the workman by operation of law, nor shall
any claim be set off against the same.-Sec. 9.
This section has been framed, to protect as far as possible
the workman from moneylenders.
Notice and Claim
Section 10 of the Act provides that no claim for compensation
shall be entertained by the Commissioner unless notice of the
accident has been given in the manner provided as soon as
practicable. (This is subject to certain exceptions noted below.)
I. The required notice must be served upon the employer
or upon any of several employers or upon any person responsible .
to the employer for the management of any branch of the trade
or business in which the injured workman was employed.
2. The notice shall give the name and address of the person
injured, the cause of the injury and the date of the accident,
3. The notice may be given by the injured workman or by
anybody on his behalf.
4.1t may be served by delivering it or sending it by registered
post.
5. The State Government may require that any prescribed
class of employers shall keep at the place of employment a
940 INDUSTRIAL LAW

notice-book (accessible to all workers or persons acting bOnafide

on their behalf) where the occurrence of. accidents may be
recorded. An entry in the notice-book is sufficient notice. .
The want of notice or any defect or irregularity in it shall
not be a bar to a claim in the following cases :
(I) Where a workman dies or an accident occurring in the
premises of the employer or while working under the control of
the employer or of any person employed by ilim, and the
workman died on the premises or without leaving the vicinity
of the premises.
(2) If the employer or anyone of several employers or any
person responsible to the employer for the management of any
branch of the trade or business in which the injured workman
was employed, had knowledge of the accident from any other
source at or about the time when it occurred.
(3) If tile Commissioner is satisfied that the failure to give
notice was due to sufficient cause.
A workman is bound to give notice of any accident which
is not merely trivial, and it is not for him to decide whether
it is likely to give rise to a claim for compensation. Ahmedabad
Vic/aria Iron Works LId. v. Magan/a/ Keshav/a/ Pancha/.\
. Section 10 also provides that a claim for compensation must
be preferred before the Commissioner within two years of the
occurrence of the accident or the date of death as the case may
be. In case the accident is the contracting of a disease the date
of its occurrence is the first of the days during which the
workman was continuously absent from work in consequence of
the disablement caused by the disease.
The Commissioner may entertain a claim, filed after the
prescribed time, if he is of opinion that the failure to file it within
time, was due to sufficient cause.
Fatal Accident
Section lOA provides that where a Commissioner receives
information that a workman has died as a result of an accident
arising out of and in course of his employment, he may send
by registered post a notice to the workman's employer requiring
him to submit, within thirty days of the service of the notice,

I AIR (1941) Born. 296

 WORKMEN'S COMPENSATION ACT '''41

a statement in the prescribed form. giving the' circumstances

attending the death of the workman. and indicating whether in
the opinion of the employer. he is or is not liable to deposit
compensation on account of the death. • .
If the employer is of opinion that he is liable, he shall make
the deposit within thirty days of the service of the notice. If he
is of opinion that he is not liable, he must state his grounds.
In the latter case, the Commissioner, after such enquiry as he
may think fit infonn any of the dependants of the deceased
workman that it is open to .them to prefer a claim' and may give
them such further information as he may think fit.
Section lOB provides that where by any law for the time
being in force, notice is required to be given to any authority
by or on behalf of an employer, or any accident resulting in death
or serious bodily injury, the person required to give the notice
shall also send a report to the Commissioner. The report may
be sent alternatively to any other authority prescribed by the State
Government.
The State Government may extend the scope of the provision
requiring report of fatal accidents to any class of premises. But
Sec. lOB does not apply to factories to which the Employees'
State Insurance Act applies.
Medical Examination (Sec. 11)
I. After a workman gives notice of an accident, the employer
may, within three days of the service of the notice, offer to have
him examined free of charge by a qualified medical practitioner.
2. Any workman in receipt of half-monthly payments may
also be required to submit for examination from time to time.
3. The Examination must be in accordance with the rules
framed for the purpose.
4. If the workman refuses, without sufficient cause, to submit
to the examination or if he leaves the vicinity of the place in
which he was employed, h is right to receive compensation shall
be suspended during the continuance of the refusal or until his
return to the vicinity and examination.
5. In case the workman, who refused medical examination,
subsequently dies. the Commissioner has discretionary powers of
direct payment of compensation to the dependants of the deceased
workman.
942 INDUSTRIAL LAW

6. The condition of an injured workman may be aggravated

by refusal to submit to medical examination or refusal to follow
the instructions of the medical examiner or failure to be att.nded
by or follow the instructions of a qualified medical practitioner.
7. In such a case he would get compensation, not for the
aggravated injury, but for what the injury would have been had
he been properly treated.
Employment by contractors (Sec. 12)
When an employer engages-contractors who engage workmen,
any workman injured may recover compensation from the
employer if the lollowing conditions are satisfied :
(a) the contractor is engaged to do a work which is part
of the trade or business of the principal,
(b) the engagement is in the course of or for the purposes
of his trade or business, and
(e) the accident occurred in or about the vicinity of the
employer's premises.
The workman may also proceed against the contractor. So
he has alternative remedies. When the employer pays
compensation, he is entitled to be indemnified by the contractor.
Example: .
A company was the sole selling agent of a mill. It appointed a
firm of transpon contractors to remove bales from the mill godown
to its shop. The transpon contractors hired a lorry from a lorry
owner. A Workman who was cleaner of the lorry was accidentally
killed while removing bales: Held that the selling agents were liable
to pay compensation. Bai Kokilabai v. Keshavlal Mangaldas .. Co. I
Remedies of employer a,ainst straDger (Sec. 13)
Where a workman has recovered compensation in respect of
any injury caused under circumstances creating a legal liability
of some person other than the person by whom the compensation
was paid and any person who has been called on to pay an
indemnity under Section 12 shall be indemnified by the person
SO liable to pay damages as aforesaid.

Insolvency of Employer (Sec. 14)

The liability to pay workmen's compensation can be insured
against. If an employer who has entered into a' contract of
I AIR (1942) Bom. 18
 WORKMEN'S COMPENSATION ACT 943
insurance for this purpose, becomes insolvent or enters into a
scheme of composition or arrangement or (beil\g a company) is
wound up, the rights of the employer as against the insurer shall
be transferred to and vest in the workman, The liability to pay
compensa.tion to a workman is to be treated as a preferred debt
IInder insolvency and winding up. For this purpose, the liability
to pay half-monthly payments is to be taken as equivalent to
the lump sum payment into which it 'an be commuted. This
section does not apply where a company is wound up voluntarily
merely for the purpose of reconstruction or amalgamation with
another company.
TraDsfer of Asseta by Employer (Sec. 14A)
Where an employer transfers his assets before any amount
due in respect of any compensation, the liability wherefore
accrued before the date of the transfer, has been paid, such
amount shall, notwithstanding anything contained in any otber
law for the time being in force, be a first charge on that part
of the assets so transferred as consists of immovable property.
Master aDd SeameD
So far as masters and seamen are concerned, the provisions of
the Act apply with certain modifications laid down in Section 15.
RetarDS
The State Government inay, by notification in the official
Gazette, direct employers to submit returns regarding
compensation paid by them and particulars relating to the
compensation. -Sec. 16.

CODtractiDI; Out .
Section 17 provides that aay contract by which a worker
relinquishes his right to receive compensation for injury is null
and void in so far as it purports to remove or reduce the Iiabil ity
of any person to pay compensation under th is Act.
Penalties
Section ISA provides for penalties for failure to perform the
duties prescribed under the Act, e.g., failure to send returns or
maintain notice books etc.'
944 INDUSTRIAL LAW

Bar to Civil Suits

A Civil Court has no jurisdiction to settle, decide or deal
with any qu'estion which, because of the provisions of the 'Act,
is required to be decided or dealt with by the Commissioner or
to enforce any liability und~r this Act.-Sec. 19(2).
Recovery of the amO:l1' awarded
Any amount payable under the Act;· whether under an
agreement or otherwise, shall be recovered as an arrear of land
revenue.-Sec. 31.
COMMISSIONERS
The Act provides for appointment of Officers to be known
as Commissioners of Workmen's Compensation. The Commis-
sioners are to determine the liability of any person to pay
compensation (including the question whether a person is or is
not, a workman) and the amount or duration of compensation
(including any question as to the nature or extent of disablement).
No civil court has jurisdiction to deal with matters which are
required to be dealt with by a Commissioner. Certain powers have
been given to the Commissioners, e.g., the power to caU for
further depillSits. The Coinmissioner has the powers of a Civil
Court.
Form of application: No application for settlement of any
matter by a Commissioner shall be made, if the parties have been
able to settle it by agreement.
An application to the Commissioner shall be made in the
prescribed form according to the rules, and accompanied by a
prescribed fee. The following particulars must be given namely-
(a) concise statement of the circumstances and the relief claimed;
(b) in case of claim for compensation against an employer, the
date of service of notice of accident, with its due time of notice
and the reason why notice was not given; (c) the names and
addresses of the parties; and (d) except in case of application
by dependant for compe'nsation a concise statement of the matter
on which, agreement has and of those on which agreement has
not been come to. If the applicant is illiterate or for any reason
is unable, to funiishth,e" required information, the application, if
the applicant so desires, shall be prepal-ed under the direction
of the Commissioner.-Sec. 22. '
 WORK\.tEN'S COMPENSATION ACT 945

Appearance of lJarties : Appearance may be done on behal f

of applicant by a legal practitioner or an official of an Insurance
Company,. or an authorised person of a registered Trade Union,
duly authorised.-Sec. 24.
Appeals and References: For proceedings under the Act, the
High Court of the State is the appellate Court. The Commissioner
can refer a question of law to the High Court for decision and
he must decide the malter according to such decision.-Sec. 27.
Appeals
An appeal lies to the High Court from the following orders
of a Commissioner-
(a) an order awarding as compensation a lump SUlll' whether
by way of redemption of a half-monthly payment or
otherwise or an order awarding interest or penalty under
Section 4A;
(h) an order refusing to allow redemption. of a half-monthly
payment;
(e) an order providing for the distribution of compensation
among the dependants of a deceased workman, or
disallowing any claim of person alleging himself to be such
dependant;
(d) an order allowing or disallowing any claim for the amount
of an indemnity under the provisions of Section 12(2);
(e) an order refusing to register a memorandum of agreement
or registering the same or providing for the registration
of the same subject to conditions.
Other Pro"isions Rl'garding Appeal
1. No appeal shall lie against any order unless a substantial
question of law, is involved in tlie appeal and, in the case of an
order other than an order sllch as is referred to in clause (b). unless
the amount in dispute in the appeal is not less than Rs. 300.
2. No appeal lies inany case in which the parties have agreed
to abide by the decision of the Commissioner, or in which the
order of the Commissioner gives effect to an agreement come
to by the parties.
3. No appeal by employer lies unlcss the memorandum of
appeal is accompanied by a certificate by the Commissioner to
the effect that the applicant has dcposit~d with him the amount
pa}able under the order appealed against.
Industrial Law - 60
•
946 INDUSTRIAL lAW

4. The period of limitation for an appeal under this section

shall bl! 60 dl:Ys and the provisions of Section 5 of the Indian
Limitation A,ct, 1908, shall be applicable to appeals under this
section.

EXERCISES
I. Define and explain
(a) Partial disablement and total disablement. (Pages 925-926)
(b) Occupaliunal Ois~ases. (Page 933)
(c) Employer. (Pages 924-925)
(d) Workman. (Pages 928-929)
., D~line and discuss. 'arising oul of and in the course of employment'
as used in Seclion 3 of Ihe Workmen's Compensation Act, 1923.
(Pag~ 931-932)
3. 51 ale when an employer is nol liable 10 pay compensalion to a
workman for personal injury. according to. the Workmen's
Compensation A(t. Is negligence or contributory negligence of the
workman a valid defence 0 (Pages 934-935)
4. Discuss the defences available to an employer against a claim for
compensalion made by a workman under the Workmen's
Compensation Act, 19~3. (Pages 922-923)
5. A workman in wilful disobedience to an order of the employer,
was seriollsly hurl. Is the employer liable to pay compensation?
What will happen if that workman dies? (Pages 930-931)
6. State the rules as to the distribution of compensation under the
Workmen's Compensation Act. (Pages 937-938)
7. Stale the rules regarding the notice of accident and its proper
manner. (Pages 939-940)
8. What is Ihe time of payment of compensation? State th. Penalty
for default of it. (Page 939)
9. What are the rules relating to registration of agree_nlS? What
. is the effect of failure of such registration? (Pages 939-944)
10. There is an agreement between the employer and the employee
stating that the lallel will have no claim for compensation in the
case of accident. I· . valid? (Pages 939-944)
II. State the rules regardmg distribution of compensalion (for death
from injury) and the payment of compensation 10 a woman, or a
person under a legal disability. (Pag<s 937-938)
12. State the provisions regarding employers' liability for compensation
under the Act. (Pages 934-935)
13. The cmplo}er becomes insolvent. What remedies of Ihe workman
are available under the· Workmen's Compensation Act?
(Pages 939-940)
 WORKMEN'S COMPENSATION ACT 947

14. What is the liability of the principal employer in respect of injury

sustained by a 'workman employed through a contractor?
(Page 942)
15. Discuss the method of calculating wages. (Pages 926-928)
16. State the rules regarding penalty for default in payment of
compensation in iime. (Page 939)
17. Under what circumstances the order of the Commissioner under
the Workmen's Compensation Act are appealable?
(Pages 945-946)
18. Explain the prOVisions of the workmen's compensation Act, 1923
relating to the liability of the employer in case of a workman
suffering from occupational disease. (Pages 932-933)
19. Problems
(a) Are the following persons workmen as defined by the Workers
Compensation Act? Give reasons. (I) A clerk permanently
employed in an administrative office of a railway. (i,) A person
working in the construction of a building. (iii) A performer
in a circus company. (Pages 928-929)
(b) An employer IS in default in paying the compensation within
the due time. The commissioner directs him to pay the arrear
at a compound interest of 10% per year and 75% of the arrear.
Is he bound to pay? (Page 939)
20. Discuss the provisions of the Workmen's Compensation ACt, 1923
relating to notice of accident in connection with presenting claim
for compensation to the Commissioner for Workmen's
Compensation. (Pages 939-940)
21. (a) (I) Discuss the provisions ofthe Workmen's Compensation Act,
1923 relating to registration of agreements. (Page 939)
(il) What are the effects of failure to register agreements ry
(Page 939)
(b) An employer is in def,ult in paying the Compensation due
under the Workmen's Compensation Act, 1923. Discuss the
course of action to be taken by the Commissioner for Workmen's
Compensation against the employer. (Page 939)
 TRADE UNIONS ACT

OBII:CT AN" SCOPI:

The Indian Trade Unions Act (Act XVI of 1926) was passed
to provide for the registration of Trade Unions and in certain
respects to define the law relating to registered Trade Unions.
The Act applies to the whore of India, including the State of
Jammu and Kashmir.1 By the amending Act of 1964, the word
"Indian" has been dropped.
The Maharashtra Recognition of Trade Unions and Prevention
of Unfair Labour Practices Act, 1971, provides forthe recognition
of trade unions, for facilitating collective bargaining for certain
undertakings, etc.
DEFINITIONS UNDER THE TRADE UNIONS ACT
Trade Union
In ordinary language the term 'Trade Union' means an
association of workers. Under the Bombay Industrial Relations
Act, 1956, a union of employers is not a trade union.
The Act defines the term as follows. "Trade Unions means
any combination, whether temporary or permanent, formed
primarily for the purpose of regulating the relations between
workmen and employers, or between workmen and workmen, or
between employers and employers, or for imposing restrictive
conditions on Ihe conduct of any trade or business, and includes
any Federation of two or more Trade Unions."-Sec.2(h).
From the above it follows that a Trade Union may be
temporary or permanent. A Trade Union may be formed for the
purpose of regulating the relations between (i) workmen and
employers or (ii) between workmen and workmen or (iiI) between
employers and employers. It may also be formed for the purpose
of imposing restrictive conditions on the conduct of any trade
or business. A Federation of Trade Unions also comes within
the definition.
The Trade C'J/ium Acl does /101 ajJecl-
(I) any agreement between partners as to their own business;

I See p. ~. footnote

948
 TRADE UNIONS ACT 949

(ii) any agreement between an employer and Ihose employed

by him as to such employment; or
(iii) any agreement in consideration of Ihe sale of the
goodwill of a business or of instruction in any profession,
trade or handicraft. Proviso to Sec. 2.
Certain Acls nol 10 apply: The following Acts do root apply
to a registered union, viz .. (i) Societies Registration A ;1, 1860
(ii) The Co-operative Societies Act, 1912 and (iii) The Companies
Act. The registration of any such union under any such Act is
void.-Sec. 14.
Ca•• La" :
I. A union of employees of Raj Bhavan is not a trade ,rion.
Rangswami v. Registrar I
2. The .mployees of the Defence Establishment such as cooks.
chowkidars, laskars. barbers. carpenters, mechanics, boat makers.
tailors etc. in training establishments answer the description of
members of the Armed forces and they cannot form trade unions
as their fundamental right has been taken away by the Central
GO,vernment.
3. By vinue of Section 21 of the Army Act. the Central Government
was competent by notification to make rules restricting or cunailing
their fundamental rights under Act 19( I Xc). OilS hlili/ingal ,khlldan
Sair and others v. [,'moll of India and Olhers.2
Trade dispute
"Trade dispute" means any dispute between employers and
workmen or between workmen and workmen. or between
employers and employers which is connected with the
employment or non-employment. or the terms of employment or
the conditions of labour of any person.-Sec. 2(g).
Workman
"Workman" means all persons employed in trade or industry
whether or not in the employment of the employer with whom
the trade dispute arises.-Sec. 2(g).
The term workman has been defined in a wide sense. The
Act does not distinguish between officers. clerical persons or
unsk,lIed workers. The only requirement is that the person is
employed In trade or industry.
It has been held that an assistant editor of a newspaper may
be a workman under the act. V. N. & Ors. v. The Bihar Journals LId 3
I (1961) I LU. 599 , AIR (1976) Supreme Court 1179
1 (1953) I L.U. 633
 950 IN[)LSTRIAl LAW
•Ap'p~priate Government
The term Appropriate Government means that Central
Government in the case of Unions whose objects are not confined
to one State ahd tile State Government in other cases.
,Registered
'
Trade Union
Registered Trade Union means a Trade Union registered
under this Ac\.-Sec.2(e).
Officer
Officer in cases of a trade union includes any member of
the executive thereor. but does not include an auditor.
, Registered Office
Registered Office means the office of a trade union which
is registered under the Trade Unions Act as the Head Office
thereof.
LEGAL STATUS OF A REGISTERED UNION
A registered trade union is a statutory body. It has legal
entity. It can own property and can act as an agent. It can acquire
and hold both movable and immovable properties. contract and
sue and be sued by the name in which it is registered.-Secs.
13, 15.
In English Law the legal status of trade union was clarified
in the Osborne cuse. I
The legal simus of Gil ullregislered Irade union: If a trade
union is not registered it does not get the privileges provided
in the Act. For example. a contract with such a union may be
unenforceable because of restraint of trade. But an unregistered
union may nOI be illegal.
REGISTRATION OF TRADE UNIONS
Registrar
One of the objects of the Act is to provide for the registration
of Trade Unions. Section 3 provides that the Appropriate
Government shall appoint a person to be Registrar of Trade
Unions for each State. It may also appoint Additional or Deputy
Registrars of Trade Unions and give them specified powers.
'(1910) A.C. 87
 TRADE UNIONS ACT 951

Mode of Registration
Any seven or more members of a Trade Union can apply
for registration of the Trade Union. They must subscribe their
names to the rules of the Trade Union. They must comply with
the provisions of the Act relating to registration.-Sec_ -t( I).
Every application for registration shall be made to the
Registrar and shall be accompanied with a copy of the rules of
the Trade Union and a statement of the following particulars :
(a) the names, occupations and addresses of the members
making the application:
(b) the name of the Trade Union and the address of its head
office; and
(c) the titles, names, ages, addresses and occupations of the
office-bearers of the Tracie Union.
Where a Trade Union has been in existence for more than
one year before the application for registr,ation is made. the
application must be accompanied with a general statement of the
assets and liabilities of the Union prepared in the prescribed
form.-Sec. 5(2).
A Trade Union shall not be entitled to registration, unless
the executive thereof is constituted in accordance with the
provisions of the Act.---Sec_ 22. (See p.959, para 4)
Registration will be refused unless the rules of the Union
provide for the following matters : Sec~ 6,
(a) the name of the Trade Union:
(b) the whole of the objects for which the Trade Union has
been established;
(c) the "hole of the purposes f,'r which the general funds of
the Trade Union shall be applicable:
(Registration will be refused unless the purposes are in
accordance with the rules laid down in Section 15. See pages
957-958).
(d) the maintenance of a list of members of the Trade Union
and adequate facilities for the inspection thereof by the
office-bearers and members of the Trade Union:
(e) the admission of ordinary members who shall be persons
actually engaged in an industry with which the Trade Union
is connected, and also the admission of the number of
honorary or temporary members as office-bearers required
under Section 22 to form the executive of the Trade Union:
952 INDUSTRIAL t.AW

(ee)' the payment of a subscription by membe~ of a Trade

Union which shall be not less than twenty-five paise per
month per member;
(/) the conditions under which any member shall be entitled
to any benefit assur-:d by the rules an" under which any
fine or forfeiture may be imposed on the members;
(g) the manner in which the rules shall be amended, varied
or rescinded;
<ill the manner in which the members of the executive and
other officers of the Trade Union shall be appointed and
removed;
(i) the safe custody of the funds of the Trade Union, an annual
audit, in such manner as may be prescribed, of the accounts
thereof, and adequate facilities for the inspection of the
account books by the office-bearers and members of the
Trade Union; and
(jl the llJanner in' which the Trade Union may be dissolved.
The Registrar may call for further information for the
purpbse of satisfying himself that the Trade Union complies with
the provisions of Sections 5 and 6. If the information is not
supplied, registration llJay be refused.-Sec. 7( I).
If the name under which the Trade Union is proposed to
be registered is identical with the name of any other registered
Union or resembles it, in the opinion of the Registrar, to such
an extent as to be likely to deceive the public or members of
either Union, the Registrar may require that the proposed name
be altered. If such alteration is not made registration may -be
refused.-Sec. 7(2).
When the Registrar is satisfied that all requirements have
been complied with, he shall register the Trade Union by entering
its name and particulars in the Register.-Sec. 8. He shall also
issue a certificate of registration in the prescribed form. The
certificate shall be conclusive evidence that the Trade Union has
been duly registered under the Act.-Sec. 9_
Example:
A union named Inland Steam Navigation Workers' Union was
refused registration on the ground that it was really a Union (called
the I. G. N. Union) which had been declared to be an unlawful
body. It was held that the dUlies of the Registrar, under Section

, This clause was added by The Trade Unions (Amendment) Act, 1960.
 TRADE UNIONS ACT

8 of the Act. are to see whether the objects of the Union arc in
accordance with the provisions of Ih. Act and whether all the
requirements of the Act have been complied with. If so. the
Registrar has no other option but to register the Union. In Re In/and
Steam Navigalion Workers' Union. I
Cancellation of Registration
Section 10 gives powers to the Registrar to withdraw or
cancel the certificate of registration under the following
circumstances :
(al on the application of the Trade Union. verified in the
prescribed manner, or
(h) if the Registrar is satisfied that the certificate has been
obtained by fraud or mistake. or that the Trade Union has
ceased to exist or has wilfully and after notice from the
Registrar contravened any provision of the Act or allowed
any rule to continue in force which is inconsistent with
any such provision, or has rescinded any rule providing
for any matter required to be provided by Section 6.
In cases coming IInder (b) two months' previous notice in
writing must be given.
If registration is refused or if the certificate of registration
is withdrawn or cancelled, the Union can appeal to the Court.
Where the registered office of the Union is situated in a
Presidency Town, the appeal lies to the High Court. In other
cllses,. it lies to such court, not inferior to the COllrt of an
additional or assistant judge of a principal Civil Court of original
jurisdiction, as the appropriate Government may appoint.
The Appellate Court may-
(a) dismiss the appeal, or
(b) pass an order for registration or issue a certificate of
registration under Section 9, or
(c) set aside the order for withdrawal or cancellation of the
certificate.
The registrar mllst comply with the order of the Appellate
Court.-Sec. II.
The Effect of Registration
Upon Registration. the trade union becomes a body corporate
by the name it is registered.-Sec. 13.
'40 C. W. N. 97
954 INDUSTRIAL LAW

Communication to tbe registered offico

Communication and notices to a registered Trade Union may
be addressed to its registered office. Change of the address of
the Head Office of the Trade Union shall be given within 14
days of such change to the Registrar in \~riting. The changed
address shall be recorded in the register maintailled in the office
of the Registrar.-Sec. 12.

RIGHTS AND PRIVILEGES

A registered Trade Union (and its members) have been given
certain rights and privileges.. They are enumerated below.
l. Incorporation
Every registered Trade Union shall be a body corporate by
the name under which it is registered, and shall have pe'flctual
successio" and a common seal with power to acquire and hold
both mm d' ,Ie and immovable prop'erty and to contract and shall
by the sa;,1 name sue and be sued.-Sec. 13.
2. Immunity from criminal prosecution
No office-bearer or member of a registered Trade Union shall
be liable to punishment under sub-'section (2) of section 120B
of the Indian Penal Code. in respect of any agreement made
between the members for the purpose of furthering any such
object of the Trade Union as is specified in Section 15, unless
the agreement is an agreement to commit an offence. -Sec. 17.
Section 120B(2) of the Indian Penal Code provides for
punishment for the 0ffence of criminal conspiracy. Section 17
of the Trade Unions Act gives immunity to members and ollice-
bearers of registered Trade Unions from criminal conspiracy in
connection with trade disputes. The term Trade Dispute IS
defined in Section 2(g). (See p. 949).
3. Immunity from Civil Suit in certain cases
No suit or other legal proceeding shall be maintainable in
any Civil Court against any registered Trade Union or any office-
bearer or member thereof in respect of any act done in contemplation
or furtherance of a trade dispute to which a member of the Trade
Union is a party on the ground only that such act induces some
other person to break a contract of employment of'some other
 TRADE UNIONS ACT 955

person or with the right of some other person to dispose of his

capital or of his labour as he wills, Sec, 18( I),
A registered Trade Union shall not be liable in any suit or
other legal proceeding in any Civil Court in respect of any tortious
act done in contemplation or furtherance of a trade dispute by
an agent of the Trade Union if it is proved that such person acted
,vithout the knowledge of, or contrary to express instructions
given by, the executive of the Trade Union,-Sec, 18(2),
4. Enforceability of Agreements
Notwithstanding anything contained in any other law for the
time being in force, an agreement between the members of a
registered Trade Union shall not be void or voidable merely b~
reason of the fact that any of the objects of the agreement are
in restraint of trade :
Provided that nothing in this section shal1 enable any Civil
Court to entertain any legal proceeding instituted for the express
purpose of enforcing or recovering damages for the breach of
any agreement concerning the conditions on which any members
of a Trade Union shall or shall not sell their goods, transact
business. work, employ or be employed,-Sec, J9,
S. Right to inspect books
An office bearer or member of' the Union can inspect the
account books of the Union at such times as may be provided
for by the rules of the Union.-Sec, 20,
6. Right of minors to be member
Subject to any rule of the Union to the contrary, any person
who has attained the age of fifteen years may be a member of a
registered Trade Union and enjoy all the privileges of such member-
ship,-Sec. 21, For the purposes of the Trade Unions Act. a Minor
means a person who has not attained the age of eighteen years,
7_ Change of name
The name of a registered Trade Union may be changed (i) if
two-thirds of the total-number of members agree and (ii) if the
proposed new name is not identical with that of any existing
registered Union and does not. in the opinion of the Registrar.
resemble any such name so nearly as to be likely to deceive the
public or members of either union. Notice in writing of the
956 INDUSTRIAL LAW

change of name, signed by the secretary and seven members must

be sent to the Registrar. The Registrar shall register the change
if satisfied that the provisions of the Act have been complied
with. The change takes effect from the date of registration. The
change in name does not affect any right or obligation of the
Trade Union or render defective any legal proceeding by or
against the Trade Union, and any legal proceeding which might
have been continued or commenced by or against it by its former
name may be continued or commenced by or against it by its
new name.-$ecs, 23, 25 and 26.
8. Amalgamation of Unions
Any two or more registered Trade Unions may become
amalgamated together as one Trade Union, with or without
dissolution Or division of the funds of such Trade Unions or either
or any of them provided that the votes of at least one·half of
the members of each or every such Trade Union entitled to vote
are recorded and that at least sixty per cent of the votes recorded
are in favour of the proposal.-Sec. 24.
Notice in writing of the amalgamation, signed by the
secretary and seven members of each and every Trade Union
which is a party thereto shall be sent to the Registrar of each
of the States in which any of the amalgamated unions had a
registered office. The Registrar of the State in which the head
office of the amalgamated Union is situated shall register it if
satisfied that all the provisions of the Act have been complied
with. The amalgamation takes effect from the date of registra·
tion.-Sec. 25.
An amalgamation of two or more Unions does not prejudice
any right of any of the Trade Unions or any right of a creditor'
of any of them.-Sec. 26.
DUTIES AND LIABILITIES
The Act imposes certain duties and liabilities on registered
Trade Unions. They are enumerated below.
1. Change of registered office
If the address of the head office ofa Trade Union is changed,
notice in writing must be given to the Registrar within fourteen
days of the change. The change shall be recorded in the
Register.-Sec. I~.
 TRADE UNIONS ACT 957

2. Objects on which general funds may be spent

Section IS provides that the general funds of a registered
Trade Union shall not be spent on any object other than the
following:
(0) the payment of salaries, allowances and expenses to office-
bearers of the Trade Union;
(b) the payment of expenses for the administration of the Trade
Union, including audit of the accounts of the general funds
of the Trade Union;
(c) the prosecution or defence of any legal proceeding to which
the Trade Union or any member thereof is a party. when
such prosecution or defence is undertaken for the purpose
of securing or protecting any rights of the Trade Union
as such or any rights arising out of the relations of any
member with his employer or with a person whom the
member employs:
(d) the conduct of trade disputes on behalf of the Trade Union
or any member thereof;
(e) the compensation of members for loss arising out of trade
disputes;
if) allowances to members or their dc-pendants on account of
death, old age, sickness. accidents or unemployment of
such members;
(g) the issue of, or the undertaking of liability under. policies
of assurance on the lives of members. or under policies,
insuring members against sickness. accident or
unemployment;
(II) the provision of educational, social or religious benefits
for members (including the payment of the expenses of
funeral or religious ceremonies for deceased members) or
for the dependants of members;
(i) the upkeep of a periodical published mainly for the purpose
of discussing questions affecting employers or workmen
a, such;
(j) th" payment, in furtherance of any of the objects on which
the general funds of the Trade L'nion may be spent. of
contributions to any cause intended to benefit workmcn in
general, provided that the expenditure in respect of such
contributions in any financial year shall not at any time
958 INDUSTRIAL LAW

during that year be in excess of one-fourth of the combined

total of the gross income which has up to that time accrued
to the general funds of the Trade Union during that year
and of the balance at the credit of those funds at the
commencement of that year; and
(k) subject to any conditions contained in the notification any
other object notified by the appropriate Government in the
official Gazette.
3. The Political Fund
Section 16 empowers a registered Trade Union to constitute
a separate Fund to be used for political purposes. Contributions
to the Political Fund must be separately collected on a voluntary
basis. No member can be compelled to contribute. No member
can be excluded from any benefit or deprived of any privilege
by reason of his not contributing to it. The Political fund can
be used for the following purposes :
(a) The payment of any expenses incurred, directly or
indirectly, by a candidate or prospective candidate for election
10 a legislative body under the Constitution or to a local body.
The expenses mighl have been incurred before, after or during
the election.
(b) The holding of any meeting or the distribution of any
literature or documents in support of such a candidate.
(e) The maintenance of a person who is a member of a
legislative body under the Constitution or of a local body.
(d) The registration of electors or the selection of a candidate
for election to a legislative body under the Constitution or a local
body.
(e) The holding of political meetings of any kind or the
distribution of political literature or political documents of any kind.
The conditions for the creation of a political fund are as
follows:
(i) Such fund can be created only from contributions separately
levied or made to that fund. (Sec 16( I»)
(ii) Members must not be compelled to contribute to the fund.
(iii) A member who does not contribute to the fund must not
be excluded from any benefits of the Trade Union.
(iv) Contribution to the political fund must not be made a
condition for admission to the Trade Union. (16(3)]
 TRADE UNIONS ACT 959

4. Proportion of office-bearers to be connected with the

industry
Not less than one-half of the total number of the office-
bearers of every registered Trade Union shall be persons actually
engaged or employed in an industry with which the Trade Union
is connected. The appropriate Government may by a spccial or
general order exempt any Union or e1,'ss of Unions from this
provision.--Sec. 22.
S. Dissolution
A registered Trade Union may be dissolved according to the
rules of the Union. Notice of the dissolution must be given signcd
by the Secretary and seven members within fourteen days of the
dissolution. The dissolution takes effect from the date it is
registered. If the rules of the Union do not provide how the funds
of the Union shall be distributed, the Registrar shall distribute
the funds among the members in tne manner prescribed by the
. rules framed under the Act.-Sec. 27.
6. Returns
Section 28 provides as follows :
(a) By a prescribed date, every registered Trade Union must
send to the Registrar a general statement showing its receipts
and expenditure during the year ending 3 I st December of the
previous year audited in the prescribed manner. It must also send
a statement of assets and liabilities as on the 31 st December.
(b) Along with the aforesaid statements must be sent a
statement showing all chunges of office-bearers made during the
aforesaid yeS.' and 8 copy of the rules of the Trade Union
corrected up to date. .
(e) A copy "f every "Iteration made in the rules of a
registered Trade Un.ion shall be sent to Ihe Registrar within 15
days of the making ,of the alteration.
7. Penalties
Certain penalties are provided under Sections 31 and 32 of
the Act, for failure to send :lny notice or return required under
the Act and for supplying fal5e information.
8. Disqualifications of omce-bearer or Trade Unions
By section 21 A added by the amending Act of 1964 .• t .s
provided that a person shall be disqualified for being chosen as
 INDUSTRIAL LAW

or being a member of the executive committee or an office-bearer

of a Trade Union under the following circumstances :
(i) if he has not attained the age of 18 years;
(ii) if he has been convicted by a court in India of any offence
involving moral turpitude and sentenced to imprisonment
(unle.ss a period of 5 years has elapsed since his release).
Any such member or office-bearer, who has been imprisoned
for such an offence bervr. the commencement of the amending
Act of 1964, shall on the dace of commencement of the amending
Act cease to hold office, unless a period of 5 years has elapsed
since his release before that date.
9. Audit
According to Regulation 13 of the Central Trade Union
Regulations of 1938, the annual audit of account of any registered
Trade Union shall be conducted by an Auditor authorised under
Sec. 276 of the Companies Act, 1956. This rule applies to Trade
Unions who have members exceeding 2500 members. There are
provisions for the audit of Trade Unions "hieh have members
less than 2500 but exceeding 750 and bctween 750 to 2500
members.

EXERCISES
I. What are the objects on which the gen':ral funds of a registered
Trade Union may be spent ~ (Pages 956-958)
1. State whether the provisions of (I) the Societies Registration Act,
1860, or (ii) The Co-operative Soc;e!;,es Act. 1912,. or (iii) The
Companies Act. 1956. may be applied '(0 any registered trade union.
(Pages 949-950)
A trade union wants. to gel itself H':gistcrcd under anyone of the
aforesaid Acts. ",'ill the rcgistrati(JI1 be valid? (Pages 949-950)
.,. Stat< the procedure of the registration of. Trade Union and its
J.ssolution (Pages 950-951. 959)
4. Is the registration of a Trade l!nion obligatory ? State the eOect
of the registration of a Trade Unioll. State the rights and privileges
of a registered Trade t.;nion and irs m~ll1ncrs.
(Pages 95G-951. 953, 95.t-955)
5. What are the RTovisions to be contained in the ruks of a Trade
t ;nion ~ (Pa~es 950-951)
6. State the rtlle~ regarding ~hc constitution (If the e~ccudve of a
registered trade union (\'a~es 950-95 \)
 TRADE UNIONS Arr 961

7. State when a Registrar can refuse to register a Trade Union

(Pages 950-951)
8. What are the rights of minors to membership of Trade Union?
(Page 955-956)
9. What are the disqualifications of the office-bearers of Trade
Unions? (Pages 959-960)
10. What are the rights and privileges enjoyed by registered !raj"
unions and the members thereof? (Pages 954-956)
II. State .the grounds for cancellation of registralion. (Page 953)
12. What are the objects for which the fund for political purposes may
be spent under the Trade Unions Act. . (Page 958)
13. Explain the provisions relaling to (I) application for registration.
and (iI) cancellation of registration. (Pages 950-953)
14. What are the provisions of the Trade Unions Act relating to change
of name and amalgamation of trade unions? Can a minor be
admitted to membership of a trade union? (Pages <?55-956)
15. (<I) What is a trade union? When will be a trade union recognised?
(b) What are the remedies available for the cancellation of the
registration of a Irade union by the Registrar?
. (Pages 948, 950-951)
16. The Registrar of Trade Unions has cancelled the certificate of
registration of a trade union. Discuss the action to be taken by
the members of that trade union against (he order of the Registrar
(Page 953)
17. Deline "trade unIOn". State Ihe procedure for changing the name
of a union. (Pages 948, 955-956)
18. Discuss the provisions of the Trade Unions Act, 1926 relating 10
penalties to be imposed for failure to submit returns and al;o r",
supplying false information regarding trade union (Page 959)
19. Problems:
(I) One hundred members of a trade union applied for registrat.on
Fifly members out of hundred dissociated themselves from the
application. State whether the registration can be granted.
(Pages 950·951)
(2) X. a member of a trade union was convi'ted and scntcnc«!d to
imprisonment for a period of Iwo ~ears tur breach of trw.t in
1978. On his release, X intends to cunte't an election of the
office bearer of the union in 1981. A~i>e .r
(Page 959-960)
(3) The name of the trade union has been changed" .th Ihe consent
of tbe majonty of Ihe members. Is this change of name of the
trade union valid? (Page 955)

Industrial Law - 61
962 INDUSTRIAL LAW

20. (a) Define (i) "trade dispute" anj (iI) "trade union" as per Trade
Unions Act, 1926.
(b) Discuss the provisions of the Trade Unions Act, 1926 relating
to submission of 'returns' to the Registrar.
(Pages 948, 949, 959)
21. (a) State the provisions of the Trade Unions Act, 1926 relating
to the panicuiars to be mentioned in the rules of a Trade Union.
(b) State whether the following persons can be chosen as office-
bearers of a registered Trade Union :
(i) A person convicted by a Court of England of an offence
involving moral turpitude and sentenced to imprisonment,
and a period of five years has not elapsed.
(;1) A person who has attained the age of sixteen years.
. (Page$ 950-95 I, 959)

•
 PAYMENT OF WAGES ACT

OBJECT AND SCOPE

The Payment of Wages Act (Act IV of 1936) was passed
to regulate the payment of wages to certain classes of persons
employed in factories and industrial establishments. The Act
ensures regular and prompt payment of wages and prevents the
exploitation of wage-earners by prohibiting arbitrary fines and
deductions from wages.
The Act applies to the whole of India, including the State
of Jammu and Kashmir.'
The Act applies to the payment of wages to persons
employed in any factory and to persons employed (otherwise than
in a factory) upon any railway by a railway administration either
directly or through a subcontractor, by a person fulfilling a
contract with a railway administration.
The State Government may after giving three months' notice.
by notification in the Gazette. extend the provisions of the Act
or any of them to the payment of wages of any class of persons
employed in any industrial establishment or class or group of
industrial establishments.
In many States, the Act has been extended to various indus-
tries, e.g., shops and establishments, omnibus service (in Assam,
Maharashtra. West Bengal). tramways (in Tamil Nadu) etc.

