UNIT 1

Shruti Minocha

According to section 2(h) An agreement enforceable by law is a contract. Contract essentially consist of two elements: a) Agreement b) Legal Obligation

 All contracts are agreement but all Agreements are not contract

Valid Contract : An Agreement enforceable by law and satisfy al essential elements of valid contract. Voidable Contract :An agreement enforceable by law at the option of one party only. Void Contract: It implies a useless contract which have no legal effect at all.

1) Offer And Acceptance : There must be lawful offer and Lawful acceptance for the same. 2) Intention To create Legal Relation: There must be intention among both the parties to create a legal obligation. Contract of social or domestic nature are generally presumed not to carry any legal obligation. CASE: BALFOUR V/S BALFOUR

3) Lawful Consideration: Consideration is the price paid by one party for the promise of other. The consideration is unlawful under following conditions: a) If it is forbidden by law:

Any act punishable by criminal law. Any Act Probhited by special legislation or regulation.

b) If permitted it would defeat the provision of any law. c) If act is only fraudulent: d) If court regard its immoral.

4) Capacity of Parties: Following persons are incompetent to enter into contract: a) Minor b) Unsound Mind: Various Types of Unsoundness of mind is:

Idiocy: It is god given and permanent with no interval of saneness. Lunacy :It is disease of brain .Lunatic loses the thinking power of his brain due to some strain or disease. Drunkenness: Hypnotism: Mental Decay: This is on account of old age.

C) Disqualified Person: Following persons are disqualified to enter into contract:

Alien Enemies: Foreign Sovereign and ambassador. Convict Married Women

5) Free Consent: Section 14 lays there is a absence of free consent under following conditions: a) Coercion: is threatening to convict any act. b) Under Influence: Such a contract where relation existing between the parties is such that one dominate the will of other. Eg: relationship between master and servant.

c) Misrepresentation: A representation means a statement of fact made by one party to the other either before or at the time of contract ,with the intention to induce the other party to enter into the contract. Eg: A says to B who intends to purchase his land my land produces 10 quintals of wheat per acre A, believes the statement to be true, although he doesnt not sufficient grounds for the belief .Later on ,it transpires that the land produces only 7 quintals of wheat per acre. This is misrepresentation.

d) Fraud: It includes all acts committed by a person with an intention to deceive another person. For Eg: A sells a horse to B which he knows is of unsound mind but unsoundness is during intervals. so he sold the horse during the time when horse was of sound mind. He hided the fact to make B enter into the agrreement.later when B realized he can file a case of fraud against A and can claim damage caused for the same.

FRAUD
Implies on intention to deceive, hence it is intentional or willful wrong.

MISINTERPRITATI ON

Is an innocent wrong without any intention to deceive. The person making the statement believes it to be true. A civil wrong which entitles Gives only the right to a party to claim damages in rescind the contract and addition to the right to there can be no suit for rescind the contract. damages.

6) Lawful Object : The object for which agreement has been entered into it must not be fraudulent or illegal or immoral or imply injury to the person than such a agreement cannot be treated as a valid contract. For eg.: A rents out his house for the business of prostitution or for making bomb, the acts performing there are unlawful. Hence such agreement cannot be treated as a valid contract.

7) Writing and Registration :The contract act does not insist that the agreement must be in writing, it could be oral. But, in some cases the law strictly insist that the agreement must be in writing like agreement to sell immovable property must be in writing and should be registered under the Transfer of Property Act, 1882. These agreement are valid only when they fulfill the formalities like writing, registration, signing by both the parties are completed.

8) Agreement not expressly declared void: Section 24 to 30 specify certain types of agreement which have been expressly declared void. For eg- If John promises to pay $50 to Mary if she does not marry throughout her life and Mary promise not to marry at all. But this agreement cannot be treated as a valid contract owing to the fact that, under sec 26 restraint of marriage expressly declared void. agreement in restraint of trade (Sec 27)

9)Certainty of meaning: Wording of the agreement must be clear and not uncertain or vague. Suppose John agrees to sell 500 tones of oil to Mathew. But, what kind of oil is not mentioned clearly. So on the ground of uncertainty, this agreement stands void.

10) Possibility of performance: As per section 56, if the act is impossible of performance, physically or legally, the agreement cannot be enforced by law. Impossible agreements like one claims to run at a speed of 1000km/hour or Jump to a height of 100feet etc. would not create a valid agreement

Shruti Minocha

1)

Discharge by Performance: There are two types of performance: Actual Performance Attempted Performance

2) Discharge By Mutual consent :Can be done under the following ways: Novation: when a new contract is substituted for a existing contact ,either between the Same parties or between different parties, the consideration mutually being discharged for old contract. Alteration: means change in one or more material terms of the contract.

Rescission: A contract may be discharged ,before the date of performance by agreement between the parties to the effect that is shall no longer bind them . Remission: means acceptance of a lesser fulfillment of the promise made. Waiver: When the parties to a contract agree that they shall no longer be bound by the contract. Consideration is not necessary for waiver.

3) Discharge by impossibility: a) Impossibility Existing at time of agreement b) Impossibility arising subsequent to the formation of contract known as SUPERVENING IMPOSSIBILTY Discharge in case of supervening impossibly: Destruction of Subject Matter: When the subject matter of a contract, subsequent to its formation, is destroyed without any fault of the parties to the contract, the contract is discharged.

Non Existence or Non Occurrence of a particular state of things: Sometimes contract is entered between two parties on the basis of a continued existence or occurrence of a particular state of things and if that state of thing does not occur, the contract is discharged. Death or Incapacity for personal experience: Where the performance of contract depends on the personal skills of a party, the contract stands to be discharged on his death or illness as incapacity to perform.

Change of law : When subsequent to the formation of contract, change of law takes place under such a situation contract stands to be discharged. Outbreak of War: A contract entered into with an alien enemy before the war stands to be discharged during a period of war.

Difficulty of Performance : Commercial Impossibility: When in a transaction profits dwindle to a very low ,therefore it becomes commercial impossible. Impossible due to the default of third person strikes and lockouts Failure of one of the object.

4) Discharge by lapse of time: The limitation act1963 lays down that a contract should be performed within a specific period, called period of limitation. 5) Discharge by operation of Law: Death: In contracts involving personal skill or ability ,the contract is terminated on death of the promisor. In other contracts, the right and liabilities of a deceased person pass on to the legal representatives of the deceased person.

Merger : Where an inferior right contract merges into a superior right contract, the former stands discharged. Unauthorized Material Alteration: A material alteration made in written document or contract by one party without the consent of the other will make the whole contract void.

Shruti Minocha

REMEDIES FOR BREACH

A contract, stands to be discharged when it is performed resulting contracting party got free from its obligations. But in case contracting party fails to perform the contract than there is breach of contract.

REMEDIES FOR BREACH

The party committing breach of contract is called the guilt party and the other party is called the injured or aggrieved party

The remedies are: Following

remedies are available to aggrieved party against the guilty party:

1. Suit for rescission, 2. Suit for damages, 3. Suit for quantum meruit, 4. Suit for specific performance, 5. Suit for injunction.

1).

Suit for Rescission

The breach of contract no doubt discharges the contract, but the aggrieved party may sometimes need to approach the court to grant him a formal rescission, i.e. cancellation, of the contract. This will enable him to be free from his own obligations under the contract.

2. Suit for Damages

The word damages means monetary compensation for loss suffered. Whenever a breach of contract takes place, the remedy of damages is the one that comes to mind immediately as the consequence of breach.

A breach of contract may put the aggrieved party to some disadvantage or inconvenience or may cause a loss to him. The court would desire the guilty part to accept responsibility for any such loss of the aggrieved party and compensate him adequately. The quantum of damages is determined by the magnitude of loss caused by breach

Types of Damages (Sec.73)

When the aggrieved party claims damages as a consequence of breach, the court takes into account the provisions of law in this regard and the circumstances attached to the contract. The amount of damages would depend upon the type of loss caused to the aggrieved party by the breach.

The court would first identify the losses caused and then assess their monetary value. Sec.73 of the Act lays down the basic guidelines for identifying the losses.

(a)

General or ordinary damages:

Such losses would be called the general or ordinary losses which can be seen as arising naturally and directly out of the breach in the usual course of the things. They would be the unavoidable and logical consequence of the breach. The damages for such losses are called general or ordinary damages. An aggrieved partys right to damages applies most naturally for the direct or general losses. There can be no damages for indirect and remote losses

(b) Special

damages:

Special damages would be the compensation for the special losses caused to the aggrieved party by the special circumstances attached to the contract. At the time of making the contract, a part may place before the other party some information about the special circumstances affecting him and tell him that if the contract is not performed properly, he would suffer some particular types of losses because of those special circumstances. If the other party still proceeds to make the contract, it would imply that he has agreed to be responsible for the special losses that may be caused by an improper performance of his obligation. Compensation for such special losses is called special damages

The two types of losses that have been put under two separate points above, the ordinary losses and the special losses, are in reality based on one common idea only. And that idea is that the level of knowledge of circumstances at the time of making the contract would determine what losses shall be compensated by the guilty party.

Exemplary or vindictive damages: Sometimes, the courts

(c)

award damages for mental or emotional suffering also caused by the breach. Such damages are called exemplary or vindictive damages. These may be taken as an exception to the general principle that damages are awarded only for the financial loss caused by breach of contract.

the court stated that in three cases mental suffering and pain of the aggrieved party can also be taken into account: (i) Unjustified dishonour of a cheque, (ii) Breach of promise of marriage, and (iii) Failure of vendor of real estate to make title.

(d)

Nominal damages:

If the breach of contract

causes no loss to the aggrieved party, no damages need be awarded to him. However, in order to record the fact of breach by guilty party, the courts may award nominal or token damages, e.g. a compensation of Rs.10. They would be called nominal damages.

Rules Regarding Award of Damages

(i) Compensation not penalty:
The fundamental purpose of awarding damages is to compensate the aggrieved party for any loss suffered and not to punish the guilty party for causing breach.

(ii) Limited damages: The aim of the

courts, in awarding damages, would be to place the aggrieved party, as far as money can do it, in the same position in which he would have been, had the contract been properly performed.

(iii) Damages for attributable losses:

Damages are awarded for the losses which can be attributed to the breach.

(iv) Mitigation of losses:

The aggrieved party is expected to make sincere efforts to minimize the losses that are resulting out of breach of contract.

(v) Stipulation for liquidated damages or penalty: Sometime, the parties to contract may themselves stipulate an amount in the contract to be payable by the guilty party to the aggrieved party as damages for breach of contract. This stipulation of the amount may be by way of liquidated damages or by way of penalty.

(vi) Cost of suit:

The breach of contract by a party forces the other to initiate legal action against the guilty party. This necessarily entails expenditure. This cost of suit can be recovered from the guilty party only at the discretion of the court.

Suit for quantum meruit

The term quantum meruit means as much as earned. It implies a payment deserved by a person for the reason of actual work done.

Suit for quantum meruit

When a party has done some work under a contract, and the other party repudiates the contract or somehow the full performance of the contract becomes impossible, then the party who has done the work can claim remuneration for the work under a suit for quantum meruit.

Suit for specific performance

In certain cases of breach of a contract, damages may not be an adequate remedy. Then the Court may direct the party in breach to carry out his promise according to the terms of the contract. This is a direction by the Court for specific performance of the contract at the suit of the party not in breach. But in general, Courts do not wish to compel a party to do that which he has already refused to do.

Suit for injunction

It means order of court restraining a person from doing something. The injunction can be granted where the contract is of negative character i.e. where the party has promised not to do something but he does it thereby he makes breach of contract. CASE: Metropolitian Electric Supply Company VS Ginder.

Shruti Minocha

The contract of indemnity is a CONTRACT where one part promises to save the other from loss caused to him by the conduct of promisor himself or by conduct of any other person, is called as contract of indemnity. The person who promises to make good the loss is known as INDEMNIFIER(Promisor) The person to whom promise is made or whose loss is to be made good is know as Indemnified or Indemnity Holder (Promisee)

Entitled to recover all damages from indemnifier Entitled to recover all costs reasonably incurred. Entitled to recover sum he paid the consequences of compromise.

A contract of Guarantee is contract to perform the promise ,or discharge the liability ,of a third person in case of his default. The person who gives the guarantee is know as Surety. The person in whose default guarantee is given is known as Principal Debtor. The person to whom guarantee is given is known as Principal Creditor.

1)

2)

3)
4)

Concurrence : There must be acceptance of all the three parties. Primary liability in some Person other than surety to enter into contract of guarantee. Essential elements of a valid contract Writing not necessary : A guarantee can be oral and written .It may be expressed and implied too.

INDEMNITY
There are two parties to contract

GUARANTEE
There are three parties to contract

There is only one contract

It is for reimbursement of loss

There are three contracts

It is for security of debt

The Primary liability can be on indemnifier himself.

The liability of surety is secondary it arises only on default at part of principal debtor.

INDEMNITY
The liability of indemnifier arises only on happening of certain thing In future

GUARANTEE
This is usually an existing debt or duty, the performance of which is guaranteed by surety.
A surety can directly approach the principal creditor since he has discharged the principal debtor from his duties.

An indemnifier cannot sue the third part for loss in his name.