SCOPE OF PAYMENT
History
The Payment of Wages Act of 1936, was initially made
applicable to people drawing less than Rs. 200 a month. In 1967,
the limit was raised to Rs. 400 a month. On 12th November 1975.
the President of India issued an Ordinance amending the Act to
cover workers getting up to Rs. 1000 a month. In 1976. the
Ordinance was replaced by an Act, w/lich was passed on 11th
February. The effect of the Act was that nothing in this Act
applied to wages payment in respect of a wage period. over such
I S« p. S. footnote

963
964 INDUSTRIAL tAW

\\Iag~ period, aveTa~c; Rs, .JQOO;8}1lOnp, or JI1I¥e. This limit'.was

raised frO"m' RL" I (j(j0 to' Rs. 1600 b)': the' Payment of Wages
~Arrieni1iiientY AcCf9S:t·-- .- ......." .' . . .... --".
The Act of 1976 provided for the payment of wages in cash,
by cheque or by cniditin~ the wages to the bank account of a
worker after obtaining his wri.llen authorization. It also permitted
authorized deductions from wages for contribution to t\le Prime
Minister's National Relief Fund or such other funds as the Cenlral
Government may specify by notification in the official gazette.
Tbe present law
The Payment of Wages Act of 1936, was amended in August
1982. !t was passed by both the houses of the Parliament and
has received the assent of the President.
The amendment to the Payment of Wages Act covers all
industrial establishment. The limit of emoluments of the worker
is increased from Rs. 1000 to Rs. 1600. The amendment also
authorised deduction from workers' wages for a welfare fund set
up by the employer or a registered trade union. The worker can
authorise the management to deduCt wages to a trade union
according to his choice.
The amendment has increased the penalty for nonpayment
of wages to a minimum of Rs. 200 and maximum Rs. 1000. If
an employer contravenes the provision of the amendment for the
second time, the punishment would be imprisonment from one
to six months andlor a fine between Rs. 500 to Rs. 3000 or both.
DEFINITIONS UNDER THE PAYMENT OF WAGES ACT
. ,
Factory
Factory means a factory as defined in section 2(m)" of the
Factories Act. 1948.
Industrial establishment
The term ind'ustrial establishment means any--{a) tram"ay
or llIotor omnibus service; (b) docl.. "harf or jetty; (e) inland
vessd, mechanically prupcll,d: (d) mine, quarry or oil field;
(e) plantation; (j) "orl.shop or other establishment ill which
articles are produced, adapted or manufactured. wilh a view tlJ
their use. transport or sale; (gl estahlishment in "hich any \H;rl.
relating to the con;;tructiun. dC\c!,1pmcnt or maintenance of
huildings. road", canals or rclatinp In l'p~ration connected \\ ith
 PAYMENT Of WAGES ACT 965

navigation, irrigation or the supply of water, or relating to the

generation, transmission and distribution of electricity or any
other form of power is being carried on.-Sec. 2(ii).
Railway administration
Railway administration has the meaning assigned to it in
section 3(6) of the Indian Railwa}s Act, 1890.
Wages
The term 'wages' means all remuneration (whether or by way
of salary, allowances or otherwise) capahle of being expressed
in terms of money, which would he payahle, conditionally or
otherwise, \0 the employed person if the terms of the conlract
of employment were fulfilled.~<;ec. 2(vi).
The contract of employm~nt m,,} he expressed or implied
The remuneration payaole is called wages even though it is
payable conditionally_
The term 'wages' include the following:
(a) any remuneration payable under any award or settlement
between the parties or order of 3 court:
(h) any remuneration to which the person employed is entitled
in respect of overtime work or holidays or any leave
period;
(e) any additional remuneration payable under the terms of
employment (whether called a oonus or by any other
name) ;
(d) any sum which by rcason of the tennination of employment
of the person employed is payable under any law, contract
or instrument which provides for the payment of such sum,
whether with or without deductions but does not provide
for the time within which the payment is to be made;
(e) any sum to which the person employed is entitled under any
scheme framed under any law for the time being in force.
The term 'wages' does nol iI/elude the following:
(I) any bonus (whether under a scheme of profit sharing or
otherwise) which does not form part of the remuneration
payable under the terms of employment or which is not
payable under any award or settlement between the parties
or order of a court;
(2) the value of any house accommodation, or of the supply
of light, water, medical attendance or other amenity or any
966 INDUSTRIAL LAW

service excluded from the computation of wages by a

general or special order of the State Government;
(3) any contribution paid by the employer to any pension or
provident fund. and the interest which may have accrued
thereon;
(4) any travelling allowance or the value of any travelling
concessIOn;
(5) any sum paid to the employed person to defray special
expenses entitled on him by the nature of his employment; or
(6) any gratuity payable on the termination of employment in
cases other than those specified in sub-clause (el).

RULES FOR PAYMENT OF WAGES

Who is responsible?
The employer is responsible for the payment of wages. In
the case of persons employed (otherwise than by a contractor)
the following persons are also responsible for the payment of
wages: (Sec. 3).
(a) the person named as manager in a factory;
(b) in industrial establishments the person, if any, who is
responsible to the employer for the supervision and control
of the establishment;
(e) upon railways the person nominated by the rail\\ay
administration in this behalf for the local area concerned.
Wage periods
The person responsible for the payment of wages shall fix
the wage periods in respect of which, \\ ages shall be payable.
No wage period shall exceed one month.-Sec. 4.
Time of Payment
Section 5 lays down the following rules regarding the time
of payment of wages :
(I) In a railway, factory or industrial establishment in which
less than 1000 persons are employed, wages must be paid before
the expiry of the seventh day after the last day of the wage period
in respect of which the wages are payable. In all other factories
or industrial establishments. wages must be paid before the expiry
of the tenth day from the last day of the "age period as aforesaid.
 PAYMENT OF WAGES ACT 961

(2) Where the employment of any person is terminated by

or on behalf of the employer, the wages earned by him shall
be paid before the expiry of the second working day from the
day on which his employment is terminated.
(3) The State Government may exempt persons employed in
a railway (otherwise than in factory) from the operation of this
section, partially or wholly.
(4) All payment of wages must be made on a working day.-
Sec. 5(4).
The medium of payment
All wages shall be paid in current coin or currenc) notes
or in both. The employer may, after obtaining the written
authorisation of the employed person, pay him the wages either
by cheque or by crediting the wages in his bank account.-Sec. 6,
as amended in 1976. (See p.963).
By an amendment in Maharashtra it was provided that in
the case of a bonus which exceeds one fourth of the annual
earnings of the employee the excess may be paid by cheque or
invested.

AUTHORISED DEDUCTIONS
Deductions from Wages
Section 7 provides that the wages of an employed person
shall be paid to him without deductions of any kind except those
which are authorised by or under this Act. Every payment mad~
by an employed person to his employer or his agent is deemed
to be a deduction.
The following deductions are permitted under the Act :
I. Fines
Section g lays down the following rules regarding fines-
(1) Aq employed person can be fined only for acts and
omissions which are specified in a list which is approved by the
State Government or the prescribed authority.
(2) The list must be exhibited in the place of work in the
prescribed manner.
(3) Before the fine is imposed on an employed person. he
must be given an opportunity of showing cause against the fine
968 INDUSTRIAL LAW

(4) The total amounl of fine which can be imposed on a

person in anyone wage period'must not exceed an amounl eqLlal
In half an anna in the rupee of the wages payable to him during
the \I age period.'
(5 I No fine can be imposed on a person who is helo" Ihe
age of IS.
(6 I No fine can be recovered by instalments or after Ihe
"'piry of 60 days from the day on which it was imposed.
17 I Evcry fine sha II he deemed to have heen imposed on
the day of the act or omission for which it was imposed.
(8) All fines and the realisation thereof shalf be recorded
111 a register. All such realisations shall be applied only to such
purposes heneficial to the persons employed in the factory or
establishment as are approved by the prescribed authority. Where
the person employed is pan of a stafT employed under the same
management .• 11 such realisations may be credited to a common
fund maintained for the stafT as a "hole. But such a fund can
be applied only to the approved purposes.
2. Deductions for absence from duty
,\Ibence from duty means absence from the place where the
cmpl()~ ed person is required to work. If the employed person.
t"<,ugh present at such place, refuses to carry out his work. in
I'U"";l1lCO of a stay-in-strike or for any other cause which is not
rc"",nable, he is deemed to be absent from duty.
Deduction from wages are permitted for absence from dUly,
Sect i()n 9 provides that the ratio between the amount of such
deduction and Ihe wages payable musl not exceed the ratio
bet\\' cen the period of absence and the wage-period. It is however.
prO\ided that (subject to any rules made in this behalf by the
Stale Government) if ten or more employed persons acting in
l.'ncerl absent themselves without due notice and without
reasonable cause, such deduction from any such person may
include such amount (not exceeding his wages for eight days)
as may be due to the employer in lieu of notice.
3. Ded uctioDs for damage Of" loss
Deductions from wages are permitted for damage to or loss
of goods expressly entrusted to the employed person for custody,
or for loss of money for which he is required to account, where
such damage or loss is directly attributable to his neglect or
 PAYMENT OF WAGES ACT 969

default. Section 10 provides that a deduction under this rule shall

not exceed the amount of damage or loss caused to the employer
by the neglect or default of the employed person. Also, before
the deduction is made. the employed person must be given an
opportunity of showing cause against the deduction and the
procedure prescribed for making the deduction must be followed.
All deductions' and the realisations thereof must be recorded in
a register.
4. Deductions for senices rendered
Deductions are permilled for house-accommodation supplied
by the employer and for such amenities and services as the State
Government rna),. by general or special order,authorise. The word
'ser"ice' does not include the supply of tools and raw materials
required for the purposes of employment. Section II provides
that deductions for services of the aforesaid character can be
made only if the services are accepted by the empioyed person
as a term of service or otherwise. Deductions must not exceed
the value of ihe accommodation or other services. As regards
services other than house·accommodation, the State Government
may impose conditions.
5. Advances and overpayments of Wages
Deductions are permilled for recovery of advances or for
adjustments of overpayments of wages. Section 12 provides that
(a) recoycry of an advance of money given before employment
began shall be made from the first payment of wages in respect
of a complete wage· period. but no recovery shall be made of
such advances given for the travelling expensp.s; and (b) recovery
of advances of wages not already earned shall be subject to any
rules made by the State Governemnt regulating the extent to
which such advances may be given and the instalments by which
they may be recovered.
6. Income Tax
The employer is permitted to deduct income tax payable by
an employed person.
7. Orden of Court
If any deduction is directed by the Court (e.g., in execution
of a decree against the employed person) it must be done.
970 INDUSTRIAL LAW

8. Provident Fund
Deductions may be made of the contributions payable by the
employed person to the provident fund. The rate of contribution
to Provident Fund in all industries and establishments has been
increased from 8.33 per cent to 10 per cent with effect from
1st March, 1997, for both employers and employees.
9. Co-operative Societies and Insurance Schemes
Deductions may be made for payments to co-operative
societies approved by the State Government or to a scheme of
insurance maintained by the Indian Post Office. The State
Government may impose conditions l'pon such deductions.
10. Written authorisation
(I) Deduction made with the written authorisation of-
(i) the employed person; or (ii) the president or secretary of tlie
registered trade union of which the employed person is a member
on such condition as may be prescribed, for contribution to the
National Defence Fund or any Defence Savings Scheme approved
by the State Government.
(2) Deductions, made with the authorisation of the person
employed for payment of any premium on his life insurance
policy, or for the purchase of securities of the Government of
India or of any State Government or for being deposited in any
Post Office Saving Bank in furtherance of any savings scheme
.of any sueh Government.
(3) From the wages of a worker, there may be deductions,
made with the written authorisation of the employed person, for
contribution to the Prime Minister's National Relief Fund or to
such other Fund as the Central Government may, by notification
in the official Gazette, specify.-Sec. 7(2)(p) as amended in 1976.
(See pp.963-964).
11. Insurance Schemes
Deductions may be made for contributicns to any insurance
scheme framed by the Central Government for the benefit of its
employees.-Sec. 7(2)(q), Payment of Wages (Amendment) Act,
1977.
12. Deductions for recovery or loans
Deduction for loans granted for house building or olher
 PAYMENT OF WAGES ACT 971

purposes and the interest due in respect thereof approved by tbe

State Government may be made under Sec. 7(2){fff) and 12-A.
Duties of employer
The employer must maintain separate registers for all
deductions from wages, as provided in Section 7.
The employer must also maintain a register of wages showing
(i) the gross wages earned by a person (ii) deductions from Ihose
wages and (iii) the wages actually paid, the word perfonned by
the workman and the receipt given by them.
Limits on Deduction
The total amount of deductions which may be made under
the above heads in a wage period from the wages of an employed
person shall not exceed 75 per cent of such wages in cases where
such deductions are wholly or partly made for payments to
cooperative societies. In any other case, they shall not exceed
50% of such wages.-Sec. 7(3).
ENFORCEMENT OF THE ACT
Inspectors
Inspectors may be appointed for the purpose of examining
records and documents relating to the payment of "ages and
to do other work necessary for carrying out the purpose of the
Act. Inspectors of Factories, appointed under the Factories Act,
are inspectors for the purposes of this Act.-Sec. 14.
Authority to hear claims (Sec. 15)
The State Government may appoint any Commissioner for
Workmen s Compensation. or any officer having expel,"nce as
judge or magistrate, as the authority to hear and decide all claims
arising out of deductions from wages or delay in payment of
wages.
An application before such authority may be filed by the
person concerned or any legal practitioner or official of a
registered trade union authorised by him in writing or any
inspector under this Act or any other person with the permission
of the authority appointed as aforesaid.
The application shall be presented within six months of the
date of deduction or the date when the payment of wages was
972 INDUSTRIAL I.AW

due. It may be filed later if the authority is satisfied that there

was sufficient ·cause.
The authority is to enquire into the maUer, giving an
opportunity to the employer of being heard. The authority may
direct refund 'of deduciton or paymcnt of the delayed wages.
together with such compensation as he may think fit, not
exceeding ten times the deduction in cases of improper deductions
and Rs. lOin cases of delayed wages. No compensation is to
be given in cases of bona fide error or dispute, the occurrence
of an emergency or the existence of exceptional circumstances
or the failure of the employed person to apply for or accept
payment.
If the authority considers that any application is malicious
or \'exalious, he may dn-ect that a penalty not exceeding Rs. 50
shall be paid to the employer by the person presenting the
application. The penalty will. be realised as if it was a fine
imposed by a magistrate.
"The Authority has the jurisdiction to decide what actually
the terms of the contract between the parties were. that is to
say to determine the actual wages; but the Authority has no
jurisdiction to determine the question of potential wages." A. V
D'Costa v. B. C. Patel'
Single application for several employees
A single application under Section 15 may be presented by
a number of employed persons together if they belong to the
same unpaid group and in such case the maximum compensation
that may be awarded shall be Rs. 10 per head.-Sec. 16.
Appeal
From the orders of the authority appointed under Section 15
an appeal may be preferred within 30 days to the Court of Small
Causes in Presidency Towns and the District Court in other
cases. An appeal lies (a) by the employer if the total sum payable
exceeds Rs. 300, or employer has to incur financial liability
exceeding Rs. 1,000, or (b) the employed person if the total wages
withheld exceeds Rs. 50 and (c) by any person directed to pay
a penalty. In all other cases the direction of the authority is
final.-Sec. 17.
I 57 Born. L. R. 738
 rWMENT OF WAGES ACT " ..
7, '

Powen or a Civil Court , ,

Every authority appointed under sectiqn \S( I) shall have all
the powers of a Civil Court, under the Code of Civil Procedure,
for the purpose of taking evidence and of enforcing the attendance
of witness and compelling the production of document. Every
such authority shall be deemed to be :1 Civil Court.-Sec. 18.
Power to R«over
When the Authority or the Court is unable to recover from
any person (other than an employer responsible for the payment
of wages) the Authority shall recover (any amount directed by
IUch Authority or Court) to be paid by such person, from the
employer of the employed person concerned.-Sec. 19,
MISCELLANEOUS
Attachment
Conditio,,;al al/achlllent of property of employer or OIher
per.<On rl!lpUllsible for payment of wages : Where after making
an application or after filing an appeal, the Authoriiy or the Court
is satisfied that the employer or other person responsible for the
payment of wagcs is likely to evade payment of any amollnt that
may be directed to be paid, the AuthOrity or the COll'rt, as thc
case may bc, except in cases where the Authority or the Court
is of opinion'that the ends of justi~e would be defeated by the
delay, aftcr giving an employer or othe person an opportunity
of being lieard, may di'rect the attachment of so much of the
property of the employer or other person responsible for payment
of wages as is sufficient to satisfy thc amount payable under
the direction. Thcse provisions of the Code of Civil Procedure
shall apply to such an order for attachment.-Sec. 17 A.
Penalty' ,.
-.
Persons violating the provisions of Sections S & 7 to I J
can be fined lip to Rs. 1000. Persons violating the provisions
of Sections 4, 6 and 2~ 'tan be fined up, to Rs. SOO for each
offence.--Sec. 20. '
Procedure in trial of offences
Section 2 I pn1\ ides Ihe follo\\ ing
(Ij Nfl Court ,hall take cogniz,llIce ll,gainst an) pc"''" f,)r
an ,l!'fTcnc; Linder ,celio;I.' 20( I) un"e~s' an application in respect
974 INDUSmlAL LAW

of the fact constituting the offence has beJ:n presented 'under

section 15 and has been granted and the authority empowered
under section 15 or the appellate court granting such application
has sanctioned the making of the complaint.
(2) Before sanctioning the making of a complaint against any
person for an offence under ,section 20( I), the authority or Court
shall give such person an opportunity of showing cause against
the granting of such sanction, and the sanction shall not be
granted if such person satisfies the AuthoritJ( or Court that his
default was due t~
(0) an error or a dispute, as to the amount payable to the
employed person, or
(b) the occurrence of an emergenty or the existence of
exceptional circumstances, such that the person responsible
for the paymeJlt of the wages was unable, though exercising
reasonable diligence, to make prompt payment, or
(c) the failure of the employed person to apply for or accept
payment.
(3) No collrt shall take cognizance of a contravention of
section 4 or of section 6 or contravention of any rule made under
section 26 except on a complaint made by or with the sanction
of an Inspector under this Act,
(4) In imposing any fine for an offence under Section 20(1),
the court take into consideration the amount of a compensation
already awarded against the accused in any proceedings taken
under section 15,
Bar of Suita
No court shall entertain any suit for the recovery of wages
or deductions from wages if the matter is pending or has been
decided under section 15. or 17 or could have .been recovered
by an application under section IS.-Sec. 22.
Coatracting Out
Any contract whereby an employed person relinquishes any
right conferred by this Act, shall be null and void in so far as
it purports to deprive him of such right.-Sec. 23.
!'{otice
The person responsible for the payment of wages in a factory
shall cause to be displayed in such factory a notice containing
 PAYMENT OF WAGES ACT 975

an abstract of the Act and the rules framed under it in English

and in the language of the majority of the persons employed in
it.-Sec 25.

Rule making power

The State Government may make ",Ies to regulate the
procedure to be followed by the authori. ies and courts referred
to in Sections 15 and 17 and for the purpose of carrying into
effect the provisions of this Act.-Sec. 26.

Application 01 Act
The powers of this Act conferred upon the State Government
shall, in relation to railways, mines and oil-fields, be powers of
the Central Government.-Sec. 24.

EXERCISES
I. Define and explain :
(a) Industrial establishment. (Page 964)
(b) Wages. (Page 965)
(c) Fines. (Pages 967-968)
(d) Deductions for absence from duty. (Page 968)
2. What are the persons to whom the provisions of the Payment of
Wages Act are applied? (Pages 963-964)
3. Who is responsible for the payment and time of wages under the
Act? (Pages 966-967)
4. State and discuss the provison. for time of payment of wages.
(Page 967)
5. The Payment of Wages Act provide. that the wages are to be paid
in a particular form, at regular interval and without any unauthorised
deductions. Explain. (Pages 967-969)
6. What is the procedure for determining claims arising out of
deductions from wages? State the powers of the Authority.
(Pages 971-973)
7. What are deductions which may be made from the wages of
employed persons? (Pages 967-969)
8. Stale and discuss Ihe provisions relating to (1') deductions for
damage or loss, and (iI) deductions for services.
(Pages 968-969)
9. State the rules regarding the imposilion of fines under Ihe Payment
of Wages Act. (Pages 967-968)
97(; INDUSTRIAL LAW

10. Explain the rules for the prevention and recovery of wrongful
deductions under, the Payment of Wages Act. (Pages 971-972)
II. When can the court direct conditional attachment of property of
employer or other person responsible for payment of wages?
, ,. (Pages 971-972)
12. State the rules regarding (/) deductions for recovery of advances
and (i/) deductions for recovery of loans. (Pages 969-970)
13. Discuss the provisions of the Payment of Wages Act, 1936 relating
to deductions for (/) damages or loss, (ii) services rendered,
(iii) recovery of ad"ance, and (iv) Payment to Co-operative
Societies. (Pages 968-970)
14. State what is meant by wages according to payn,eoit'ofWages'ACt.
Who is r,esponsible for payment and time of wages under the Act?
(Pages 965-966)
15. Problems:
(I) Twelve employees jointly absent themselves for five days
without due notice and without reasonable cause. Can their
wages be deducted? " . (Pages 967-968)
(2) An employed Person, whose monthly salary is Rs. 400/-, is paid
Rs. 50/- afier deducting dues for Co-operative Socielies. Is such
deduction valid? (Page 970)
(3) An employer intends to deduct Rs, 5001- for payment to the
Co-operative Society and Rs. 200 for damages to the goods
"of the employer from the wages of the emplo..·" person. The
employed person draws monthly wages of Rs. 900, State with
reason whether the employer can validly make these deductibns.
,(Pages 968-969)
16. Discuss tbe provisions of the Payment of Wages Act, 1936 relating
to responsibility for payment of wages. (Page 966)
17. Discuss the provisions of the Payment of Wages Act, 1936 relating
to deductions from wages for absence from duty. (Page 967)
18. Mention the authority to whom application will be mad~ in case
of delayed Payment of wages. (Page 971)
19. Who are the Authorities to d~cide claims arising out of deduction
of wages 0 Who is the Authority for claims of delayed wages?
What is the time limn of such application? What are the provisions
regarding payment of compensation to aggrieved employees?
(Pages 971-972)
20. (a) Di~uss the provisions Qf the Payment of Wages Act, J936
relating to time of paym~nl of wages. (Pages 966-967)
(b) State whether ihe loss of wages resulting from the follOWIng
wiU be deellJed to be, a, deduction from, ..,wages-(i), the
withholding of increment or promotion, (it) I~e reduction to
a lower' ·post. (Pages 970-971)
 PAYMENT OF WAGES ACT 977

(c) Five employed persons absent themselves without due notice

and without reasonable cause. Employer wants to deduct wages
from each of those. five employed persons for eight days. Is
the action of the employer valid? Give reasons for the answer.
(Pages 969-970)
21. (al What is meant by 'wage~' as defined in the Payment of Wages
Act, 1936? (Pages 965-966)
(b) An advance of money was given by the employer to a pe~on
for travelling expenses before his employment began. The
employer wanted to recover the said advance from the first
payment of wages of that person in respect of a complete
wage-period. Was the action of the employer valid? Give
reasons for the answer. (Pages 969-970)
22. Objective questions. Give short answe,.
(I) Mention the period within which the payment of wages will
be made in case less than one thousand persons arc employed
-in an industrial establishment. (Pages 967-968)
(2) Mention the different kinds of persons who can present
application under the Payment of Wages Act. 1936 against
unauthorised deductions from wages. (Pages 971-972)
(3) What is meant by "wages" as per Payment of Wages Act, 1936?
(Pages 965-966)
(4) An employer wants to deduct Rs. 300 from the monthly gross
wages of Rs. 500 drawn by an employee. Comment on the action
of the employer. (Page 967)

Industrial Law - 62
 MINIMUM WAGES ACT

OBJECT AND SCOPE

The Minimum Wages Act (Act XI of 1948) provides for
fixing minimum rates of wages in certain employments. The
object of the Act is to prevent the exploitation of iabour and
sweated labour. The Act endevours to promote the welfare of
workers in a competitive market by fixing the minimum rates
of wages in certain ,employments.
The Act extends to the whole of India, including the State
of Jammu and Kashmir.'

DEFINITIONS UNDER MINIMUM WAGES ACT

Appropriate Government
The Central Government is the appropriate Government in
relation to any scheduled employment carried on by or under
the authority of the Central Government, by a railway
administration, or in relation to a mine, oilfield, or major port,
or any corporation established by a Central Act. The State
Government is the appropriate Government in any other scheduled
employment.-Sec. 2(b).
Scheduled Employment
Scheduled Employment means an employment specified in the
schedule or any process or branch of work forming part of such
employment. The Schedule is divided into two parts. Part I mentions
employment in any woollen carpet or shawl weaving, rice mill, flour
mill or dal mill, tobacco (including bidi making), oil-mill, stone
breaking etc. Part II mentions employment in any agriculture, i.e.,
farming, dairy farming, harvesting, etc.-Sec. 2(g).
The appropriate Government can add to the schedule.-
Sec. 27.
Schedule, Part I
I. Employment in any woollen carpet making or shawl weaving
establishment.
I See p. 5 footnote.

978
 MINIMUM WAGES ACT 979

2. Employmenl in any rice mill, flour mill or dal mill.

3. Employmenl in any lobacco (including bidi making) manufaclory.
4. Employment in any plantation, that is to say, any estate which is
maintained for the purpose of growing cinchona, rubber. tea Of
colTee.
5. Employmenl in any oil mill.
6. Employmenl under any local authority.
7. Employment on the construction or maintenance of roads or in
building operations.
8. Employment in stone breaking or stone crushing.
9. Employment in any lac manufactory.
10. Employment in public motor transport.
II. Employment in any mica works.
12. Employment in lanneries and leather manufactory.

Schedule, Part 1\
Employment in agriculture, that is to say, in any form of farming,
dairy fanning. the production, cultivation, growing and harvesting
of any agricultural or horticultural commodity, the raising of live-
stock. bees or poultry.
Examples :
\. Wages less than what is prescribed by the Minimum Wages Act
is violative of the article 38 of the constitution of India. Service
provided by worker is forced labour. San)ir Roy v. Slate of
Rajasthan. I
2. Tube well operators working in District and Taluka Panchayat are
entitled to the benefits of Minimum Wages Act. Palel Isln ..rbhal
Prahladbha; elc. v. Taluka Development Officer and others. 2
3. Workmen employed by owners of ferries are entitled to receive
minimum wages. Ram Kumar Misra v. Slale oj Bihar and others_ 3

Competent authority
Competent authority is the authority appointed by the
appropriate Government by notification in its official Gazette to
ascertain the cost of living index number applicable to the
employee employed in the scheduled employments specified in
such notification.-Sec. 2(c).
Cost of Living Index Numbers
The appropriate Government can appoint a competent
authority to ascertain from time to time the cost of living index

I AIR (1983) Supreme Coun 328 2 AIR (1983) Supreme Court 336
'AIR (1984) Supreme Court 537
980 INDUSTRIAL LAW

number applicable to the employees employed in the scheduled

employments. The Index Numbers are notified in the official
Gazette.-Sec. 2( d).
Wages
The term 'wages' means all remuneration, capable of being
expressed in terms of money. which would, if the terms of the
contract of employment (expressed or implied) were fulfilled, be
payable to a person employed in respect of his employment or
of work done in such employment and includes house rent
allowance. The term does /lot include-
(i) the value of house accommodation, supply of light, "ater,
medical attendance or any service excluded by general or
special order of the appropriate Government;
(ii) any contribution paid by the employer to any Pension Fund
or Provident Fund or under any Scheme of Social
Insurance;
(iii) any travelling allowance or the value of travel concession;
(iv) any sum paid to defray special expenses entailed on him
by the nature of his employment; or
(v) any gratuity payable on discharge.-Sec. 2(h)
Case Law:
The term wages includes remuneration in respect of days of rest.
A. C. C Ltd v. Labour Inspector. I

Employer
This term means any person who employs. either directly
or through any other person, or whether on behalf of himself
or any other person, one or more employees in a scheduled
employment where minimum wages have been fixed. The term
includes the manager of a factory and other persons in the same
position.-Sec. 2(e).
Employee
This term means any person who is employed for hire or
reward to do any work, skilled or unskilled. manual or clerical,
in a scheduled employment in respect of which minimum rates
of wages have been fixed. The term includes a worker who works

I (1960) I L. L. J. 192
 MINIMUM WAGES ACT 981

outside the factory with materials supplied by the employer, and

by another person to be made up, cleaned, altered, finished or
otherwise processed for sale for the purposes err trade or business
of that other person where the process is to be carried O'lt either
in the home of the outworker or in some other premises not being
controlled by that other person. It also includes an employee
deelared to be an employee by the appropriate Government but
excludes any member of the Armed forces of the Union.-
Sec.2(i). .

Adult, Adolescent, Child

These terms have the same meaning as In the Factor;es
Act.-Sec. 2(a).

FIXATION AND REVISION OF MINIMUM WAGES

Fixation of minimum rates of wages (Sec. 3)
The Act provides that the appropriate Government shall fix
the minimum rates of wages payable to lI1e employees of
scheduled employments within the dates laid down in the Act.
(The dates have been extended by later amendments.)
The appropriate government shall review at such intervals
not exceeding five years, the minimum rates of wages so fixed
and if necessary, revise the minimum rate.
The minimum rates may be fixed for the whole State or for
a part of the State or for a specified class of employment. The
rates may be fixed for time-work, piece work and overtime work.
If in a scheduled employment, less than 1000 workers are
employed, minimum rates need not be fixed until the number
reaches 1000.
Minimum rates may be fixed for time-work, piecework and
overtime work, and a minimum rate of remuneration to apply
in the case of employees employed on piece work for the purpose
of securing to such employees a minimum rate of wages on a
time-work basis. The last mentioned rate is called "a guaranteed
time-rate. "
Different rates of wages may be fixed for different scheduled
employment; different classes of work in the same scheduled
employment; adults, adolescents, children and apprentices; and
different localities.
r
982 INDUSTRIAL LAW

Minimum rates of wages may be fixed by anyone or more

of the following wage-periods, namely: (i) by the hour; (ii) by
the day; (iii) by the month; or (iv) by such other larger wages- •
period as may be prescribed; and where such rates are fixed
by the day or by the month, the manner of calculating wages
for a month or for a day as the case may be, may be indicated.
As regards the basic minimum wages, there is no difference
between men and women workers.
Where any wage-periods have been fixed under section 4
of the Payment of Wages Act, 1936, milimum wages shall be
fixed in accordance therewith.
Section 4 of the Minimum Wages Act provides that any
minimum rate of wages fixed or revised by the appropriate
Government may consist of the following :
(i) a basic of wages together with a cost of living allowance
to be adjusted in accordance with the variations in the cost
of living index number; or
(ii) a basic rate of wages with or without the cost of living
allowance, and the cash value of concessions in respect of
supplies of essential commodities where authorised; or
(iii) an all-inclusive rate allowing for the basic rate, the cost of
living allowance and the cash value of concessions, if any.
Case Law:
The Appropriate Government can fix the minimum rates of wages
for overtime also. Union of India and another v. B. D. Rath; and
others. I

Procedure for fixing and revising minimum wages

For fixing minimum wages the appropriate Government shall
either (a) appoint a committee (with sub-committees for different
localities) or (b) by a notification in the official Gazette published
its proposals and specify a date, not less than two months from
the date of the notification, on which the proposals will be taken
into consideration.
After considering the advice of the committee in case (a)
and the representations received from the parties interested in
case (b) the appropriate Government shall fix the minimum rate
by notification in the official Gazette. Unless otherwise provided,

I AIR (1%3) Born. 54

 MINIMUM WAGES ACT .983

the rates shall come into force on the expiry of three months
from the date of the notification.-Sec. 5.
For the purpose of revising the minimum rates of wages, the
appropriate Government may appoint Advisory Committees and
Sub-committees. To co-ordinate the work of the Committee, there
may be an Advisory Board. The Central Government shall appoint
a Central Advisory Board for the purpose of advising the Central
and the State GoveJnments and for co-ordinating the work of the
Advisory Boards. The members of the Committees and Boards
shall be nominated by the appropriate Government. Each shall
consist of an equal number of representatives of employers and
employees and independent persons, not exceeding one-third of
the total number of members. The Committees and Boards are
to be consulted before revising the minimum rates. Revisions of
rates are to be notified in the official Gazette. Unless otherwise
provided, the revisions come into force on the expiry of three
months from the date of issue of the Gazette.-Sections 5 to 10.
Case Law:
No procedure has been prescribed in the Act as to (he method which
the Advisory Board is to adopt before making its recommendations
to the State Government. It can devise its own prccedurc and collect
some information by appointment of a sub-commiuce consisting
only of some of its members. Out the AdviSOr) Board has no power
to appoint a -(ivai sub-committee to the one appointed by the
Government and take in such sub-committee persons who are not
members of the Board. as was done in this case.
h, however, does not necessarily follow that the report of the
Advisory Board is thereby vitiated. Held the irregularity, even
characterising it as illegality. committed by the Advisory Board in
taking into consideration the report of the sub-committee was not
such as to nullify its recommendation contained in its report. or
in any event, the final decision of the Government contained in the
impugned notification. Siale of Rajasthan and another v. Hari Ram
Nathwani and others. I

PAYMENT OF MINIMUM WAGES

The Rates of wages
Where minimum wages have been fixed as provided above,
the employer shall pay wages at a rate not less than the minimum
fixed for every category of employees with\lut any deductions
'29 Bom, 373
984 INDUSTRIAL LAW

except such as may be authorised. The provisions of the Payment

of Wages Act are not to be affected.-Sec. 12.
Wages in Kind
Minimum wages payable under the Act shall be paid in cash.
Bul where it is customary to pay wages wholly or partly in kind,
the appropriate Government may authorise such payment. It may
also authorise the supply of commodities at concession rates. The
cash value of such concessions and of wages in kind shall be
estimated in the prescribed manner.-Sec. II.
Fixing Hour for a Normal Working Day
In a scheduled employment where minimum wages have been
fixed, the appropriate Government may fix the number of hours
of work which shall constitute a normal working day, inclusive
of one or more specified intervals. It may also provide for a day
of rest in every period of seven days and for the payment of
remuneration in respect of such days.-Sec. 13. It may provide
for payment for work on a day of rest at a rate not less than
the overtime rate.-Sec. 13(1).
Under secrion 13, the appropriate Government is to provide
the day of rest.
Wages of Worker who works for less than Normal Working Day
An employee working less than the normal working day is
entitled to receive wages for the full working day except in .the
foJlowiJ1~cases (i) where his failure to work is caused by his
unwillingness to work and not by the omission of the employer
to provide him with work, and (il) in such other cases and
circumstances as may be prescribed.-Sec. 15.
Overtime
For every hour or part of an hour worked in excess of the
normal working day, the employee is entitled to' receive
remuneration at the rates fixed for overtime work under this Act
or under any law of the appropriate Government in force,
whichever is higher.-Sec. 14.
Wages for two or more classes of work
Where an employee does two or more classes of work to
each of which a different minimum rate is applicable, the
 MINIMUM WAGES ACT 985

employer shall pay the employee in respect of the time

respectively, occupied in each class of work, for each such class
of work wages at rates not less than the minimum rate in force
in respect of each such class.-Sec. 16.
Minimum time rate wages for piece work
Where an employee is employed on a piece work for which
minimum time rate and not a minimum piece rate has been fixed
under this Act, the employer shall pay wages at not less than
the minimum time rate.-Sec. 17.
Register and Records
Every employe~ shall maintain registers and records glvmg
particulars of employees employed by him, the work performed
by them, the wages paid to them, the receipts given by them
and other particulars, in such fonnas may be prescribed. The
employer shall keep exhibited in the factory, workshop or place
where the employees in the scheduled employment may be
employed, or in the case of out-workers, in such factory,
workshop or pla~e as may be used for giving out work to them,
notices in the prescribed form containing prescribed particulars.
The appropriate Government may frame rules for the issue of
wage books or wage slips to employees employed in any
scheduled employment, and prescribe the manner in which entries
shall be made and authenticated in such wage books or wage
slips by the employer or his agenl.-Sec. 18.

ENFORCEMENT OF THE ACT

Inspectors and their Powers
The appropriate Government may, by notification in official
Gazette, appoint such persons as it thinks fit to be Inspectors
for the purposes of this Act, and define the local limits within
which they shall exercise their functions. Power of Inspectors
is the subject to any rules made by the appropriate Government.
An Inspector may (a) enter, at all reasonable hours, with such
assistants, if any, as he thanks fit, any premises or place where
employees are employed or work is given out to outworkers in
any scheduled employment in respect of which minimum rates
of wages have been fixed, for the purpose of examining any
regl,ter, record of wages or notices and require the production
986 INDUSTRIAL LAW

thereof for inspection; (b) examine any employee; (c) require

any person giving out-work to give any information with regard
to the work and the payments made for the work; (d) seize
or take copies of any register, record of wages or notices or
portions thereof as he may consider relevant in respect of any
offence under this Act which he has reason to believe has been
committed by an employer; and (e) exercise such other power
as may be prescribed.-Sec. 19(2).
Claims: The Authority (Sec. 20)
The appropriate Government may, by notification in the
official Gazette, appoint any Commissioner of Workmen's
Compensation and certain officers of the Central Government and
the State Governments to exercise the functions of a Labour
Commissioner. The Authority, appointed as above, can hear and
decide in any specified area from claims any arising out of
payment of less than minimum rates of wages, or in respect of
payment of remuneration for days of rest or for work such days
under Sec. 13 of wages at overtime rate to employees employed
or paid in that area.
For the above claims the following persons may apply to
the Authority for hearing and deciding the case; (i) the employee
himself; or (ii) any legal practitioner or any official of a
registered trade union authorised in writing; or (iii) any
Inspector; or (iv) any person acting with the permission of the
Authority.
The application shall be presented within six months, from
the date on which the minimum wages or other amount became
payable. unless the Authority is satisfied that he has sufficient
cause for the delay.
After hearing the applicant and the employe( the Authority
and after such further enquiry, if any, as it may consider necessary
may, without prejudice to any other penalty to which the
employer may be liable under this Act, direct (i) in the case of
a claim arising out of payment of less than the minimum rates
of wages, the payment to the employee of the amount by which
the minimum wages payable to him exceed the amount actually
paid. together with the payment of such compensation as the
Authority may think fit. not exceeding ten times the amount of
such excess in any other case; and (ii) in any other case, the
 MINIMUM WAGES ACT '187

payment of the amount due to the employee, together with the

payment of such compensation as the Authority may think fit,
not exceeding ten rupees. The Authority may direct payment of
such compensation in cases where the excess or the amount due
is paid by the employer to the employee before the disposal of
the application.
If the Authority is satisfied that the application is malicious
or vexatious he may direct a penalty not exceeding Rs. 50 to
be paid to the employer.
Any amount directed to be paid under section 20 may be
recovered as if it was a fine imposed by the Magistrate.
Every Authority under section 20 shall have all the powers
of a Civil Court.
Every direction of the Authority under section 20 shall be final.
Case Law:
The Labour Court has jurisdiction to entertain a petition for
minimum wages due and can delennine the money the employee
is entitled to. Anand Oil indusfries v. Labour Courl. ff.rderabad
and others. I
Single application in respect of a Dumber of employees
Section 21 provides that subject to such rules as may be
prescribed, a single application may be presented under section
20 on behalf or in respect of any number of employees employed
in the scheduled employment. The maximum compensation which
may be awarded shall not exceed ten times the aggregate amount
of such excess or ten rupees per head, as the case may be. The
Authority may deal with any number of separate applications as
a single application.
Penalties
Section 22 provides for penalties for violating the provisions
of the Act. An employer who pays less than the prescribed
minimum wage or infringes any order or rule made under Section
13, may be punished with imprisonment of either description up
to six months and/or fined up to Rs. 500. The section also lays
down the procedure for taking cognizance of offences under the
Act and/or holding. trials for the same. Sec. 22A provides that
if there is no other penalty for the contravention by this Act,
o AIR (1979) AP 182 (Full Bench)
988 INDUSTRIAL LAW

any offence under this Act is punishable with fine which may
extend to Rs. 500.
Cognizance
Section 22B provides that a complaint of any person under
the Act is to be made by or with the sanction of the appropriate
Government or of an Inspector.
Offences by Companies and Firms
Section 22C provides that in cases of offences by a company
or firm, any person is punishable who is in charge of, and is
responsible to the concern. No person is punishable if it was
committed without his knowledge or that who exercised all due
diligence to prevent it.