Shruti Minocha

Section 48 defines Bailment as Delivery of good by one person to another for some purpose, upon a contract to return after use or to dispose off as asked by the person who delivered the goods. BAILOR: who Gives BAILEE: who Takes BAILMENT : Transaction

For Exclusive benefit of the Bailor : as delivery of some valuables to a neighbor to keep it in its safe custody without giving any fees for the same. For Exclusive benefit of Bailee : as lending a cycle to a fiend ,without charge.: gratuitous Bailment For mutual benefit of Bailor and Bailee : In this consideration passes. : Non Gratuitous bailment

To disclose Known faults To bear extraordinary expenses of bailment To indemnify bailee for loss in case of premature termination of gratuitous bailment To receive back the goods To indemnify the Bailee

To take reasonable care of goods Bailed: Not to make any unauthorized use of goods Not to mix the goods bailed with his own goods
With the Bailor Consent Without The Bailor consent,if goods can be seperated Without the bailor consent ,if goods cannot be seperated.

Not to set up an adverse title to return any accretion to the goods to return the goods

Enforcement of Bailees duties: Duties of bailee are rights of a Bailor. A bailor can thus suit Bailee for all such. To claim Damages To terminate the contract of Bailment To claim Compensation To demand Return Of Goods To claim increase or profit from goods bailed.

Duites of Bailor

The bailment of goods as security for payment of a debt or performance of a promise is called pledge The bailor is called the pawnor and the bailee is called the pawnee Example: A borrows a watch from B and keeps his watch as security

Pledge is only a special kind of Bailment The ownership remains with the pawnor There is only a transfer of possession of goods. The pledgee or pawnee has only special interest in the goods pledged. The general interest remains with the pawnor. Like bailment pledge is also concerned with movable goods.

1.

As to purpose : It is for specific purpose like security for a loan etc, bailment is for purposes other than this ex. Repair,safe custody etc As to right of sale : Pledgee has right of sale on default after giving notice to pledgor but there is no such right in bailment,the bailee may retain goods or sue the bailor for non payment of his dues

2.

1.

As to right of using the goods : In case of pledge the pledgee has no right, while no such restriction exists in case of bailment if nature of transaction so requires.

1.

2.

3.

4.

Right To Retainer: He has right to retain goods until his dues are paid.He has right to hold goods until his dues are paid or promise performed but also interest due and other necessary expenses are paid. This is called right of lein. Right of subsequent advances : In an event that further advances are given without any further security, it is presumed that right to advances extend even to subsequent advances. Right of extraordinary expenses : Pawnee has right to recover extraordinary expenses incurred, he cannot retain goods if not paid for but can only sue. Right to sue the pawnor or sell goods on default: When pawnor makes a default in payment of debt or fulfil a promise, he may exercise the follwing rights: a) Bring a suit to recover and retain goods as collateral security b) He may himself sell after giving due notice, this is alternative right of sale and following is to be noted: - Reasonable notice is essential -Cannot sell to himself - if proceeds is insufficient , he may claim for the rest from the pawnor

To take reasonable care of goods Not to make any unauthorised use of pledged goods Not to mix his goods and pledged good Not to do any violation of contract of pledge, ex. Should not sell To return goods on receipt etc. To deliver any accretion to goods, the accretion remains the property of the pawnor.

Enforcement of Pawnees duties : All the duties listed earlier of the pawnee are enforeceable by law. Defaulting pwanors right to redeem: A pawnor who defaults has right to redeem the debt at any bsubsequent time before the actual sale of goods, thus an agreement that pledge should become irredeemable, if it is not redeemed within a certain time would be invalid. Any extra expenses would have to be paid

To compensate the pawnee for extraordinary expenses incurred by him To meet his obligation on stipulated date and comply with terms of the contract

Mercantile Agents : A mercantile agent who is with the consent of owner in possession of goods or tile to goods can make a valid pledge. Person in possession under a voidable contract : Person having possession under voidable contract can make a valid pledge of goods provided the contract has not been rescinded at the time of pledge and the pledgee has acted in good faith without the notice of the pledgors defect of title. Pledgor having limited interest : When a person pledges goods he has only a limited interest, pledge is valid to the extent of that interest. Seller in possession of goods after sale: A seller left in posession of goods sold is no more owner but a pledge created by him will be valid, provided the pawnee acts in good faith and has no notice of the sale of goods to the buyer.

Buyer in possession of goods under an agreement to sell: : where in the goods to become the property of the buyer on fullfillment of certain conditions or on expiry of time obtains possession of goods the pledge is valid.

There are two terms in this Agent and Principal An agent is a person employed to do any act for another or to represent another in dealings with the third persons, the person whom the such an act is done is or who is represented is called the principal The contract which creates the relationship of principal and agent is called an agency.

Example : A appoints B to buy something on his behalf.A is the Principal, B the agent and the seller is the third party.

Under the contract of agency the agent is authorized to establish the privy of contract between the principal (his employer) and a third party. Function of agent is to bring contractual relation. After creating the contract the agent drops out and ceases to be party to the contract.

Whatever a person is competent to do himself, he may do through an agent, except for acts involving personal skills and qualifications, where the work is to be done personally no agent can be employed. He who does through another , does by himself.: The acts of agent for all legal purposes the acts of the principal.

From the point of view of extent of Authority

General Agent Special Agent Universal Agent

From the point of view of nature of work

Mercantile Agents Non Mercantile Agents

To follow Principal direction To carry out work with reasonable skills To render accounts To communicate To deal on his own account Not to make any profit other than his remuneration Termination of Agency on Principal Death or Insanity Not to Delegate authority

To receive remuneration Right of Retainer: He has right to keep the sum obtained on Principal account as for the money due to him as remuneration, advances made, expenses incurred in conducting the business of agency. Right of Lien : Right to be Indemnified against consequences of lawful acts Right to be Indemnified against consequences of act done in good faith. Right of stoppage of goods in transit.

Agency by Expressed agreement Agency by Implied Agreement

Agency by Estoppel If a person, by his words or conduct, allows a third party to believe that Mr. X is his agent, when Mr. X is not and the third party relies on it to his detriment, that person will be estopped or precluded from denying the existence of Mr. Xs authority.

. Agency of Necessity In certain situations, the law allows the agent to act for the principal without the knowledge and consent of the principal. These are known as agencies of necessity.

Agency by Ratification: Ratification means the subsequent adoption and acceptance of an act originally done without instruction or authority.

UNIT 2
SALE OF GOODS ACT 1930.

The law relating to sale of goods is contained in sale of goods act 1930 There are sixty six sections. A contract of sale of goods happens by an offer from one party and acceptance by other, it is consensual transaction. The parties agree to any terms they like relating to delivery and payment of price etc.

A contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price.