MISCELLANEOUS
Undisbursed amount due to employees : Section 22D
provides that any money payable to an employee under this Act
which could not be paid on account of death of the employee,
the payment is to be deposited to the prescribed authority who
shall deal with the money in the prescribed manner.
Protection against allachment of assets of an employer with
Government : Section 22E provides that any amount deposited
with the appropriate Government by an employer, to secure the
due performance of the contract with the Government, shall not
be liable to attachment under any decree or order of the Court
other than any debt or liability in connection with the contract
aforesaid.
Scheduled Employment : Section 22F provid~s that an
Inspector appointed under the Payment of Wages Act shall be
deemed to be Inspector for the purpose of enforcement of the
provisions of the Minimum Wages Act.
Exemption of employer from liability in certain cases:
Section 23 provides that an employer will be excused from
liability if he can show that some other person was responsible
for the offence and (a) that he has used due diligence to enforce
the execution of the Act, and (b) that the said other person
committed the offence in question without his knowledge, consent
or connivance. The other shall in such cases be liable to
punishment.
 MINIMUM WAGES ACT 989

Bar of suits: Section 24 provides that no court shall

entertain any suit for the recovery of wages in so far as the sum
so claimed has been dealt with under Section 20 of the Act or
might have been recovered under that section.
Contracting' out: Section 25 provides that any contract
whereby an employee either relinquishes or reduces his right to
a minimum rate of wages or any privilege or concession accruing
to him under the Act shall be null and void in so far as it purports
to reduce the minimum rate of wages fixed under this Act.
Exemptions and exceptions allowed: The following
exemptions and exceptions are allowed under Section 26.
(I) The provisions of the Act shall not apply to disabled
employees if the appropriate Government so declares.
(2) Specified employments may be exempted from all or some
of the provisions of the Act by the appropriate Government.
(3) Nothing in the Act shall apply to the wages payable by
an employer to a member of his family who is living with
him and is dependent on him. Member of the family of
an employer shall be deemed to include his or her spouse
or child or parent or brother or sister.
Powers of Government: The Central Government can give
directions to State Government as to the carrying into execution
of this Act in the State.-Sec. 28.
The Central and the State Governments have been given
power to frame rules under the Act.-Sec. 29 and Sec. 30.
EXERCISES
1. Discuss and explain the rule regarding the following: (i) worker
who works Jess than the normal working day; and (it) wages to an
employee who does two or more classes of work. (Pages 984-985)
2. State how an employee can take action if he is getting less than
the minimum wages. What is the procedure for the final
determination of the dispute? (Pages n5-987)
3. State the procedure for fixing and revising minimum wages. State
the registers and records to be maintained by the employer.
. (Pages 982-983)
4. Write notes on
(a) Employee. (Page 980)
(h) Employer. (Pages 980-981)
(c) Wages. (Page 980)
(d) Cost of Living Index Number. (Pages 979-980)
990 INDUSTRIAL LAW

5. What is 'Scheduled Employment' ? State-the schedule employments.

Can the list of such employments be closed? (Page 978)
6. Is it possible to pay wages in kind? (Page 980)
7. What is the composition and role of Advisory Committees and
Boards? (Pages 982-983)
8. (a) The employer could not make payment of minimum wages to
the employee since the whereabouts of the employee are not
known. State the course of action to be taken by the employer
in respect of the amount of money payable to the said
employee.
(b) An employee whose minimum rate of wages has been fixed
under the Minimum Wages Act, 1948 works on a day for a
period less than the requisite number of hours constituting a
normal working day. Will the employee succeed in ·cIaiming
full wages at the minimum rate of Wages? Give reason for
the answer.
(c) An industrial dispute relating to the rates of wages payable to
some of the employees employed in a scheduled employment
is pending before an Industrial Tribunal. In the meantime,
minimum rate of wages has been fixed by the State Government
in that scheduled employment. State with reason whether the
minimum rate of wages so fixed is applicable to the employees
whose industrial dispute is pending before the Industrial
Tribunal. (Pages 988, 983)
9, What are the provisions re,lating to the composition of Advisory
Board and Central Advisory Board? (Pages 982-983)
10. State the rules regarding overtime wages and wages of workers,
who work for less than nonnal working hours, prescribe<! by the
Minimum Wages Act. (Pages 983-985)
II. Can different rates of wages be fixed for different scheduled
employments'.' (Pages 983-985)
12. (I) State the minimum rate of wages. (Pages 981-982)
(U) Examine the following statements :
(a) The components of minimulll wages may be = basic rate of
wages plus cost of living allowance. .
(b) The components of minimum wages may be = basic rate of
wages, plus cost of living allowance plus cash value of
concession regarding supplies of essential commodities at
concessional rates.
(c) The components of minimum wages may be = basic rate of
wages minus cost of living allowance plus cash value of
concession regarding supplies of essential commodities at
concessional rates. (Pages 981-983)
 MINIMUM WAGES ACT 991

13. Discuss the rules .regarding (i) Wages of Worker who works for
less than nonnal working hour. (i') Wages for \Wo or more. classes
of work. . (Pages 983-984)
14. Discuss the procedure for fixing and revising minimum rate of
wages in respect of any scheduled employment.
(Pages 981-982)
15. Discuss the circumstances under which an employer who is charged
with an offence under the Minimum Wages Act, 1948 can be
exempted from his liability. (Page 988)
16. State the procedure to be adopted in 0 der to add any employment
to either part of the schedule for the prupose of fixing minimum
rate of wages. (Pages 978-979)
17. (0) Define the following according to the Minimum Wages Act.
1948-{i) Employer, (ii) Employee.
(b) Discuss the provisions of the Minimum Wages Act, 1948
relating to payment of wages for overtime work.
(c) Minimum wages payable by an employer to an employee cannot
be paid on account of his whereabouts not being known. Advise
the employer in taking further action in the maner.
(Pages 981, 983-985, 988)
18. (a) State the procedure for fixing and revising the minimum rate
of wages under the Minimum Wages Act, 1984.
(b) State the procedure to be adopted by the appropriate
Government in order to add to either part of the schedule any
employment in respect of which minimum rate of wages may
be fixed.
(c) A, an unmarried daughter living with B, her father, and C, a
married daughter living with her husband, are employed by B
in a scheduled employment. Both A and C present their claims
for payment of minimum rate of wages. Will they succeed?
(Pages 981-983, 978-979, 985)
 INDUSTRIAL DISPUTES ACT

APPLICATION AND OBJECTS

Application: The law relating to industrial relations in India
is contained in the Indu,trial Disputes Act of 1947 and several
local Acts passed in Stall s (e.g.• in Maharashtra). The Industrial
Disputes Act is a Cer.tral Act which came into operation on 1st
April, 1947. The latest amendment to the Act was made in 1984.
The Act applies to the whole of India, including the State
of Jammu and Kashmir.'
Objects: The object of the Act is, "to make provision for
the investigation and settlement of industrial dispute. and for
certain other purposes."
The aim of the Act is to secure industrial peace through
voluntary negotiation and compulsory adjudication. It lays down
the procedure according to which disputes between employers
and workmen can be settled. The Act also aims at securing
economic justice to the workmen. Indvstrial disputes generally
arise from dissatisfaction of workmen owing to the deteriorating
economic conditions. The Act has also been formulated in order
to improve the condition of workers in industry by. (a) redressal
of grievances of workmen through a statutory machinery and by
(b) offering job security.

THE AMENDMENT OF 1982

The Industrial Disputes Act of 1947 was amended several
times; the latest was in August 1982. [The Industrial Disputes
(Amendment) Act, 1982; Act of 46 of 1982.) This Act received
the assent of the President on 31.8.1982. It shall come into force
on such date as the Central Government may. by notification in
the Official Gazette, appoint.-Sec. I( I) and (2).
The amendment provides for' extensive changes. It has recast
the terms used in a main Act e.g., Industry, Workman, Industrial
Establishment or Undertaking, etc. The rules regarding closure,
layoff, reinstatement, retrenchment etc. are altered. Certain new
I Applied to Jammu and Kashmir, see page 81 L footnote.

992
 IMlUSTRJAL Ulspuns ACl 993

concepts and rules have been introduced, e.g., the rights of legal
heirs, a time limit for adjudication of disputes, a model grievances
redressal procedure etc. A schedUle to the amending Act gives
a list of unfair labour practiceS-
The importanl rrovisions of the amending Act have been
summarized in an Appendix added at the end uf this chapter.
[It is to be noted that the amendment of 19H1 has not been
applied yet.)
INDUSTRY
Definition
Section 2(j) dcfines an "'industry" as, "any business, trade,
undenaking, manufacture or calling of employers and include,
any calling, service, employment, hal,<Ii.:raft. or industrial
occupation or avocation of workmen."
The Statement of Objects and Reasons, issued '" itb The
Industrial Disputes (Amendment) Act of 1982, contains the
following observation:
"The Supreme Court in the decision in the Banga/ore »cuer
Supply and Se .... era.~e Board v. A. Rajappa alld others I had. while
interpreting the delinition of . industry' as contained in the Act.
observed that government might restructure this definition by
suitable legislative measure,. It i, nccordingly proposed to
redeline the term 'industry'. While doing so, it is proposed '"
exdude from the sc<'pe of this expression, cenain institutions
like hospitals and di,pcnsaries, educational. scientific, research
0r training institutes. institutions engaged in charitable. so\:ial and
philanthropic services. etc., in view of the need to maintain in
such institutions ell atmospher~ different from that in industrial
and commercial undertakings alld to meet Ihe special needs "f
Stich organisati~ll1j. (t is also proposed to exclud~ slIvereign
functions of gcncrtlTllcnt induding a~livitics relating to atomic.:
energy, sra\.:e and d('f~ncc.: resl!arch frl)1ll the puni~\\ of the term
·indll$try~. 1lowc\cr, keeping in \ic\\ the.: :-'PCl,;b!lharat..:teristiL:'
of these three acti\ itics and the [1Ct that their \\urkmcn also Ilt:~d
prol~clioll. it is pr\)p\..hed to h:n-c a ::,\,;varak la\\ for the $t'ttkmefH
\.)1' individual grinanccs as well as cL,llccti\oc disputc~ in respect

!elf the workmen (If these institutiL)tl_-;. All th ...~~c have bc!cn takl?ll
into aCCOUlH and the tcrlll . industr) . has bct:1l madt~ more spec itic
I s~~ p, (N7

Industrial Ll\\ 63
994 INDUSTRIAL LAW

while making the coverage wider. The scope of the term

'wQrkman' has also been· enlarged io cover the supervisory staff
,,,hose wages do not exceed Rs. 1,600 per month.
Section 2(j) of the Amending Act defines 'industry' as
follows: 'industry' means any systematic activity carried on by
co-operation between an employer and his workmen (whether
such workmen are employed by such employer directly or by
or through any agency, including a contractor) for the production.
suppl) or distribution of goods or .services with a view to satisfy
human wants or wishes (not being wants or wi~hes which arc
mere I) spiritual or religious in nature), whether or not-
(i) any capital has been invested for the purpose of carrying
on such activity; or
(ii) such activity is carried on with a O1otive to make any gain
or profit, and includes-
(a) any activity of the Dock Labour Board established under
Section SA of the Dock Workers (Regulation of
employment) Act. 1941 (9' of 1948);
(b) any activity. being a profession practised by' any
Individual or body of Individuals;
(e) any activity relating to the promotion of sales or business
or both carried on by an establishment, but docs not
include-
(1) any agricultural operation except where such
agricultural operation is carried on in an integrated
manner with any other activity (being any such
activity as is referred to in the foregoing provisions
of this clause) and such other activity is the
predominant one; or
(2) hospitals or dispensaries; or
(3) educational, scientific. research or training institu-
tions.: or
(4) institutions owned or managed by organisations
wholly or substantially engaged in any charitable.
social or philanthropic sen'icc: or
(5) Khadi or village industries: or
(h) any activity of the govcrnment relatable to Ihe
sovereign functions of the government including all
the activities carried on by the depanments of Ihe
 INDUSTRIAl. DISPUTES ACT 995

Central Governmenl dealing with defence research,

atom ic energy and space; or
(7) any activity which is carried on by a co-operative
society. being a Co-operative Society in which less
than ten persons are employed.
Industry meanS any systematic activity carried on b)
cooperation between an employer and his' workmen for the
production, supply or distribution of goods or services with a
view to satisfy human wants or wishes. It does not make any
difference whether or not
(i) any capital has been invested for the purpose of carrying
on such activity; or
(ii) such activity is carried on with a motive to make any gam
or profit.
"Industry" encompasses-
(a) any activity of the Dock Labour Board established under
Section 5-A of the Dock Workers (Regulation of
Employment) Act, 1948;
(b) any acti\ity relating to the promoting of sales or business
or both carried on by an establishment.
Case Law :
1. The Supreme Court holds that it is necessary (0 draw a line. in
a fair and just mannl!'r. to put some limitation on the width of the
words ..\" ('. C f.'mployc!t's \'. Industrial Tribuna!. I
2. The term Industl) has a wide import. But it cannot Of!' ma~ntficd
to I.werreach itself The term "undertakinJ.!.'· musl suffer a contextual
and associational shrinkage. Ban1!olorc H;lla-.-wpplt ". .-1 R(J)lIl'l'jJ.~
The supreme court apprcwed the dc~isi()11 of [J .\ [f,Ul&!rjl'r! \0.
rR .\I/lk"t!rjt!t'.~ lSec p. 998 and p JOO::!).

Indust"ial Establishment or l"ndertaking

The C\pl~ssion "ul1i.krtakil1!!·· ill the C~llltcxl ('If S. 25}-TF.
m('ans a sc-paratC' and distinct huslTl(,';~ l)r cnrnmcrclal ()r trading:
or industrial adivity. It cannnt (\)Illpn:hl~nd an infinite-..,itnall~
small part of a manufacturing process. ISe" p 103 I )
Scdi('Il ~Ika) PI' the Al1lcndin~ ALI stah. . s as foll()\\')
"industrial establishment or :.mdertaking'· Inc-ans an cSlahli~h111cnt
t'r undt-rtaking in \\ hich any illdllstr~ i" L'arricd {"""In
AIR r j'i(,::l Supreme ("('!un I08(J
: :\IR I!',"'SI Suprem\,.' Cl\llrt ~~S anJ I)~,q
; {'I)'.-;) S C .\. ~O~
Y96 INDUSTRIAL LAW

Provided that where several activities are carried on in an

establishment or undenaking and only one or some of such
activities is or are an industry or industries, then-
(u) if any unit of such establishment or undertaking carrying
on any activity, being an industry, is severable from the
other unit or units of such establishment or undertaking,
such unit shall be deenled to be a separate industrial
establishment or undertaking;
(b) if the predominant activity or each of the predominant
activities carried on in such establishment or undertaking
or any unit thereof is an indust!)' and the other activity
or ,,"~h Or the other activities carried on in such establish-
ment or undertaking or unit thereof is not severable from
and is. for the purpose of car!)ing on, or aiding the carrying
on of, such predominant activity or activities, the entire
establishment or undertaking or, as the case may be. unit
thereof shall be deemed to be an indu~trial establish-ment
or undertak ing.
The painting section of an enterprise cannot be recognised
as 3 subsection of it, el igible for being styled as a part of the
undertaking. Such a mini classification if permitted would enable
the employer to !lout S2SF with impunity. Aron Services Pruduc-
Tiun Agencies I/') Ltd v. Industrial Tribunal, Haryana and
olher.l. I (See appendix)

the Concept of Industry

The meaning of the term "Indust!)'" has created conflicting
decisions in the High Courts and others, In 1976 Krishna Iyer,
J. of the Supreme Court. said that an acti,ity can be regarded
as an Indu,try, within the meaning of section 2(i) only if there
is a relationship between the employer and the employees and
its acti'llies are analogous to trade and business. "'>rkmen uf
Indiall ')((JIIJard" InslflU/ion v, MUfl,'gemen/ of Indian Standards
InSTill//um.2 In 1978 the question of definition of the term Industry
alose before the Supreme Court" ith a number of cases which
\\ere adJuJiLated by seven judges of Supreme Court including
:'1. II. l3e~ tthe then C J.). Y. \'. Chandrachud (now C J),

) -\!R (IW7 91 Supreme Court 170 \ 171)

~ .\!R (1'17(!1 Supreme Cowt 1--15
 INDUSTRIAL DISPUTES ACT 997

Krishna lyer. and four other Judges. 1 he decision of the seven

Judges was reported under the heading Bang(l/or~ 1t"la-supp/v
v. A. Rajappa.1 The highlights of judgement are stated below:
\. In an Industry. there must be (i) syslemal ic activity.
(ii) organized by co-operation between employer and employee
and (iii) for the production and/or distribution of goods and
services calculated to satisfy human wants and wishes. If the
above three essential elements arc found. prima facie. there is
an Industry in that enterprise.
2. Absence of profit motive or gainful objective is irrelevant
in the public. joint, private or other sector. A trade or business
organization docs not cease to he one because of philanthropy
animating the undertaking.
3. The decisive test of the term "Industry" is the nature of
the activity with the employer-employee relationship.
4. Where undertaking is calculated to satisfy materia! things
and services. geared to celestial bliss, e.g makin~ '>11 a large
scale prasad or food (for spiritual or religious services). there
is an Industry. -
s. Jfihal em.! included i1l Industry'? The seven judges.
mentioned above. held that the triple tests listed in para 1 ahove
arc satisfied in following enterprises: (i) professions (iJ) clubs
(iii) educational institutions including gllrllku/ (i") co-operative,
(v) research institutes (vi) charitable projects. and ("ii) other
kindred adventures.
6. The exempliolls. i.e. where there is no IncluslI:v
(a) [n pious and altruistic missions many person, emplo,
themselves free or for small honoraria. Such all institution is not
Industry. even if. stray servants, manual or technical. arc hired.
(b) Sovereign functions are not industries. But the \\clfarc
activities or economic adventures undcrt3ken by the government
are industries.
(c) Departments discharging sovereign functions can he
considered "ithin Sec.2(j). if such units are industries and
substantially severable.
(tI) Constitutional and competent I, enacted legl,;lati"e
prov isions Illa, rem",'e them frolll the scope of the Act.
(e) \\"hcre there is a complex of dcti"ities. somt' nf \\hieh
qualify for e:l.cmption but others do no\. the tnt'll undertaking
998 INDUSTRIAL LAW

and the integrated nature of the departments will be an Industry,

although there are some persons who are not workmen by
definition and may not benefit by that status.
A list
The concept of industry is clarified b) the Court decisions
,lIl the subject. A list is given below.

I. Industry
I he following arc "industries":
I. .I!anllfacturing esrablishlllcllfS. Agriculfllral farm.. and
L'()lI1merCilll huuses.
~. .4 Municipality: In thc tcrm .. industry" the word
"undertaking" is used and a municipality is an undertaking which
supplies lil,(ht or water for payment. D. V Banerjee v. P R.
Mukherja. I
3. A nOli-profit organisation: The Western India Automobile
Association which rcnders service to its members on a non-profit
basis has been held to be an "industry" \\ ithin Ihe meaning of
Ihe Act. PrOl'illce of Bombal" v. "hh'm Illdia Automohile
A sJOciatioll. " Profit ;notivc is" not necessary characteristic of
industry.
4. A chartered accoUIlfW" (Iargl! scale): If a chartered
accountant doing audit \\ork with a large staff it can 'be called
an industry. R"billdra Nuth Sen Y. 711e First Industrial Tribunal.
II: B. lind ()thers.l (See p. 1002)
5. A col/eKt! H'lth I"wrmac.v: A college pharmacy manufac-
turing Ayuf\edic medicines for sale is an industry. Lalit Ifari
AnllTedic Col/ege I'h"rmocv v. I~orker S Union 4
6. The activities of the Indian Standards Institution fall
\\ ilhin the category of Industry. Itorkmell of Indian Slandards
IIISlillitioll v. Af,,"agemellt of Illdian Stalldards !lwitllfion 5
7. Actil'ities of GOI'I!YI1me/1/ in indll.<II:)': The State has to
undertake many activities which would otherwise be called
industries. Such activities are included in definition of the term
·indust!)··. Sagpur Corporalioll v. Its Employees. 6 The Mach-
kunda Hydro Electric Project is an industry within the meaning
'(1953) seA. 303 , ()949) F.C.R. 321
~ ll(3) 67 C.W.N. 232 • (1960) J.L.L.J. 250
< AIR «)976) Supreme Coun 145 • AIR (1960) Supreme Coun 6i,
 INDUSTRIAL DISPUTES ACT 999

of the Act. Superintending Engineer. Machkund v. Workmen of

Machkllnd 'Eleclric Projecl. 1
II. No Industry
The following are not '"industries"
I. The Universily: A University cannot be oiled an
industry. Uni"ersily of Delhi alld olhers v. . Ram Nalh elc 2
~. A Dock Labour Board: A Dock Labour Board, which
Supl)lies "orkmen to the Stevedores for loading or unloading of
ships, is not an industry. f7=agapalllam Dock Labollr ;". Sln'edures
As.weiatioll. Vishakhapaillam and Ors. J
3. A charlered accolllllalll : It was held that a chartered
accountant's office is not an industry. R. r<,idywl<1lha" v. Fifth
/"dllslrial Irihllllal.. IV B. & Olhers' UlIt, sec para 4 above.
4. A sulicitor: The calling of a solicitor is not an industry.
so long as he carries on the normal avocations of a solicitor.
Brijllwhall Bag"ri" v. N. C. Chaueriee.; (Sec p. 1002).
5. Educalional i",'/I·llIIioll.'·: A society "hose main object is
advancement of learning is not an industry. even though it
publishes and sells books. Asialic Sociell' v. Slale of W Bel1ga/ 6
6. A religiom inslitmioll: t\ religious institution like a
temple or a church. is not regarded as an industry.
7. Hospital: Dhanrajgiriji lIospital. Shlliapur is not carrying
I..m any economic activity in the nature of trade or business.
Thcrefore, this hospital is not an industry. ,\{a""g~ment of Safilar
.Illllg Hospital. Nell" Delhi v. Kllidil' Sillg S~lh 7 Dhallrajgiriji
HO.\l'i/(/1 v. Workm~lI. ~
8. SOl'ereigll fllllctions: Several English and Indian cases
held that the activities of a lawful government must undertake
the administration of justice, maintenance of law and order,
p~evention of crime etc. and such activities do not come within
Ihe term 'industry.' Fede/"£lted Sla/~ Sc/IVol r~llcher:, Associatioll
uf Alls/ralia v. Slllle uf Victoria9 • .'lIllIe of Bombay v. Hospital
.\I,,=door Sub}",. 10
9. Club: Non-proprietary members clubs. \\ ith mult i farious
, AIR (1960) Orissa 205 : AIR (1963) Supreme Coun 1873
't 1971) I.S.C.A. 6~5 ISupreme Coun, , (1976,71 C.W.N. 755
'(1958'62 C.W.N. 473 '(1967) 71 C.W.N. 119
- AIR (1970) Supreme Court 1407 • AIR (19751 Supreme Coun 2032
• 41 Com. L.R. 569 'IAIR (1960) Supreme Court 610
1000 INDliSTRIAL LAW

act,vll,es providing a venue for SptH1S and games and facilities

for recreation, entertainment and for catering of food, and refresh-
ment, are nol Induslries . .HadraJ Gymkhana Club Employee:,
Union v. Management. I
Activity of Cricket Club of India is not industry. It IS
members' self-service instilution. Cricket Club of I"d;o \.
Bombay Labour Union and another l
10. Other orKlIni.wtionJ: The following organisations arC
not industries-professions; lawyer's office; humanitarian insti-
tutions like rinjrapoles and a home for destitute children:
government empl,)yees in income tax department; non-gazetted
government seryants: Rajt>ha\an staff.
II. Khadi or village industries.
12. any domestic sen ice.
13. any activity if the number of persons employed by Ihe
individual or hody of indi\'idual in relation to such profession
is less than len.
I~. any aClivity carried un hy a co-operative society if the
numher of rersons employed b) the cooperative society is less
lhnn ten.

INDUSTRL\L DISPUTES
J).. fiuition
According to Section 2(k) of the Act, industrial dispute.
means "any dispute or difTerence between employers and
employers. or between employers and INorkmen, or between
w"rkmen and workmen. \\ hieh is connected with the emplo) ment
or non-employment or ti,e terms of employment or with the
conditions of lahour of any person."
From the definilion it folh)\\5 that a dispute or difference
between
(a) employers a.nd employers,
(b) employers and workmen. and
(e) workmen. and workmen. is an industrial displlt~ within the
meaning of the Act. prO\ided the dispute or difference
relates to,
(i) employment. or (ii) lIon.employment. or (iii) terms of
employment. N. (i .. ) the «'nditions of labour, of any rerson.
I AIR (1968) Supreme Coun :;5·1
 INDUSTRIAL DISPUTES ACT 1001

The definition of industrial dispute signifies that it refers to

an industry defined in the Act and refers to disputes that bear
upon the relationship of employers and workmen and the terms
of employmcnt and condition of lahour.
When Industrial disputes arise
Disputes or differences arise when a demand is made by one
party and is refused by the other party. The demand Illay be
oral or in writing. A request contained in a letter from workmen
may amount to a dcmand. If the request is not complied with.
a dispute arises.
Who can raise a dispute?
A demand may be made by a group of \\ orkmen or by the
Trade Union on their behalf. A disputc \\ ith an individual
workman may b~l:o!1lc an industrial dispute if the \\orJ...man is
supportcd by other workmen 0r the Union.
Collective Disputes
When the workmen raise a dispute as against their employer.
thc person regarding whose employmcnt that dispute is raised,
must be one in whose cmployment, non-employmcnt, terms of
cmployment or conditions of labour, the workmcn as a dass have
a direct or substantial intercst. lJurkmen v. Mal/agemel/I of
Dimalruchi Tell ESlatc. J Those sponsoring the case must bc in the
same employmcnt. association or union. There must not be mere
sympathy for thc aggrieved workman but community of interest.
Exprcs5 Sell'sp,,!,er (F) LId. v. L"bollr Court. Hest Bengal.:
Disputes may be collective disputes or indiv idual disputes.
Collcctive disputes arc those which are sUI'Ported by a large
number of workmen. Collectivc dispute may be due to man~
causes e.g" hours of work, wages, bonus 1",lidays, retrenchment,
closure etc. collective disputes may be industrial disputcs.
No rigid rulc can he laid down regarding the number of
workmen whose association \\ill c"mert an individual into a
collective dispute. The llI11nber depends upon the facts of the
case and the nature of I!'l..: ,1 i ..;pute A . . !locialed CemenT Companies
Lid v. Tlreir It'orJmh'H ,;

I AIR, 1958) Supreme COUll ,:',

',1'/(0) ILL!. 491
r INDl!STRIAL LAW
1002

A section of an und"naking, e.g., the clerical staff, can raise

an industrial dispute.
The union need not be a recognised trade union.
Individual Dispute
Cases where" displlte "'itl1 all illdil'idualll"orklllllll is deeliled
to be all indllstrial dispute: Section 2A, insened by the Industrial
Disputes (Amendment) Act, 1965, provides that where any
employer. discharges. dismisse.(. retrenches. 01' olhen\'ise termi~
lIates the scrviees of an individual workman, any dispute or
difference between that workman and his employer cOIlIll!cted
lI"ith or arising out of such discharge, dismissal, retrenchmcnt
or termination" shall be deemed to be an industrial dispute.
notwithstanding that no other workman nor any union of
\\orkmen is a pany to the dispute.
F.xamplc$ uf industrial disptlles:
(i) Uequcsling bonus: A Union of workmen wrote a letter to the
employers, in very COurtC'OliS and polite language requesting
additional bonus. The request was rerused. Held that an industrial
dispute arose from the refusal. SI't.'f! ,\/iIlOkshi .\fills V. Slutt! of
,\ladras, 1
(il) .Utmicipalil)': T\\o cmploYl~es of a municipality were dismissed on
certain charges and a dispute arose b\!twcen the municipality and
the workers employed by it. It was held that the dispute was an
industrial dispute because in the definition of the: term "industry"
the ''''ord "undertaking" is used and a municipality is an undertaking
which supplies light or water for payment. D. S. Bane,jee v.
P. R. .\!Uklrt?')l'I!.2
(i;;) So/i(:itor: The term industry' docs not include the case of an
individual who carries on a profession dependent on his own
intellectual skill. The calling of a solicitor is nol an industry, so
long as he carries on the normal avocation of a solieilOr. Therefore.
a dispute between a firm of sollcitors and its emplo)ees is not an
industrial disputc.lThe calling ofa solicitor may become an industry
under ec:nain circumstances c.g., when hc carries on an invcstment
businessl. fJrUmoltmr Bagar;d v. S C Challcljf!l'. ~
(;,') ... charten:d ",:colln/mll: A chartered accountant carries on auditing
work on a magnificd scale, \\o'ith more clients than he can himself
manage. it w:ts held that the dispute between the chartered
accountant and his staff was an industrial dispute. Rabindra .Vatll
SI!IJ v. 7hl! First Imilis/rial Tnbwwl. West Ut!IIgal & Ors . .&
I AIR (1951) Mad. QH '( 1953) S.CA. 303
'(1958) 62 CW.N. 473 I (t963) 61 CW.N. 232
 INDUSTRIAL DISPUTES ACT 1003

(v) "Foreign" {,:"ion: A dispute between a line-operator and his

management \\las espoused by union of workmen of another
organisation. Held that is not an industrial dispute. .h'ewspaper.'i
Ltd.. .-U'a/what! \" . .\'talt! Industrial Tribunal, (; pi

WORKMAN
Definition
The definition of the term 'workman' as given in Section
2(s) of the Act can be summarised as foIlO\\s: Workman means
any person (including an apprentice) employed in an industry
to do any skilled or unskilled manual, supervisory, technical or
clerical work for hire or reward. The terms of employment may
he either express or implied. A workman who has been dismissed.
discharged or retrenched, comes within the definition of the term
'workman' if there is any dispute relating to such dismissal,
dischargc or retrenchment.
Section 2(s) of the Amending Act defines 'workman' as
follows: 'workman' means any person (including an apprentice)
employed in any industry to do any manual, unskilled, skilled,
technical. operational. clerical or supervisory work for hire or
reward, whether the terms of employment be express or implied,
and for the purposes of any proceeding under this Act in relation
to an industrial dispute, includes any such person who has becn
dismissed, discharged or retrenched in connection with, or as a
consequence of, that dispute. or whose dismissal, discharge or
retrenchment has led to that dispute, but does not include any
such person-
(i) who is subject to the Air Force Act, 1950 (45 of 1950),
or the Army Act, 1950 (~6 of (950), or the Navy Act,
1957 (62 of (957); or
(ii) \\ho is cmployed in the police service or as an officer or
other employee of a prison; or
(iii) who is employed mainly in a managerial or administrative
capacity: or
(i\') who, being employed in a supervisory capacity, draws
wages exceeding one thousand six hundred rupees per
mensem or exercises, either by the nature of the dulies
anached to the office or by reason of the powers vested
in him. functions mainly of a managerial nature.
I I 1%0) S.C'. I.1:S
1004 INDUSTRIAL LAW

Exceptions
The Act excludes the following types of workers from the
definition of 'workman'-
(i) Persons subject to the Army Act, 1950, or the Air Force
Act, 1950 or the Navy (Discipline) Act, 1934.
(ii) Persons employed in the police service or a prison.
(iii) Persons employed mainly in a managerial or administrative
capacity.
(iv) Persons employed in a supervisory capacity drawing wages
exceeding Rs. 1600 per month or exercising function
mainly of a managerial nature.
With the exception of the four excluded categories stated
above. every person working in an industry. for hire or reward.
is a workman. See "Worker", p. 814 and "Employee". p. 879.
The Relationship of Employment
The relationship of employee and employer arises between
,two persons by agreement between them. express or implied,
when the employee is under the control of the employer.
Chinlalllall Rao and another \'. Slale of Madhya Pradesh,l
An employee is said to be under a control of an emplo) <r
if he is bound to follow the orders of th.e employer (a) regarding
the work which he shall execute, (b) the details of the work,
(e) the manner of its execution.
The manner of payment
Hire or reward to a workman may be in any manner. It ma)
be (a) time wages (b) at piece rates or (e) a commission on
production or sale,
Examples of Workmen
The following persons were held 'workmen' under the Act.-·
Temporary workmen and casual workmen paid weekly; persons
"(lrkil1~ of a supervisory character but receiving a salary helm'
Rs. 1600 per Illf'nth : a gardener working at an officer's quarter
but whose name is c'n the compan)s' payroll; a salesman "h"
draws wages and not commission: an auditor employed in the
concern and doing mainly c !erical "ork; workers engaged b)
a conlractor if the contractor is an employee of the principal
1 AIR 119~3) Sup,"",e Court .'88
 "'DlJSTRIAL DISI'Ul ES ACT 1005

concern and not an independent contractor; a timekeeper; a

jamadar; a guard.
Piece rated Tailors working in big tailoring establishment arc
workmen. Shining Tailor \'. InJus/rial Tribunul If, l. '.P, Ludllo\1'
unJ a/hers. I
A Security Inspector at the gate of :hc factory premises and
it "as neither managerial nor supervisory in nature, so as to
exclude him from the definition of"workman" under Section 2(;)
of the Act. Ved Pr"kash GlIplll v. Delloll Cable Illdia (1') Lid. 2
Persons held not Workmen
The following persons are not regarded 'workmen' IInder the
Act.--Casual and temporary workers are not workmen after the
job for which they ate engaged is finished; the non-pcrmanent
staff of seasonal factories are not WOI kmen during the otT-season
when work is not being carried on: persons holding ",anagerial
and supervisory post :. an advertisement manager; a gate sergeant ~
a sales representativc; a medical representative; a draughtSlllan :
editorial statT including reporters; a midwife and a nurse; a
chemist. a super\'isor.

F.MPLOYER
Section 2(g) of the Industrial Disputes Act states that thc
term Employer means,
(i) in relation to an industry carried on by or. under the
authority of any department of the Central Go\ernment or
a State GO\"Crmllent, the authorit), prcscribed in this behalf.
or where no authority is prescribed, the head of the
department ;
(ii) in relation to an industry carried on by or on behalf of
a local allth,,,itv. the chief executive officer of that
autlwrity.
A tenn 'employer' has been extended in many States. The
!'>laharashtra Industrial Relations Act adds phrase, "(h) Any agent
"I the employer." It h:ls beell held that the agent "f the employer
includes-general manager. director and the oCClipier of a factory.
The lJ.P. Industrial Disputes Act. 1947. adds thc follo\\ ing
more c iallses

, AIR 11984) Supreme C{)urt 23 :0 AIR (lCJ84) Suprt:lllc Cl)IH1 91-l

1006 INDUSTRIAL LAW

"(iii) an aSSOCiatIon of a group of employers

(i'->
where the owner of an industry in the course of or for
the purpose of conducting the industry contracts with any
person for the execution by or under such person of the
whole or any part of any work which is ordinarily part
of the industry, the owner of such industry."
Clauses (ii) and (iii) are same in clauses. (i) and (ii) of the
main Act. (See above)
Workmen and Employer
Where a worker. or group of workers, labours to produce
goods and services and these goods and services are for the
business of another. that other is. in fact, the employer. The
presence of intermediate contractors with whom alone the
workers have immediate or direct relationship ex coll/ractll has
no consequence. On lifting the veil the different paper 3rrangement
is to be fOllnd out so that the real employer is the Management
not the intermediate contractors. Gallesh Heedi:, Case. I
f1l1ss11illbhai v. The Alatl! Factory etc 2
WAGES
Section 2(rr) of Ihe Industrial Disputes Act states that
"wages' means. "all remuneration capable of being expressed in
terms of money. which would. if the terms of employment,
express or implied. were fulfilled, be payablc to a workman in
respect of his cmpillyment or of work done in such employment.
and ineludes-
(il sllch allowances (including dearness allm'ances) as the
workman is for the time being entitled to:
(ii) the value of any house accommodation. t>r of sllpply of
any sen ice or of any concessional supply or food grains
or othet articles:
(iii) any travelling concc,\ ... ioll :
but does not incJude·-
(u) allY honus;
(b) any contribution paid or pa)uble by Ihe employcr to any
pcnsion fUlld or provident fund or for thc bcncfit of the
workman under an) law for the time being in force ~
te) an~ gratuil) pa)ablc on the termin:uill l1 of his service."
I AIR (19741 Supreme COUll. 1832 'AIR (1')781 Supreme Court 1410
 INDUSTRIAL DISPUTES ACT 1007

Wages constitute the return obtained by the workman for

placing I)is labour, skill and energy at the disposal of his
employer. The term is used in the Act to mean the total
remuneration to which the workman is entitled under the terms
of service and which can be calculated in terms of money. II
illcllldes (I) allowances like dearness allowance. (2) value of
house accommodation, water supply and other amenities, (3) any
travelling concession. II does 1101 include (I) bonus (2) employer's
contributions to pension, provident fun J5 ctc. and (3.) gratuities
payable on retirement.
PAYMENT Ot' FULL WAGES
Section 17B. Pa)'l1/ell/ offll/l wages 10 1I"0rkmall pelldillg
proceedillgs ill higher COllrls-
Where in any case, a Lahour Court. Tribunal Or National
Tribunal by its award directs reinstatement of any workman and
the employer prefers any proceedings against such award in a
High Court or the Supreme Court, the employer shall be liable
to pay such workman. during the period of pendency of such
proceedings in the High Court or the Supreme Court, full wages
last drawn by .him. inclusive of any maintenance allowance
admissible to him under any rule if the workman had not been
employed in any establishment during such period and an
affidavit by such workman had been filed to that etTect in such
Court :
Provided that where it is proved to the satisfaction of the
High Court or the Supreme Court that such workman had been
employed and had been receiving adequate remuneration during
any such period or part thereof, the Court shall order Ihal no
wages shall be payable under this section for such period or part.
a' the case ma~ be.
TIME LIMIT
There hfts been dissatisfaction wilh delays ill\·olved in Ihe
adjudicat ion of industrial disputes. It is proposed to fix a time
limit for the adjudication of indiridual and collecli,,: disputes.
as also for the disposal of claims. applicalions and other
references by the Labour C,'urt. the Industrial Tribunal or the
Nalional In<luslrial Tribunal "ith a ,·iew to securing speedier
justice to ""'Killen. It has als<, heen pro,ided that no case \\ ill
1008 INOt;STRIAL LAW

lapse merely on account of the fact that the time limits specified
had expired.
Sectilill f2A) of Amelldillg ACI: An order referring an
mdustrial dispute to a Labour Court, Tribunal or National
Tribunal under this section shall specify the period within with
such Labour Court, Tribunal or National Tribunal shall submit
its award on such dis"u,,! 10 the appropriate Government :
Provided that where •. 'ch industrial dispute is connected with
an individual workman, no such period shall exceed three months.
Provided further that "here the parties to an industrial
dispute apply in Ih~ prescribed manner, whether jointly or
separately. to the Labour Court, Tribunal or National Tribunal
for extension of such period or for any other rea,ons, and the
presiding officer of such Labour Court, Tribunal or National
Tribunal considers it necessary or expedient to extend such
period, he may for reasons to be recorded. in writing, extend such
period by such further period as he may think fit :
Provided also that in computing any period specified in the
sub·section. the period. if any. for which the proceedings before
Ihe Labour Court, Tribunal or National Tribunal had been stayed
by any injunction. or order of a Civil Court shall be excluded:
Provided also that no proceedings before a Labour Court,
Tribunal or National Tribunal shall lapse merely on the ground
Ihat any period specilied under this sub-section had expired
\\ ithtJut stl~h proceedings being completed.

BONUS
Definition
The term Bonus is used to denote any exIra payment to the
workman .in addition to his wages, allowances and the usual
fringe benefits.
The law regarding bonus was codified in 1965. Under that
code. 13(llluS was defined as. "An annual statutory payment by
an empluyer to his employee according to the provisions of the
Payment of Bonus Act 1965."
The Bonu, law
'1 he Act of 1965 \Vas amended in 1976. 1977, an ordinance
i;sucd Oil 21 st August, 1980 and an Act passed in December,
I'iRO. The Act was t\\ice amcllded in 1985. At first Section 12
 INDUSl1UAL DlSfIJlES ACr 1009

was abolished. But second amendment reintroduced Section 12

with an amendment. The highlights of the Bonus Acts are
summarised below :
I. The Bonus Act applies (i) to every factory as defined in
the Factories Act of 1948 and (ii) every other establishment in
which ten or more persons are empioyed in any day during an
accounting year. It extends to the whole of India. Bonus is
payable to Banking, Reconstruction Corporation & Railways.
2. Bonus is payable on the salary or wage earned by the
employee in an accounting year at the rate of up to 20%. The
minimum bonus is 8.33%. The bonus is payable whether or not
the employer has any allocable surplus in the accounting year.
3. Every employee who has worked in the establishment for
not less than thirty working days in the accounting year, and
whose monthly wage is not more than Rs. 1,600 is to be paid
bonus. All employees including manual worker and also the
executive staff are eligible. But a person getting a monthly wages
exceeding Rs. 750 will be given bonus calculated on the basis
of Rs. 750 only.
4: Where an employee who has not completed 15. years of
service, the minimum shall be 8.33% or Rs. 60 whichever is
higher. An employee, who has completed his service for 15 years
or more, must get at least Rs. 100.
5. Where an employee has not worked for all the working
days in an aCcounting year, the bonus shall be proportionately
reduced.
6. Under the Act certain types of workers are not eligible
to get bonus, e.g., seamen under the Merchant Shipping Act;
employees in irIdian Red Cross Society and similar Institutions;
universities and other educational institutions, etc. .
7. An employee, dismissed for the following reasqns, will
not get bonus viz. fraud, riotous behaviour while on the pre.mis~s
of the establishment, or theft, misappropriation or sabotage of
any property of the establishment.
Comment
The salient feature of the Ordinance and the Act of 1980
is that the paYment of bonus was made a permanent" part of law
of which for the past three years were ad hoc arrangements. But
disputes between workmen and employers occur as regards bonus

Industrial Law - 64
1010 INDUSTRIAL LAW

exceeding the mmunum. The range is wide because it varies

between 8.33% to 20%.
Case L.a,,' :
The minimum bonus under this Act is a right vested in an employee.
For the enforcement of this Act, an employee can" file an application
to the Labour Court under the Industrial Disputes Act. For such
a claim it is not necessary to refer for adjudication to an Industrial
Tribunal. Anand Oil Industry v. Lahour Court, /lyderahad and
mlrers_ 1
Workmen in establishment receiving attendance bonus over and
above the bonus is outside the purview of the Act. Baidyanalh
Ayuneda Bhawan Aftre/oor Union. Palna v. Alanagement of Shri
Baid.vanalh Ayun'etlu BhOlwn Pvt. LJd. and others. 2
I,atest Amendments
(i) On 27.9.1985 the Government of lnjlia issued an ordinance
raising the ceiling limit, as discussed in 3 above, for computing
bonus from Rs. 750 per mensem to Rs. 1600 per mensem. Hence
by this ordinance an employee getting wages more than Rs. 750
per mensem but less than Rs. 1600 per mensem will get bonus
calculated on his actual wages. This will be applicable for the
accounting in 1984 and for subsequent years.
(ii) On 27.11.1985 a bill was introduced ill Parliament
amending Section 2(13) of the Payment of Bonus Act stating
that an Employee means any person (other than an apprentice)
employed on a salary or wage not exceeding Rs. 2500 per
mensem in any industry to do any skilled or unskilled. manual,
supen isory. managerial, administrative, technical or clerical work
fur live or reward whether this terms of employment be express
or implied.
In the same bill a new section had been added which made
that where the salary or wage of an employee exceeds Rs. 1600
per menscm, the bonus payable to such employee under Section
10 or as the case may be under Section II, shall be calculated
as if his salary or wage were Rs. 1600 per mcnsem. (Sec. 12)
The Second Amendment 1985 maintains that a minimum
bonus of 8.33 per cent of the wage or salary of an employee
is payable irrespective of the fact whether the establishment has
made a profit or loss. Bonus is nu longer linked with production
and profitability. Liability for bonus is a statutory liability.
I AIR (1'1791 AP 18~ (Full llcnchl '.~IR (\98~1 Supreme Court 4<7
 INDUSTRiAl DISPUTES ACT lOll

DIFFERENCES BETWEEN WAGES AND BONUS

I. Wages means the remuneration for work, the regular
allowances and fringe benefits when given. Bonus means any
payment other than above items.
2. The rate of wages is based on the contract between the
employer and employee. Bonus is based upon contract, award,
(by tripartite or bipartite) and the Bonus Act.
3. The rate of wages is more or less stable. Bonus varies
from year to year.
4. Wages are given weekly or monthly. Bonus is given
annually.
5. The Industrial Disputes Act specifically excludes bonus
from the definition of wages. But under the Payment of Wages
Act. the term wages includes bonus.
6. Wages are regarded as a part of cost of production of
a firm. But under the Bonus Act. bonus must be given whether
there is any surplus/profit or not. Some people consider bonus
to be deferred wages.
7. In case of lay-off or discharge. the employee is entitled
to get compensation on the basis of his wages of the employee.
But bonus is not included in such compensation.

GRATUITY
Gratuity is a sum of money gi\ en by the employer to the
employee at the end of his service. The term is not defined in
the Industrial Disputes Act. Formed). gratuity "as paid under
schemes formulated by the employer or b) tripartite or bipartite
agreement Or by a\\:ards. No,,, the la\\' relating to gratuit~ has
been codified bv the Payment of Gratuity Act 1972 (Act No.
39 of 1972). The Act was amended by the Amendment' Act of
1987. The provisions of the Act are summarised bdo\\.
I. The Act pt:<,\icics for a scheme for the payment of gratuity
to employees engaged in facloflt:::,. mines. oilfields, plantation<;.
ports, railway companies. shops 'If other est"blishments.
2. It extends to the \\ hole of India. But in so far as it relate>
to plantations or ports. it shall not ""tend to the State of Jammu
and Kashmir.
3. Gratuity is pa}ablc to an emplo}ee on the termination <)f
his employment after he has rClldt:rcd continuous service for not
less than five )cars---
1012 INDUSllUAL LAW

(0) on his superannuation, or

(b) on his retirement or resignation, or
(c) on his death or disablement or due to accident or disease.
But the completion of continuous service of five years shall
not be necessary where the termination of. the employment of
any employee is due to death or disablement.
4. The omoulTl of gratuity: For every completed year of
serv ice or part thereof in excess of six months, the employer
shall pay gratuity to an employee at the rate of frfteen days'
wages based on the rate of wages last drawn by the employee
concerned.
Under Section 4(3), the amount of gratuity payable to an
employee shall not exceed Rs.2,50,000. The Amendment Act
1994 replaced the existing ceiling of 20 month's wages for
payment of gratuity by a monetary ceiting of Rs.50,000. The
Amendment Act 1997 has revised it to Rs.2,50,000.
Nothing in this section shall affect the right of an employee
to -receive better terms of gratuity under any award or agreement
Or contract with the employer.
5. Notwithstanding anything contained in the above rules the
gratuity of an employee, whose services have been terminated
for any act, wilful omission or negligence causing any damage
or loss to, or destruction of property belonging to the employer,
shall be forfeited to the extent of the damage or loss so caused.
The gratuity payable to an employee shall be wholly
forfeitcd-
(i) If the services of such employee have been terminated for
his riotous Or disorderly conduct or any other act of
vioh:nce on hi" part, or
(Ii) if the SCI ,ices 01 ",ch employee have been terminated for
any act whe" consututes an offence involving moral
tUI ritude, provided that such offence is committed by him
in the course of his employment.
6. Pena/II,·': A penal pro"ision in the Act- provides that
a,'\ ·'ody inl,'ndin,: to avoid payment of gratuity by subn",,,,,n
" ;~I.e statemc'nts, leturns etc. \I ill he liable 10 imprisonment,
aIIJ,t,." ',.') pay 3 t';'le.
; P., 1,'cl1011 oj gl )fllill': No gratuity payable under this Acl
shall he' iI~blo to attach",c III ill execution of any decree ur nrder
('If an) CIVIl. revenlle or (f11llin:lI (\lurt.
 INDUSTRIAL DISPUTES ACT 1013

Case Law :
(I) So<:. 1(3)(b) of the Payment of Gratuity Act applies to every
establishment which is within the meaning of Sec. 2(ii)(g) of the
Payment of Wages Act. The definition of Sec. 4( I) of the Gratuity
Act is framed in the widest terms. The Act is a cont~lete code
containing detailed provisions covering all essential fea~res. The
proceedings for payment of gratuity must be taken unde· the Act.
The Labour Court under the Industrial Dispute Act has no jurisdiction
to entertain them. Slate of Punjab v. The L"hour Court etc. I
(2) A permanent employee remaining absent without leave and working
for less than 240 days in the year is not entitled to gratuity, A social
welfare legislation must get beneficent construction. La/apra
Lingappa and o/hers v. La'(mi Vishnu Textile A/ills Lld. 2
(3) Civil suit to recover gratuity is maintainable. Sudhir Chandra
Sarkar v. Tala iron and Steel Co. LId., and atlrers.]

AUTHORITIES UNDER TilE ACT

The Act sets up certain authorities for the investigation and
settlement of industrial disputes. They are (i) Works Committees
(ii) Conciliation Officers (iii) Boards of Conciliation (iv) Courts
of Enquiry (v) Labour Courts (vi) Industrial Tribunals
(vii) National Tribunals and (viii) Grievance Settlement
Authorities (ix) Reference to Arbitration. The powers and duties
of these authorities arc explained below.
The National Tribunals are constituted by the Central
Government. The other authorities, (Conciliation Officers etc.)
arc appointed by the Appropriate Government.
Appropriate Government (Sec, 2(a)]
The Central Government is the Appropriate Government in
relation to an industrial dispute concerning (i) any indust!)
carri~d on by or under the authority of the Central Government
(ii) a railway (iii) any controlled industry (il') the Employees'
State Insurance Corporation (v) the Agricultural Refinance
Corporation (vi) the Deposit Insurance Corporation (vii) the Unit
Trust of India (viii) the Indian Air Lines and Air India Corporation
and ('x) a banking or an insurance company, a mine, an oil field,
Cantonment Board, or a major port.
In relation to all other industrial disputes, the State
Gm'ernment is the Appropriate .Government.
I AIR (1979) Supreme Court 1981 2 AIR (1981) Sopreme Court 852
3 AIR (1984) Supreme Court 1064
1014 INDUSTRIAL LAW

In section 2(a) of the Amending Act, a list is given of

industrial establishment where the Central Government is the
Appropriate Government.
EX<1l11p/es: a Dock Labour or the Industrial Finance Corpora-
tion of India; the Employees' State Insurance Corporation; the
International Airport Authority of India; The Export Credit and
Guarantee Corporation Limited of the Industrial Reconstruction
Corporation ",f India Limited; etc.
WORKS COMMITTEE
The Works Committee is a committee consisting of
representatives of employers and workmen. (Sec. 3). In the case
of any industrial establishment in which 100 or more workmen
are employed or have been employed on any day in the preceding
twelve months, the Appropriate Government may direct the
employer to constitute a Works Committee in the manner
prescribed by the rules framed under the Act.
The number of representatives of workmen in the works
committee must not be less than the number of representatives
of the employer. The representatives of workmen are to be
selected from the men engaged in the establishment in consultation
with their Trade Union, if there is any registered Union.
Duties: It shall be the duty of the Works Committee (I) to
promote measures for sec uri ng and preserving amity and good
relations between the employer and workmen. (2) With this end
in view, the Committee is to comment upon matters of their
common interest or concern and (3) endeavour to compose any
material difference of opinion in respect of such matters.
The Works Committee is a forum for explaining the difficul-
ties of all the parties. It can be possible to maintain cordial
relationship, even though there are disputes and differences.
The decisions of the Works Committees arc not binding.
The success of Works Committees and similar organisations
like Boards of Conciliation, depends on the efforts of both the
parties. A Works Committee is not a substitute of Trade Unions.
CONCILIATION OFFICERS
Section 4 of the Act provides for the appointment of Conci·
liation Officers by the Appropriate Government. A conciliation
officer may be appointed for a specified area or for a specified
industry or industries in an area.
 INDt:STRI,\1. DISPlITES ACT 1015

Dillies: Conciliation Officers are charged \\ ith the duty of

mediating in and promoting the settlement of industrial disputes.
Section 12 provides as follows :
(I) \Vhere an industrial dispute exists or is apprehended, the
conciliation officer may hold conciliation proceedings in the
prescribed manner. Where the dispute relates \0 a public utilit)
service and the necessary notice of strike or lock-out (under Sec.
22) has been given he shall hold such proceedings.
(2) For the purpose of bringing about a settlement of the
dispute, the conciliation officer shall without delay investigate the
dispute and all matters relating to the merits thereof. lie may do
all such things as he thinks fit for the purpose of inducing the
parties to come to a fair and amicable settlement of the dispute.
(3) If the dispute is settled, the conciliation officer shall send
a report to the Appropriate Government (or an officer authorised
in this behal f) with a memorandum of the settlement signed b)
the parties.
(4) If no settlement is arrived at, the conciliation officer shall
send a report stating the facts and circumstances. the steps taken
and the reasons why no settlement was arrived at.-Sec. I ~(6).
Case Law:
The duty of a conciliation officer is not judicial but administrati\"c.
He has to investigate the dispute and do all 5u(h things as he thinks
fit for the purpose of inducing the parties to arrive al a fair and
amicable settlement of the dispute Royal Culoilla Golf Club
,\ la=dool' Cllioll v. Stall!. I

The Conciliation Officer is entitled to enter an establishment

to which the dispute relates, atier reasonable notice. and also
to call for and inspect any document which he considers releva;,l.
A Conciliation Officer cannot compel the attendance of
parties at the conference but all parties 10 the dispute have the
right to attend in a conference.
Generally the Conciliation Officer calls all the parlies. sit
around a table and discuss the dispute. Delay may be avoided
According to the rules the proceedings are conducted in pri\ ale.
although they actually become public.
The report of the conciliation officer shall be submitted
within 14 days of the commencement of the conciliation procee-
I AIR (1956) Cal. 550
1016 INDUSTRIAL LAW

dings or within such shorter time as the Government may fix.

The time may be extended beyond 14 days by such period as
may (with the approval of the Conciliation Officer) be agreed
upon in writing by all the parties to the dispute.
After considering the report, the Government 'may send the
matter to a Tribunal or any other authority. If it does not do
so it shall record and communicate to the parties concerned its
reasons therefore.

BOARD OF CONCILIATION
Section 5 provides that the Appropriate Government may
constitute a Board of Conciliation for promoting the settlement
of an industrial dispute. The Board shall consist of a chairman
~nd two or four members as the Government thinks fit. The
Chairman shall be an independent person .
. A person is "independent" for the purpose of appointment
to a Board, Court or Tribunal if he is unconnected with the
dispute or with any industry directly affected by such dispute.
He may be a shareholder of a company connected with or likely
to be affected by such dispute. But in such a case he must disclose
to the Government the nature and extent of his shores.-Sec. 2( i).
The other members shall be appointed in equal numbers to
represent the two parties. Each party is to recommend the names
of their representatives, but if this is not done, the Government
shall selict the members.
Dillies: Section 13 provides as follows:
(I) The Board shall endeavour to bring about a settlement
between Ihe parties.
(2) If a settlement is arrived at, the Board shall send a report
thereof to the Government wilh a memorandum of the settlement
signed by the parties.
(3) If no settlement is arrived at, the Board shall send a report
stating the facts al1d circumstances, the steps laken, the reasons
why no settlement was arrived at, and its recommendations for
the determination of the dispute.
(4) Ifon the receipt ofa report in respect ofa dispute relating
to a public utility sevice, the appropriate Government does not
make a reference to a labour court, Industrial tribunal or National
tribunal under Section 10, it shall record and communicate to
the parties concerned its reasons therefore. [Sec. 13(4)).
 INDUSTRIAL DISPUTES ACT 1017

A Board of Conciliation can only try to bring about a

settlement. It has no power to impose a settlement upon the
parties.
(5) The report of the Board must 'be sent within two months
of the date on wl/ich the dispute was referred to it, or such shorter
time as the Government may fix. The Government may extend
the time up to two months. The time may be extended by
agreement in writing by all the parties.
The report must be signed by all the members. Any member
can submit a dissenting report. Every report togetller with the
minute of dissent must be published by the appropriate
Government within 30 days from its receipt.
In case of no settlement, the Government may refer the
matter to a Labour Court, Tribunal or National Tribunal. If it
does not do so it shall record and communicate to the parties
the reasons therefore.

COURT OF ENQlJIRY
Under Section 6 of the Act the Appropriate Government ma)
appoint a Court of Enquiry for enquiring into any matter
appearing to be connected with or relevant to an industrial
dispute. A Court may consist of one or more independent persons. •
If there are more than one person. one of them shall be appointed
Chairman.
Dillies: Section 14 provides that a Court shall enquire into
the nJalters referred to it and report thereon to the Appropriate
Government. ordinarily within a period of six months from the
commencement of the enquiry.
A Court of Enquiry has no power to impose any settlement
upon the parties.
The Report of the COllrt must be signed by all the members.
A member can submit a note of dissent. The Report together
with the dissenting note must be published by the Appropriate
Government "ithin 30 days from its receipt.

LABOUR COURTS
Appointment
Under Section 7 of the Act the Appropriate Government may
appoint one or more Lahour Courls. The Labour Courl shall
consist of one person.
 1018 INDUSTRIAL LAW

The person appointed to be the presiding officer of a Labour

Court (i) must be or has been a judge of a High Court, or (ii) has
been a District Judge or Additional District Judge for not less than
three years or (iii) has held office as chairman or member of Ihe
Labour Appellate Tribunal (formerly existing) or any Tribunal for
not less than two years. or (i,·) has held a judicial office in India
ror not less than 7 years, or (v) must have been the presiding officer
of a I.abour Court constituted by Provincial Act or a State Act for
not less Ihan 5 years. He must be an "independent" person and
l11uSI not have attained the age of 65 years.
JuriS4iiction
The Labour COlirt has jurisdiction over the following matters
(Second Schedule to the Act) :
I. The propriety of legality of an order passed by an employer
under the standing orders.
o The application and interpretation of standing orders.
J. Discharge or dismissal of workmen including reinstatement
of, Or grant of relief to, workmen wrongly dismissed.
4. Withdrawal of any customary concession or privilege.
5. Illegality or otherwise or a strike or lock-out.
6. All l11att~rs other than those specified in the Third Scheduie
• (i.e., those matters which are within the jurisdiction of
Industrial Tribunals).
Case Law
1. The Labour Court has jurisdiction to entertain a claim for bonus
and determine the amount due. Alland Oil Industries v. labour
COllrt. Hyc/eranad and others. 1
'") The Labour Court has jurisdiction to entertain a petition for
minimum wages due and can dClenninc the money the employee
is entitled to. AnaJ1d Oil Industries 'It. Labuur {VlIri. flyderabad
and ofhas (See above).
3. The Labour Court was right and justified by directing reinstatement
of the Appellant tthe driver in this case) in service. But the driver
is not entitled to backwages. JuSH"tWI Singh v. Pepsu Roadways
Tnll1Sporl (·orpll. alld allollt!!/: 1

Dillies: The Labour Court shall hold its proceedings expedi-

tiously and shall as soon as it is practicable on the conclusion
thereor, submit its award to the Appropriate Governmcnt.-
Sec. 15.
I AIR (1979) AP IS~ (Full Bench) 'AIR (1984) Supreme Court 355
 INDUSTRIAL DISPUTES ACT 1019

INDUSTRIAL TRIBUNALS
The Appropriate Government may by notification in the
official Gazette constitute one or more Industrial Tribunals for
the adjudication of industrial disputes relating to any matter,
whether specified in the Second Schedule or the Third Schedule
to the Act.-Sec. 7A.
The 2nd schedule has been reproduced above. under Lahour
Courts. The 3rd schedule contains the foHowing items: wages_
including the period and mode of payment; compensatory and
other allowances; hours of work and rest intervals; leave with
wages and holidays: bonus, profit-sharing, provident funds and
gratuity; shift working otherwise than in accordance with
standing orders; classification by grades; rules of discipline:
rationalisation; retrenchment of workmen and closure of
establishments; and any other matter that may be prescrihed.
Section 7 A also provides that a Tribunal shaH consist of one
person. A person shaH not be qualirled for appointment as
presiding officer of a Tribunal unless he is or has been a judge
of a High Court or has held the office of Chairman or member
of the Labour Appellate Tribunal [formerly existing under the
Industrial Disputes (AppeHatc Tribunal) Act, 1950] or of any
Tribunal for a period of not less than two years or has been
a District Judge or Additional District Judge for not less than
three years. He must be an "independent'- person and must not
have attained the age of 65 years.
The Appropriate Government may appoint two persons as
assessors to advise the Tribunal.
Dillies: The Tribunal have the same duties as Labour
Courts-Sec.15 ; when an industrial dispUk has been referred
to a Tribunal for adjudication_ it shall hold its proceedings and
shall wjthin the specified period submit its award to the
appropriate Government. The' period may be extended in
accordance with Proviso 2 to Sec. 10(2-A).

NATIONAL TRIBUNAL
Section 713 pflwides that the Central Government may by
notification in the official Gazette constitute one or more National
Tribunals for the adjudication of industrial disputes which, in
the opinion of the Central Government. invoh e questions of
national importance or are of such a nature that industrial
1020 INDUSTRIAL LAW

establishments situated in more than one State are likely to be

interested in, or affected by ~uch disputes.
A National Tribunal shall consist of one person only. No
person can be Ihe presiding officer of a National Tribunal unless
he is or has been a judge of a High Court or has held the office
of the chairman or any other member of the Labour Appellate
Tribunal (formerly in existence) for a period of not less than
two years.
The Central Government may, if it thinks fit appoint two
persons as assessors to advise the National Tribunal.
The presiding officer of a National Tribunal must be an
independent person and must not have attained the age of 65
years.-Sec. 7C.
DlIIies: National Tribunals have the same duties as Labour
COllrts and Industrial Tribunals.-Sec. IS; see above.
GRIEVANCE SETTLEMENT AUTHORITIES
Setting up of Grievance Settlement Authorities and reference
of certain individual disputes to such Authorities.
Notes: A model grievances redressal procedure had been
commended for adoption. But this voluntary arrangement has not
proved effective. It is, therefore, proposed to make it obligatory
for every induslrial establishment employing 100 or mOre work-
men to sct up a time-bound grievance redressal procedure.
Sectifm 9(,: (I) The employer in relation to every industrial
establishment in which one hundred or more workmen are
employed or have been employed on any day in the preceding
twelve months, shall set up, in accordance with the rules made
in that behalf under this Act, a Grievance Settlement Authority
for the settlement of industrial disputes connected with an
individual workman employed in the establishment.
(2) Where an industrial dispute connected with an individual
workman arises in an establ ishment referred to in sub-section (I),
a workman or any trade union of workmen of which such.
workman is a member, refer, in such manner as may be prescribed
such dispute to the Grievance Settlement Authority set up by
the employer under that sub-section for settlement.
(3) The Grievance Settlement Authority referred to in sub-
section (I) shall follow such procedure and complete its
proceedings within such period as may be prescribed.
 INDUSTRIAL DISPUTES ACT 1021

(4) No reference shall be made under Chapter III with respect

to any dispute referred to in this section unless such dispute has
been referred to the Grievance Sflltlement Authority concerned
and the decision of the Grievance Settlement Authority is not
acceptable to any of the parties to the dispute.

REFERENCE TO ARBITRATION
Voluntary Reference
Section lOA of the Industrial Disputes Act provides for the
voluntary reference of disputes to arbitration. Where any industrial
dispute exists or is apprehended and the employer and the
workmen agree to refer the dispute to arbitration, they may do
so by a written agreement in the form prescribed by the rules
and signed in the manner laid down in the rules. The reference
to arbitration must be made before the dispute has been referred
to any authority under Section 10. (See below).
The parties can select any person or persons as arbitrators
(including the presiding officer of a Labour Court, Tribunal or
National Tribunal). Where there is an even number of arbitrators,
the agreement must provide for the appointment of an umpire.
If the arbitrators are equally divided, the umpire shall enter upon
the reference and his award shall be deemed to be the arbitration
award for the purposes of the Act.
A copy of the arbitration agreement shall be forwarded to
the appropriate Government and the Conciliation Officer. The
Government shall within one month of its receipt publish it in
the official Gazette.
When the Government is satisfied th.at the parties to the
arbitration agreement represent the majority of each party, it may
by notification permit employers and workmen (who are not
parties to the agreement but are concetlled with the dispute) to
present their case before the arbitrators.
When a dispute is referred to arbitration, the appropriate
Government may prohibit the continuance of any pending strike
or lock-out.
The arbitrator or arbitrators shall investigate the dispute and
submit to the appropriate Government the award signed by all of
them. The provisions of the Arbitration Act of 1940 do not aprl~
to an arbitration under Sec. lOA of the Industrial Disputes Act.
1022 INDUSTRIAL LAW

Case Law:
The Arbitrator, under S. 10,\ of The Industrial Disiputes Act, is
amenable to the jurisdiction of the High Court. The High Court
can interfere with the award of the Arbitrator. GIIlarat Steel Tubes
Ltd.. elc. elc. v. Gujarat Steel Tubes lUn:door Sabha and others. I

RIGHTS OF LEGAL HEIRS (NEW)

There have been conflicting decisions about the right of
legal heirs of a workman in· the event of the death of the latter
pending proceedings before the authorities under the Act.
Provision is being made to make it clear that pending disputes
will not abate in the event of the death of the workman,
Section 10(8) of the Amending Act states as follows: No
proceedings pending before a Labour Court, Tribunal or National
Tribunal in relation to an industrial dispute shall lapse merely
by reason of the death of any of the parties to the dispute being
a workman, and such Labour Court, Tribunal or National Tribunal
shall complete such proceedings and submit its award to the
appropriate Government.
REINSTATEMENT (NEW)
It is observed that when Labour Courts pass awards of
reinstatement, these are often contested by an employer in the
Supreme Court and High Courts. The delay in the impl"mentation
of the award causes hardship to the workmen concerned. It is,
therefore, proposed to provide for payment of wages last drawn
by the workmen concerned. under certain conditions, from the
date of the award ti II the case is finally decided in the Supreme
Court or the High Courts.
REFERENCE OF DISI'UTES
Section 10 of the Industrial Disputes Act provides that where
the appropriate Government is of opinion that any industrial
dispute exists or is apprehended. it may at any time by order
in writing-
(a) refer the dispute to a Board for promoting a settlement
thereof: or
(b) refer any matter appearing to be connected with, or relevant
to, the dispute to a Court for Enquiry; or
I AIR (1980) Supreme Court 1896
 INDUSTRIAL DISPUTES ACT 1023

(c) refer the dispute or any matter appearing to be connected

with, or relevant to, the dispute if it relates to any mailer
specified in the Second Schedule, to a Labour Court for
adjudication; or
(d) refer the dispute or any matter appearing to be connected
with, or relevant to, the dispute, whether it relates to any
matter specified in the Second Schedule or the Third
Schedule, to. a Tribunal for adj ,A:cation.
Where the dispute relates to any nailer specified in the Thrd
Schedule and is not likely to affect more than 100 workmen,
the appropriate Government may refer it to a Labour Courl.
Where the dispute relates to a public utility service and
notice (of strikelJock·out) under Sec. 22 has been given. the
appropriate Government shall make a reference under Sec. 10
(notwithstanding that any other proceedings under the Act has
been commenced) unless it considers that the notice has been
frivolously and vexatiously given and that it is inexpedient to
make a reference under Sec. 10(1).
Where the Central Government is of opinion that any
industrial dispute exists or is apprehended and the dispute
involves any question of national importance or is of su<:h a
nature that industrial establ ishments situated in more than one
State arc likely to be interested !n or affected by such dispute,
it may refer the dispute or any matter connected with it, or
relevant to it, whether it relates to any matter specified in the
Second Schedule or the Third Schedule, to a National Tribunal
for adjudication.
A reference may also be made on the application of the
parties to the dispute, jointly or separately. if the appropriate
Government is of opinion that the applicants represent the
majority of each party.
When a reference under this section is made the appropriate
Go\'ernment may prohibit the continuance of any pending strike
or lock·out.
The appropriate Government may in the reference order
specify the points of dispute for adjudication, in which case the
adjudication shall be limited io those points and mailers incidental
thereto.
After the 'order of reference, but before Ihe a\\ard. the
appropriate Go\crIJ1l'u:nt 11la~ include in the reference. establish-
 1024 INDUSTRIAL LAW

ments interested in or likely to be affected by the dispute, though

there may be no dispute in them at that time.
When a reference has been made to a National Tribunal, the
subject under reference cannot be referred to any Labour Court
or Tribunal. If any such matter was pending before any such
authority, the proceedings before it shall be deemed to have been
quashed when a referp l1ce is made to the National Tribunal. In
proceedings before the National Tribunal the "appropriate
Government" is the Central Government.

Power to make Reference

The power to make reference by the appropriate government
is discretionary power and it can be exercised on being satisfied
that an industrial dispute exists or is apprehended. There must
be some material before the government. Its power is
administrative in character. The Court cannot question the
government's opinioli, that is, it is not justiciable. Avon Services
PrudZiCIion Agencies (Pi Ltd. v. Induslrial Tribunal, Haryana ond
others. I

Transfer
Section 33B provides that the appropriate Government can
transfer proceedings from a Labollr Court, Tribunal or National
Tribunal to another. The order mllst be in writing and the reasons
for doing so must be recorded.
Filling of v'acancies
If, for any reason, a vacancy (other than a temporary absence)
occurs in the office of the presiding ollicer of a Labour COllrt,
Trihunal or National Tribunal or in the office of the Chairman
or any other member of a Board or COllrt, then, in the case of
a National Tribunal, the Central Government and, in any other
case, the appropriate Government. shall appoint another person
in accordance with the provisions of this Act to fill the vacancy
and the proceeding may be continued before the Labour Court,
Tribunal, ~ational Tribunal, Board or Court, as the case may
be. from the stage at which the ,,\can9 is filled,-Sec, g,

I AI~ (l97Q, Supreme Court 170

l
 INDUSTRIAL DISPUTES ACT 1025

PROCEDURE AND POWERS

The authorities appointed under the Act shall follow such
procedure as they think fit, subject to rules framed by the
Government in this behalf. The authorities may, after giving
reasonable notice, enter the premises occupied by any
establishment to which the dispute relates.
The above authorities have the powers which are vested in
a Civil Court for the purpose of enforcing the attendance of
witnesses and examining them, compelling the production of
documents and material objects, issuing commissions for the
examination of witnesses etc.
A Court of Enquiry, Labour Court, Tribunal and National
Tribunal may appoint assessors to advise them. Membe~s of the
aforesaid bodies and conciliation officers are public servants.
Every Labour Court, Tribunal and National Tribunal is a Civil
Court. They can determine and award costs.-Sec. II.
The powers of Labour Court. Tribunals and National
Tribunals have been enlarged in 1971. by new section II A. The
provi~ions of the section are stated below.
Where an industrial dispute relating to the discharge or dismissal
of a workman has been referred to a Labour Court, Tribunal or
National Tribunal for adjudication and, in the course of the
adjudication proceedings, above authorities may be, is satisfied that
the order of discharge or dismissal was not justified, it may, by its
award, set aside the order of discharge or dismissal and direct
reinstatement of the workman on such terms and conditions, ifany,
as it thinks fit, give such other relief to the workman including the
award of any lesser punishment in lieu of discharge or dismissal
as the circumstances of the case may require.
The above authorities under section lIA, shall rely only on
the materials on record and shall not take any fresh evidence
in relation to the matter.

AWARD AND SETTLEMENT

Award
Award means an interim or a final determination of anv
industrial dispute or of any question relating'thereto by an\.'
Labour Court, Tribunal or National Tribunal and .includes 0"
arbitration award made under section IOA.-Sec.2(b).

Industrial Law - 65
1026 INDUSTRIAL LAW

The Award of a Labour Court, TTibunal or National Tribunal

shall be signed by its presiding officer.-Sec. 16(2).
The report of a Board or Court shall be in writing and shall
be signed by all its members. A member may, however, record
a minute of dissent.-Sec. 16(1).
Every such award shall be published by the appropriate
Government within 30 days from its receipt.-Sec.17(1).
Subject to the provisions of Sec. 17A (see; next two
paragraphs) the award published under Sec. 17(1) shall be final
and shall not be called in question by any Court in any manner
whatsoever.-Sec. 17(2).
Commencement of award
An award (including an arbitration award) shall become
enforceable on such date as may be specified therein and if no
date is specified, on the expiry of 30 dAys from the date of
publication by the Government.-Sec. 17A(I) & (4).
But the appropriate Government (in the case of awards of
a Labour Court or a Tribunal) and the Central Government (in
the case of awards of a National Tribunal) have been given power
to reject or modify an award, if they are of opinion that it will
be inexpedient on public grounds affecting the national economy
or social justice to give effect to the whole or any part of the
award. The order rejecting or modifying the award must be placed
before the State legislature or the Parliament as the case may
be. The modified award· becomes effective from the expiry of
15 days from the date on which it is laid before the legislature.-
Sec. I7A(2) & (3).
Settlement
Settlement means (I) a settlement arrived at in course of
conciliation proceedings and (2) includes a written agreement
between the emplo~r and workmen arrived at otherwise than
in the course of 'conciliation proceeding where such agreement
has been signed by the parties thereto in such manner as may
be presc~ibed and a copy thereof has been sent to an officer
authorised in this behalf by the appropriate Government and the
conciliation officer.-Sec. 2(p).
Persons OD wbom Settlements and Awards are binding
Settlements and awards are binding on the following
persons-Sec. IS.
 INDUSTRIAL DISPUTES ACT 1027

I. A settlement arrived at between the employer and

workmen (otherwise than in course of conciliation proceedings)--
on the parties to the agreement.
2. An arbitration award--Qn the parties who referred the
dispute to arbitration.
3. A settlement arrived at in course of conciliation procee-
dings under the Act and an award of a Labour Court, Tribunal
and National Tribunal--Qn all parties to the· dispute and all
parties summoned to appear as parties (unless the authority
concerned records the opinion that they were summoned without
proper cause). The term party, in this section, includes (in the
case of an employer)--hisheirs, successor or assigns; and (in
the case of workmen)--all persons employed in the establishment
or the part of which to which the dispute relates and all persons
who subsequently become employed in that establishment or part.
Case Law:
(I) Arbitrator functioning under Sec. lOA of the Industrial 'Disputes
Act is a statutory Tribunal. If in its Award there is an apparent error
of law the award can be set aside. Rohtas Industries Ltd & another
v. Bohlas Industries Staff Union & others. I
(2) Settlement arrived at between the parties by the President and
SecretaJ)'. of Union is binding on the parties. Burmah Shell U.'orkers·
Union v. State of Kerala. 2
(3) Every settlement is an arrangement or agreement: But every
arrangement or agreement is not a settlement. India Tobacco Co.
v. Dy. Labour C ammr. J
\4) lOA settlement, not being one arrived at in the course of conciliation
proceedings would be enforceable only against the parties thereto:'
Jhagrakhan Collieries (p) Ltd.. v. G. C Agrawal elc. 4
(5) An award or settlement continues to regulate relationship between
the parties till replaced by new one. There is no distinction between
award and settlement from the "View point of their legal force. The
object of the Industrial Disputes A,. is senlement of industrial
disputes, not an enactment bearing merely on terms and conditions
of service. Life Insurance Co/poration of India v. D J. Bahadllr
and a/hers. 5
Period of Operation
A settlement shall come into operation on such date as may
be agreed upon by the· parties to the dispute, and if no date is
I AIR (1976) Supreme Court 425 2 AIR (1962) Kerala 190
) (1971) 75 C.W.N. 217 'AIR (1975) Supreme Court 171
'AIR (1980) Supreme Court 2181
1028 INDUSTRIAL LAW

agreed upon, on the date the memorandum of agreement is

signed.-Sec. 19(1).
A settlement is binding for such period as is agreed upon
by the parties. If no such period is agreed upon it remains binding
for 6 months from the date it was signed. It continues to remain
binding after this period of 6 months, till a party (representing
the majority of persons bound by the settlement or award) gives
notice in writing to terminate the settlement. The settlement
terminates on the expiry of 2 months from the date of such
notice.-Sec. 19(2).
An award remains in operation for a period of one year from
the date on which it becomes enforceable. But the appropriate
Government may reduce the period of operation. It can also, by
an order issued before the expiry of the award, extend the period
of operation. Such extension can be made for one year at a time,
but the total period of operation cannot exceed 3 years.-Sec.
19(3). The award continues to remain binding after expiry of
the period of operation till notice is given by a party bound by
the award to the other party or parties intimating its intention
to terminate the award. The award ceases to be binding on the
expiry of 2 months from the date of the notice.-Sec. 19(6). The
provisions of Section 19(3) do not apply to an award which by
its nature, terms and other circumstances does not impose, after
it has been given effect to, any continuing obi igation on the
parties bound by it-Sec. 19(5).
If it appears that since the award was made there has been
a material change in the circumstances on which it is based, the
appropriate Government may refer the award ora part of it to
an authority (of the same kind as the one which made the original
award) for decision whether the period of operation should be
shortened. The dec.ision of the authority shall be final.-Sec. 19(4).
Penalty for breach of Settlement or Award
A person who commits a breach of any settlement or award
binding on him can be punished with imprisonment up to 6
months or with fine or with both. Where the breach is a
continuing one, there may be a further fine of up to Rs. 200 for
every day during which the breach continues after the conviction
for the first. The whole or part of the fine can be-paid as
compensation to the injured party.-Sec.29.
 INDUSTRIAL DISPUTES ACT 1029

Some e •••• r.gardlag Pow.rs of Tribunals

(i) Creation of new rights and obligations: The function of an
Industrial Tribunal is not confined to administration of justice in
accordance with law. 11 is not bound by any contract between the
parties and it can create new rights and obligations if it conside"
it proper to do so for keeping industrial peace. But a Tribunal is
vested with the powers of a Civil Court. Hence an application for
special leave to appeal from the decision of a Tribunal is competent.
The Bharat Bank. Delhi v. Employees of Bharat Bank.'
(ii) Mutual righl$ and obligations: The basis of industrial arbitration
is the recognition of the doctrine that employers and workers
engaged in an industry have mutual rights and obligations. These
rights and obligations must either be incidental to the membership
of a civilised community or based on positive law. The Waterside
Jforkers Federation of Australia v. J. W. Aie:'Cander LId.].
(iiI) Interim Award: A Tribunal has power to give interim relief by an
interim award even though its jurisdiction to deal with the dispute
has been challenged. An interim award is a provisional or temporary
arrangement made in matters of urgency and subject to the final
adjudication or complete determination of the dispute. National
Tobacco Co. v. Sarathi. 3
(i,.) Mailers related to the terms of reference: The scope of the
jurisdiction of a Tribunal is created by the terms of reference to
it. Ordinarily it should confine itself to the matters in dispute
specifically referred to it. But if necessary, it can deal with matters
related to the terms of reference.' Associated Cement Companies
v.Khilari Cement Workers Union. 4
(v) A general award: A general award affecting all workmen cannot
be quashed ot varied against some only. It must be quashed against
all if not binding on some. Md. Oosman Rahimtlll/a v. Labour
Appel/ate Tribunal.'
(vi) Retrospective Award: It is within the powers of a Tribunal to make
an award with retrospective effect from a special date. Jeewanlal
Ltd. v. Their Workmen'
(vii) Quasi-judicial bodies: Industrial Tribunals are quasi-judicial bodies
and are not hampered by the rules of evidence applicable to
proceedings in a court of law and would be entitled to rely on d.t.
available to it otherwise from evidence adduced on behalf of the
parties. Electric .Wechanical Industries v. "Industrial Tribunal. 1
(vF;) Award on promotion of an employee: Ordinarily promotion of a
workman from a lower grade to a higher grade is a managerial