1.Two Parties Buyer and seller exception Undivided joint owners, case of part owners., In case of execution of a decree (auction). 2.Transfer of property : Means ownership, actual transfer of interest. 3. Goods : Any kind of movable property. Trade mark copy rights, brands etc. 4. Price : Money should be exchanged , other wise it is barter and governed by transfer of property and not sales goods act. 5. Includes both sale and Agreement to sale:

Sale : Under contract of sale the property in the goods is immediately transferred at the time of making the contract from the seller to buyer. - It is referred to as true sale - It is an executed contract - there is immediate conveyance of ownership An Agreement to sell becomes a sale after time lapses or the conditions are full filled subject to which property in goods is transferred.

6. No Formalities Observed: Does not prescribe any particular form to constitute a valid contract of sale.It can be made by mere offer and acceptance, written or oral. Either party can make the offer. Example

1.

Transfer of property (Ownership) - Immediate in case of sale - No transfer at the time of contract, the conveyance of property takes place later so that the seller continues to be owner until the agreement becomes a sale or by the expiry of time or the fulfilment of some condition - An agreement to sale creates a jus in personam- that is it gives right to buyer and seller against each other for any default in full filling his part of agreement. Risk Of loss The risk prima facie passes with property ,if goods were lost even before it reached the buyer loss falls on buyer. - In case of agreement of sale ownership is yet to pass such loss has to be borne by the seller Consequence of breach In sale: if buyer wrongfully neglects to pay the seller can sue for the price. Even though the goods are in his possession. - In case of agreement the seller can only sue for damages and not for price even though the goods are in possession of buyer

2.

3.

Right Of resale The property is with the buyer and as such the seller (in possession of goods) after sale cannot re sale.If he does the subsequent buyer having knowledge of the previous sale cannot aquire title to goods.The original buyer can sue and get the goods. - In agreement to sale the seller can dispose off the goods if he likes, but orginal buyer can sue and get damages.

Insolvency of buyer before he pays for the goods : In a sale if the buyer is adjudged insolvent before he pays then the seller in absence of right of lien must hand over the goods to official receiver or assignee, the seller is entitled to only a rateable dividend for price of goods. - In agreement to sell the seller may refuse to deliver goods. Insolvency of seller if the buyer has already paid the price : If seller is adjudged insolvent then the bueyer is entitled to recover goods from the official assignee.
- In agreement to sale if the buyer has already paid , then the buyer can only claim a ratable dividend and not goods because property in them still rests with the seller

Both the contracts resemble very much. However legal incidents are quite different Under hire purchase goods are delivered to the hire purchaser for use, but owner agrees to transfer the property only when certain instalments are paid. Till such time hirer remains the bailee and instalments are regarded as hire charges.

Hire purchase agreement is no agreement to buy but there is only bailment of goods coupled with option to purchase them which may be exercised.

Goods is transferred to buyer immediately Position of buyer is owner here it is bailee In sale buyer cannot terminate contract, hire purchase he can terminate the contract. In sale the seller takes risk of loss resulting from insolvency of buyer, the owner takes no risk, he gets right to take back goods The buyer can pass a bonafide title to goods, the hire purchaser cannot

1.

Existing Goods : Goods that are in existence and which are in sellers ownership and or possession at the time of entering the contract of sale are called existing goods. When the seller is the owner he has general property in them. Existing goods may again be either specific or unascertained. a) Specific Goods : Goods identified and agreed upon at the time of making contract of sale are called specific goods. b) Unascertained Goods: The goods which are not separately identified or ascertained at the time of the making of the contract are known as unascertained goods.

2.

Future Goods: Goods to be manufactured, produced or acquired by the seller after making of the contract of sale are called future goods. They may not be in existence but not yet aquired by the seller. There can be no present sale of future goods. Contingent Goods : Goods the acquisition of which by the seller depends upon an uncertain contingency are called contingent goods. They are a type of contingent goods and a contract for the sale of contingent goods also operates as an agreement to sell and not a sale. The property to goods does not pass to buyer at the time of making the contract. - Contract of sale of contingent goods is enforceable only if the event on the happening of which performance of the contract is dependent happens

3.

Perishing not only means physical destruction but also damage to goods that have ceased to exist, loss of goods by theft, where goods have been requisitioned lawfully by govt.
1. a) b)

Perishing goods at or before making of the contract: In case of perishing of the whole of goods In case of perishing of only part of the goods: depends on whether contract is whole or divisible.

2. Perishing of goods before sale but after agreement to sell

The money consideration for sale is known as price. The price is an essential element in every contract of sale of goods, that is no valid sale can take place without a price. The price should be paid or promised to be paid in legal tender money, unless other wise agreed. Modes of fixing price: 1. It may be expressly fixed by the contract itself. 2.It may be fixed in an agreed manner provided by the contract. 3. It may be decided by the course of dealings between parties 4. If price cannot be decided by any of the method above the buyer is bound to give a reasonable price

Money deposited with the seller by the buyer as security for due fulfillment of the contract . Where contract is carried through earnest money is taken as part of payment If contract goes off the seller is entitled to forefeit the amount.

If contract goes off due to the sellers default the buyer can recover the money in addition to damages.

Stipulation relating to time of delivery of goods- The time fixed for delivery of goods is the essence of contract. -If there is a delay in delivery the contract becomes voidable at the option of the buyer, the buyer may refuse to accept and put an end to contract.

Stipulation relating to time of payment of the price As regards the time fixed for payment of price, time is not deemed to be the essence of the contract. Thus even if the price is not paid as agreed the seller cannot avoid the contract on that account. - He has to deliver if the buyer tenders the price within reasonable time before the re-sale

Any document which is used in an ordinary course of business as proof of possession or control of goods, authorising or purporting to authorise either by endorsement or delivery, the possessor of document to transfer or receive goods thereby is a document of title of goods

Example BL,Railway receipt etc, the right of the transferee (even if bonafide ) will not be superior to that of the transferor.

Condition and Warranties A contract of sale of goods contains various stipulations regarding quality of goods, the price, mode of payment, the delivery of goods, its time and place. All the terms are not equally important . Some of these terms may be major and go to roots of the contract. Their breach may frustrate the very purpose of the contract.

- Other terms may be minor ones which are not vital that their breach may lead to breach of the whole contract as such.

- The major terms are the condition

- The minor terms are the warranties

- Mere statements of commendations or praise or expressions by the seller do not constitute condition and warranties

- They do not from a part of contract and hence give no right to action - Example

It is a stipulation essential to the main purpose of a contract. The breach of this gives the aggrieved party the right to repudiate the contract An action for damages or losses can also be claimed.

It is a stipulation collateral to the main purpose of the contract The breach of this gives the aggrieved party the right to sue for damages The party cannot avoid the contract

Meaning and legal effects of condition and warranty is very clear , condition is fundamental to contract and warranty is of only secondary importance. There are no hard and fast rule as to which is condition and which is warranty.