, AIR (1950) Supreme Court 188 2 (1918) 25 C.I.R. 434

) (1952) 11 L.L.J. 319 • (1952) 11 L.L.J. 484
'(1952) L.L.J. 172 6(1951-52) 3 F.l.R. 485
1 AIR (1950) Mad. 839
r
1030 INDUSTRIAL LAW

function and in the absence of a finding that the refusal of the

management to place a workman in the higher grade was on account
of his trade union activities or any unfair labour practice, the Labour
Court could not arrogate to itself the promotional function.
The award of the Court directing the reposting of the workmam
in his original department was bad and should be set aside.
Hindustan Lever Ltd. v. The Workmen. I
Ux) Award: The definition "award" in Section 2(b) falls in two parts.
The first part covers a determination, final or interim, of any
industrial dispute. The second pan takes in a determination of any
question relating to an industrial dispute. But the basic postulate
common to both the parts of the definition is the existence of an
industrial dispute, actual or apprehended. U·S Cox and Kings
(Agents) Ltd v. Their Workmen and others. 2

CONFIDENTIAL MATTERS
Reports and Awards under the Act must not include informa-
tion of a confidential nature obtained from evidence given, but
not available otherwise. The information must not be disclosed
in any other way. The persons concerned (the employer, the trade
union etc.) can make a request in writing to the authority dealing
with the matter to keep any information secret.-Sec. 21.
A person, who wilfully discloses confidential information,
can be punished by fine up to Rs. 1,000 or imprisonment up to
6 months or both.-Sec. 30.
LOCK-OUT
Definition
"Lock-out" means the closing of a place of employment, or
the suspension of work, or the refusal by an employer 10 continue
to employ any number of persons employed by him.-Sec. 2( I).
Lock-out is an act of the management. A temporary
suspension of work (for example, on account of shortage of raw
materials) is not Ii lock-out. A lock-out is generally intended to
put pressure on the workers so that they may agree to the terms
of work of the employer.
Conditions precedent to lock-out
I. No employer carrying on any public utility service shall
lockout any of his workmen (a) without giving them notice of
lock-out, in the prescribed manner, within six weeks before
I AIR (1974) Supreme Court 17 2 AIR (1977) Supreme Court 1666
 INDUSTRIAL DISPUTES ACT 1031

locking out; or (b) within fourteen days of giving such notice;

or (c) before the expiry of the date of lock-out specified in any
such notice as aforesaid; or (d) during the pendency of any
conciliation proceedings before a conciliation officer and seven
days after the conclusion of such proceedings.-Sec. 22(2).
2. Notice of lock-out or strike is not necessary wher, a strike
or lock-out (respectively) is already in existence. But the
employer shall inform the prescribed authoriiy.-Sec. 22(3).
3. When an employer of a public utility service receives
notice of strike or gives notice of a lock-out, he must within
five days report to the appropriate Government or the au "lCrity
appointed by such Government for this purpose.-Sec. ~:( J).
Differences between Lock-out and Discharge
In a lock-out the relationship between the employer and the
employee, continues. But in case of a discharge the relationship
between the employer and the employee is cut off.
Differences between Lock-out and Closure
I. Lock-out means suspension of work. Closure means
discontinuation of the business.
2. Lock-out is intended to exert pressure upon the workmen.
Closure may be due to other factors, for example, economic causes.
3. Lock-out is generally caused by strike, fear of disorder,
and destruction of the properties of the firm. Most of these causes
are the results of industrial disputes. Closure is usually not the
result of industrial disputes. But there were some cases where
closure was a product of strike, assault upon the officer and
unhappy incidents. Feroz Din v. Slale of Wesl Bengal.'
STRIKE
"Strike" means a cessation of work by a body of persons
employed in any industry acting in combination, or a concerted
refusal, or a refusal under a common understanding, of any
number of persons who are or have been so employed to continue
to work or to accept employment.-Sec. 2( q).
Strike means stoppage of work by a number of employees
acting together. A strike is the weapon used by workmen to force
the employer to agree to their demands.
I AIR (1960) Supreme Court 363
,.
1032 INDUSTRIAL LAW

The duration of the cessation of work is not material. If the

employees cease work, even only for an hour or a part thereof,
would be called a strike. Buckingham and Camalic Co. Lid v.
Workers.'
Under t~e Industrial Disputes Act a' strike notice is to be
given when the workers are employed in a Public Utility Service.
(See below: the definition of Public Utility Service).,
A strike is illegal on Iy when it is against the provision of
the Industrial Disputes Act (See below).
Partial Refusal: A partial refusal of work may constitute
a strike.
Refusal or overtime work
In certain industries, overtime work is customary and is done
habitually. In certain industries overtime work is a legal obligation,
e.g., urgent repairs. In the above cases refusal of overtime work
is against the conditions of service. Not to do such work may
be interpreted as a strike.
Stay-in Strike
This type of strike happens when the workers stay inside
the factory or establishment but do not work. It is sometimes
also called pen-down strike or sit-down strike. This type of strike
is expensive.
Go-slow
Go-slflw is a deliberate delaying of production by workmen.
lt delays production and thereby reduces the output, although the
workmen will be entitled to get full wages. I.n the case Fireslone
1}pe v. & Rubber Co. India Ltd. v. Bhoja Shelly and anolher2 ,
it was observed that go-slow methods are regarded in labour
legislation as a form of misconduct. Such employees can be
charges heeted, and. if misconduct is proved, they can be dismissed.
Deduction rrom wages ror ,trike
Section 9 of the Payment of Wages Act provides that an
amount up 'to 8 days of wages may be deducted if ten or more
persons acting ill concert and without reasonable cause and
without giving due notice, absent themselves from work. (See
p.967, para 2).
I AIR (1953) Suprcm~ Coun 47 , (1953) I L.LJ. 599
 INDUSTRIAL DISPlITES ACT 1033

Where any strike is commenced without glvmg notice as

required under Sec. 22, or within 7 days of the conclusion of
proceedings, the strike must be held to be illegal irrespective of
whether it was provoked by the employer, and the workmen
would not be entj,tled to any pay for the. period of strike. Moha
Luxmi Callan MiTIs Ltd v. Workers' Union I Crompton Greaves
Ltd. v. The Workmel1.' (See p. 1036).
PUBLIC UTILITY SERVICE
This term is defined in Section 2 (n). It include~ any railway
service; any section of an industrial establishment, on the
working of which the safety of the establishment or the workmen
employed therein depends; any postal, telegraph or telephone
service; any industry which supplies power, light or water to
the public; any system of public conservancy or sanitation.
Any of the industries mentioned below (specified in the First
Schedule to the Act) may be declared to be a public utility service
(for a specified period, not exceeding six months initially but
capable of being extended for further periods not exceeding six
months at a time) if the appropriate Government is satisfied that
public emergency or public interest so requires: Transport (other
than railways) for the carriage of passengers or goods by land,
or water; banking; cement; coal; cotton textiles; foodstuffs;
iron and steel; defence establishment; service in hospitals and
dispensaries; fire brigade service.
PROHIBITION OF STRIKES AND LOCK-OUTS
Certain types of strikes and lock-outs are prohibited by the
Industrial Disputes Act :
. I. Strikes and lock-out in a Public Utility Service
No person employed in a public utility· service shall go on
strike in breach of contract (a) without giving to the employer
notice of strike, in the prescribed manner, within six weeks before
striking; or (b) within fourteen days of giving such notice; or
(e) before the expiry of the date of strike specified in any such
notice as aforesaid; or (d) during the pendency of any conciliation
proceedings before a conciliation, officer and seven days after
the conclusion of such proceedings.-Sec. (22)( I).
I F.J.R. 248 L.A. Tribunal 1 AIR (1978) Supreme Court 1489
1034 INDUSTRIAL LAW

No employer carrying on any public utility service shall lock-

out any of his workmen (a) without giving them notice of lock-
out, in the prescribed manner, within six weeks before locking
out; or (b) within fourteen days of giving such notice; or (e)
before the expiry of the date of lock-out sp~cified in any such
notice as aforesaid; or (d) during the pendency of any conciliation
proceedings before a conciliation officer and seven days after
the conclusion of such proceedings.-Sec. 22(2).
Notice of lock-out or strike is not necessary when a strike
or lock-out (respectively) is already in existence. But the
employer shall inform the prescribed authority.-Sec. 22(3).
When an employer of a public utility service receives notice
of strike or gives notice of a lock-out, he must within five days
report to the appropriate Government or the authority appointed
by such Government for this purpose.-Sec. 22(6).
II. Strike and lock-out in an Industrial Establishment
Section 23 provides that no workman who is employed in
any industrial establishment shall go on strike in breach of
contract and no employer of any such workman shall declare a
lock-oul-
(a) during the pendency of conciliation proceedings before a
Board and seven days after the Conclusion of such
proceedings;
(b) during the pendency of proceedings before a Labour Court,
Tribunal or National Tribunal and two months after the
conclusion of such proceedings;
(bb) during the pendency of arbitration proceedings before an
arbitrator and two months after the conclusion of such pro-
ceedings, where by notification under Sec. IOA{3A) parties,
other than parties to the arbitration agreement, have been
permitted to present their case before the arbitrators; or
(e) during any period in which a settlement or award is in
operation. in respect of any of the matters covered by the
settlement or award.
III. By Order of the Government
Section I O(3) provides that where an industrial dispute has
been referred to a Board, Labour Court, Tribunal or National
Tribunal, the appropriate Government may by order prohibit the
 INDUSTRIAL DISPUTES ACT 1035

continuance of a strike or lock-out in connection with such

dispute which may be in existence on the date of the reference.
Under Section IOA(4A) the appropriate Government can issue
a similar order when a dispute has been referred to arbitration
and a notification has been issued under sub-section 3A of
Sec. lOA.
IV. Prohibition of Strike. Lay-off, and Lock·out in Essential
Services
Under the Essential Services Maintenance Act, 1981, the
Central Government can prohibit strike, lock·out, and lay·off in
essential services by a notification by general or special order
for a limited period. After the notification is issued the strike,
lock·out and lay·off will be considered illegal. The Act has
prescribed penalties for illegal strike etc. (See the next topic).
When is a strike or lock-out illegal?
A strike or lock·out is illegal if it is in contravention of
Section 22 or 23 or is against an order issued by the appropriate
Government under Section 10(3) or IOA(4A). They are illegal
also in essential services (See IV. above). These cases have been
enumerated above.
Where a strike or lock·out is already in existence at the date
of the reference to a Board, Labour Court, Tribunal or National
Tribunal, the continuance of such strike or lock-out is not illegal
provided that such strike or lock-out was not illegal at its
commencement.-Sec. 24(2).
A lock-out declared in consequence of an illegal strike or
a strike declared in consequence of an illegal lock-out shall not
be deemed illegal.-Sec. 24(3).
No person shall knowingly expend or apply any money in
direct furtherance or support of any illegal strike or lock-out.
-Sec. 25.
Penalties under the Industrial Disputes Act
The penalties provided for violation of the rules regarding
strikes and lock-cuts are as follows :
Any workman who commences, continues or acts in
furtherance of an illegal strike-imprisonment up to one month
or fine up to Rs. 50 or both.-Sec. 26( I).
1036 INDUSTRIAL LAW

Any employer who commences, continues or acts in

furtherance of an illegallock-out-imprisonment up to one month
or fine up to Rs. 1000 or both.-Sec.26(2).
Instigating or inciting an illegal strike or lock-out-imprison-
ment up to six months or fine up to Rs. 1,000 or both.-Sec. 27.
Financial aid to illegal strikes and lock-outs-imprisonment
up to six months or fine up to Rs. 1,000 or both.-Sec.28.
Penalties under the ESMA: See below.
Court Decisions :
I. A strike is legal if it does not violate any provisions of the statute.
A strike cannot be said to be unjustified unless the reasons for it
are entirely perverse or unreasonable. Whether a particular strike
was justified or nol is a question of fact which has to be judged
in the light of fact and circumstances of each case. The use of force
or violence or act of sabotage resorted by the workmen during a
strike disentitle for wages during the strike. Cromplon Greaves LId.
v. The Workmen.'
2. Every employer declaring an illegal lock-out and every employee
participating in an illegal strike can be punished according to penal
section of the Industrial Disputes Act. The Supreme Court has
decided that participation in an illegal strike is sufficient for
dismissal from service where the standing orders contained such a
provision. In an illegal strike the workmen are not entitled to any
pay for the strike period. Maha LlIxnri COl/Oil Alills Ltd. v. Workers·
Union.' (See p.1033).

PROHIBITION OF STRIKE, LAY OFF, AND LOCK-

OUT IN ESSENTIAL SERVICES (ESMA)
Object and reasons
The Government wanted to prevent strike, lay-off, and lock-
out in essential services. The object was to provide the
maintenance of certain essential services and the normal life of
the community.
Application
On 27th July, 1981, the Central Government issued an
Ordinance with the object and reasons as stated above. The
duration of the Ordinance was six months only. Later on the
Ordinance was replaced by an Act on 23rd September, 1981. The
, AIR (1978) Supreme Court 1489 1 FJ.R. 248 L.A. Tribunal
 INDUSTRIAL DISPUTES ACT 1037

Act is called the Essential Services Maintenance Act, 1981, or

the ESMA (Act No. 40 of 1981). The provisions of the Act are
summarised below.
The Act extends to the whole of India, provided that it shall
not apply to the state of Jammu and Kashmir in so far as it
is related to any essential services connected to matters with
respect to which Parliament has no power to make laws for that
State. Section 8 (lock-out) and Sec. 9 (Lay-of!) were applied
immediately; the other provisions were deemed to have come
into force on 26th July, 1981.
Essential Service
The Act defines and makes a list of all services which are
included within the term "Essential Servces". The list is
comprehensive and covers almost all important industries,
employment and services connected therewith. The items are
stated below: (i) Postal, telegraph and lelephone service;
(ii) railway and transport; (iii) aerodromes and the operation,
repair and maintenance of aircraft; (iv) major ports including
loading, unloading and movement of goods etc. ; (v) clearance
of goods or passengers through customs or prevention of
smuggling; (vi) armed forces or its installation connected with
defence; (vii) any establishment or undertaking dealing with
production of goods required for defence; (viii) any service
pertaining to scheduled Industries; (ix) any service connected
with purchase etc. regarding foodgrains ; (x) any service connected
with public conservancy, sanitation, or water supply, hospital,
dispensaries etc.; (xi) banking; (xii) production, supply and
distribution of coal, power, steel and fertilizer; (xiii) oil field
or refinery; (xiv) mint or security press; (xv) election to
Parliament and the state Legislature; (xvi) Service connected
with affairs of the union; (xvii) any other service connected with
matters with respect to which Parliament has power to make laws
and which the Central Government being of opinion that strikes
therein would prejudicially affect the maintenance of any public
utility service, the public safety or the maintenance of supplies
and services necessary for the life of the community or would
result in Ihe infliction of grave hardship on the community, may,
by notification in the official Gazette, declare to be an essential
service for the purposes of this Act.-Sec. 2( I lea).
 1038 INDUSTRIAL LAW

Strike
"Strike" means the cessation of work by a body of persons
while employed in any essential service acting in combination
or a concerted refusal or a refusal under a common understanding
of any number of persons who are or have been so employed
to continue to work or to accept work assigned and includes-
(I) refusal to work overtime where such work is necessary for
the maintenance of any essential service ;
(ii) any other conduct which is likely to result in or results
in, cessation or substantial retardation of work in any
essential service.-Sec.2(b).
Notification under the ESMA
Every notification issued under sub-clause (xvii) of clause
(a) of-section (1) shall be laid before each House of Parliament
immediately after it is made when the House is in session and
on the first day of the commencement of the next session of
the House if it is not in session, and shall cease to operate at
the expiration of forty days from the date of its being' so laid
or from the re-assembly of Parliament, as the case may be, unless
before the expiration of that period a resolution approving the
issue of the notification is passed by both Houses of Parliament.-
Sec. 2(2), See the item (xvii) above.
Power to prohibit strikes in certain employments
(I) If the Central Government is satisfied that in the public
interest it is necessary or expedient so to do, it may, by general
or special Order, prohibit strikes in any essential service specified
on the Order.
(2) An order made under sub-section (I) shall be published
in such manner as the Central Government considers best
calculated to bring it to the notice of the persons affected by
the Order.
(3) An Order made under sub-section (I) shall be in force
for six months only, but the Central Government may, by a like
Order, extend it for any period not exceeding six months if it
is satisfied that in the public interest it is necessary or expedient
so 10 do.
(4) Upon the issue of an Order under sub-section (I ),-
(a) no person employed in any essential service to which
the Order relates shall go or remain on strike;

l
 INDUSTRiAl DISPUTES ACT \039

(b) any strike declared or commenced whether before or

after the issue of the Order, by persons employed in
any such services shall be illegal.-Sec. 3.
Illegal strike: See 3(4)(b), above.
Penalties for illegal strike: See below.
Lock-out
This term is not defined in this Al t hut is defined in the
Industrial Disputes Act, 1947. (See p. ,030).
Power to prohibit lock-out in certain establishments
Under Sec. 8 of this Act, the Central Government may
prohibit, by Order, lock-out in certain establishments in the same
manner as a strike is prohibited, (see above) and for the same
duration.
lIIegallock-out: A lock-out declared or commenced whether
before or after the issue of an Order prohibiting lock-out, is an
illegal lock-out.
Penalties for illegal lock-out : The employer can be punished
by imprisonment up to 6 months and/or fine up to Rs. 1000.
Lay-off
This term is not defined in this Act but is defined in the
Industrial Disputes Act, 1947. Lay-off implies the failure, refusal
or inability of an employer to provide employment to a workman
whose name is included in muster rolls of his industrial
establishment and who has not been retrenched.
Power to prohibit Lay-off in certain establishments
Under Sec. 9 of this Act, the Central Government may
prohibit, by Order, lay-off in certain establishments in a same
manner as in strike is prohibited, (see above) and for the same
duration.
Illegal Lay-off: A lay-off declared or commenced whether
before, after the issue of an order prohibiting lay-off, is an illegal
lay-off.
Penalties for illegal lay-off: A workman whose lay-off is
illegal shall be entitled to all the benefits under any law for the
time being inforce as if he has not been lay-off. The employer
can be punished by imprisonment up to 6 months and/or fine
up to Rs. 1000.
1040 INDUSTRIAL LAW

Penalties
This Act provides certain penalties. Employees participating
in illegal strike shall be liable to disciplinary action (including
dismissal). (Sec. 4). Any person participating in illegal strike
shall be punishable with imprisonment up to six months andl
or fine up to Rs. 1000 (Sec. 5). Any person who instigates or
incites to part in iIIega' strike is punishable for imprisonment
up to one year andlor R •. 2000. (Sec. 6). For giving financial
aid to illegal strike way be punishable with an imprisonment for
one year and/or Rs. 2000 and both. (Sec. 7).
A police officer may arrest without warrant any person who
is reasonably suspected of having committed any offence under
the Act (Sec. 10). All offences under the Act can be tried in
a summary way by any Metropolitan Magistrate, or any Judicial
Magistrate of the First Class (Sec. II).

LAY OFF, RETRENCHMENT AND CLOSURE

Rules regarding lay-off, retrenchment and closure are
contained in sections 25A to 25J in chapter VA and in sections
25K to 25S in chapter VB. The chapter VB was added by the
Industrial Disputes (Amendment) Act of 1976. The rules of
chapter VA and VB are stated below.
Application of Chapter VA
Section 25A states that the rules contained in Chapter VA
do not apply to-
(a) an industrial establishment in which less than 50 workmen
on an average were employed per working day in the
preceding calendar month; or
(b) industrial establishments which are of a seasonal character
or in which work is performed only intermittently.
If a question arises whether an industrial establishment is
of a seasonal character or whether work is performed therein only
intermittently, the decision of the appropriate Government thereon
shall be final.
Certain provisions of Chapter VA apply to an "industrial esta-
blislunent" viz., sections 25B, 25D, 25FF, 25G, 25H, 25J, and 25S.
Application of Chapter VB (25KI
(I) The Provisions of this chapter shall apply to an industrial
 INDUSTRIAL DISPUTES ACT 1041

establishment (not being an establishment of a seasonal character

or in which work is performed only intermittently) in which not
less than three hundred workmen were employed on an average
per working day for the preceding twelve months.
(2) If a question arises whether an industrial establishment
is of a seasonal character or whether work is performed therein
only intermittently, the decision of the appropriate Government
thereon shall be final.
Industrial Establishment (2SL(a)(
"An industrial establishment" of the purposes of Chapter
VB means (i) a Factory as defined in Sec. 2(m) of the Factories
Act, 1948, or (ii) a mine as defined in Sec. 2(J) of the Mines
Act, 1952, or (iii) a plantation as defined in Sec. L(f) of the
Plantation Labour Act, 1951.

SMALL ESTABLISHMENTS
The special provisions relating to lay-off, retrenchment and
closure as contained in Chapter VB of the Act apply at present
to establ ishments employing 300 workmen or above. With a view
to extending this statutory protection to workmen of smaller
establishments also, it is proposed to reduce the existing employ-
ment limit from 300 to 100.

Appropriate Government [2SL(b)1 .

Notwithstanding anything contained in sub-clause (ii) of
clause (a) of section 2-
(i) in relation to any company in which not less than fifty-
one per cent of the paid-up share capital is held by the
Central Government, or
(ii) in relation to any corporation [not being a corporation
referred to in sub-clause (i) of clause (a) of section 2]
establ ished by or under any law made by Pari iament, the
Central Government shall be the appropriate Gowrnment.
(See p. 1013).

Authority
The Central Government has authorised the Ministry of
Labour to deal with all applications for the purposes of sections
25M(I) to (7) and 25N.

Industrial Law - 66
 1042 INDUSllUAL LAW

Badli Workman
A badli workman is one who is employed in an industrial
establishment in the place of another workman whose name is
borne on the muster rolls of the establishment. A badli workman
ceases to be regarded as such when he has completed one year
of continuous service in the establishment.-Sec. 25C( I).
Explanation.
Continuous Sen ice (Sec. 25B)
A workman is said to be in continuous service for a period
if he is. for that period, in uninterrupted service. Interruptions
It>r thl' following reasons do not constitute break of service:
sickness. authorised leave. accident, a strike which is not illegal,
lock·out. or a cessation of work which is not due to any fault
on the pan of the workman.
Where a workman is not in continuous service within the
meaning of the above clause, he shall be deemed to be in
cont il1UOIIS serrice for one year under an employer, under the
following circumstances ;
If during a period of twelve calendar months preceding the
date with reference to which calculation is to be madc, he has
actually work.ed under the employer for not less than (i) 190 days
in .the case of a workman employed below ground in a mine;
and (ii) 240 days in any other case.
A workman shall be deemed to be in continuous service for
six months under an employer, under the following circums·
tances; If during a period of six calendar months preceding the
date with reference to which calculation is to be made he has
actually worked under the employer for not less than (i) 95 days
in the case of a w0rkman employed below ground in a mine;
and (ii) 120 days in any other case.
When calculating the number of days for the above purposes,
the employer shall include the days on which the workman-
(i) has been laid off under an agreement or as permitted by
standing orders made under the Industrial employment
(Standing Orders) Act, 1946, or under the Industrial
Disputes Act or under any other law applicable to the
industrial establishment;
(ii) has been on leave with full wages, earned in the previous
year:

l
 INDUSTRIAL DISPUTES ACT 1043

(iii) has been absent due to temporary disablement caused by

accident arising out of and in thc course of his employment;
and
(il') in the case of a female, she has been on maternity leave;
so, however, that the total period of such maternity leave
does not exceed 12 wceks.-Explanation to Sec. 258.
Average Pay
Average pay means the average of the wages payable to a
workman-
(i) in the case of monthly paid workman, in the three complete
calendar months,
(ii) in the case of weekly paid workman, in the four complete
weeks,
(iii) in the case of daily paid workman, in the twelve full
working days,
preceding the date on which the average pay becomes payable
if the workman had worked for three complete calendar momhs
or four complete weeks or twelve full working days, as the case
may be, and where such calculation cannot be made, the average
pay shall be calculated as the average of the wages payable to
a workman during the period he actually workcd.-Sec. 2(3a).
Muster Roll
Muster roll means official list. Section 25D provides that
notwithstanding that workmen in any indu5trial establishment
have been laid off, it shall be the duty of every employer to
maintain for the purposes of sections 25A to 25J, a muster roll
and to provide for the making of entries therein by workmen
"ho may present themselves for work at the establishment at
the appointed time during normal working hours.
Case Law:
The Industridl Disputes Act is a w~lfare statute. SL!ch a statute must
receive a broad interpretalion and the Court is not to make inroads
by making etymological excursions. Relief of reinstatement in
service with full back wages (Sec. 25-F) can be don~.
The meaning of continI/Oils st!n'h'l?: The workman must have
worked for atleast 240 days in one year, it is not necessary that
he has been in continuous service for one year. Surendra KI~mar
~erma etc. v. The Central Government Industrial Tribunal etc 1

I AIR (198 I) Supreme Courl 4~2

1044 INDUSTRIAL LAW

LAY OFF
Definition
"Lay Off" means the failure, refusal or inability of an
employer to give employment to a workman whose name is borne
on the muster rolls of his industrial establishment and who has
not been retrenched. Lay Off may be due to shortage of coal,
power or raw materials or the accumulation of stocks or the
breakdown of machinery or for any other reason. The term
includes its grammatical variations and cognate expressions.-
Sec. 2(kkk).
The Explanation to Sec. 2(kkk) provides that any workman-
whose name is borne on the muster rolls of the industrial
establ ishment and who presents himself for work at the time
appointed for the purpose during normal working hours on any
day-is not given employment within two hours, he is deemed
to have been laid off for the day.

LAY OFF IN MINES

It is proposed to provide that workmen in mines could be
laid off for reasons of fire, flood, excess of inflammable gas
or explosion without previous permission.
If the workman, instead of being given employment at the
commencement of any shift for any day, is asked to 'present
himself during the second half of the shift for the day and is
given employment then, he is deemed to have been laid off for
one-half of the day. If the workman is not given any employment
when he presents himself during the second half of the shift as
asked, he becomes entitled to full basic wages and dearness
allowance for that part of the day.
[The rule regarding the 'second half of the shift' was omitted
in West Bengal by an amendment of the Industrial Disputes Act,
in 1974.]
Since employment is for wages, if a workman is paid for
the day but given no work, it is not a case of layoff.
The duration of layoff
The duration of layoff can be classified as follows-
(i) When work is denied within two hours of his presenting
himself.
 INDUSTRIAL DISPUTES ACT 1045

(ii) When work is denied in the first half of the shift but the
workman again presents himself at the second half orthe shift.
(iii) When there is lay-off for one full day.
(iv) When there is lay-off for more than one day but not
amounting to retrenchment.
Distinction between Lay orr and Retrenchment
Layoff is a temporary inability or refusal to give employment.
Retrenchment is termination of the services of a workman. Lay
off does not involve break of service or loss of "continuous
service." Retrenchment involves break of service and loss of
"continuous service".
Distinction between Lay orr and Lock-Out
(I) Layoff occurs in a continuing business. In a layoff the
employer is unable to give employment to some workmen. In
a lock-out the business is stopped. In case of lay of[ compensation
has to be given at the rate specified by the Industrial Disputes
Act. In case of lock-out there is no statutory liability to pay wages
to the workers locked out. Of course if the business is totally
closed they have to pay compensation. (2) Lock out is resorted
to pressurise the workers to accept employer's demands. Layoff
may be due to economic reasons beyonU the control of the
employer. (3) Lock out may be due to an industrial dispute. Lay
off is not connected with the dispute with a worker.
Prohibition of lay-orr (Sec. 25M('
The section has been amended by the Amendment Act 1984.
Sub-section (I). No workman (other than a bad'i workman or
a casual workman) whose name is borne on the muster rolls of
an industrial establishment to which this Chapter applies shall
be laid-off by his employer except with the previous permission
of such authority as may be specified by the appropriate
Government by notification in the Official Gazette, unless such
lay of[ is due to shortage of power or to natural calamity.
Sub-section (2). Where a lay-off was already continuing, the
employer shall within a period of 15 days from such commencement,
apply to the specified authority to continue the lay-off.
I Sections 25M and 25Q were added by Industrial Disputes (Amendment)
Act, 1976.
1046 INDUSTRIAL LAW

Sub-Section (3): In the case of every application for

permission under sub-section (I) or sub-section (2), the authority
to whom the application has been made may, after making such
inquiry 8S he thinks fit, grant or refuse, for reasons to be recorded
in writing, the permission applied for.
Sub-Section (4): Where an application for permission was
made to the specified authority and his order was not
communicated within a period of two months from the date when
the application is made, the permission applied for shall be
deemed to have granted all the expiration of the said period of
two months.
Sub-Section (5): (a) Where no application for permission
under sub-section (I) is made, or (b) where no anplication for
permission under sub-section (2) has been made within the
specified period therein, or (c) where the permission for the lay-
off or the continuance of the lay-off has been refused. such three
cases shall be deemed to be illegal and the workmen shall be
entitled to all the legal benefits.
Sub-Section (6): The provisions of section 25C (other than
the second proviso thereto) shall apply to cases of lay-off referred
to in this section.
Explanation: For the purposes of this section, a workman
shall not be deemed· to be laid-off by an employer if such
employer offers. "-
(i) any alternative employment (which in the opinion of the
employer does not call for any special skill or previous
experience and can be done by the workman) in the same
establishment from which he has been laid off, or
(ii) in any other establishment belonging to the same employer
which is situated in die same town or village, or,
(iii) which is. situated within such distance from the
establishment to which belongs that the transfer will not
involve undue hardship to the workman having regard to
the facts and circumstances of his case.
But the wages which would normally have been paid to the
workman are to be offered for the alternative appointment.
Penalty (Sec. 25Q)
Any employer who contravenes the provIsions of section
25M or clause (c) of sub-section (I) or sub-section (4) of section
 INDUSTRIAL DISPUTES ACT 1047

25N shall be punishable with imprisonment for a term which may

extend to one month, or with fine which may c.xtend to one
thousand rupees Or with both.
Compensation to workmen laid off
Section 2SC provides for the payment of compensation to
a workman who is laid off. The rules regarding compensation
can be summarised as follows :
I. To be entitled to compensation, the workman must not
be a badli workman or a casual workman. His name must be
on the muster rolls of the establishment. Also he must have
completed not less than one year of continuous service.
2. The rate of compensation is 50% of the total of the basic
wages and dearness allowance that would have been payable to
him had he not been laid off.
3. The workman is entitled to compensation for all days
during which he is laid off (except for such weekly holidays
as may intervene)."
4. If during any period of 12 months, a workman is laid
off for more than 45 days. no such compensation shall be payable,
for further lay offs after the expiry of the first 45 days, if there
is an agreement to that elTect between the workman and Ihe
employer.
5. In any case falling under para 4 above, the employer can
retrench the workman in accordance with the provisions of Sec.
2SF of the Act, any time after the expiry of the first 45 days
of the layoff. If he does so, the compensation paid for layoff,
during the preceding 12 months, can be set off against the
compensation payable for retrenchment.
When no compensation is payable
Section 25E provides that no compensation is payable in the
following cases :
(i) If the workman refuses to accept (a) any alternatire
employmellt in the same establishment or (b) in any olher
establishment belonging to the same employer situated in the
same town or village or te) situated within a radius of five miles
from the establishment to which he belongs. and (d) if, in the
opinion of the employer. such alternative e'mployment does not
call for any special skill or previous experience and can be done
1048 INDUSTRIAL LAW

by the workman. [The same wages must be offered for the

alternative employment.)
(ii) If the workman does not present himself for work at the
establishment at the appointed time during nonnal working hours
at least once a day.
(iii) If such laying off is due to a srrike or slowing down
of production on the part of workmen in another part of the
cstablishment.
Case Law:
An offer of job of coolee to a skilled workman cannot amount to
the offer of an alternative job. Industrial Employee oS Union, Kanpur
v. J.K COllon Spinning and Weaving Mills Company,'

RETRENCHMENT
Definition
Sec. 2(00) of the Act defines retrenchment as, "the
termination by the employer of the services of a workman for
any reason whatsoever, otherwise than as a punishment inflicted
by way of disciplinary action, but does not incJude-
(a) voluntary retirement of the workman; or
(b) retirement of the workman on reaching the age of
superannuation if the contract of employment between thc
employer and the workman concerned contains a stipulation
in that behalf; or
(c) termination of the service of a workman on the ground
of colltinued ill health."
Conditions precedent to retrenchment
Section 25F provides that a workman who has been in
continuolls service for not less than one year under an employer
shall not be rctrenched by that employer unless all the following
conditions are fulfilled :
(I) (a) No/ice: The work'~'n has been given three months
notice in writing indicating tile reasons for retrenchment
and the period of notice has expired or the workman has
been paid in lieu of such notice, wages for the period
of notice. But no notice is necessary if the retrenchment
is under an agreement which specifies a date for the
termination of service.
'(1956) I L.L.J. 327.
 INDUSTRIAL DISPUTES ACT 1049

(b) Compensation: The workman has been paid, at the time

of retrenchment, compensation equivalent to 15 days
average pay for every completed year of continuous
-' service or any part thereof in excess of 6 months,
(c) Notice: Notice in the prescribed manner is served on the
appropriate fjovernment or such authority as may be
specified by the appropriate Government by notification
in the Official Gazette, and the permission of such
Government or authority is obtained under sub-section (2),
(2) On receipt of a notice under clause (c) of sub-section
(I) the appropriate Government or authority may, after making
such inquiry as such Government or authority thinks fit, grant
or refuse, for reasons to be recorded in writing, the permission
for the retrenchment to which the notice relates_
(3) Where the Government or authority does not communicate
the permission or the refusal to grant permission to the employer
within three months of the date of service of the notice under
clause (c) of sub-section (I), the Government or authority shall
be deemed to have granted permission for such retrenchment on
the expiration of the said period of three months_
(4) Where at the commencement of the Industrial Disputes
(Amendment) Act, 1976, the period of notice given under ciause
(a) of section 25F for the retrenchment of any workman has not
expired, the employer shall not retrench the workman but shall
within a period of fifteen days from such commencement. apply
to the appropriate Government or to the authority specified in
sub-section (2) for permission for retrenchment,
(5) Where an application for permission has been made under
sub-section (4) and the appropriate Government or the authority,
as the case may be, does not communicate the permission or the
refusal to grant the permission to the employer within a period
of two months from the date on which the application is made,
the pernlission applied for shall be deemed to have been granted
on the expiration of the said period of two months,
(6) Where no application for permission under clause (c) of
sub-section (I) is made, or where no application for permission
under sub-section (4) is made within the period specified therein
or where the permission for the retrenchment has been refused,
such retrenchmenl shall be deemed 10 be illegal from the date
on which the notice of retrenchment was given to the workman
1050 INDUSTRIAL LAW

and the workman shall be entitled to all the benefits under any
law for the time being in force as if no notice had been given
to him.
'-
(7) Where at the commencement of the Industrial Disputes
(Amendment) Act, 1976, a dispute relating, either solely or in
addition to other matters, to the retrenchment of any workman
or workmen of an industrial establishment to which this Chapter
applies is pending before'a conciliation officer or the Central
Government or the State Government, as the case may be, and-
(a) there is an allegation that such retrenchment is by way of
victimisation ; or
(b) the appropriate Government is of the opinion that such
retrenchment is not in the interests of the maintenance of
industrial peace. the appropriate Government, if satisfied
that it is necessary so to do, may. by order. withdraw such
dispute or. as the case may be, such dispute in so far as
it relates to such retrenchment and transfer the same to
an authority (being an authority specified by the appropriate
Government by notification in the official Gazette) for
consideration whether such retrenchment is justified and
any order passed by such authority shall be final and
binding on the employer and the workman or workmen.
Penalty (Sec, 25Q)
See page 1046- \047.
Last in, first out
Section 25G provides that when any workman of a particular
category has to be retrenched. the employer shall select for
retrenchment the person who was last to be employed in that
category. This rule applies only if the workman is a citi7.en of
India. The employer may deviate from this rule of '"last in, first
out"' for reasons to be recorded in writing,
Preference to Indian citizens
Section 25H provides that when the employer appoints new
personnel, retrenched workmen, if any, who offer themselves for
re-employment shall have preference over other persons. (This
rule applies only to those retrenched workmeli who are Indian
Citizens.)
 INDUSTRIAL DISPUTES ACT 1051

Case Law:
J. Termination of services even of a temporary employee on the
grounds of surplus labour amounts to retrenchment and the employee
is entitled to claim retrenchment compensation. Bans; Ught .'?ailway
Co. Ltd v. K N. Jog/akar I
2. Siriking ofT the name of the workman from the rolls by the
management is termination of his service. Such termination of
service is retrenchment within the meaning of S. 2(00) of the Act.
The provisions of S. 25F(a), the proviso apart and (b) are mandatory
and any order of retrenchment. in violation of these two peremptory
conditions precedent is invalid. Delhi Cloth and General/wills Co
Ltd. v. Shambhu ,"'lath A.fukeerjee and o/hers.2
3. "Retrenchment" includes every kind of termination. Sqnlosh Gupla
v. State Bank of Paaa/a. J
4. Last come first go: The rule is not inflexible rule and extraordinary
situations may justify variations. For instance, a junior recruit who
has a special qualification needed by the employer, may he retained
even though another who is one up is retrenched. The burden is
on the Management to substantiate the special ground for departure
from the rule. Om Oil & Oi/seeds Exchange Ltd. Delhi v. Thdr
lVorkmen,4 Workmen v. The .Hanageme11l of JOl'ehaut Tea Co_ Ud.~
5. Termination of service on aCCQunt of recession and reductJoll of
volume of work amounts to retrenchment. Gammon India Limired
v. Niranjan Dass. 6
6. Termination of service not falling under any of the exceptions In
Section 2( 00) amounts to retrenchment. lIan !dohan RaslOgi v.
Labour Court and annlhel: 7
7. Employee after his retirement on superannuation given fresh
appointment for a terl1l-Termination on expiry of that period-Does
not amount to retrenchment. Bino)' A.'umar ("halte/jee v. JUKallfar
Limiled and alhers. 8
8. Even discharge of probationer amounts to retrenchment-·
Requirements of Section 25-F have to be complied with. Afanagemt!n1
0/ KS.R.T. Carpn .. Bango/m'e v. AI. Boroiah. 9

Discharge
The employer has the power to end the services of. an
employee after a period of notice and compensation specified
in Sections 25, 25G, 25H, 25N and Sec. 33(2) to (5). (See pages
1047-1051 and 1061).
I AIR (1957) Supreme Court 121 2 AIR (1978) Supreme Court 8
) AIR (1980) Supreme Court 1219 • AIR (1966) Supreme Court 1657
'AIR (1980) Supreme Court 1454 6 AIR (1984) Supreme Court 500
7 AIR (1984) Supreme Court 502 8 AIR (1983) Supreme Court 865
9 AIR (1983) Supreme Court 1320
1052 INDUSTRIAL LAW