Whether a stipulation is a condition or a warranty in a contract of is determined by the construction of the contract.
The court is not guided by terminology but looks at intention of parties by referring to terms, its construction and surrounding circumstances to judge whether a stipulation is a condition or warranty Example A man purchases a horse

As to value condition is essential to contract, warranty is collateral to main purpose of contract As to breach Breach of condition give aggrieved party the right to repudiate, the breach of warranty give right to claim damages. As to treatment A breach of condition may be treated as breach of warranty, a breach of warranty cannot be treated as breach of condition

Voluntary waiver by buyer: Example Acceptance of goods by buyer Acceptance of only part of goods : If the contract is indivisible acceptance of part means acceptance of whole.i.e breach of condition will be treated as breach of warranty. If the contract is divisible he can repudiate as regards, the remaining goods

- When he intimates to the buyer that he has accepted - When he does any act in relation to goods which is inconsistent with the ownership of the seller i.e consumes, uses, pledges etc. - when after the lapse of reasonable time he retains the goods without intimating him that he has rejected.

Condition and warranties may be expressed or implied They are said to expressed when with the will of parties they are included in the contract.

They are implied when law presumes their existence in contract.

Implied condition and warranties may be negatived or varied by express agreement or by course of dealing between the parties.

Conditions to title: In every contract the implied condition is that the seller ahs right to sell. He has the right if owner or agent If the title turns out to be defective then he can reject and recover his price. In some case if there is a claimant he may have to return to original owner, treat the the breach as breach of warrenty and claim damages Example

Condition in sale by description :Where there is a contract of sale of goods theris a implied condition that goods correspond with the description.Example Condition in a sale by sample : When under contract of sale goods are to be supplied according to a sample agreed upon the implied conditions are:

- The bulk shall correspond with sample in quality - The buyer shall have reasonable opportunity of comparing the bulk with sample - Goods shall be free from defect. Example

Condition in a sale by description: Implied condition that the bulk of goods shall correspond with the sample. Example Condition as to fitness for quality : No implied condition or warranty as to quality. This is governed by Caveat Emptor Buyer shall be aware But an implied condition appllies that the seller shall give goods which are reasonably fit for and this applies when: - Buyer expressly makes known to seller his requirement - The buyer relies on sellers skill or judgement - The goods sold must be of description which the seller deals in ordinary course of business example

Condition to Merchantability : This is implied only when in sale by description, not only this following condition also needs to be satisfied: - The seller should be dealer in goods of that description - The buyer must not have an opportunity to examine or some latent flaws that was not visible. example Condition to Wholesomeness: Implied only in eatables and provision, must be according to description and merchantable but also wholesome, free from defect. example

Warranty of Quiet Possession - Buyer should have quiet posession of goods - Should not be disturbed by someone with superior rights - This is an extension of implied condition Example Warranty of freedom from encumberance - Goods shall be free from any encumberance - If goods are found to be subject to a charge , the buyer can claim warranty example

Warranty to disclose dangerous nature of goods to the ignorant buyer - The seller would warn if goods are dangerous in nature - If there is breach of warranty the buyer is entitled to claim damages Example

Let buyer beware. It is duty of buyer to be careful and in absence of an enquiry by the buyer the seller is not bound to disclose every defect in the goods. The buyer may examine the goods and check for its suitability The buyer should depend on his own ability

Seller makes mis- representation Seller makes false representation Goods purchased on description do not correspond to description Goods purchased are not merchantable quality Goods brought by sample caveat emptor does not apply Brought by sample and description and bulk goods do not correspond When buyer tells the purpose for which goods are purchased Trade usage attaches an implied condition

In a sale transfer of goods takes place from buyer to seller It means transfer of ownership. property in goods in goods is different from possession of goods.

Thus property in goods may pass from buyer to seller but the possession may remain with the seller.

Risk Prima facie passes with property: as a rule the

risk of loss of goods is to be borne by the person in whose name property is.

Action against third party: The party in whose name

property is can only take a action against the third party.

Suit for price: seller can sue for the price if property in goods
has been passed to buyer.

Insolvency of the seller or buyer:In case the property

in goods is in name of the person who has become insolvent than official receiver or assignee can take no control on the goods

Transfer of property in specific or ascertained goods Transfer of property in unascertained goods or Future Goods

When there is a contract for the sale of specific or ascertained products then transfer of property occurs when the parties to contract intend it to happen. The parties can pass the property At once at time of contract When goods are delivered When goods are paid for

It is only when the intention of parties is not very clear that the following rules have to be referrred to: When goods are in deliverable state Property in goods pass on as soon as sale is made and payment of price is immaterial. For eg: A buys a bicycle for Rs.2000 on a months credit and ask the shopkeeper to sent to it house.The shopkeeper agrees to do so .the bicycle immidatly becomes the property of A.

When goods have to be put into a deliverable state When seller has to do something to goods, the property does not pass as long as such thing has been done. Merely doing something does not result in transfer of property the buyer should be duly notified about it. Case: Rugg Vs Minett

When goods have to be measured etc to ascertain price When the seller has to weigh ,

measure or test or do something the property passes as soon this is done by the seller. If the seller has already done all what is required to do under the contract and nothing remains to be done by him, the property passes to the buyer even if buyer has to do something for his own satisfaction. For eg: A sold to B 289 bales of goat skins, each bale containing five dozen and price was certain for per dozen. It was the duty of A to count the goat skin in each bales. Before A could do the same, the bales were destroyed by fire.Held,the property in goods has not passed to the buyer as something still remained to be done by the seller for ascertaining the price, and as such the loss caused by fire had to be borne by the seller.(i.e. A)

When goods are delivered on approval In a case where goods are delivered on sale or return basis, the property passes to buyer when: He signifies his acceptance He returns the goods within the stipulated time frame. Example: A Delivered a horse to B on the terms of
sale or return ,within 8 days.The horse died on the third day without any fault on the part of B .Held A,was to bear the loss as the horse was still his property when it perished.

When goods that are to be sold are not ascertained or when they are future goods the property in goods does not pass as long as they are ascertained or unconditionally appropriated and brought to the deliverable state either by the seller with the ascent of buyer or the buyer with the ascent of the seller, such an ascent may be expressed or implied.

Essentials of valid appropriation:

The appropriation must be of goods matching the requirement in the contract The appropriation must be intentional Appropriation must be made either by seller or buyer The appropriation must be unconditional (The seller should not reserve himself the right of disposal of goods )

An unauthorized sale by a mercantile agent : A mercantile agent has authority to sell or raise money using the goods as security and hence he has an authority to sell, goods convey a good title. The following condition must be satisfied. He should be in possession of goods or relevant documents of title to the goods He should sell while acting in normal course of business The buyer should act in good faith without having any knowledge that agent has no authority to sell

Transfer of property by estoppel: When a person by his conduct or words leads others to believe that certain state of affairs existed would be estopped from denying later on that such a state of affairs did not exist. Estoppel may arise when:

The owner is standing when sale takes place Assists the sale Permits the goods to go into possession of other Made representations so as to induce buyer

Example

Sale by person in possession under voidable contract When seller has obtained possession of goods under a voidable contract before contract has rescinded, the buyer if he was unaware of the defect to title acquires a good title to goods. For eg: A,by misrepresentation induces B to sell and deliver to him a cow .A sells the cow to c before B has rescinded the contract.C purchases the cow in good faith and without notice of the sellers defective title. Sale by joint owner If one of several joint owners has sole possession by permission of joint owners then the property in the goods is transferred to any person who buys from joint owner in good faith, without knowledge of the fact that seller has no authority to sell. The buyer would have obtained the title of co owner Thus establishing no one can give what he has not got. For eg: A,B and C are three brothers. They own a cow in common .B and C entrust the work of looking after the cowin A s possession .A sells the cow to D .D purchases bonafide for value .D gets a good title.

Sale by seller in possession after sale - A seller in possession after sale again sells conveys a good title provided the buyer acts in good faith without being aware of the defect in the title. Sale by buyer in possession after agreement to buy -A buyer in possession from an agreement to buy contract pledges or resells the buyers gets a good title provided he received the goods in good faith without being aware of any lien or rights of the original seller.

Resale by an unpaid seller When an unpaid seller who has exercised his right of lien or stoppage in transit resells the goods , the subsequent buyer get a good title, even though resale may not be justified in the circumstances that original buyer was not notified. Exceptions under other acts Examples of such situation are finder of lost goods, pawnee , official receiver or assignee.

It is the duty of the seller to deliver the goods and the buyer to accept the good and pay for them according to the terms of the contract of sale. Thus performance simply implies: Delivery of goods by seller Acceptance of goods by buyer Payment of price by the buyer The parties are free to choose terms of contract like place of delivery, mode of payment, manner of delivery etc.

Delivery means voluntary transfer of possession of goods from one person to another, if it is under coercion then it is not delivery

Actual Delivery Physical possession of goods is given to buyer. Example Symbolic Delivery Goods remain where they are but means of obtaining them are given Example : Key of godown etc.

Constructive delivery or deliver by attornment Such deliver occurs when person in possession of goods of the seller acknowledges in accordance with the sellers order , that he holds the goods on behalf of the buyer and the buyer has assented to it.

Delivery may be actual, symbolic or v constructive Delivery and payment are concurrent condition Effect of part delivery, when property in goods is to pass on delivery Buyer to apply for delivery Time of delivery Place of Delivery

Delivery of goods when they are in possession of third party Expense of Delivery Delivery of wrong quantity or different quality Instalment deliveries Delivery to carrier or wharfinger Liability of buyer for neglecting or refusing to take delivery of goods

When he intimates the seller that he has accepted When he does any act in relation to goods which is inconsistent with ownership of the seller example consumes, pledges, resells etc.

 Rights of an Unpaid Seller

Buyers right against Seller

Unpaid seller The seller of goods is deemed to be unpaid under two circumstances when: A) When whole price is not paid B) Where a bill of exchange or other negotiable exchange has been received as condition of payment and dishonoured

Seller includes any person ho is in the position of a seller, an agent in whose name B/L IS endorsed or consignee or agent is also a seller The definition emphasises following characteristics of the seller - He must sell goods on cash terms, must be unpaid - He must be unpaid either wholly or partially - He must not refuse payment when tendered

Right of unpaid seller against goods

Rights of unpaid seller against the buyer personally

An unpaid seller has following rights against the goods Right of Lein Right of stoppage of goods in transit Right of resale

Lein is the right to retain of possession of goods and refuse to deliver until the price in due respect of them is paid or tendered. An unpaid seller in possession of good is entitled to exercise his lein in following cases

When the goods have been sold without any stipulation to credit When goods have been sold on credit but the term of credit has expired When buyer becomes insolvent even though period of credit may not have yet expired

The unpaid sellers lein is a possessionary lein i.e it can be exercised as long as seller remains in possession of the goods. He may exercise his right of lein notwithstanding that he is in possession of the goods as agent or bailee for the buyer. Transfer of goods or transfer of document of title to the goods does not affect his right to exercise his right if possession of goods is with the seller Sellers lein when property has not passed is called a rigght of withholding delivery

When is lein lost:

When he delivers the goods to a carrier or bailee When buyer or his agent gains possession lawfully When the seller expressly or impliedly waives his right of lein, when fresh term of credit is given , accepts a b/e at a future date etc.

Right of stopping further movement of goods when they are with the carrier for the purpose of transmission to the buyer and retaining possession until payment is received. When can one exercise this? - When buyer becomes insolvent - When the property has not passed to the buyer - When the goods are in course of transit- when goods are with transit agent. The right of stoppage can be exercised only as long as goods are in transit, once this ends then the right to stoppage cannot be exercised

Duration of Transit: The transit is deemed to end in following cases: - When The buyer or his agent takes delivery - When buyer or his agent take delivery before it arrives at appointed destination - When goods have arrived at destination and carrier acknowledges to buyer of its arrival - When goods have arrived and buyer requests the c carrier to keep it for some more time - When carrier wrongfully refuses to deliver to deliver the goods to buyer - When part delivery of goods have been made with intention to deliver the rest

How to exercise stoppage of goods: - By taking actual possession By giving notice of his claim to the carrier or other bailee Lein and stoppage in transit distinguished

Lein Lein attaches when buyer is at default, solvent or insolvent

Stoppage in transit Only when buyer is insolvent

When goods are in actual possession

Comes to end once seller hands over to carrier Consists retaining possession

When goods are in custody of independent agent

Commences after seller has delivered to carrier Regaining possession

This is a very valuable right, without this the right the unpaid sellers other rights like right of lein and stoppage in transit has no meaning. The lae gives right to an unpaid seller to resell in case : - goods are perishable in nature - when such right ispressedly mentioned in contract - when seller has given a notice to buyer of his intention

Suit for price: Where property in goods has passed to the buyer or where a sale price is to be payable on a certain date,althought the property in goods has not passed, and the buyer wrongfully neglect or refuse to pay the price acc to terms of the contract, the seller is entitled to sue the buyer for the price irrespective of delivery of goods. Suit for damages for non acceptance: Where buyer wrongfully neglects or refuse to accept the pay for the goods,the seller may sue him for damage for non acceptance .The damage would be decided under section 73. Suit for special damages and interest: seller can sue the buyer for special damage ,means the loss which is known to the parties at the time contract ,which is likely to result in case of breach of it.He also get interest at a reasonable rate on the total unpaid price of the goods sold, from the time it was due until it is actually paid.