The industrial authorities (tribunal etc.) can enquire into the

validity of termination of services. If the discharge order was
bona fide the industrial authorities will not interfere with it.
TR<\NSFER OF UNDERTAKINGS
Section 25FF provides that where the ownership or
management of an undertaking is transferred, whether by
agreement or by operation of law to a new employer, every
workman who has been in continuous service for not less than
one year in that undertaking immediately before such transfer
shall be entitled to notice and compensation (as if he has been
retrenched) unless the following conditions are satisfied :
(a) the service of the workman has not been interrupted by
such transfer;
(b) the terms and conditions of service applicable to the
workman after such transfer are not in any way less
favourable to the workman than those applicable to him
immediately before the transfer; and
(c) the new employer is, under the terms of such transfer or
otherwise, legally liable to pay to the workman. in the event
of his retrenchment, compensation on the basis that his
service has been continuous and has not been interrupted
by the transfer.
CLOSURE
Definition
The term 'closure' is not defined in the Industrial Disputes Act.
Definition: 'closure' means the permanent closing down of
a place of employment or part thereof.-Section 2(cc).
For Section 25-0 of the principal Act. the following section
shall be substituted, namely: 25-0, Procedure for closing down
an IIndertaking-
(I) An employer who intends to close down an undertaking
of an industrial establishment to which this Chapter applies shall,
in the prescribed manner, apply. for prior permission at least
ninety days before the date on which the intended closure is
to become effective, to the appropriate Government, stating
clearly the reasons for the intended closure of the undertaking
and a copy of such application shall also be served simultaneously
on the representatives of the workmen in the prescribed manner:
 INDUSTRiAl DISPUTES ACT 1053

Provided that nothing in this sub-section shall apply to an

undertaking set up for the construction of buildings, bridges,
roads, canals, dams or for other construction work.
(2) Where an application for permission has been made under
sub-section (I), the appropriate government, after making such
enquiry as it thinks fit and after giving a reasonable opportunity
of being heard to the employer the workmen and the persons
interested in such closure may, having regard to the genuineness
and adequacy of the reasons stated by the employer, the illterests
of the general public and all other relevant factors, by order and
for reasons to be recorded in writing grant or refuse to grant
such permission and a copy of such order shall be communicated
to the employer and the workmen.
(3) Where an application has been made under sub-section (I)
and the appropriate Government does not communicate the order
granting or refusing to grant permission to the employer within
a period of sixty days from the date on which such application is
made, the perm ission appl ied for shall be deemed to have been
granted on the expiration of the said period of sixty days.
(4) An order of the appropriate government granting or
refusing to grant permission shall, subject to the provisions of
sub-section (5), be final and binding on all the parties and shall
remain in force for one year from the date of such order.
(5) The appropriate government may, either on its own
motion or on the application made by the employer or any
workman, review its order granting or refusing to grant permission
under sub-section (2) or refer the matter to a Tribunal for
adjudication : '
Provided that where a reference has been made to a Tribunal
under this sub-section, it shall pass an award within a period
of thirty days from the date of such reference.
(6) Where an application for permission under sub-section
(I) is made within the period specified therein. or where the
permission for closure has been refused, the closure of the
undertaking shall be deemed to be illegal from the date of closure
and the workmen shall be entitled to all the benefits under any
law for the time being in force as if the undertaking had not
been closed down.
(7) Notwithstanding anything contained in the foregoing
provisions of this section. the appropriate government may: if
1054 INDUSTRIAL I.A W

it is satisfied that owing to such exceptional circumstances as

accident in the undertaking or aeath of the employer or the like,
it is necessary so to do, by order, direct that the provisions of
sub-section (I) shall not apply in relation to such undertaking
for such period as may be specified in the order.
(8) Where an undertaking permitted to be closed down under
sub-section (2) or where permission for closure is deemed to be
granted under sub-section (3), every workman who is employed
in that under- taking immediately before the date of application
for permission under this section, shall be entitled to receive
compensation which shall be equivalent to fiften days, average
pay for every completed year of continuous service or any part
thereof in excess of six months.
In the State Acts of Mahara,htra and Madhya Pradesh the
term is defined as follows: "Closure means the closing of any
place or part of a pl~ce of employmenl or the total or partial
suspension of work by an employer or the total or partial refusal
by an employer to continue to employ persons employed by him
whether such closing, suspension or refusal is or is not in
consequence of an industrial dispute"
Compensation for Closure
See Sec. 25F (I )b, p. 1049 and Sec. 25-0 (7), p. 1056.
Ninety days' notice to be given of intention to close down
any undertaking (Sec. 25-0)
(I) An employer who intends to close down an undertaking
of an industrial establishment to which this Chapter applies shall
serve, fAr previous approval at least ninety days before the date
on "'hich the intended closure is to become effective, a notice
on the appropriate Government. The notice should be served
in the prescribed manner, stating clearly the reasons for the
intended closure of the undertaking :
Provided that nothing in this section shall apply to an
undertaking set up for the construction of buildings, bridges,
roads, canals. dams or for other construction work.
(2) On receipt of a notice under sub-section (I) the
appropriate Government may. if it is satisfied that the reasons
for the intended closure of the undertaking are not adequate and
sufficient or such closure is prejudicial to the public interest, by
order, direct the employer not to close down such undertaking.
 INDUSTRIAL DISPUTES ACT 1055

(3) Where a notice has been served on the appropriate

Government by an employer under sub-section (I) of section
25FFA and the period of notice has not expired at the
commencement of the Industrial Disputes (Amendment) Act,
1976, such employer shall not close down the undertaking but
shall, within a period of fifteen days from such commencement,
apply to the appropriate Governmel't for permission to close
down the undertaking.
(4) Where an application for pen lission has been made u,!l.der
sub-section (3) and the appropriate Government does not
communicate the permission or the refusal to grant the permission
to the employer within a period of two months from the date
on which the application is made, the permission applied for shall
be deemed to have been granted on the expiration of the said
period of two months.
(5) Where no application for permission under sub-scction
(I) is made, or where no application for permission under sub-
section (3) is made within the period specified therein or where
the permission for closure has been refused, the closure of the
undertaking shall be deemed to be illegal from the date of closure
and the workman shall be entitled to all the benefits under any
law for the time being in force as if no notice had been given
to him.
(6) Notwithstanding anything contained in sub-section (I)
and sub-section (3), the appropriate Government may, if it is
satisfied that owing to such exceptional circumstances as accident
in the undertaking or death of the employer or the like it is
necessary so to do, by order, direct that the provisions of sull-
section (I) or sub-section (3) shall not apply in relation to such
undertaking for such period as may be specified.
(7) Where an undertaking is approved or permitted to be
closed dO,,'1 under section (1) or sub-section (4), every workman
ill the said undertaking who has been in continuous service for
not less than one year ill that undertaking immediately before
the date of application for permission under this section shall
be entitled to notice and compensation as specified in seclion
25N and he will be deemed to be retrenched under that section.
Restarting'
.
Special provision as to restarting of undertakings closed
~
1056 INDUSTRIAL LAW

down before commencement of the Industrial Disputes

(Amendment) Act, 1976. (Sec. 25P).
If the appropriate Government is of opinion in respect of
any undertaking of an industrial establishment to which this
Chapter applies and which closed down before the commencement
of the Industrial Disputes (Amendment) Act, 1976-
(a) that such undertakiny, was closed down otherwise than on
account of unavo.dac Ie circumstances beyond the control
of the employer ;
(b) that there are possibilities of restarting the undertaking:
(e) that it is necessary for the rehabilitation of the workmen
employed in such undertaking before its closure or for the
maintenance of supplies and services essential to the life
of the community to restart the undertaking or both; and
(d) that the .. restarting of the undertaking will not result in
hardship to the employer in relation to the undertaking;
it may, after giving an opportunity to such employer and
workmen, direct, by order published in the official Gazette,
that the undertaking shall be restarted within such time (not
being less than one month from the date of the order) as
may be specified in the order.
Penalty for closure (Sec. 25R)
(I) Any employer who closes down an undertaking without
complying with the provisions of sub-section (I) of section
25-0 shall be punishable with imprisonment for a term which
may extend to six months, or with fine which may extend to
five thousand rupees, or with both .
(2) Any employer, who contravenes a direction giving under
sllb-section (2) of section 25-0 or section 25P, shall be punishable
with imprisonment for a term which may extend to one year,
or with fine which may extend to five thousand rupees, or with
both, and where the contravention is a continuing one, with a
further fine which may extend to two thousand rupees for every
day during which the contravention continues after the conviction.
(3) Any employer who contravenes the provisions of sub-
section (3) of section 25-0 shall be punishable with imprisonment
for a term which may extend to one month, or with fine which
may extend to one thousand rupees, or with both.
 INDUSTRIAL DISPUTES ACT IOS7

Distindion betweea Closure . .d Retreachmeat

Rettenchmept occurs when some workers are discharged; the
business continues. In closure the business itself ceases to exist.
Clse lAw :
I. Closure of a parI of lhe underlaking: Where an employer closes
down only a branch or department of his business the Industrial
Tribunal has no juridiClion, even on a reference under Section 1Q(1l
(d) of the Industrial Disputes Act, 1947, to interfere with the
discretion of the employer and direct him to continue that part of

-'
the business which he has decided to close down. Workmen of The
Indian Leaf Tobacco Del'eiopmenl Co. LId.. Guntllr v. Management

.
2. There is nothing wrong for an employer to close an establishment
by stages. Workmen v. MIS Slru'" Board Manufacturing Co. Ltd'
3-. Right of Closure. The right to close a business is an integral part
of' the fundamental right to carry on business. But as no right
is absolute in its scope, so is the nature of this right. It can cenainly
be restricted, regulated, or controlled by law in the interest of general
public. The right to close down business cannot be placed at par
as high as right not to start and carry on the business at all. Excel
Wear v. Union of India and others_ J

SUBSISTENCE ALLOWANCE
The West Bengal Payment of Subsistence Allowance Act,
1969, provided for 8 subsistence allowance to employees in
certain establishments during the period for which they may be
suspended by the management. According to the .provisions of
the Act, a suspended employee will receive 50% of his wages
during the first three months and if the inquiry takes longer, then
75% of the wages for each subsequent month.
THE CONDITIONS OF SERVICE
n"finition
"Conditions of Service~ means the tenns of employment as
between the employer and the employees. It denotes the sum tota I
of the rights and obligations of the worker and the employer.
The conditions of service include. the following: the contract
between the employer and the employee, Statute law, decisions
of the Court, the standing orders, custom and usage. In industrial
, (1970) \I S.c. A, 477 (Supreme Court) 2 AIR (\97~) Supreme Court L132
3 AIR (1979) Supreme Court 25

Industrial Law - 67
IOS8 'INDUSTRIAL LAW

establishments the employers are required to define precisely the

conditions of employment. The conditions include the Standing
Orders.

SUBSISTENCE ALLOWANCE FOR SUSPENDED

WORKERS
Central Rules
In 1984 the Central Government has amended the Industrial
Employment (Standing Orders) central rules regarding, payment
of subsistence allowance.
According to a notification pending investigation Or
departmental enquiry, a suspended worker shall be paid
subsistence allowance at the rate of 50 per cent of the wages
which he was entitled to immediately preceding the date of
suspension for the first 90 days. . .
Workers will be paid 75 per cent of such wages for the
remaining period of suspension if the delay in the completion
of disciplinary proceedings is not directly attributable to his
conduct.
The notification states that .disputes relating t.o payment of
subsistence allowance could be brought before the Labour Court
by either party under the Industrial Disputes Act within the local
limit. The decision on the Court will be binding on the parties.
The notification, further, clarifies that where the laws relating
to subsistenj:e allowance are more beneficial they shall be
applicable.
The employer shall normally have to complete the enquiry
within 10 days. The payment of subsistence allowance is subject
to the worker not taking up employment elsewhere during
suspension.

TIME-FRAME FOR LABOUR DISPUTE

The Central Government has prescribed a time frame for
settlement of industrial disputes at labour courts, tribunals and
national tribunals right from the reference of the case till the
final verdict. For individual cases, award shall ordinarily be
submitted within a period of three months.
According to the notification the Central Government s~al\
direct the parties raising the dispute to file a list of reliable
 INDUSTRIAL DISPUTES ACT 1059

witnesses within 15 days of the reference of the dispute to the

labour court, tribunal or national tribunal.
The courts and tribunals, after ascertaining that copies of
the statement of claims are furnished to the other side by the
party raising the dispute, shall fix the first hearing on a date
not beyond one month from the date of receipt of the order of
reference. The opposition parties will also be given 15 days to
file documents.
The courts and tribunals will fix a date for evidence within
one month from the receipt of the filing of relevant documents,
which shall ordinarily be within 60 days of the date on which
dispute was referred for adjudication. On completion of evidence,
a date shall be fixed which shall not be beyond a period of fifteen
days from the close of evidence for arguments or oral hearing.
The Industrial Employment (Standing Orders) Act (Act XX
of 1946) requires employers in industrial establishments formally
to define and put down in writing the conditions of employment
of the workers employed by them. A model of Standing Orders
have been appended to the Act.
Change in the conditions of service
Section 9A, of the Industrial Disputes Act, provides that the
conditions of service (applicable to any workman in respect of
any matter specified in the 4th schedule to the Act) cannot be
changed without giving notice to the persons affected and within
21 days of giving such notice. The 4th schedule to the Act
contains a list of the conditions of service which cannot be
changed except in the manner laid down in Section 9A. The items
are as follows:
I. Wages, including the period and mode of payment;
2. Contribution paid or payable, by the employer to any
provident fUM or pension fund or for the benefit of the
workmen under any law for the time being in force:
3. Compensatory and other allowances:
4. Hours of work and rest intervals;
5. Leave with wages and holidays;
6. Starting, alteration or discontinuance of shift working
otherwise than in accordance with standing orders;
7. Classification by grades;
8. Withdra"al of any customary concession or privilege;
1060 INDUSTRIAL LAW

9. Introduction of new rules of discipline, or alteration of

existing rules, except insofar as they are provided .in
standing orders ;
10. Rationalisation, standardisation or improvement of plant or
technique which is likely to lead to retrenchment of
workmen;
II. Any increase or reduction in the number of persons
employed or to be employed in any occupation or process
or deplfrtment or shift, not due to forced matters.
Exemptions
No notice is required (a) where the change is effected in
pursuance of any settlement, award or decision of the Labour
Appellate Tribunal formerly in existence, and (b) where the
workman is subject to the rules applicable to Government
servants and railway establishments.
The appropriate Government can exempt any class of
industrial establishment or any class of workmen from the
operation of Section 9A if it is of opinion that the application
of the provisions of that section will affect employers so
prejudicially that there will arise serious' repercussion on the
industry concemed.-Sec. 9B.
During the pendency of any conciliation proceedings before
a conciliation officer or a Board or of any proceeding before
an arbitrator or a Labour Court or Tribunal or National Tribunal
in respect of an industrial dispute the conditions of service of
the workmen relating to any matter connected with the dispute
cannot be altered to the prejudice of the workman without the
written permission of the authority before which the proceeding
is pending. Such workmen cannot be punished or discharged for
any misconduct connected with the dispute without the permission
of such authority.-Sec. 33( I).
Punishment
Regarding matters not connected with the dispute, the
conditions on service may be changed. The workman may be
punished in accordance with the standing orders of the
establishment or, where there are no standing orders, according
to the ,terms of. the contract, express or implied, between the
employer and the workman. B~t no workman can be discharged
 INDUSTRIAL DISPUTES ACT 1061

unless he has been paid one month's wages and an application

has been made by the employer to the authority before which
the proceeding is pending for approval of the' action. The
authority concerned shall hear the application and pass orders
without delay.-Sec. 33(2) & (5).
Protected Workman
A protected workman cannot be punished or discharged, nor
can his terms of service be altered without the express permission
of such authority. A "protected workman" is one who is an officer
of a registered trade union connected with the establishent and
is recognised as such in accordance with the rules. In every
establishment the number of workmen to be recognised as
protected shall be one per cent of the total number of workman,
subject to a minimum of five and a maximum of one hundred.
Rules may be framed regarding the dislribulion of such workmen
among various trade unions, manner of choosing them etc.-Sec.
33(3) & (4).
Complaint
When an employer contravenes any of the aforesaid
provisions during the pendency of proceedings before a Labour
Court, Tribunal or National Tribunal, any employee aggrieved
can· make a complaint in writing to the authority before which
proceedings are pending and such authority shall adjudicate upon
the complaint as if it were a dispute referred to or pending before
it.-Sec. 33A.
Abandonment of Service (S. 33A)
Certain workers put forward some demands to their
management. The management refused and intimated them to join
the work within a certain date. The workmen did not join. Held
that it is not a case of abandonment of service on the part of
the workers and the management cannot terminate the service.
G. T Lad and others v. Chemicals and Fibres India Ltd. I
Penalty
A employer who contravenes the provisions of Section 33
can be punished with imprisonment up to six months or fine up
to Rs. 1,000 or both.-Sec. 31(1).
I AIR (1979) Supreme Court 582
1062 INDUSTRIAL LAW

Case Law:
The law relating to Certified Standing Orders has been explained
by the Supreme Court in the case, Glaxo Laboratories (/) Ltd. v.
Presiding Offict!r. Labour Court. Meerut and Oihers.1 The judgement
is summarised below.
I. The Conditions of Service under the Certified Standing Orders
prescribed under the Industrial Employment (Standing Orders) Act
should receive interpretation as a more or less statutory flavour. It
is safe to give the words in their natural meaning. The Act was
enacted for ameliorating the conditions of the workers and therefore
conditions of service prescribed thereunder must receive such
interpretation as to advance the intendment underlying the Act and
defeat the mischief.
2. Misconduct. "Committed within the premises of the establishment
or in the vicinity thereof', must have a causal connection with the
place of work and with duty hours. The employer has no extra
territorial jurisdiction under the above Standing Orders to punish
for misconduct.
3. The power to prescribe conditions of service is not unilateral but
the workmen have right to object and to be heard and a statutory
authority namely, Certifying Officer have to certify the same.
4. Misconduct. neither defined nor enumerated in the Standing OrderS.
is not punishable merely because the employer believes to be
misconduct ex post facto.
5. The provision in the Standing Orders enumerating or defining acts
of misconduct are in the natufe of penal and must receive strict
construction.

OFFENCES AND PENALTIES

Penalty for offences not otherwise provided under the
Act. : Whoever contravenes any of the provisions of the Act or
any rule made thereunder shall, if no other penalty is elsewhere
provided by or under this Act, be punishable with fine which
may extend to Rs. IOO.-Sec. 31 (2).
Offences by a company or association: Where a person
committing an offence under this Act is a company or an association,
every director, manager, secretary, agent or other officer or person
concerned with the management thereof shall, unless he proves that
the offence was committed without his knowledge or consent, be
deemed to be guilty of such offence.-Sec. 32 .
. Cognizance of offences: No court shall take cognizance of
any offence punishable under this Act, save on complaint made
I AIR (1984) Supreme Court 505
 INDUSTRIAL DISPUTES ACT 1063

by or under the authority of the appropriate Government.-

Sec. 34(1).
Place of trial: No court inferior to that of a Presidency
Magistrate or a Magistrate of the first class shall try any offence
punishable under this Act.-Sec. 34(2)
RECOVERY OF MONEY FROM EMPLOYER
Where any money is due to workman from an employer
under a settlement or an award or' an account of layoff or
retrenchment he can apply to the appropriate Government for the
recovery of the money through the Certificate Procedur. (the
special procedure available for the recovery of arrears of I~nd
revenue). Any other person authorised by him can also apply.
In case of his death his assignee or heirs may apply. If the
appropriate Government is satisfied that the money is due, the
procedure will be applied. The workman may also use any other
mode of recovery if he wishes.
The application shall be made within one year of the date
when the money became due. It may be made after that period
if the appropriate Government is satisfied that the applicant had
sufficient cause for not making the application within the period.
I f any question arises as to the amount of money due or
the' cash value of any benefit to which the workman is entitled,
the question may be referred to a Labour Court. The Labour
Court may appoint a Commissioner to compute the cash value
of any benefit. After hearing his report, the Labour Court shall
forward its decision to the appropriate Government. Thereafter
the Certificate procedure can be applied.
A number of workmen under the same employer may apply
jointly for the relief mentioned above.-Sec. ne.
PROTECTION OF PERSONS
A member of a trade union or of a society cannot be expelled
or in any other way punished by the union or society for refusing
to take part in an illegal strike or lock out. Such a person cannot
be subject to
(I) expUlsion from any trade union or. society,
(2) any fine or penalty, or
(3) deprivation of any right or benefit to which he or his legal
representatives would be entitled to,
1064 INDUSTRIAL LAW

(4) any disability either directly or indirectly. If any person

is expelled on such grounds. the Civil Court may. order
the restoration of his membership or alternatively direct
that he be paid out of the funds of the union or society
such sum by way of compensation as the court thinks
just.-Sec. 35. (See Ch. 6).

REPRESENTATION OF PARTIES
A workman who is a party to oj dispute shall be entitled
to be represented in any proceeding under the Act by (0) an
officer of the trade union of which he is a member, or (b) an
officer of the federation of unions with which his trade union
is affiliated. or (c) where the worker is not a member of any
union. by an officer of any trade union connected with or by
any workman employed in, the industry in which the workman
is employed. The representative must be authorised in the
prescribed manner.-Sec. 36(1).
An employer who is a party to a dispute is entitled to. be
represented by (0) any officer of an association Qf employers
of which he is a member; (b) any officer of the federation of
associations of employers with which the association referred to
above is affiliated, or (c) where he is not a member of any
association of employers, by an officer of any association of
employers, connected with or'by any other employee engaged
in the same industry. The representative must be authorised in
the prescribed manner.-Sec. 36(2).
No pa~ to a dispute shall be entitled to be represented by
a legal practitioner in any conciliation proceedings under this Act
or in any proceedings before a Court.-Sec. 36(3),
In any proceedings before a Labour Court, Tribunal or
Nat ional Tribunal, a party may be represented by a legal
practitioner with the consent of the other parties and with the
leave of the Labour Court. Tribunal or Natiol)al Tribunal as the
ease may be.-Sec. 36(4). .
The director of a company can represent the company even
if he be a la\\yer. Hall & Anderson LId. v. S. K Neog),l
A la\\yer, simpliciter, cannot a~ before an Industrial
Tribunal without the consent of the opposite party and leave of
'(1954) I.L.L.J. 629
 INDUSTRIAL DISPUTES ACT 1065

the Tribunal merely by virtue of a power of attorney executed

by a party. A lawyer can appear before the Tribunal in the
capacity of an office-bearer of a registered trade union or an
officer of associations of employers, and no consent of the other
side and leave of the Tribunal will, then, be necessary. Paradip
Port Trust v. Their Workmen. I

• EXERCISES
I. Explain the following terms as used in the Industrial Disputes Act,
1947 :
(a) Workman. (Page 1003)
(b) Industry. (Page 993)
(e) Industrial Dispute. (Page 1000)
(d) Wages and Bonus. (Page 1006 & 1008)
(e) Average Pay. (Page 1043)
(f) Retrenchment. (Page 1048)
(g) Strike and Lock-out. (Pages 1030-1031)
(h) Illegal strike and lock-out. (Page 1035)
(i) Lay-off and Retrenchment. (Pages 1044, 1048)
U) Award and Settlement. (Page 1025)
(k) Employer. (Page 1005)
(I) Wages. (Page 1006)
(m) Public Utility Service. (Page 1033)
(n) Continuous Service. (Page 1042)
2. State whether the following undertakings are included in the term
"Industry"-'-Hospital, Electrical department of the municipality,
Ayurvedic College, Staff of Delhi University and business of a
chartered accountant. Hospital. (Pages 993-1000)
3. What is industry? Discuss whether the following organisations
come under the definition of industry: (i) \ firm of chartered
a~countants (il) The university of Delhi (iiI) A college with an
Ayurvedic Pharmacy. (I) University, (2) Hospital, (3) Municipal
Corporation, (4) Firm of Solicitors. (Pages 993-1000)
4. What are the authorities prescribed under the Industrial Disputes
Act, 1947 for settlement of industrial disputes? Discuss their
functions and powers. (Pages 1013-10 I 5)
S. What authorities have been set up under the Act for investigation
and settlement of Industrial disputes? (Page 1013)
6. Meniion the authorities and discuss the procedure of settlement of
industrial disPute as provided in the Industrial Disputes Act.
(Pages 1013-1015)
I AIR (1977) Supreme Court 36.
1066 INDUSTRIAL LAW

7. What do you understand by industrial dispute' as defined in the

industrial Disputes Act, 1947? Who can raise a dispute?
(Pages 1000-1003)
8. Explain the meaning of industrial dispute according to the Industrial
Disputes Act, 1947. Can a single workman raise an industrial
dispute? (Pages 1000-1003)
9. Explain the meaning of the expressions: (I) industry, and (il)
industrial dispute in the Industrial Disputes Act, 1947. Distinguish
between lay-off and retrenchment. (Pages 993, 1000-1003)
10. (a) What is Industrial Dispute? (b) Explain the procedure for
voluntary reference of disputes to arbitration. (Pages 1000-1003)
II. Enumerate the statutory provisions prohibiting strikes in a public
utility service. (Pages 1033-1036)
12. What are the provisions regarding "Lay Off' in the Industrial
Disputes Act, 1947? (Pages 1036, 1039)
13. State the provisions of the Industrial Disputes Act, 1947 regarding
prohibition of Strike and Lockouts. (Pages 1033-1036)
14. State the law regarding lay-off and strikes as proyided in the
Industrial Disputes Act, 1947. (Pages 1031, 1039)
15. What are the conditions precedent to a Lock-out df any factory ?
(Page 1030)
16. Distinguish between strikes and lock-outs. What are the restrictions
imposed on strikes and lock-outs under the Industrial Disputes Act,
1947. (Pages 1030-1031, 1033-1039)
17. Discuss tm, circumstances when compensation is or is not payable
to a workman who has been laid off. (Page 1047)
18. Define the term 'Loock-out' as used in the Industrial Disputes Act,
1947'. What are the restrictions imposed on 'lock-out' by the above
Act? (Pages 1030-1033)
19. What are the rights of a workman who has been laid off for
compensation? (Pages 1047-1048)
20. Distinguish between lay-off and retrenchment under the Industrial
Disputes Act, 1947. (p,age 1045)
21. What are the provisions for compensation payable to w.orkman in
case of lay-off and retrenchment under the Industrial Disputes Act,
1947. (Pages 1047-1049)
22. What are rules regarding the prohibition of lay-off an<:\ closure of
industrial undertaking under the Amendment of 1976.
(Pages'1045, 1053)
23. What is "Retrenchment"? State the statutory requirC/llents for
retrenching a workman. State the right of retrenched workmen.
(Pages 1048-1052)
24. What are the compensation payable to workmen-III cases of transfer
and closing down of undertakings? (Pages 1052-1055)
 INDUSTRIAl DISPUTES ACT 1067

25. State the conditions to be satisfied for retrenchment of a workman.

(Page 1048-1052)
26. Explain the rules regarding the period of operation of the settlement
and award. (Pages 1027·1030)
27. What are the provisions in the 1.0. Act relating to not'ce for
changing the conditions of service? What are matters in respect
of which notice of change is prescribed in the 1.0. Act?
(Pages 1059-1062)
28. State the provisions of the industrial Disputts Act relating
(Commencement of the Award; persons on. whom Settlements and
Awards are binding and, the period of operation of Settlements and
Awards. (Pages 1026-1028)
29. Who are protected workmen " What are their privileges?
(Page 1061)
30. What do you understand by an "industrial dispute" as defined in
the Indtistrial Disputes Act? (Page 1000-1002)
31. State, the matters for which the Labour Court 'can give its award.
(Page 1017)
32. (a) Discuss the provisions of the Industrial Disputes Act, 1947
relating to voluntary reference of disputes to arbitration.
(h) Enumerate the provisions of the Industrial Disputes Act, 1947
relating to conditions precedent to retrenchment of workmen.
(Pages 1021-1022. 1057-1059)
33. (a) Discuss the provisions of the Industrial Disputes Act, 1947
relating to, payment of compensation in case of closing down
of undertakings.
(h) Mention the persons on whom the settlements and awards are
binding. (Pages 1054-1055. 1025-1027)
34. Discuss the provisions of the Industrial Disputes Act, 1947 relating
to strikes and lock-outs in public utility service.
(Pages 1033-1036, 1022-1024)
35. Who can raise an industrial dispute? (Page 1001)
36. Objective questions. Give short answer.
(I) Mention the persons who are not workmen according to the
Industrial th Disputes Act. (Page 1003)
(2) Define average pay as per Industrial Disputes Act. 1947.
(Page 1043)
(3) The service of a workman who has stolen some material from
the factory has been terminated. Will this termination of service
be amounted to retrenchment? (Pages 1047-1048)'
(4) What are the conditions precedent to retrenchment of a
workman? (Pages 1048-1050)
 THE INDUSTRIES (Development
and Regulation) ACT, 1951

For the purpose of implementation of various objects of the

Industrial Policy Resolution of 1948, the Government of India
has enacted the Industries (Development and Regulation) Act,
1951 which came into force on May 8, 1952.
The Act brought under central control a number of important
industries whose activities would greatly affect the economy as
a whole and the development of which depend more on the import
of the country. In order to achieve a balanced and sound industrial
structure in the country the Act urged all new industrial
undertakings to obtain license from the Central Government.
Moreover, the Act empowered the Central Government to make
rule for the registration of existing undertakings, for regulating
the production and development of the industries and for
consultation with the State Government on the matters. Besides,
the Act provided for the establishment of a Central Advisory
Council. In taking any action like revocation of a licence,
registration or taking over control and management of any
industrial concern the Central Government must consult the
Central Advisory Council.
Over the Years a number of difficulties cropped up with the
changing situation and the Act was amended in 1953 and 1971
to enable the rehabilitation of closed units through government
initiative. The new economic policy amended the Act to a great
extent.
The Act extends to the whole of India and applies to the
industries which are specified in the first Schedule of the Act.
Establishment and Constitution of The Central Advisory
Council and Development Councils
For the control and development of the industrial undertakings
in consonance with the Industrial Policy Resolution, 1948 the
Industries (Development and Regulation) Act, 195 I provided under
Section 3 of the Act for the establishinent of the Central Advisory
Council by the Central Government. Accordingly, the Cerntral
Advisory Council was established by the Central Government
1068
 THE INDUSTRIES (Development and Regulat;on) ACT. 1951 1069

under Section 5 ofthe Act. The functions of the Advisory Council

are to advise the Central Government in respect of development
and regulation of scheduled industries, and in respect of
administration of the Act and to make rules under the Act.
The Advisory Council consists of a Chairman and such other
.....
members not exceeding thirty in number, all of whom shall be
appointed by the Central Government. The members shall
represent the interests of
(a) Owners of industrial undertakings in scheduled industries.
(b) Persons engaged in industrial undertakings in scheduled
industries.
(c) Consumers of goods manufactured or produced by
scheduled industries.
(d) Such other class of persons including primary product>,who .,
ought to be represented on the Advisory Council as per,
opinion of the Central Government.
The term of the members of the Advisory Council and the
procedures to be followed in the discharge of their functions will ~
be determined by the prescribed rules. Likewise, the manner
of filling casual vacancies among members will also follow the
prescribed rules.
I! should also be noted that in the matters of formulation
of rules and procedures other than prescribed in Section 3 of
the Act, Central Government must consult the Advisory Council
in terms of Section 5 of the Act.
Development Councils
The Central Government has the power to establish a body
of persons to be called a Development COllncil for any scheduled
industry or group of scheduled industries. The Council consists
of members representing the interests of labour, capital,
consumers and technical skills. The number and term of tI;e
office of and the procedure to be followed in the aischarge of
their functi6ns, and the-manner of filling c~sual vacancies among
. members of'Development Council shall' be such as may be
prescribed. So far as the status of the Development Counci I is
concerned th~ Council will be considered as a Corporate body,
c'apable of holding and transferring property. Further, it may sue
and be slled in its own name.
 1070 INDUSTRIAL LAW

Functions of The Development Council

The purpose of the Development Council is to secure proper
development of scheduled industries. To that end the Council is
involved in so many functions the most important of which are
as follows:
I. To recommend target~ for production, co-ordinate production
programme and review prospects from time to time.
2. To suggest nonns of efficiency with a view to eliminating
waste, obtaining ma('imum production, improving quality
and reducing costs.
3. To recommend measures for securing fuller utilization 01
the installed Capacity.
4. To promote arrangements for better marketing and assist
in the distribution of controlled materials.
5. To promote standardisalion of product.
6. To promote or undertake enquiry as to materials and
equipments and method of production, management and
labour utilisation including the discovery and development
of new materials, equipments and methods and of
improvements in those already in use.
7. To promote the training of persons engaged or propose
engagelilents in the industry in technical subjects.
S. To promote the retaining in alternative occupations of
persons engaged in or retrenched from the industry.
9. To promote or undertake scientific and industrial research.
10. To promote improvements and standardisation of accounting
and costing methods and practice.
II. To promote or undertake the collection and formulation of
statistics.
12. To investigate possibilities of decentralizing stages and
processes of production with a view to encouraging the
growth of allied small scale .and Cottage industries.
13. To promote the productivity of labour and to secure safer
and better working conditions.
14. To undertake enquiry for the purpose of tendering advise
to the Central Government on matters referred to a
. Development Council.
15. To undertake arrangements for making available to the
indusiry information obtained and for advising on matters
with which the Development Councils are concerned.

l
 THE INDUSTRIES (Dev.lop.....,' IIId ReCUI.. ;oo) ACT. 1951 1071

The Development Council is required to perform such other

functions as required under the Act.
Under Section 22 of the Act every Development Council,
in the exercise of its function, is required to be guided by such
instructions as may be given to it by the Central Government.
Such instruction may include directions relating to the manner
in which, and the purpose for which a1V proceeds of the cess
lived under Section 9 which may hav{ been haniled over to it.
will be spent. .
Cess on Scheduled Industries by The Central Government
and Its Utilization
Further, under Section 9, the Central Government may buy
and collect a cess on all goods manufactured or produced in any
scheduled industry as may be specified by the Central Government
by a notified order. Different rates may be specified for different
goods or different classes of goods. The amount of cess so
collected will have to be utilized by the Development Council
strictly for the advancement of scientific and industrial research.
improvement in design and quality, training of technicians and
labour and for muting administrative expenses.
Report and Accounts of Development Councils
Under Section 7 of the Act the Development Council is
required to prepare a detailed report about its functions during
the last financial year. This report must be submitted along with
the statement of accounts duty audited. The statement must sho\\
the total remuneration and allowances paid during the year to
members and officers also. A copy of each such report of
Development Council shall be laid before the Parliament by the
Central Government.
Dissolution of Development Conncils
Under Section 8 the Central Government may by notified
order. dissolve any Development Council if it considers that this
Development Council is not required at all. On its dissolution
the assets of the Development Council if any. shall vest in the
Central Government.
Regulation of Scheduled Industries
Regulation of scheduled industries can be made by two ways-
registration of existing .industries and licensing of new ones.
1072 INDUSTRIAL LAW

Under the Industries (Development and Regulation) Act,

1951 registration of all the existing industrial undertakings and
licensing of new ones are compulsory.
Registration of Existing Industrial Undertakings
Under Section 10 of the Act the registration of all the
existing industrial uf':!: -takings in the scheduled industries is~
compUlsory. Therefore, ,he owners of the undertakings must
obtain a certificate of registration within a stipulated period. Even
when the Central Government is the owner it has to take the
certificate of registration for an undertaking owned by it. The
certificate will contain the approved productive capacity of the
undertakings and such particulars as prescribed by the authority.
Revocation of Registration
Under Section 10 of the Act, the Central Government has
the power to revoke any given registration if it deems necessary,
especially if it has been obtained by misrepresentation of essential
facts, or if the industry or concern has been granted exemption
from the registration, or if for any other reason the representation
has became useless or ineffective.
Licensing of New Industrial Undertakings
The basic objectives of inaustrial licensing policy are (a)
to promote and reglliate industrial development in accordance
with the plan priorities, (b) to encourage and project the medium
and small industries, (e). to prevent concentration of economic
power, and Cd) to promote regional economic balance.
The. industries (Development and Registration) Act, 1951
incorporated the industrial licensing policy 'amended in 1948. The
important provisions of the Act were-
(I) No new industrial units could be established or substantial
extension to existing plants made without a license from the
Central Government, while granting licence for new undertakings,
government could lay down conditions regarding location,
minimum size etc., if riec'essary.
. (2) The owner of an industrial undertakings, not being the
Ce,ntral Government, is req~ired. to obtain a licence or prior
permission for the pr~uction or manufacture of a new article
by t.he. industry so registered or licensed,'.
 THE INDUSTRIES (Development IIId Regulation) ACT. 1951 1073

(3) The State Governments, however, need not take such

I icence except that they must seek the prior permission of the
Central Government before establishing any new industry.
procedure for The Grant of Licence or Permission
Under Section 14, before granting any licence or permission
under Section II, Section 11 A, Section 13 or Section 29-B, the
Central Government may require such officer or authority as it
may appoint for the purpose to make a full and complete
investigation in respect of the application received in this behalf
and report to it about the result of such investigation. In making
any such investigation, the officer or authority must follow such
procedures as may be prescribed.
Revocation and Amendment of Licence
Under Section 12 the Central Government has the power to
revoke or amend a licence, if the licensee has failed to establish
an industry within the time fixed in the licence. Before the
Central Government may revoke the licence, it must be satisfied
that the person or authority has, without reasonable cause, failed
to establish the new industrial undertakings.
Present Position of Licensing and Registration
With the idea of globalisation of the Indian economy the
new Industrial Policy, 1991 makes a big departure from the old
policy and the Act, 1951 as well. In the sphere of industrial
licensing, the role of the government has to .be changed from
that of only exercising control to one of providing help arid
guidance by making essential procedure fully transpar~nt and by
eliminating delays. In the above context industrial licensing will
hence forth be abolished . For all industries, except 18 specified
industries. Similarly, all <;xisting registration schemes will be
abolished. Entrepreneurs will henceforth be required only to file
an information memorandum on new projects and substantial
expansion.

Basic Features of Present Licensing Policy

(I) Industrial licensing will be abolished for all projects
except for a short list (18) of specified industries. These specified
industries will continue to be subject to compulsory licensing
for r<!asons related to security and strategic cOllCerns, social
Industrial Law - 68
•
1074 INDUSTRIAL LAW

reasons, hazardous chemicals and overriding environmental issues

and articles of elitist consumption.
(2) Areas where security and strategic concerns predominate
will continue to be reserved for the public sector.
(3) In projects where imported capital goods are required,
automatic clearance will be given.
(4) In locations other than cities of more than I million
popUlation there :will be no requirement of obtaining indusirial
approvals from the Central Government except for industries
subject to compulsory licensing.
(5) The exemption from licensing will apply to all substantial
expansions of existing units.
(6) The Compulsory licensing provisions would not apply
in respect of the small-scale units taking up manufacture of any
of the 18 specified items reserved for exclusive manufacture in
small scale sectors.
List of Industries in Respect of Which Industrial Licensing
Will Be Compulsory
(I) Coals and lignite, (2) petroleum (other than crude) and
its distillation products, (3) distillation and brewing of alcoholic
drugs, (4) sugar, (5) animal fats and oils, (6) cigars and cigarettes
of tobacco and manufactured tobacco substitutes, (7) asbestos and
asbestos-based products, (8) plywood, (9) raw hides and skins,
leather and patent leather, (10) tanned or dressed furskins,
(II) motor cars, (12) paper and newsprint except baggage-based
units, (\3) electronic aerospace and defence equipment, all types,
(14) industrial explosives, (\5) hazardous chemicals, (\6) drugs
and pharmaceutical, (\7) entertainment electronics, colour TVs,
C.D. Players, tape recorders, (18) white goods (domestic
refrigerators, domestic dish washing machines, domestic washing
machines, microwave ovens, aircoJlditioners).
. .
Power to Cause Investigation to be Made in to Scheduled
Industries or Industrial Undertakings
Under Section 15 of the Industries (Development and
Regulation) Act, 1951, only the registration and licensing of
industrial undertakings is not enough for the purpose of regulation
of industries, but it is also essential to keep a careful watch on
the day to day working of scheduled industries. To that Section
15 empowers the Central Government to cause investigation to

•
 THE INDUSTRIES (Developmen. and Regula.ion) ACT, 1951 1075"1

be made into selected industries or industrial undertakings under

certain circumstances which are as follows-
(I) that there has been a substantial fall in the volume of
production in respect of any article, without any
justification;
(2) that there is a fall of quality of any article without any
justification;
(3) that there has been a rise in the price of any article without
any justification;
(4) that it is necessary to take any such action as it is prov ided
for the purpose of conserving any resource of national
importance which are utilized in the industry or industrial
undertaking as the case may be;
(5) that any industrial undertaking is being managed in a
manner highly detrimental to the scheduled industry or to
the public interest.
Under Section 15A of the Act, where a company owning
an industrial undertaking is being wound up by or under the
supervision of the High Court, the Central Government may apply
to the Court for the permission to make an investigation into
the possibility of running or restarting an industrial undertaking.
The investigation shall be done by such person or body of persons
as the Central Government may appoint for the purpose.
Power of The Central Government
Under Section 10 of the Act, if after due investigation the
Central Government is satisfied that action under Section 16 is
desirable, then it may issue such directions to the industrial
undertaking or industrial undertakings concerned as may be
appropriate in the circumstances for all or any of the following
purposes namely-
(I) to regulate the production of any aniele or class of anicles
and fix the standards of production,
(2) to require the industrial undenakings to take such step as
the Central Government may consider necessa~ to
stimulate the development of the industry to which the
industrial undertakings relate.
(3) to prohibit the industrial undertakings from resorting tel 811\
act or practice which might reduce their prodllcti.,,,
capacity or economic value.
 INDUSTRtAL LAW .