Suit for damages for non delivery Suit for specific performance Suit for damages of breach of warranty Suit for rescission of contract for damages for breach of condition Suit for recovery of price together with interest

Shruti Minocha

Means a written document which can be transferred to another party as a form of payment. A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. According to the Negotiable Instruments Act, 1881 in India there are just three types of negotiable instruments i.e., promissory note, bill of exchange and cheque.

Sec. 23. When Instrument Payable To Order: payable to the order of a specified person or to him or his order.

Instruments to order, customarily read "Pay to the order of John Brown" or "Pay to John Brown, or order." "It may be drawn payable to the order of: A payee who is not maker The drawer or maker; or The drawee; or Two or more payees, jointly; or One or some of several payees; or The holder of an office for the time being.

The instrument is payable to bearer: 1. When it is expressed to be so payable; or 2. When it is payable to a person named therein or bearer; or 3.When the only or last endorsement is an endorsement In blank. For Eg.: a cheque is payable to A.A endorse it merely by putting his signature on the back and delivers to B with the intention of negotiating it .In the hand of B cheque is A Bearer instrument.

Easy negotiability : It must be transferable. Transferee can sue in his own name without giving notice to the debtor: Better title to a bona fide transferee for value:

Presumptions a} Every instrument was made for some consideration b} Was made on such date c} Was accepted within reasonable time after its date and before its maturity d} Transfer was made before maturity e} Endorsement were made in order in which they appear F}The negotiable instrument is duly stamped G} The holder of instrument is holder in due course.

It is an instrument in writing containing an unconditional undertaking signed by the maker to pay a certain sum of money only to or to the order of a certain person, or to the bearer of the instrument. In case of promissory note negotiability is restricted.

It must be in writing: An oral promise to pay does not become promissory note. It must state a clear undertaking to pay ,not necessity of word promise. Eg: A signs the instrument in following manner: I promise to pay B I acknowledge myself to be indebted to B in Rs. 1000 to be paid on demand for value received.

It must contain a promise or undertaking to pay, a mere acknowledgement of indebtedness is not a promissory note until it states a promise to pay. Illustration: I am liable to pay to B rs.500. To be a valid promissory note: Illustration: I acknowledge myself to be indebted to B for Rs 500 ,to be paid on demand, for value received

Promise to pay must be unconditional: The promise to pay depend upon the happening of uncertain event is invalid: Eg: I promise to pay B rs.500 seven days after my marriage with C. If happening of an event is certain but time is not certain than its a valid promissory note. Eg: I promise to pay B rs.500 seven days after Cs death.

It must be signed by maker: signature may be at any part of the instrument may not be necessarily at the bottom. If a maker is illiterate-thumb mark is sufficient.

The maker must be certain person: It must indicate with certainty the person who is the maker: Eg; I,Alok Kumar promise to pay. In case a person signs in a assumed name, he is liable as a maker because a maker is taken as certain identity, Eg: Satish chandra is a good note against Alok Kumar only.

The payee must be certain Payee must be certain on the face of the instrument. A note is valid even if the payee is misnamed or indicated by his official designation provided he can be ascertained by evidence.

The sum payable must be certain The amount payable capable of contingent additional or subtraction is invalid promisory note. Eg: I promise to pay B rs.500 and all other sums which shall be due to him. to be valid the amount to be paid must be certain.

The amount payable must be in legal tender money of India A document containing a promise to pay a certain amount of foreign money or to deliver a certain quantity of goods is not a promissory note. Eg: A say I promise to pay B rs.500 and to deliver him my black horse on next 1st jan is not a valid promissory note.

Other formalities must be properly stamped as required by the Indian stamp act. An unstamped or inadequately stamped promissory note is invalid.

A bill of exchange is an instrument in writing containing an unconditional order, signed by maker, directing a certain person to pay a certain sum of money only to or to the order of, certain person or to the bearer of the instrument The three parties in Bills of exchange are Drawer The person who makes it Drawee The person who is directed to pay Payee The person to whom the payment is made

Must be in writing Must contain an order to pay Must be unconditional Must be signed by drawer The drawer,drawee,payee must be certain Sum payable must be certain Must contain an order to pay money only Must comply with formalities

Bases

Promissory Note

Bills of Exchange

No of parties

3 parties-drawer, drawee and the payee. The maker of a The maker cannot The drawer and note cannot be the be the payee payee may be payee because promisor same person and promisee where a bill is cannot be same drawn Pay to person. Me Promise and order There is a promise There is a order to to make the make the payment payment.

2 parties-maker and the payee

Bases Acceptance

Promissory Note It requires no acceptance as it is signed by the person who is liable to pay.

Bills of Exchange It must be accepted be accepted by drawee before it is presented for the payment.

Nature of liability The liability of the maker is primary.

The liability of drawer arises only when acceptor or drawee does not honor the bill.

Bases

Promissory Note

Bills of Exchange

Makers position

There is immediate relation between drawer and payee.

There is immediate relation between drawer and drawee but not between drawer and payee.

A cheque is a document/instrument (usually a piece of paper ) that orders a payment of money. Drawer, the person or entity who makes the cheque . Payee, the recipient of the money . Drawee, the bank or other financial institution where the cheque can be presented for payment

Wherever Reserve Bank of India has its office the clearing house is managed by it. Reserve Bank of India manages 14 clearing houses at Ahmedabad, Bangalore, Bhubaneshwar, Mumbai, Calcutta, Chennai, Guwahati, Hyderabad, Jaipur, Kanpur, Nagpur, New Delhi, Patna and Thiruvananthapuram. In the absence of an office of the Reserve Bank, the clearing house is managed by the State Bank of India, its associate banks and in a few cases by public sector banks.

MICR- Magnetic Ink character recognition 9 digit no. First 3 digits no. City code of bank Next 3 digit no.- Bank code Next 3 digits branch code . Next 6 digits Account no. maintained by RBI Last 2 digits- Current or saving account. IFSC code-INDIAN FINANCIAL SYSTEM CODE 11 digits- first 4 characters bank remaining branch.

Drawn on banker Payable on demand

Drawn on any other person On demand or after expiry of certain period Payable to bearer on demand Payable to bearer on demand valid absolutely void Not require acceptance by the Requires acceptance by the drawee before payment is drawee demanded. No need to be stamped Must be stamped
No grace period allowed as it is payable on demand Three days of grace period allowed while calculating maturity date in case of time bills

Cheques Drawer not discharged by the delay of the holder in presenting for payment

Bills of Exchange Drawer is discharged from liability if not duly presented for payment

CROSSING OF CHEQUES Cheques can be of two types:1. Open or an uncrossed cheque 2. Crossed cheque

Open Cheque An open cheque is a cheque which is payable at the counter of the drawee bank on presentation of the cheque.