(4) to control the prices or regulate the distribution of any

articles which have been the subject matter of investigation.
The Central Government may issue all interim directions
pending conclusion of investigations.
Management or Control of Industrial Undertakings by
Central Government
Under Section ISA, when the Central Government is of the
opinion that an industrial undertaking has failed to comply with
nny directions issued by the Government, or
Is being managed in a manner highly detrimental to the
scheduled industry concerned or to public interest, the Central
Government may, by notified order, authorise any person or body
of persons to take over the management of the whole or any
part of the undertaking or to exercise in respect of the whole
or any part of the undertaking such functions of control as may
be specified in the order.
The period of management remains effective upto five years
depending upon the order specified. However, if the Central
Government is of the opinion that it is necessary for public
interest to extent the period then it may be extended upto 12
years by stages-not extending more than two years at a time
after 5 years. Where any such order is issued, a copy thereof
shall be laid as soon as may be, before both houses of Parliament.
Section 18F empowers the Central Government to cancel the
notified order issued under Section 18A under certain
circumstances. On the cancellation of any such order, the
management or control of the industrial undertaking shall vest
in the owner of the undertaking.
Power to Take Over Industrial Undertakings Without
Investigations
Under Section IS-AA of the Act, wide powers of taking over
the management of industrial undertakings are vested in the
Central Government. The grounds upon which this power can
be exercised are as follows-
(a) The persons incharge of the industrial undertakings have,
by reckless investments or creation of encumbrances on the assets
of industrial undertaking or by diversion of funds, brought about
a situation which is likely to affect ttie production 9f articles
 THE INDUSTRIES (Development .,d Regulalion) ACT. 1951 1077

manufactured or produced in the industrial undertaking and that

immediate action is necessary to prevent such a situation.
(b) The industrial undertaking has been closed for a period
of not less than 3 months and such closure is prejudicial to the
concerned scheduled industry and that the financial condition of
the company owning the industrial undertaking and the ,'ondition
of the plant and machinery of such undertaking are such that
it is possible to restart the undertaking and sllch restarting is
necessary in the interest of the general public.
Where notified order has been made by the Central
Government, the person or body of persons having for the time
being control of the industrial undertaking must immediately
make over the charge of management or control of the industrial
undertaking to the authorised person.
Effects of Notified Order
The effects of the notified order under Section 18A
authorising the taking over the management of an industrial
undertaking are as follows :
(a) All persons in charge of the management shall be deemed
to have vacated their office.
(b) Any contract of management between the industrial
undertaking and any director thereof holding office as such
immediately before the issue of the notified order shall be deemed
to have been terminated.
(c) The persons or body of persons authorised under Section
18A to take over the management shall take all necessary steps
to take into his or their custody or control all the property. effects
and actionable claim, from the date of the notified order.
(d) The persons, autliorised under Section 18A to take over
the management of an industrial undertaking which is a company
shall be for all interests and purposes, the directors of the
ind"strial undertaking duly constituted under the Companies Act.
The business of the undertaking shall be carried on pursuant
to any directions given by the authorised persons in accordance
with the provisions of the notified order. The persons or the body
of the' persons authorised must exercise his or their functions
in accordance with such directions as may be given by the Central
Government.
Section D of the Act takes away the right to compensation
for termination of office or contract.
1078 INDUSTRIAL LAW

EXERCISES
I. Describe the constitution of the Central Advisory council in the
Industries (Development & Regulation) Act, 195 \.
(Pages 1068·1069)
2. Describle about the establishment, constitution and function of
Development Council. (Pages 1068·1070)
3. Discuss about the regulation of Scheduled Industries.
(Pages 1071·1072)
4. State the procedure for the grant of licence or permission.
(Page 1073)
5. Discuss about the take ones, management and control of Industrial
Undertakings. (Page 1076)
6. What are the effects of Notified order under Section 19A ?
(Page 1077)
7. Write short notes:
(a) Central Advisory Council; (b) Registration; (c) Industrial
Licencing Policy. [Pages (a) 1068; (b) 1072 ; (c) 1073]
 INDEX

(COMMERCIAL LAW(
Administrative law. 5 Agreement and Contract. 13; Illegal,
Unenforceable 47; Void, 46;
Commercial Law, Definition of, 6; Voidable. 46. 47; Mutual. 115
scope of, 6 : Sources of. 7
Aliens. 56. 79. 189
Commercial Suit, 6
Allotment of Shares. 71
Common Law, 7
Alteration. 107. 116; Material
Custom, 8 Alteration. 127
Conduct, Rules of, Anticipatory breach. 128
Democracy. 6 Apponionment. 169
Equit)', 7 Appropriation of Payments, 112
Equality, 5 Assessment. difficulty of, 135
Inequalities. 5 Assignment. 107
Judicial Decisions, 8 Auctioneer, 178
Law. Rule of, 4 Authority. 182; exceeding. 183
Law, Definition of. I Attorney. power of. 174
Lex. Mercantoria. 7
Legislature. 5 Badia, 91
Mercantile Law. 6 Bailee, 161, 170, 176
Privy Council. 8 Bailment, 161, 168. 169
Roman Law, 7 Bailor. 16\, 165, 169
Society and Law, 2 Barristers. Contracts by. 57
Social objectives. 3 Breach of Contrac~ 128 ; Actual. 129 ;
Supreme Court, 8 Anticipatory. 129
Usage, ~ Bail bond, \36
Broker, 177
LAW OF CONTRACT
Capac it)', 14, 49
Acceptance, \3. 17,18,22; Conditional.
23 ; by conduct. 24 : mental, 24; Care. degree of, 161 ;
by post, 24; Revocation of. 30; Reasonable, 162
Rules re, 23 ; Telephone, 27 Carriers, 165
Accord and Satisfaction, 117 Cenainty. 14. 19
Accounts. of Agen~ 191 Champony, 80
Accretion, 165 Charity. Promise to, 40
Actio Personalis Moritur Cum Persona. Chose in action, lO8
101 Clarification, 23
Actionable Claims. \09 Civil Disturbances. 123
Ad Idem. 59. 73 Co-agen~ 186
Agency. 42. 174. 178 Coercion. 59, 146
Agent, 53. 174. 189. 194. 195 Collateral Event or Agreement, 47.91
"Agreeing to Agree", 33. 89 Commercial impossibility. 122. 95
Agreements, Unlawful. 77 Commercial transactions. 90
Agreement Uncc:nain, 88 Commission Agent. 177

1079
1080 COMMERCIAL LAW

Communication. of acceptance. 20. 26 : Contract. Tennination of: 115, 127

• of OfTer. '20, 26 ; of Revocation. 30 · Unberrimae Fidei. 70
Compensation, 52, 134, 169. 188 , Under Seal. 39
Concealment, 66, 150 · Valid, 48
Conditions. 23 , Voidable, 47
Conditional acceptance. 23 -, . Variation of. 154
Condilional Offer. 21 · which need nol be performed.
107
Consensus ad idem, 59. 72
Contribution. 103, 158
Consent. 14, 59; and Mistake, 71 Co-owner. 171
Consideration. \3,35,83. 150, 177 Corporation. Contract of. 57
Adequacy of, 38 Costs, 134
Definition of. 13, 35 Co·Surelies. 151. 156, 158
Desired by. 36 Counter-offer. 23
Difference from English Court of \\ards. 49
l.aw,39 Creditor. 150. 156. 158
Executed, 35 Criminal acts. 193
Executory. 35 Cross words. 90
future, 35 Damages, 68. 131
Illegal, 38 .. . Compensatory, Special, 133.
Immoral,38 134
"No Consideration No . Nominal, Contempous. 131
Contract", 41 E.xemplary, Punitive or
... . Opposed to Public Vindictive. 131
Policy, 38 Death. 30. 109. 121, 125, 127. 152,
Reality, 36 154. 168. 188. 192
Rules re, 36 Debt Relief Acts. 155
Suits by stranger to. 43 Deception, 67
. Types of, 3S Default. 106. 172
Del Credere Agent. 178
, Unlawful. 77
Delegatus Non Potest DelegaTe. 186
• Unlawful. in Part. 92 Delivery. 161, 163, 166
Contingee}' on party, 96 Deposit of money, 161
Coolingenl Contracts. 95 Devolution ofjoint rights and liabilities,
Contract, and agreement, 12-13 40, 102
.. ,Act of 1872, 12 Deligrncc. ordinary, ~
, Definition of, 12, 13 Discharge, see Termination
, Essential Elements of, 13, 14 Diselosure. 165
, formal. 39 Di$<Jualified Persons, 56
, fonvard, 92 nt~putes. 87
· Indemnity of, 147 Doctors. contracts by, 57
· Object of, 12 Drunkenness.. 56
· Parol, 39 Duress. 61
, Performance of, 99, 100 Duty, breach of, 65, 81
, Printed, 22 Duty of agent, 189
, Scope of, 12 Emergenc)" 183
· Simple. 39 Enemy, trading with. 79
, Speciality, 39 Estoppel, 52, 178
· Standard forms of, 22 Expenses. 166, 168. 171
,Standing. 28 Express Agreement, 178
 INDEX 1081

Faclor. 177 Infant,. see Minor

Failure of Prc·c('Inditions,': 120 Information. J84
False Slalemenl 66 Injunclion. 131. 139
Family Setlle",enl. 44. 71 Innkeeper. 165
Family Reforms Ael of 1969, 49 Insanill'. 30, 55, 188. 192
Fictitious person,. :195 Insolvency. 54. 127, 189
Fiduciary relationships. 71 Insurance, 74, 91
Finder of goods. 145. 168 Intention and Offer. 19
Forbearance. 156 Interest. as damages, 137; High rates
Foreign Principal. 195 of. 60. 62 ; Opposed to Duly. 81
Foreign sOvch:igns. 56 Interest Act, 137
Fraud. 66, .18; by agenl, 186, I ~5 Interplead. 169
Fraud, Constructive. 66 Invitation and Offer. 19
Fraudulen. Acl. 67 Irrevocable agency. IS8
Frustration. Doctrine of. 119, 124, 126
Joint owners. 166
Games o(Skill. 91 Joint Principals. 177
General ~genl. 178 Joinl Righls. 104
Gin, 43.'·· JuS! and Reasonable, 125
Good\,'il,l:·;il4. 85 Justice. interfering with. 79
Graluitia"' Ilailmenl. 162. 166, 168
Guardia·ns~ip. 54 Lapse of offer. 29
La\\'. change of, 120, 125
Guarantee. Contracts of. 149, 150;
Continuing. 152; Simple. 152; Legal Proceedings, interference with,
79; reslrainl of. 83
Specific. 152
Guarantor, J 49
Legal Relations and Contracts. 19,33
Lien. of Agenls. 195; of Bailee. 166;
Halleu's Estale. 113 General, 167
Holding OUI. 179 Linlitalion, 127
Horse race, 91 Limited IntereSl, 171
HOIel Keeper. 165 Liquidaled damages. 135
Husband and wife. 180 Lock Oul. 123
Hypnolism. 55 Loss. 132. 157
LOlh:ries. 90
Idiocy. 55. 56
Illegal Agreemenl 47 Lunalie. 55, 56. 143
Immoral Agreement. 78 Maitenance. 80
Immovable property. 70 Marital Duties. interference with,82
Implied Offer. 18 Marriage, Brokerage, 82 ; Restraint of.
Impossible AeIS. 92, 107 82. 83 ; Selllemenl. 43
Impossible evenl. 98 Married Women, Contracts by. 57;
Impossibilil)', 92. 96, 107. 119 ; EffeelS when husband'5 agent, 180
of. 119 Malerial alleralion, 127
Incapable persons. 143 MenIal decay, 55
Ineapacily. 121. 124,125 MenIal dislrcss, 64
Indemnifier, 147 Mereanlile Agenl, 170
Indemnify. 147. 148 Merger. 119
IndemnilY. 147. 148. 150. 157 Microphone. 27
Indemnily. Cont",els of, 147. 148; Minor marriage-Sctllcmcm of. 43
Indemnil), holder. 147, 148 Minor who is. 49 ; ag.reements by. SO.
Independenl COnlraclor. 176 143
Indian Penal Code. 59. 60. 61 Miscounducl, 194
1082 COMMERCIAL LAW
Misrepresentation, 65, 69, ISO; by
agent. 149, 184. 185, 195
Mistake, 64, 71, 83, 145
Mistake, Bilateral, 71
Mistake, Unilateral, 72
Mistakes and Consent 73
Mixture, 163
Money, 162
Money Lenders Acts, 63
Necessaries, 51. 143
Necessity, 51
Necessity. Agency of. 180
Negligence. of servants. 163
Non·existent person. 195
Non-gratuitous act, 144
Notice. 29,: Agent to, 184
Novation, 107. 116
Nudum Pactum, 41
Object, destruction of. 119, 125
Object. failure of, 123
Object, legality of, 14
Object, unlawful of. 77
Object, unlawful in part, 92
Obligations, 15. 125
OtTer. 13. 17, 18; By Post. 27; By
telephone. 27 ; Communication of,
20. 27. 30; Conditional, 21;
Express, 18; Implied, 18; Of
performance, 99; Revocation or
Lapse of. 29 ; Rules re .. 18-20
Offeree, 17
Offeror, 17
Omission. 156
Open proposal. 28
Operation of Law, 188
Opinion, 72
Option, 28
Pardanishin Woman, 64
Parental Duties, interference with, 81
Partner Outgoing. 85
Partnership, 53, 85
Pav.'n, 170
Pawnee. 171
Pownor. 170
Penalty clause, 134
Performance, 14, 99-100, 188; By
Representatives. 101; By whom,
101 ; Death and. 10 I ; Difficulty of,
122 ; Intentional non. 61 ; Personal,
101 ; From a third person, 101;
Place of, 109; Order of 105;
Termination by, liS ; Time of, 109 ;
When need not of, 107
Personal freedom, restraint on, 81
Personal responsibility of agent. 195
Pledge, 170
Pledgee, 171
Plegdor, 171, 172
Post Office, offer and acceptance
through, 27
Pre-conditions, Failure of, 120
Preservation and Maintenance. 172
Pretended agent, 184. 195
Price, hi:;h of, 61, 64
Principal, 112, 174, 192, 195, 196
Principal Debtor, 149, 155, 157
Professional incapacity, 57
Professional persons. 57
Promise, 17; Joint 102
Promisee. 17
Promisor, 19; Death of, 10 I
Proof, burden"of, 62
Proposal, 17, 28
Prosecution, 60
Public duty, 37
Public offices. traffic in. 80
Public policy, 79. 83; Agreements
opposed to, 79, 81
Quantum Meruit. 130. 137
Quasi-Contracts, 143
Quit Facit per Alium Facit Se, 174
Ratification, 53, 181
Rebuttal, 63
Reciprocal Promises, 104
Redemption, 172
Refusal of otTer, 30
Refusal Performance of, 100
Registration, of concract. 13
Reimbursement 143
Release, 104, 156
Remmission, 116
Remuneration Agent of, 194
Renunciation, 187
Resprcsentation, 65, 184, 196
Rescission, 107, 118, 130
Restoration, 168
Restitution, 52, 134, 140
Retainer. right of. 171, 194
 INDEX 1083

Return. 163 Undisclosed principal, 195. 196

Return. goods of, 168 Undue influence, 61
Revocation, 23, 152. 154 Unla\'Io'ful consideration and object. 77.
Reward, 169 83,92
Riot, 123 Unsound mind. 54
Roman Law, 41 Unwarranted Assertion, 65
Usurious Loans Act of. 1918. 62
Sale, 169
Secret profit, 191 Variation of contract. 154
Security, loss of, 157 Void agreements. 46, 47, 50. 83
Servant and agent, 17:5 Voidable agreements, 46. 107. 167,171
Service contracts, 86 Wager. 89
Services, 109 Wagering agreement, 89
Shares. 71, 90 Waiver, 119
Si lence and fraud. 66 War, 56, 121. 125
Skill and diligen~, 91, 190 Warranty of title. 166
Sound mind, S4 Writing, of contracts. 15
Sovereign. foreign, 56 Wrongdoer. 169
Sepcific Performance, 53, 129. 130,
139 LAW RELATING TO SALE OF
Specific Relief Act of 1877, 52 GOODS
Stranger to a contract, 37, 43; Application, 200; Actionable claim.
Consideralion. 43; rights and 200
liabilities, 44 Acceptance, 235
Strike, 123 Appropriation. unconditional. 223
Sub·Agent, 186 Approval of goods, 224
Substituted agent. 187 Auction sale. 244
Suicide, 59
Surety. 149. 152, 157 Breach of contract, 244
Subrogation. 157 Bilaleral contract, 204
Bill of exchange, 224
Telephone. 27 Bill of Lading, 224
Teleprinter machine, 28 Breach of conditions. 212
Telex, 28 Breach of warrant\'. 212
Tender, 99, 115 Buyer, 200. 229, 232
Tcnninalion of contract, 115 ; or agency, Buyer, be\'tare of, 216
187; by act of parties. 187 Buyer, duties of. 237, 238
Test of agency, 175 Buyer. liabilities, 237. 238
Time. bar of, 42 : effiux of. 188 ; lapse Buyer, rights of, 235
of. 127; performance of, 109;
reasonable of. 29; :stipulations of, Carrier. 223, 235
110 Caveat emptor. 216, 217
Tort. 69 Compensation, 237
Trade. combination, 8:5 Conditions, 210
Trade. restraint of. 85, 87 Damages. 236. 238. 243
Trade, with enemy. 79 Damages. special. 238, 243
Trust. 43 Deliverable state. 222
Unauthorised acts of agent. 182, 195 · 232, 234
Unauthorised use of goods, 163 · symbolic. 232
Uberrimae fidei. 70 , actual. 232
C'ncertain agreements. 33. 88. 97 · Constructive. 232
1084 COMMERCIAL LAW

Deliverable Slate, pan. 232 On approval, 224

.. . instalment 234 "On sale or return" 224
• place of. 233 Ownership, 202. 225
• time o~ 233
Panics, 203. 221
Destruction. 205. 226
Patent. 217
Deterioration in the goods, 236
Pawnee. 229
Disposal. of the right of. 224
Pa"nor. 229
Documents of tille. 228
Performance. 232
Earnest money. 206 Pledge. 243 ; Possession of. 218. 229,
Encumbrance. 218 232, 233
Enforcement, 239 Price. 204, 237, 242; reserved. 244 ;
Estoppel and title. 226 upset, 245
Essential Elements. 203 Propcny, passing of. 221
Examining the goods. 235. 238 Purpose. 215
Executed contract, 203 Quality. 215
Expenses. 234
Railway Receipt, 224
Finder of Goods, 229
Remedial measures, 202
Fitness, 215
Remedy, 212, 239. 244
Goods. 200. 201; Ascertained, Repudiation. 211. 212. 238, 244
Conlingcn!. Existing, Future. Resale, right o( 239. 242
Generic. Specific. Unascrtained. Risk, passing of. 202. 225
200.201 ; Mo\able. 203; Perishing Return. 235
of. 205
Goods, unascertained, 221 Sale, 20 I. 208. 219
., and agreement to sell, 20 I, 202,
Goods, Destruction of 205
Goods, rejected, 236 205
.. and Bailment. 209
Goods, specific, 221
" "on approval", 224
Hire-purchase, 206 '. by Auction, 244
Hire-purchase. Act (of 1972), 206 .. , Breach of Contract of. 244
., by Description. 213
Implied conditions, 213
.. ,Essential Elements of, 204
Insolvency. 225
" on "Sale or Return", 224
Insolvent. 241
Inst:tlment Sale, 208 '. by Sample, 214
Intention of panics, 221 .. of Goods Act (of 1930). 200;
Seller, 200, 20 I
Interest, 237, 243
Seller. duties o~ 236
Joint Owners. 227 '. • liabilities of, 219
.' • rights of. 239
Knock out agreement. 244 ., . in possession of. 228
Legal, tender money. 200 Seller's lien. 240
Lien, 240, 243 Sepcific Performance. 236, 244
Stoppage in transit. 241. 243
Mercantile agent: 227
Subsale. 243
Merchantable, 214
Money, 205 Tax changes. 238
Time, Reasonable of. 211 ; Stipulation
Nature of contract 203 of, 210
Nemo Quod qui Non Habet. 226 Title. Condition of. 213, 229
Non-acceptance. 244 Ton. liabilities of. 219
Non-delivery, 236. 238, 244
 INDEX 1085

Transfer of property, 221, 222 Firm, 255

Transfer, exceptions of, 230 Firm-name. 255. 283
Transfer. of ownership, 202. 221 Firm-property. 283
Transfer. of title. by non·O\"ner, 226 Fraud. 282
Unpaid seller. 239 Good faith. 262
Usage of Trade, 218 Goodwill, 257. 285
Guilty conduct. 279
Vendor's Lien-See Seller's Lien
Voidable Agreements, 227 Hindu undivided family, 248. 253
llolding aLII. 270
Waiver, 211, 241
Warranties. 210. 218 Illegal parlnership, 254
Wharfinger, 235 Implied authority. 265
Work and labour, contract for. 209 Incapacity, 279
Wrong quantity, 234 Incoming partner. 273
Indemnity. 262. 268. 270
LAW OF PARTNERSHIP Indian Partnership Act o( 1932, 248
Accounts, 269 InsaniN. 279
Accounts, upon dissolution. 254. 283 Insoh·cnC)~ 174
Act of the firm, 267 Insolvent. 284
Admission by partner. 266 Interest on capital, 26&
Agency of, 249, 264 .. on advance, 268
Agreement, Partnership of. 258 Joint Hindu Family Firm. 253
Alien. 251 Joint Venture, 256'
Alteration of authority, 266 Just and equitable clause. 281
Application, 248
Authority, 265 ; in an emergency, 266 Kart •. 253
Breach of ag.reement. 280 Limited panncJship, 256
Business, Conduct of. 262. 268 La". 250. 270. 281
Club, 252 Minor. partner. 251. 271
Company. 251, 252 Misapplication, 267
Competing business, 269. 276 Misrepresentation. 282
Continuance of pre·cxisting terms. 264 Mutural rights and duties, 263
Co·owncrship. 252 Name of Partnership. 255
Coparcenary. 253 New partner. 273
Contigencies, 278 Notice. 266. 279
Death of Partner. 253. 275 Opinion. 268
Debts. 284' Outgoing partner. 273. 275
Dissolution, 25·1, 269. 278
· consequences of .::!R 1.283 p.rtner. 255
· grounds of, 278 Sleeping. 255
· by Court. 279 · Authority of. 264. 281
, settling accounts upon. · duties of, 269
283 · Active, Dormant, Nominal, 255
liabilities of. 167
Em~rg~ncy. 269 name of. 255
Estoppel. 270 relation \\ ith. 262. 263
Express authority, 265 rights of. 268
Expulsion. 274 Pannership. 248
1086 COMMERCIAL LAW

Partnership, classes of, 256 Agenl, 319, 323

" ' Essentials of, 248 Allonge, 318
, Forbidden by Law, 254 Alteration, 338, 360
• Joint venture. particular Ambiguous Instrument, 306
partnership, limited partnership. Assignment. 316
256. 257
· Property of, 257 Backer. 308
, teslS of, 249 Bank, 297
• at Will, 256 Bankers and Customers, 355 ; Liabilities
Pennanent incapacity, 279 of. 359
Person. 248. 251 Banker, duties of, 356 ; protection of,
Premium. rcturen of, 282 359
Profit. 249, 269. 276, 282 Banker's Drafts. 303
Profit. personal. 264 Banking, 355
Profit, secrel. 26-1 Banking Companies Ac~ 355
Property of firm, 268 Bearer Instrument, 304, 321
Public notice. 272 Bearer, on demand, 305
Bill of Lading, 289
Reconstitution. 269, 273 Bill of Exchange, 292. 293, 303
Registration, 283 Bill of Exchange, Essential elements
Registration of finns, 258 of, 292 .
Register of Firm, 258 Bill of Exchange, Specimens of. 293
Remuneration. 270 Bill in Sets. 309
Recission, 282
Restraint of trade. 275. 283. 285 Cancellation, 336
Rt:tiremcnt 269. 273 Certification of Cheque. 297
Revocation. 276 Cheque. 289. 294. 325
Cheque, Essential features of. 295
Secret. profits, 26"', 270 Cheque. Form of. 295
Sleeping panner. 255 Chcque. types of, 296
Status. 248. 255 Cheque. payment of. 357
Sub-partners. 255, 275 Cheques. open. 296
Transfer. partner's inten:st of. 275 Cheques, crossed. 296
Transfer of \\"hoie interest, 280 Civil Procedure Code, 302
True partnership. tests of, 249 Collection of Cheques and Drafts, 361
Compensation. 326
Unlimited liability. 270 Consideration. lad of. 335
l"nsound mind. 251 Corporation. 323
Voluntary Agreement. 248 Crossing. 296. 339
Customer. 355
Wilful neglect. 270
Winding up. 281 Date. 290. 293. 304
Woman. 251 Days of Grace, 330
Wrongful acts. 167 Default. 336
Deli\'ery. 315
LAW RELATING TO Discharge. 335
NEGOTIABLE INSTRUMENTS Dishonour. 34.1: need not be given.
Accl!pliln~:c.194. JI:! : for Honour. 31~. 346
349 · consequence of. 344
.~cc<ptor.292. 324, 334 · by non·acccptilllcc, 314. 34~
Accommodation Oills. 307 · by non· payment. 344
~AC(Olmt Payee Cheque. 296. J 19 · notice of. 345
 INDEX 1087

Oi\ idend warrant. 289 Law. 355

Documentary l3ill. 309 Legal Representative, 323
Drawee, 292. 314. 325; in case of Liability. 294, 300
Need. 292 Lunatic. 322
Drawer. 292. 324
Maker, 290, 324. 341
Drunken Persons.. 322
Margin l f an instrument, 339
Duplicate instrumen1 of, 332
Materia' alteration, 337
Endorsement. see Indorsement Maturit ... 313, 330
Escrow. 309 Minor, 322
Estoppel. 301, 341 Money. legal tender, 291. 292. 302
hidence. 303, 339
Excuse for delay. 330 Negotiable instruments, 289
.. . Act of 1881. 289
Fictitious l3ill, 308 · definition of, 289
Figures v. Words. 306 , Essential feature of. 30 I
Finder. 333 , Forged, 334
Foreign l3ills. 348 , LOSl 332
Foreign Instrument. 307 , obtained illegally. 333
Foreign Law. 342 , Payment of, 330
Forged Cheques, 360 · showing of. 313
Forged Instruments. 333 · who can be parties 10.
General acceptance. 312 322
· without consdiration. 335
Hand Note. 289 Negotiation. 302, 315
Hand\\Tittcn instrument. 295 Negotiation hack, 320
Holder. 292. 299 Negotiation by indorsement. 316
Holder in Due Course. 299. 333 Not Negotiable. cheques. 297. 319. 339:
Hundis, 289. 352 instruments, 319
Idiot. 322 Notary Public. 346
Inchoa" Instrument. 300, 306. 339 Notice. 294, 302, 317. 333. 344
Indian Contract Act, 355 Noting. 338, 347. 348
Indemnity. 332 Non-presentment. 314
Indorsement. 317 Once a bearer cheque. always a bearer
Indorsement. Faculative. 320 cheque. 321. 360
· Partial, 320 Open cheque. 296
· Restrictive. 320 Order instrument. 304
· Rules of. 318
· T)'pes of. 317 Parties to a negotiable instrum~nt. 322
Indorsement. Conditional. 319 Parties \0. liability of. 324
Indorser, 317. 325. 341 Parties 10. discharge from liability. 335
Indorser, who excludes his own liability. PaYOlent of. 330
319 .. . for honour. 350
Inland Instruml~nt. 307 · in due course. 331. 357
Insohent. 322: Interest on bills and · presentment for. 327
noles. 332 · lime of. 328
Imcrnation31 Law. 341 · of cheques. 357
I. O. ll. 290 Ilayl:e. 290. 292
Pcrpclh. 3.5-t
Jomt Notes and Bills. 304. Hindu
Per Pro. 323
family. 32.t
Personal liability. b.elusion of. 319
Kho1..ha. :153 Pdh. ~5.t
r
1088 COMMERCIAL LAW

Popularity, 303 Carriage of Goods by Sea Act, 1925,

Presentment for acceptanco, 312, 3 \3 364, 379, 380
Presentment for payment, 3l" Carriage by Air Act. 1972, 364, 391
Presentment place and time aft 327. Carrier by Air, 391
328 Carrier by Land, 364
Presumptions, 302, 318, 339, 340,'342 Carrier by Sea; 379
Procedure, special, 302 Carriers, classification, 364
Promissory Note. 289, 291, 293 Carriers. chaiacteristcs. 364
,. • specimens of, 291 Carriers, publli;, 365 '., .
, Essential elements of, 290 Carriers. piivate. 366
Proof. burden of, 340 Chaner Party, 372, 383
Pro-note, 289 Claims, 377 "
Protection. 359. 362 Common Carrier", 365'
Protest, 294, 340, 347 Common Carriers' Act, 1865.365,369
Public Holiday. 331 Consigncx. 393 .v
Consignor, 393 r
Qualified acceptance, 312
Damages, 368, 370, 395. 396
Redraft, 326
Death. 376. 395
Release. 336
Detective Receipt. 374
Reserve Bank. 291, 293
Delay. 374
Sans Recourse. 320 Demurrage, 389
Signature, 290, 297, 301 Detention. 374
Stale cheque. 295 De .... iation. 368, 37-1., 386
Stamp. 291, 293 Discrimination. 364
Stamp Act, 291 Documents. 392
Sureyship. Principk of. 325 Dunnage. 388
Tenor. 331 English Common La,,\', 369. 383
Tickri chit. 35,l English Law of Carriag~. 364. 383
Time. 310 Excepted Perils. 387
Time. Reasonable of. 31 D. 313
Falai Accidcntss Act, 395
Title. 302
Forwarding Note. 374
Undated Bill and Note. 304 . Freight. 379. 387
Usance. 331 Forgery. 374
Writing. 290. 292. 300 GratAitous Carrier. 366. 370
Goods. defective. 375
lickri Chit. 354
Hague Con\'ention. J9-t .
Hague Protocol. 391
LAW RELATING TO CARRIAGE
Accidents. 376
Affreightment, Contract of. 379
.
Uigh Contracting party. 3Q4
Indian Ilil!> of lading Act. 1856. 381.
Air Consignment Note. 392 382
Air Waybill. 392 . Injul). 376. 394
Animals. 375 . fm'iur~r. 371
Inh:rnalional carriage by air, 39'"
l3:lggage. 392 In{('rnal carriage b) air. 392. 39(,
Bailte. 372 .
Barratf). 387 Jenison. 387
Bill of Lading. 379: Clean. Through. Lay Da) ,. 38S
386 Legislation rc:iating. to carriag~. 36.1
Rounmr) Bond. 3ii9
 INDEX
Lien. 385
Lien. carriers of. 368. 38S
losses. General Average. Particular
Average. 389
luggage Ticket, 392
luggage Ticket. of passenge,s, 316.
392
Marine Insurance Act. 1963. 364. 384
Mantime Lien, 38S
Ma(~· s Receipt. 386
Merchant Shipping Act. 1958. 364.
319. 384
Motor Vehicle Acts, 37.
Non-scheduled article, 369
Negotiable instrument. 382
Owner's risk, 314
Open TrucKs. 315
Passcngc:r. Carriers of. 311
Passenger Ticket. 392
Pc:rils of ,he Sea. 381
Police Acts. 311
Primage. 381
Pri"le Carrier. 365. 310
Public Carriers, 365. 368
Railways. 372
Railways. Ac~ 1890. 364. 312
Refusal of Delivc:ry. 361
Respondentia Bond. 389
Salvage. 381
Scheduled goods. 369
Safety. 367
Transit, Termination of. 375
Tim( anJ place, 367
Unremm,ed goods. 377
Valuabk goods. 37;
Warranties.. .'83
Warsaw ConVenlilln. 391
York Ant"erp rule!'. 390
LAW or INSURANCE
Accident. Insurance of. 449
Age. proof of. 42;
All in onc policy. 450
Annuity. 417
C & I Law (Index) - 69
1089
Assignment, 412. 443. 441
Assured. sec Insured
Average policy. 448
Bar 10 question, 412
British Marine Insurance Act of 1906.
429
Burglary Insurance. 4S0
Calculation. 408
Causa Proxima, 40S. 409
Claims. 424. 44 7
Combined Policy. 448
Commission. 412
Construction of Terms. 438
Contingmt contract. 403
Contribution. 405. 410
Cover Note. 401
Deviation, 442
Disclosure: duly of. 435. 436
Documents. 413
Double Insurance. 413
Duration of the Risk. 438
Endowment Policy. 411
FAA Clause. 440
F.C & S. Clause. 439
Fact. material. 402
Fidelity Insurance. 450
Fire. 446
Fire Insurance. 416. 430. 446
Floating Policy. 433. 448
F.P.A Clause. 440
freigbt. 435
fire Policy. 446
Good faith. 401. 408. 432
Ignition, 446
Inchmaree Clause. 439
Indc:rnnity. 403. 408. 446
Insurable Int<rest, 404. 408. 432. 446 ;
Property. 430
Insured. 40 I. 406
Insurer. 400. 406. 444
Insurer. obligations of. 409
losurer. rigbts or. 410
Insurance. Act of. -103. 407
. Ad\antage and the object of.
400
. Contract or. 400
1090 COMMERcIAL LAW

Insurance. OI:finitton of. 400 Reinsl8lemenl PoliCY. 448

· Essenlial, rcquimnmlS of. Reinsurance. 414
401 Replacement Policy. 448
· Policy. 406 Repr.senl.tion. 435. 436
· Types of, 432. 434 Risk. 400. 406. 409
• Value. 433 Running Down Clause, 440
· wager. 403
Specific Policy. 448
Joinl Life Pol icy, 417 Subrogation. 40'. 410
Life Insurance. 416 Sue. Labour and Travel for. 439
• Corporation Act. Suicide. 423
1956. 425 Surrender Value. 413. 418
· Types of. 417 Time Policy. 432
• Corporalion. 407. 425
Limiled Payment Policy. 418 Uberrima. fide;, 401. 432, 435. 446
L1o~d's Policy. 438 Underwriter. 437
losses. 405. 412. 444 Unvalued Policy. 433
Lost Of nol losi. 438 •
Valu('\j Polic)'. 433, 448
Marine Adventu.... 43 I ; Insurance. 430 Voya~c. Policy, 442
Marine InslmlllCC Acl (AcllI of 1%3). \\'a~er & insurance. 408
429. 432. 441 WagL'ring Contrac~. 432
Marine Policy. features" rcquisiles or. Wagering Policy. 433
431
Warran1ics. in Marine Insurance, 440
Marine Policy. Types of. 432
"'huh: Life Policy. 417
Marili"", Pmls. 431
W"lklll\.:n·~ Compen~tiun. Insurance
Moterial FocI. 402 oj 4"U
Memorandum Clause. 440
Miscen_.. In!ltmllnce. 418. 449 LAW OF INSOLVE!\'CY
Motor Car Insurance. 450 Act of Insohency. 454
Motor Vehicles Acl of 1939. 450 Adjudicallon, Conditions, 457
N.B. Clau5C. 440 - . Legal effects of. 462
Nommalion. 420 , Order of. 4S7. 470, 477
· Proc~ings alier order
Paymcnl. 447 of, 462
Perils of lIIe sea, 431 • Proceedings prclimi-nary
Policy. 406. 432. 437 to. 452
Policy-hohler, 406 • Procedure for the
Policy-holder, duties of, 411 obtaining of, 4'7
Policy-holder, risms of. 412 Adminislralion. 462
Policy. profit wit1l. 417 Agent. 4'4
Premia, 4111 Annulment. 477
Premium. 400. 407, 410, 411. 444 Antecedent Transaction, 469
Profit Policv. 4 J7 Anangcmcnl. Schemes. 473
Propeny inSurance. 416
Protection. 408. 412 Bankrupl. 452
Public Financial Institutions Laws Committee of Inspection, 473
(Ame""-nl) Act, r97,. 427 Companies. 460
Public Policy. 40& Composition. 473
Rcinstalmcnl Polic). sec Replace·ment Convict 460
Pnlh.:~ Creditor's Petilion, 457
 INDEX 1091

Cn:ditor'~ I'.:tilion. 453 Partners. 459

- . Xh:~tings of. 472 Presidenc\ Towns Insol\iency Act of
• Position of Secured. 457. 1909: 478
470 Propcrtit..."5 AvaHablc for Dislrjbu~tions
Among. Creditors. 467
Death. 460 Proh.'Ction Order. 465
Deblor. 4~3 : dulies of. 46S Pro,inci.1 Insolv<nc~ Act of 1920. 478
lXbtor's Pl!tilion. 457
Debts. Proof of. 463. 474. 475 Rd.lion Back. 462 : Doctrine of. 469
Debts. CanlCc:llalion of. 4:53 Revuled Ownership. Doctrine of. 468
Deceased Person. 460
Discharge of Insolvent. 480 Sct Off. 476
Discharge Order of. 480. 481 Small Insolvencies. 477
()isqualHic~tlion. 453 : Personal. 463 Stay. 463
Dividends. 476 Suits against insolvent. 463
Examinalilltl oflnsohent. Public. 465; Transactions. Protected Antecedenl469
Pri\'ate . ..l66
V1o!'sting of properties, 462
Forcigno.:r. -l59 VoluntaJ)' Transfer. 463
haud-uklll rfl:f~rence. 455. 46-1
Woman. 459
Insohl"lK~ ..\,Is. 452. 454
.. A" ol~ 454. 456 .. AW OF ARBITRUION
. Courts of. 453 Appointment. 493
Ddinition of. 452
Appeals. 504
1...:g.lslation about. 452
Arbitr.tion. Act of 1940. 486. 491
NUlic!! of. 456
.. . Agreements. 4N6. 487
Obiect of. 452 490. 497 . ,
'. PrOcedufC of. 4S8. 469 Definition of. 486
Insol\'cnt. 465
Effect of. 487
· Disqualification of. 453. 463
in suits. 490
· Duties of. 463
Mallers which can be
· ""'perties of. 462, 466. 475
Rderred to. 489
· Suits against. 463
:\r~ltration. Provisions Implied in. 492
··Who CM! be declaRe! "<. 454. . . Statutory. 490
458
Inh:rest. 476 · hpes of. 489
· When n,') ~uit pending.
Joint debt.,..,. 459 490
Joint llindu family. 459 · \\ ho can refer di~pules to
488
Legal Rcpr,:stntill!ve. ~tlD
Arbitrator. AppointnlCnt of. ·N3
l.unatic. 4;8
.. . Disqualifications of. 493
ManagemCI1t. -'62 Duties of. 496
Married \\oman. 459 · New or sole. 493
Minor. 458 · Power of Party to appoint.
Mutual Dealings. 476 493
Omcial ASSignee. Powers of. 470; · Po,," of. 494. SOO
Duties of. 472 · Removal ot: 496
Olfll:ial Assignee. Receiver. PoYtcrs of. · Rc:muneration of. 498
470. 472 Rc"ocation of 3uthoril) of.
Onerous PTopen~. Disclaimer 0 f. 471
1092 COMMERCIAL LAW

Award. 498 Securilies. 506-514

-. • Defence &. off~ncc. 499 Suhmort{!:a~c. 509
- . Foreign. 491
.. • Procedure of. 499 CONSliMER PROTECTION ACT.
-, . ,,-hen modified or corrected 1986
SOl Civil I'rodedure. Code. 523
.. . When remitted. SOl Commission. National. 526
.. . When set aside. S02 Commission. Siale. 524. 525
Complaint. S 18. 519. 520. 528
Bar of suits. 487 Consumer. 519
Coun, Po\\cr to appoint Arbitrator or Dispute. 5 J9
l!mpire. 496 · Prolcclion Act. Features. 518
Coun. Powers in relation to arbitration · Proieci ion Bill. 5 J 7
pr~ccding. 5000 · Rcdressal Agencic~. 522
Consumer. Redrcsal Forum. 518
Death or Pan). 49S
Council, Ccntral & Slate. 520. 521
Delay. 495
Dispulcs what matters can be referred District Forum. 521. 524. 525. 528
to. 489
Disputes. Who can refer to arbitration. Interests. Consumer, 521
489 Jurisdiction. 527
Error of Law. 502 • Appellite. S2S
· Original. 525
Foreign Awards. 491 · Pccunian.'. 524
I"soh'eney_ effeci of. 496 Objects. 517. 520
Insolvenc), of Pany. 496
Penally. 531
Misconduct. 496. 497. S03
Moral lapse. 503 Trader. 518

Natural justice. 497 COMPANY LAW

Revocation. o(Mbitrator' authority. 495 Accounts, 560
Account books, 560. 716
Sirpanch. 493 Acquiescence. 636
Submission, 486. Acquisition of shares, 641
Three Arbitrators. 493 Advcrsof) Comminee. 563
Affairs. Statement of. 769
Umpire, See also Arbitrator Agenda. 657
Umpire. Duties of, 497 Agent Director of. 688: Sale selling
or. 691
LAW RELATING TO
Aliens. trading with. 759
SECURITIES
Charge. SII Allotment ofsharcs. 605·609, irregular.
609; Return. 609 .
II~ pOlhecalion. 512 Amalgamation. 627. 629
Annual. Accounts of. 719; General
Lien. 50 13 ; Possessory. 513 : Marilimc
514 : and Equitable. 514 Mecting of. 654 . Rcport of. 726.
759 : Return or. 663
Mortgage, 50 12: classification 01: and Appeal against refusal 10 transfer. 6.tO
Charge. 511 : and Pledge. 512 Applicalion. 538. S58
Parties 10 Mortgage. rights and liaMliucs Area of Operation Clause. 567
or. 509 Arrangement Schemes of. 626
 INDEX 1093

Articles of Association. ~M. ~70, 578 Commin« of Inspection. 772

Definition of. ~6~ Commnn Seal, 54)
Form and Contents of. 570 Compan). as Citizen. S.t I
Inte"""t.tion of. ~71 , Deemed to he public. 552.
Legal Effects of. ~82 555
Associates., investigation of. 749 · Definition of. 538
Association and Subscription Clause. Domicile of, 541
568 , DitTerences between private
Auditors. 723-731 and public. 549
Audit. ~i.l. 728. 746 .. , Essential features of. 540
Autheljtication. 720 • Essential steps of. 587
Autholi!Y. Lack of. 585 • Existing. 546
AUton'fific Conversion. 55] • Formation of. 587
· Fundamental rights of, 5~ I
Balance Sheet. 719 · Guarantee by. 545
Bmding contract, 583 · Holding. 5~9
Blank Transfer. 646 , Invesligation of thl! affairs
Board's Report. 722 of. 746
Body Corpo'"te. 546. 709 · law Administnuion of. 745
B()lIu~ shares, 619 • La"' Board. 562. 571. 630,
Bl'klk.;; and papers, 716. 787 655
I. •:\~(:ounts of. 716 , Limited by share, 545
-, . (}ptlOnal. 718 · Membership of, 635
II •Sla'uhlr~. 717 · Modes of management of.
Borrowing PO\\Cf:-;, 732 702
Breach of Trust. 697 , and PartnerShip. 5~3
Brokerage. 631 · Power of. 580
Bu~in\!ss. Ordinary. 661 · Pii\:ate into a public. 551
RlI~incss. Special. 660 · Public into a pri\-'31e, 5.54
(,,,11<, 1>47 · Prh"ate, 544
l';lpaClty. conlracual. S~
I. 543
· Public. 544
CarIL:IL 541 Aiteration. 57~ , Inl.:r~as\!
· Shares by. 5~5
tlf. ;76.620; further is:oiUC ('It: 576. · Subsidiary. 549
Su~pcnl;ion of. 762
h20. n~duclion of. 576 ;
·\ulhoriscd. Issued. Nominal. Paid r~ 1'<" of. 544
up. Subscribt!d. L'ncalkd. 613 IInlimited. 545. 568
Llpltal Clause, 567. 575 fprnp.ulIl'S Act. Changes Made In. 537
Capital. ,\l1eration of. 575 ("llrnp.m.C's (Amendment) Act of 1974.
Clpu.ll I,sll~s (Control) Act. 58"" 5.17. j58
Capital Rl!d('mption Reserve '\(dIU!lL l'ompanies Act Gene-sis of. 1956. 537 ;
1>19 extent and appli~;1tion. 538 : objects
Chamn;ln. 657 of 537
Charge. :H. 74t ~ fi\...:~1 .Ill,! 11",tI1/l~. Companll" 1"I~uidation Account 788
Cumrl·lh~IIII)ll~. 693
TU . regislr.llion ()( 7.. 1 '·'jllL!.Iole.
7.Q CnmphlllllK. 626
,r~ntr~ tiovemmelll. rO\~"'I" t)( 756 ( .l!l!plli--Ilry purchase of ~harcs. 628
Chartered Comrml~_ '\..Ill \ "n.:C'almcnt. 598
t'~m)J'AenCeml!nt III' BUSIn(,ss. 550. 'N~" l lilldltions eontr:1inClf ,~ Mcmoranduru.
~IO. 761 572
Commission. h.ll. 7-12 ConSC'1l1 uf l)in:'lor. 67n .
1094 COMMERCIAL LAW

Contract. Form of. 706: \\ ilh undis· Director. First. 667

dosed principal. 710: ~k010 of. Legal POsili,ln of. 687
551 : Prein . . . orporalion. 591 Liabilities of. 697
Contrihution. Pll1ilical Purroscs f~lr. • I.o.ns '0. 680
692 · I.oam; 10 relative of. 680
Contributor). 764. 766. 712. 779 · Managill~ 677
Ct)n1rol over cumpanks. 7~5-759 .l"umberof. 666. 672. 680. 696
CoO\crsion. 551. 5~4. 621 · Obliga'ions of. 699
Conversion. n:sults of. 555 · Ollieers as. 688
Copies. 716 Pom:rs of, 689
Curporonion. 546 Register of. 683
Corporate system. 651 Removal of. 675
Courts. jurisdicti()11 of. 561 : ro\\l.!fS in Remuneration of. 683
,\ indin~ up. 765 : powers of. 752 · Resignation o( 673
Crcd"ors. 765. 786 · Relirll!lllenl of. 672
Damages.. 60::! · RighlS of. 693
Uealh of memb.:r. 638 Sc\,ants as, 689
Ue~nturc;!s. 733-738 · Truslecs as. 687
· Classilicalion of. 735 lInlimi'cct liabili,y of. 619.
• Con\'cniblcs. 736 69<). i~~
· Rules relating to. 736 · Vacalion of omcc hy. 674
J)~h . . . nlurcs
Iioiders. Registcr and Inde\ · Validity uf aCls of. 692
of. 737 ; Rights and Rcm<dies of. · WhoiclilllC. 677
738 ; Difference. Shareholders and. · \\'ho can he. 672
738 Disdaimcr of onerous proP"'rty. 771
Debts. in \I,!indmg up of. 762. 764 Oi~dosurc. duties of. 694
Deeds of a Company. 7()(, Dis~ulution of a cl.1J1lpany. 787, 788
Dcfaull. 552 DI\'idl"mL 711; Unclaimcd. 788:
Fkfunct Companies. 788 U Ilpaid. 71 ~
D"I",~. Condonation of, 759 D~)("lInh.·nK 559 : Public. 566 : sen k'~
Ddinqucilt J)ircclor, 783 of 706
[)";p;JSilS. 596. 607 Donal ions. 692
Deprecialion. 712:. 713 [mhlcnls and Names. (Pr~\"cnti(ln of
Director. Additional. 667 Improper ['sc) Ael of 19;0. 569
· Agents 'IS. 688 Employce. Position of. ;59
• Ahcrnale. 668 [mplo,)'('c, Sccurilics of. 711
· Aproinunenl uf. 667-672 ESloppel. 62.1
· lIoaN of. 686 E\i:!>ling Compan:-. :'-'6
· Casual. 667 Expcrt. 569. 60 I
· COnlract in which is interested. [xplanalur} Stah:mcnl. 65-7
681 Extraordinaf) G~nl.:ral \k~llIlg.. 655
· I>ifinition 0(. 666
· D<linquenl. 783 F:dsc SI"h"1I1~nt. 598
· I)isabili,jes of. 695 Family C(\mpan~. :H9
· Ili"lualificalion of. 671. 679 Fietiliou!O: rcrron. 606. 637
lIy EI",,'ion. 667 riduciary Posilion. 687
• DUli.::!> of. 694 Financial institulions. 5-' 7
Employ\.'Cs as. 689 For.:ign companies. 559. ;97. 6-'3
· Indhlduials to N. 611 Foreign Register. 63-'. 737
Forkilurc. 6.t9

Forg"od Transfers. 645
Fonnatlun of a Company. 587
Fraud. 600
Fraudulent Prtf~n:nc<. 78~
Fundam.:ntal righl H2
GO\'cmmcnt Company. 557
Group. 547.6.\2
Guarantee. 545. 632. 7J~
Holding Company. 548. 758
Illegal Association. 556
Income and Expenditure Account. 717
Incoporation. Certificate of. 588
Incoporatioll, Procedure of. 588
Ind<mnity. 695
Index of. Charges. 737
Ind~x of. Charges., d~bl!nture holJers.
737
I ndli:x of. Charges ~ kmbcrs. (,J ..
Indour Management. 584
Indu~trh:s (DI!\.'clopmenl
Regulation) Act. 1951. 587
Information. Persons of. 749. 759
In~h-~nc\". 638
Ins~ctio~. 707. 716
Insl"-,,:tors. 749
Inh:rl!st. out of Capital. 709
ImcS!i ..tions. 746-749
Intra vires. 567, 581
Investigation of a comp:my. 7 t6
InH.'Stmcnt. insafTh: group of companks..
,.to
1rrr.:guLarit}. 58 ..
Joint Hindu Famil) Firm .. 556
Judidal Rc\'icw, 75 I
JUSt and equitahle clanse. 762
Laches. 603
Law Board. Compan~. 56:!. 573. 655
Liabilil\ of 5~ I. 5-U
l.i3bilil}' of. dau~. 567
\jCII. 638. M8
Liquid.tion. s.!C Winding up
l.h.luidatllr. 767. 717
Listed Industry. 642
Loans. 739
Lode.ine: thl! ccrtiticat..:-. 6.&6
I.ost Instru.ocnl. 6..&0
M.nagement. 541
INDeX 1095
Management. Deadlock in. 762
Management. modes of. S41. S43. 702
Management. by undesirable persons.
709
Manae.emenl. same, 739
Man.gcr. 704. 705. 706
M:J.nagerial Remuneration, 550. 683.
108
Managing AgenlS. 702
~1ana2.in2 Dir~ctor. 677. 702
\I>"'';-t ;.Iu<. M2
~kctings. 652
., • Annual General, 65.1
• by Court, 654.-655
· b~ Cc..1mpany Law lloard,
655
· Extraordinary. 65S
· General. 655
• on Rt::quisition. 6:55
· objects of. 652
· other General. 655
and _ Statutory_ 652
· of ll".rJ of Directors. 686
· Procl!uurc of. 656
~k'mbcrs. 63;
· Authorih of. 543
· Falling lido\,,",' the Minimum.
555
· l\umbcr of. 5~3. 5~9. 758.
· Reduction of. 762
· Reg.is.tcr and Index of. 633
· RI!St,.llution of. 660
· anJ Shareholders. 636
\kmoranJum. Ah..:ralion of. 571
· Association of. 565. 5S0.
588
· Contra.;t of. 551
· Condition in. S 71
· Ddinition of. 565
· Pifft:rcnces. 566
Impol1i.\m:e of. 565
Fo"n and Content of.
567
· Legal effects of. 5S11
\lilllmum Subscripli,-"!n_ 587. 60... 6tN
Minor. 637
~linull!s. rroc..:cliIOgs of. 661
Mi.;;,trrrIJpriatil)n. 763
\ II:'>CI lIlJUI.:t. ·763
1096 COMMERCIAL LAW

Misfeasance. 698 Prospectus. 560. 593. 595

Mismanagement. by majority. 75 I .. . by Implication. 603
Miss1alements. 598 · Legal Requircment~ of.
Mongage. 638. 741 595
· Misstalemcnl in . .598
Name of a Company, 568. 572
• Statement in lieu of. 587.
. Clause. 567
603,608
Name of. Chaoges of. 572
Protection. of olTIcers. 759
. Restriction on. SSO
Provident Fund. 711
Nomination, 668
ProM', 658
Notice of aliOlement. 605
Public Company. 5~4. 549
h, Directors. 669
• Di ff~r~nccs \\ ilh pri\'atc
or Meeting. 656. 669. 686 compan~. 5~'J
Special. 663 .. . Document, 565
Obiect. Change of, 572 Public Cllmpan), Examination. 767
'.. . Unlawful. 746 · rmancial Institution. 547
Ohli!=3tions. Statulory. 541. 54~ · Into a priv3te company. 5;4
Ollie<. 541 • 111\ ilation to. 550
om..:c of Liquidator. see Liquidalor · rruslee. 634
ProfiL 675. 696 Qualification Shares. 669
Registered, 569. ; 7~ Quorum. 658
Otlieer. 688. 705
One man Compan)". SJ9 Rl!'construction. 626
Onerous propeny. 771 Rectification. h34
Oppres~ion. 7~ I. 754 Redl!'mplion, 638
Optlonol Books. 718 Refu"3l. time of. £>.to. 643
(h\ncrship. ImcSlil?31ion of. 748. 757- Register. ~6f). 634. 707
758 Regislcr..:\! (, ·ompany. 5""'0
.. (jOice. 541. 569. 57~
Pa\ ment (0 Creditors., 786
, change in. 574
PC;laltic.-s. ~6i
Registrar. 745. 765
Prepelual S~cession. 541
.. . aprlkalion for \\'indin~ up
Personali,,". Anificial. 54)
- . Juristic. 558
IIr. 7(>-1
· Functions of. 745
, Legol o[ 5~O. ~~8
· PO\wr of Enquil')' of. 746
Place of profit. 675. 696 Rcgi,tmtion, 540, 597. 588, 6H
Political purpose. 692
.. . Monga!!c and Cha,!c 01:
Poll. 659 7~1
PO\\crs of Company La\\ Goard. 573 · Proe--dure of. 588
Preference Share. 614 Relative. 702
Preferential Payment. 785 Rel"'aot period. 554
Pre incorporation Contract. 591 Remuneration. 590. 693. 708
Private ('ompan~·. 544, 549 Rcquisilion for meeting. 651
,- . Com'crsion 10 puhli( Kcscission. 602
company. 551
Meserve Capital. 578. 613
.. . Differences \\ ilh
Rescrves. 713
Public compan). 549
Resolutions. 552. 660
. Pri,·ii<gcs of. 551
· Ordinm·. 661
Proti.. and Loss AccaunL 720
Promoh:rs. 5ft9 · Memh<;' of. 661
Registration o[ 661

Resolulions. Special. £60, 761
.. , By Special Notice. 662
R(turn. 663 as to Allotment. 609
Return of mone). 607
Re"ocation. 607
Rights Shares. 550. h:lll
Rotation. 670
Secretaries and Jr~asures. 702
SI!Crclar). 702
Seni,c of Documents. 706
Shares. 613
.. . Allotment of. 605
.. . Capilal. 613
... Cenilic<lh:. 614. 622
,- • Classification of. 614
.. . Compulsor)-' purchase of. 628
-, . Conwrsion of gm..emmcnt loans
into. 621
.. . Dl!linition ot: 613
.. . at a Di:;;c()unt. 630
.. _ Diff..:rcnces between Share
warran' and Share ceniflcate. 624
... EquilY. 616
.. . Forfeiture of. 649
.. . Issue of al a premium. 630
.. . Lien on. 6-18
... Pr.:ferencc. 614, 619
... Redeemable. 615. 619
.. . Premium Account. 636
.. . Purchase of Company's Share,
551. 632
.. . Qualilic31ion. 669
.. . R~lricti'ions on Acquisition and
Transfer of. 641
.. . Surrender of. 650
.. . Take o\'er of. 628
.. . Transfer and Transmi-ssion of.
636
.. ,Transfer of. 650. 638
.. . TruSl of. 6H
.. . Warranl of. 623
Shareholder. 616. 634. 738
· OUlies of. 618
· Liabililies of. 618
• and Member. 636
, Obligalions of. 618
· RighlS of. 617. 721
· Variation of rig:hts of. 578
· VOling righls. 616
INDEX 1097
Sole Selling Agents. 691
Solvenc)'. Declaration of. 775
Statements. Untrue. 598 : reckless. 599
Statistics. 759
Sial us. legal of. 543
Situation Clause. 567
Specific Performance. 592
Sialulory. Books of. 717
Sialulory. Company of. 539
.• • Meellng. 550. 652. 761
· Obligalion of. 541. 544
• Public Company. 545. 552.
555
, Repon. 550. 653
Siock. 624
Stock. Exchange Recognition, 608
Subscription List. 605: opening of.
606
Subsidiary Company. 548. 758
Suh5-lratum. 763
Surrender of shares. 650
Trading company. 732
Transfer. 541. 544. 550. 636. 638
· Blank. 646
· Forged. 646
· and Transmission. 636, 646
True Statement. 60 I
TruSlee. 634. 637. 687
TUrnO\ier. 554
Ullra vires. 567. 580, 581
Unclaimed Dividends. 714-715. 788
Undisclosed principal. 7\0
UndiSlribuled AsselS. 788
Unlawrul objecl. 759
• Unlimiled Company. 545
.. • D"eclors of. 619, 699. 774
Unlimiled. Liabilily. 774
Unregistered Company. 540 ; winding
up of. 789
Untrue Sialemen!. 598. 602
Value of share. 642
Veil. lifting or piercing of. 542. 7.58
VOIUnlal')' Association. 540
Volunt31')'. Transfer. 782
Void AclS. 584
Vllting. methods of. 659. 670; rights
of. 616
Winding up. 561. 638. 723·724. 761
.. . Application for. 764
•

1098 INDUSTRIAL LAW

Winding up_ CommcnCroletll of. 76' MRTP ACT

.. . Compulsory. 761. 781. 784
• Consequence of. 782
· Definition o~ 761
· of Foreign Companies. SS9
• Modes of. 761
• Mode of Distribution of
Assets upon. 7&5
Winding up. Under Supervision. 780
.. • ~rUnrcgis\cred Companies
788. Voluntary. 775. 781. 784
Commission, MRTP. 793. 79096. 802
Commission. Planning. 792
Commincc. Hauri. 792
• M .... I.nobis. 792
. Monopolies enquiry. 792
Direclj\C Principl\!5 of State PoliC)".
792
UnJt:rtakings, 797, i98
lInderfallings. DominanL 798
-, ,Inh:r-connectcd. 797, 799

IINDUSTRIAL LAWI
Introduction Child. Labour. 856
Industrial Law, Child«n. 853-856: (Pledging of
Classification of. 809 Labour) ACL 856
Dcfinitil..m. 808 Children. WorKing Hours for. 855
Obje\.:li\"es and Scope, 808 Cleanliness. 822. 826
need. for. 808 Clothe,. storing and drying of. 845. 848
Legislation. 808 Cognizance. 872
States by. 809 Confidential Position. 851
Social Insurance. 809 Consumption Unit. 861
Contra~' Labour. Abolition of. 873
Ch. I. Faclorie. :\ct, 1948
Cotton opener. 831. 843. 853
A<cess. 8H. 843
(,«<hes. 847. 849. 853
Accident. Notiliable. 868
Ado lesecnl. 816. 854 Dai!y Hours, 8.19
Adult. 816 O;)ily 'Works. 852
Consumption Unit. 861 Dangerous O!,,-'!'ations. 853. 867
Employment of. 850 Dangerous Occurr~nces. 868
\Vorking Uours of. 849 Day. 816
Aid. First appliances of. 846. 848 l)cfecti\c parts. 840
Annual Lea".:, M57 Depan""",rs as Facwry. 866
Appeals. 872 Di~asc. Notifiabk 869
Apprcnti.s. 814 Do~b" employmen~ 850
Appro,al of factories. $18-819 Drinking Water. 825. 827
Armed For~es. 814 Dry dock, 817
Dust. 823. 827
Buildings. defective of. 840. 844:
maintenance of: 8"' I, safety of. 841. Emuents. disposal of. 822. 826
845 ECl1l¢rgency. 867
Employment Women of. 852·853
Calendar \car. 816 Employment. yound ~rsons. 853·856
Canteen. 846. 849 Escape. 838-839
Casing of Machinery. 831. ~43 Establishment. 812
Central GO\'1.. P(l\\CfS of. 8"13 Eyes. protection or. 835. 8H
Certitying Surgeons. 821. 854: duties
of. 821 Faclories ACL 8\1 : application of. 8 \I :
Chains. 833. 843 of Great Ilritain. 811 : obj<c1S or:
Child. 816. 853-856. 8S7 811
Facto~. 811-812. 866
 INDEX 1099

Family. 861 Pcnahics. 870

Fencing. 828. 842 Pits, 835. 843
Fire. 838-839, SH PO\\l."r. 815. 83u
First aid appliances. 8-16. 848 Precincls. 813
Fitn(ss. C ertificale of. 85-1 Premises. 81.1
Floors. 834, 843: openings in. 835. Presumption. ~72
K43 Prcssur~ Plant X3 . t 843
Fume. 823, 827. 836. 8H Prime ~-hwer. 81 ()
Gas, Explosi,,'e or inflammable. 837. Procedun: (If P~nallies. 870-872
844 Public Emergency. 867
Pubiit.: Institutions. 867
Ilcallh Surve)'. 869-87U
"callh or Workers. 822-826 Quancr. 852
Hoisl'. K31-SJ2. 843 Ralh\ <l.y Running Sheet. 81:!
Holidays. ~52. 857-859: compcnsa- Register. 855
WI). 857 Rq;istratitm of factories. 818
11011.:1. 812 Kda~. 817
Hour:;. ()f Worl. 8-19. 852 Rc:p.lirs. urgenl. 851 ~
Humidification. 823. 827 Rest. intt.'T\ill for. 850 ~ rooms. 8~7.
Indian Min~s ACI. 812 R·N
Indian St,mdard Till1~5. S 16 Returns. tP3
I. S, T. 816 RC\l)I\IIl~ \Iachincry. 83·t ~43
In~p\!ctors. 819-821: dutks of. 821. Ropes. s:n. H·n
PO\\crs of, 819~820: obstruction "uk" N·I L 8~5, 848. 849
(If, 820 Safety Olliccrs. 8-11. 845
Latrines. 815. 818 Sali.:ty W(lrh·r~. 101"2-845
L\!a\"r,~. 857-860 Sal.It-:-. 865·S66
Licensing of f"etoric!>. 818 Sclf-ading machines, 830. S·H
I.ining Machines. 833. 843 Shelters. 8·17. 8.t9
l.ifting taclks. 833. 8-13 Shirt. 817
Lilis. R31. 843 Chan~c or. 852
li~hting. 824. 827 "ight. 850
Lunch Rooms. 8~7 (hcrlapping. 850. 852
Sittin~. 8H. 8~8
Machin«). 816. 818-834. 837. 853
Machine!,)'. Sarct) or. 840, 844
Spittoons. 826. 8:!8
Managding A{!.l!nl 817 SpreadO\·er. 850. 852
Mal1ufilt.:lurin,g. Protcss. 813 Stability. tests vJ: 840
Medical Examination. 856 Stairs. 834. 843
Standard Family. 861
Xighl Wort 852. HS4 Standard Time. 81 b
l\:utice. 818. 368 Striking Gear. 830. 843
()hslruction. 820 Sumps. 83S
Occupational dj~as<. 869 Surgl!(lns. Ccnifyin£ ()f. 821. 854
(kcupier. 817. 870 Temperature. factory of. 8:!3. 8.:!6
Olli:nccs. 870 Token. 854
O\er<:TO\\ding. 82~. 827 Transmission machinery. 816
O\cnim\:. 860
O\\ner. 870 t~nfair Labour rraclice. 862
Urinals. 82S. 828
Pa~n'h:nl of Wages Acl. 860. 865
•
1100
Ven,il"ion. 823. 826
Wages. 857·862. 865-866
Washing faeilili ... SH. 848
Wastes. disposal of. 822. 826
Waler. 825. 827
W<ok.817
W•..,kl} Holidays. 857
Weokly Hours. 8~9
Welfare Officers. 8~8. 8-19
Welfare of Workers. 8~;-8~9
WeighlS, excessive of. 835. 843, 853
Women. 831. 8~3. H52
Women. employment of. 852-8:B
Work. Notice Period of. 8.51, 855
Worker. 81~ . Obligalions of. 814, 866
Year. 816
Young person. 816. 829. 853. 856
Ch. 2. Employtcs' Statt Insurance
Act, 1948
Accident. 900
Applil.."3tion of the Act. 878
Apprentices. 880
Appropriate Government. 878. 883
Arrears. Contribution of. 907
Assignment of benefit. 907
Ana,hment of lh:ncfil. 907
Authentic.nion. 886
Dencfi ... 896. !lV8. 899. 90~. 906. 907
Central Gov!.. po\\cr of. 88-l
Confinement. 898
Conlributions. 89"'·896
Delegalion. 887
lXpendanls' Benefi!, 90~-906
LJisablcment nCIl'l!fit. 899-904
Disahlcmcnl Permanent Panial. 90 I
Disablem<'nl. Permanent Totit!. 90 I
Disablemc:nt Queslion. 903
Disahlemenl Temporal}. 901
Dismissal. 908
Double' Oe'ndils. 907
Emplo~ ee. 880
Entplo~\.'Cs·Slalc Insuran("~ r\~t. 1948.
Objetls. of 877; Appliea-tion o[
878-879
Employees' State Insurance
Corporation. 88S-889: Adminis-
INDUSTRIAL LAW
Iration Ilf. KK5. Auth.:nlicalion.
RRtl I\kl'IIII~), 887. M~mbcrs.
XSA. PranelpJ.i Oflicl!fS. 887;
SUPl!fS\!SSI(III. 887. Dckgation.
887. I'O"crs. 887; Sialus, 887;
f)ulles. 889; Audi~ 889
I:rnployces: Insurance Coun. 909-911
Employees' State Insurance Fund, 892
Employmenl Injury. 900
Employer, Duties of, 884
FaCIO,)'. 879
Family. 881
funeral Bt:nefit. 906
Immediate Employer. 883
Injul'). 900
Inspecrors, 894
Insurable Employment, 881
In.surabk Workman. 885
In ... ur;.fnc~ Fund. 892
In ... urcd Person 881 : Dealh or: 908
Managing Agent. 882
Mah:mily Rencfit. 898-899
Medical B.:netil, 906
M\!dicJI llcn¢lil Council. 890
MC'~tings. 887
Memhership. 891
O\.'cupational Diseases. 901
Penalties,. 911
Pension nIles. 903
Principal Employer. 882
Prin,jp'll om,crs. 887
R«!gi.:;tralion of factori«!s. 88:5
R~\'iew. 907
Seasonal Factory. 879
Sick Lea.·e. 898
Sickness Bendit. 896-898. 907
Sickness EXC(S-SI\'C, 907
Social Insuranc\!. X:r7
Social Insurancl! Rl.'a..;uns of: 877:
objcci of, 877
Sianding Committe..:. 89H
Stalus of Olliccrs anJ~ sen ants. 887
Supersession. 887
Table. 911
Transfer of J:..a"hlishmcnl. 914
Wa~e$. 882. 'Jt)4i

Wage period. 894
Workmen. 88S
Ch. J. Indian Fatal AC'dd~nts
19S5
Actio persol1alis meritur ClIm pCI"smral.
918
Applicalion. 918
Claim for loss. 919
Damages. 919
English Common Law. 918
Life. as an economic unit. 919
Measure of damages. 919
Panlc"lars. 919
Suit for compensation. 918
Ch. 4. Employ ••,' Liability Ad.
1938
Common Law, 920
Contracting: out. 920
Doctrine of assumed risk. 920
Doctrine {lfCommon Employment. 920
Negligence. 920
Ri~k. 921
Ch. S. Workmen's Compensation
Act. 1923
Accident. 930, Fa,.l. 940
Appeals. 945
Assumed Risks. Doctrine of. 922
Bar to Civil Suits. 944
Casual Employment. 929
Claim. 923, 939
Commissioners. 944
Common Emplo~mtnl, Doctrine of. 922
Compensation, Amount of 935;
claiming of. 923
Compensation. Distribution of. 937:
Pa~'menr or 939
Compensation. Protection or,. 936
Compensation. Rules Regarding, 930
Compensation. When is employer liable
10 pa) ') 930
Compensation. When is cmplo)er not
liable 10 PU) ') 934
ConlrJcling out. 943
C()llIraI.:INs. FmploYl11enl hy. 942
INDEX 1101
COniribulOl)' Negligence. Doclrine 0':
923
Damages. suit b) \'orli.mcn. 923
Ad, Dealh.936
Dependanl. 924
Disablement. Panial. 925
Disablement. Permanent Panial. 936
Disablement. Permanelll TOlal. 936
Disahkm~nl. Temporary. 936
Disablement. Total. 926
Disea$c. 933
Emplo)cr. 1)22. 924
Employc.-r. Insoh cney of. 942
Emplo) cr. Rel1l~dics of against stranger,
942
Employmellt. Arising out of and in the
course of. Y31
Employmen! Injul}. 931
Half-monthl) PJ) men IS. 935. 936
Injury. 931
Insolvency (II Employer. 942
Masters. 94.3
Medical E~al1linallon. 941
Minor. 924
Notice. and CLIIIll. 1)39
Notional E\!emLon. 932
Occupational dJ~ease. 933
Parties Repn::sc:ntJtlon of. 945
Penalties, 943
Personal Jnjul'}. 931
Recovery of the amount awarded. 944
References. 945
Returns. 943
Schcdule. 936
Seamen. 943
Suits. 913. 944
rons. 923
Transfer of Assets b) Employer. 943
Wages. 926·927
Wages. Monthly. 927
Workman. 928
Workmen. Compc:nsation of. 930
\t,iorkmen's Compensation Act 19:!3.
922 . Appli(ation of. 922
1102 INDllSTRL~L LAW

Ch. 6. Trade U"iOtl. Act, 1926 Act, Application of. 975

Amalgamations of Union, 956 Advance" 969
Appropriate Government. 950 Appeal,972
Audit of Trade Union. 960 Attachment of properly, 973
Authority, to he", claims. 971
Cancellation. 953
Communication to regd. office. 954 Ilar )0 suits, 974
Dispute. 949 Civil Court. PO\\:crs of a. 973
Disqualification. 939 Claim, 971
Dissolution. 959 Commissioners of Workmen's
Duties and l.iabilities, 956-960 comp\!nsaton. 971
Contracting out. 974
Enforccabilit,Y of Agreements, 9SS
Co-operative Societies. 970
Funds. of Trade Union, 937
Damage, 968
Immunity, 954 Deductinns from Wages. 967-971
Incorpor.lIion. 954
Indian Trade Unions :\':1. 1926: object Employee, 972
and scope of. Q-I8 Employer, Duties of. 971
Inspection. 955 Enforcement of the Act, 97.
Establishment. 964
Maharashtra RCl.:lH!.nillOn of Trade
Unions and Pn:-\ ention of Unfair Factory. 964
Labour Prai.:llf.:l.'''; :\ ..:t. 1971. 948 Fines. 967
Minor, 955
Income Ta.x. 969
Nan\4!. of Tr,\dl.'" 1 [lI~'n_ 955 Indian Railways Act. 965
Office. 9;0. 95-1. \,)56 Industri31 Establishment, 964
OOi.:e-bean:rs. pn'pMtion of. 959 Inspectors, 971
Officer, 950 Insurance Schemes. 970

Penalties. 959 Loss. 968

Political Fund. 9~8 Notice, 914
Registered oni..:~. 9;0, 954. 956 Offences. trial or. 973
Registered CRion. 94R : Status of. 950 Orders of Court, 969
Registrar, 950 Overpayments. 969
Registration. 951-953
" EtIcct of, 953 Pa"mcnt. lime of, 966
Mode of. 951 Pamenl. M~dium of. 967
Return .. 9~9 Poyment, Scope of. 963
Rights And Privileges. 954 P",>ment of Wages A~I. 1936. object
and Scope ot: 963
Stalus. of officers and St:f\iants of trade Pa~ m~nt of Wages Act. 19)6. Rules
unions. 950 For. Qh6
SuilS, 954 Paym..:nt of Wages Act. 1936. Who is
Trade Dispute. 949 rcsponsihlc For. 966
Trade Union. 948 Pcnolties. 973
Procedure. 973
Workman, 949 Provident Fund. 970
Ch. 7. P.yment of ",'age5 Act. Railway administralion. 965
19)1; Recu\-~r; PO\\l!r of. 973
,\hscncc from dut)'. \)68 R~CU\\:TY llf mune~. 973
 INDEX
1103
Rule Making Power. 975 Records. 985
Services rendered. 969 Rl!gisler. 985
Suits. 974 Scheduled Employment. 978. 988
Single application. 987
Wages. 965. 96h, 967
Suits. 989
Wage period. 966
Written Authoris.uion. 970 Time rate. 981
U ndisb'JfSed amount. 988
Ch. II. Minimum WOC" Acl, 1948
Adolescent. 981 Yt'agt"s. '160: in kind. 984: rates of.
Adull. 981 98 ',: for Iwo or more cla.lliseS of
Appropriate GOHnlmenl. 978 \\(Irk. 9.~4 : time rale for piece work.
Altachmenl of asst!ts. 988 985
Aulhoril~'. 986 Wage period. 982
RaT to SUfi!s. ()89 ('h. 9. Industri.1 Dispules Act.
Central Govt. PO\\eTS of. 989 "47
Child. 981 Abandonment of Sen. ice. t 061
Claim. 986 Alhl<.'ahle surplus, 1009
Cognizance. 988 AprrC'nticcs. 1003
Commissioners c~f Workmen's '\rpropriale Govcrnment. 1013. l041
COI1lpe1lsation. 986 Arhitration. to:?1
Competent Authority. 97Q As~sors. 1019
Contracting out. 989 Authority. 1013. 1041 : under Industrial
Cost of lh.-ing Index Numbers. 979 Oisp'utcs Ace 1013: powers of.
1025 : procedure of: 1025
Da),. 984 Average Pa)". 1043
Exemptions, 988 Award. 1025
Employ.e. 980 Badli Workmen. 1042
Emplo}1:r. 9110: liahilit)' of. 988 Board of Concilj.nion. 1016
Enforccmenl 985 Honus. 1008
Fixing Hour. 984 n.onus Act. 1·008
Guarantee lime·ralc. 981 Closure. 1031, 1040. 1052
Index Numers. 980 C o~nizance. 1062
Inspector.;. 985 Compensation. 1047. 1049
Conciliation. Boon! or. 1016
Minimum rates.. 981 C"""lIialiOn OfI'tcers. 1014
Minimum Wagcs :\cL 1948. object and Conditions of Servie<:, 1057
. scope of. 978 Conditions of Change in. IOS9
Minimum Wa~es. fixation of: 981: Confidential Malters, 1030
Raision of. 982 . Pa\lncnt of. 983 ; Cominuous Sen' ice. IO·U
Time rate of 985 .
Coun of Enquiry. 1013. 1017. 1/>22.
Nonnal Workrng Oa). 984 102S
Offences b}' Compani('s and Firms. 988 Deduction from ages. 1032
<henimc. 981. 98~ DIScharge. 1051
Payment of Waces "'ct. 982 Dispute. 1022
Pe~alties.. 987 ~ Dispute. Collecti'·e. 1001
Piece \\ork. 91(5 ~: Dispute. Jnd" idual. 1002
Powers of (IOlt:rnCnll)t. \)~9 Employer. 1005
i:mplo.\mcnl. rdalJOnshlp (It: tOO'"
1104 INDUSTRIAL LAW

ESMA. 1036 protected Workman. 1061

Essential Scr"icc. 1037

D
Protection of Persons. 1063
Establishment. 1034 Public l;tilil} Ser\icc. lOB
Establishment Small. 1041 Punishmt!nl. 1060
Go-slow. 1032 kecu"'''1) of mone),. 1063
Gratuit), 1011 Rdcr.:ncc. 1021
Gratuit)'. Act 1972. 1011 Rc:instalcment. 1022
Grievance Settlement,. 1020 Representation or
Parti(s. 1064
lIeir•. rights of. 1022 ReSlarling. lOSS
Retrenchment 1045. 1048
Independent Person. 101". 10: 9
Industrial Di~putl!'s. 1000 Sorvic•. condilions of. 1057. 1059;
Industrial Dispules Act of 1947. 992 ; continuous, 1057
Amendment of 1982. 992: Seuiement. Disputes of. 1025
application of. 992 : objects of. 992 Standing Orders. 1058
Industrial Employment (Standing Stay·in Strikc. 103:!
Orders) Act. 1058 Strike. 103 I
Industrial Establishment. 995. 1034 Strike. ProhibiticHl Ill'. 1033
Industrial Tribunals. 1019 SubsislcnCl:! .'\IIH\\aJKC's. 1057
Indust'). 993 Timt: Limit. 1007
Industry. Concept of. 996 Transft:r. 102 .... 1052
Labour Couns. 1017 Tr:ln~fcr. of undt:r1akml':s. 1052
-last in first oue. 1050 Tribunal. 1019 -
Lay-ofT. 1039. 1044 Undenaking. 995. 10;2
Lock-out. 1030. 1033
Vacancies. filling of 1024
MUSler Roll. 1043
Wages. 1006
National Tribunal. 1019. 1021. 1022 Workman. 1003
OfTences. 1062 Works Committe!!. 1014
Overtime, 1032
Panics. Representation of, 10M Ch. 10. The Industri ••
Payment of Bonus Act. 1008 (Dneiopment & Regul.tion) Act,
Pa)'ment of Full Wages. 1007 1951
Payment of Gratuity Act. 1011 Central Advisory Council. 1068
Payment. manncr of. 1004 Dc",clopmcnt Council. 1069
Penalties. 1012.1035. 1039. IO~O.
Licenc~. (07). 107 ...
1046. 1056. 1061. 1062
Preferences to indian Citizens. 1050 Registration. !lin
Procedure and Powers, 1025 Scheduled Industries. 11171