A crossed cheque is a cheque which is payable only through a collecting banker and not directly at the counter of the bank. Crossing ensures security to the holder of the cheque as only the collecting banker credits the proceeds to the account of the payee of the cheque. When two parallel transverse lines, with or without any words, are drawn generally, on the left hand top corner of the cheque.

Types of Crossing General Crossing Special Crossing Account Payee or Restrictive Crossing Not Negotiable Crossing

Where a cheque bears across its face an addition of the words and company or any abbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines simply, either with or without the words not negotiable, that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally. In general crossing ,the banker on whom it is drawn shall not pay it otherwise than to a banker. The holder may get it collected through some bank .collecting bank can be of his choice.

Where a cheque bears across its face an addition of the name of a banker, either with or without the words not negotiable, that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed specially, and to be crossed to that banker. [section 124] Where a cheque is specially crossed ,the bank on whom it is drawn is supposed to honor only when it is presented by the banker mentioned on it or agent of such bank.

This crossing can be made in both general and special crossing by adding the words Account Payee. in this type of crossing the collecting banker is supposed to credit the amount of the cheque to the account of the payee only.

The words 'Not Negotiable' can be added to General as well as Special crossing and a crossing with these words is known as Not Negotiable crossing. The effect of such a crossing is that it removes the most important characteristic of a negotiable instrument i.e. the transferee of such a crossed cheque cannot get a better title than that of the transferor ( cannot become a holder in due course ) and cannot covey a better title to his own transferee, though the instrument remains transferable.

A cheque is said to be dishonoured when drawee makes a default in payment. The provisions for dishonour of a cheque is contained under section 138 to 147.: a drawer of a dishonoured cheque shall be deemed to have commited offence

Holder : Any person entitled to the possession of the instrument in his own name and to receive or recover the amount due thereon from the parties liable thereto. Thus in order to be called holder a person must satisfy the following condition: 1. He must be entitled to the posession of the instrument in his own name 2. He must be entitled to receive or recover the amount due thereon from the parties liable thereto.

Principal whose name appear on an instrument. where a instrument is a bearer instrument ,whosoever holding it is a holder. where a instrument is in name of a partner of a firm, it becomes a holder as it is not a separate entity from partner. If a holder of negotiable instrument is dead,the heir of deceased holder becomes holder. A person on whose behalf a instrument is endorsed in blank ,he is the holder of an instrument though his name does not appear on the instrument.

Any person who for consideration becomes the possessor of instrument if payable to bearer or the payee or indorsee thereof if payable to order before the amount mentioned in it beacame payble.

He must be holder in due course. He must be a holder for valuable consideration. He must become a holder of the instrument before the date of maturity. He became owner without being aware that any defect existed in the title of the person from whom he received it.

He gets a better title than that of a transferor. Privileges in case of inchoate stamped instrument. Privileges in case of fictitious bills. Privileges when an instrument delivered conditionally is negotiated.

Negotiating by mere delivery Negotiating by endorsement and delivery

Blank endorsement Endorsement in full or specific endorsement Partial endorsement Restrictive endorsement Conditional endorsement Sans recourse endorsement facultative endorsement

Shruti Minocha

Means a group of persons associated together for attainment of common end ,social or economic. It has no technical or legal meaning

Registered company means company incorporated under companies act 1956.

The laws relating cos are in company act 1956, the latest amendment made in 2006. Mostly they are business cos but may also be formed for promoting art, research ,religion etc.

Separate legal Entity It is separate from its members Members can enter into contracts with it in the same manner as individuals and he cannot be held liable for acts of the company. Even if he holds the entire share capital The company property and money belongs to the company and not to share holders Case : salomon vs salomon & co ltd.

Limited Liability A company may be limited by shares or it may be limited by liability. For example if face value of share is Rs.10 and a member has paid Rs. 7, he can be called upon to pay Rs. 3 per share during the life time of company. In limited by guarantee member, the liability of member is limited to such amount as the member may undertake to contribute to the assets of the company in the event of it being wound up.

Perpetual Succession It is not subject to thousands of natural shock that flesh is heir to. Does not die Life depends on life of members Is created by process of law and can be put to an end by it only. Members come and go Even if all members are dead it continues to exist Companys existence persists irrespective of change in composition of its members

Common Seal

Company has no physical existense Must act through it agents All contracts entered into by its agents must be under the seal of the company It is the official signature of the company

Transferability of share Has share capital divided into share Shares are subject to certain condition freely transferable No shareholder is permanently wedded to a company The idea of joint stock company was that shares should be capable of being easily transferable

Separate Property A company is a legal person different from its owners Capable of owning ,enjoying and disposing of property in its own name. Although share capital is contributed by share holders they are not private or joint owners of its property. A company is a real person in which all its property is vested and by which it is controlled and managed and disposed of

Capacity to sue A company can sue It can be sued It may also inflict or suffer wrongs It can in fact have done most of things done by or to a human being

From juristic point of view company is a legal person distinct from members. This is principle is referred to as veil of incorporation The effect is there is fictional veil between company and its members Company has a corporate personality which is distinct from its members

The human being started using this veil of corporate personality blatantly for fraud or misconduct.

This forced law to look behind at persons who are the real beneficiaries of the corporate fiction The various cases in which corporate veil has been lifted are as follows:

Protection of Revenue : The courts may ignore the corporate entity of a company if it is formed purely for tax evasion persons. Prevention of fraud or improper conduct: The legal personality of a company may also be disregarded in the interest of justice where the machinery is used for some fraudulent purpose like defrauding creditors or defeating and circumventing law.

Determination of Character of a company whether it is enemy: A company may assume an enemy character when persons in def acto control of its affairs are residents of an enemy country, in such a case court shall examine the character of the person in control and declare company as enemy company.

Where company is sham : The courts also lift the veil when company is a mere cloak or sham Company avoiding legal obligation : Where the use of an incorporation is being made to avoid legal obligation, the court may disregard the legal personality of the company and proceed on the assumption as if no company existed.

Company acting as agent or trustee of the shareholders: Where a company is acting as agent of its share holders, the share holders will be liable for the acts of the company. It is the question of whether the company is acting as an agent for its shareholders. Avoidance of welfare legislation : Avoidance of welfare legislation is as common as avoiding taxation and the approach of the courts is considering problems arising out of such avoidance is generally the same as avoidance of taxation.

Protecting Public Policy : The courts now invariably left the corporate veil to protect the public policy and prevent transactions contrary to public policy. Thus when there is a conflict with public policy, the courts ignore the form and take into account the substance.

Difference
Regulating act

Company
Company act 1956 After registration under companies act Has legal personality

Partnership
Indian partnership act 1932 Registration not compulsory Is not a person in the eyes of law,made of several persons who compose it

Mode of creation

Legal Status

Liability of members

Contribute towards Partners are liable satisfaction of the cos without limit debts and liabilities is ltd. Managed by director or MD members have no right in management Shares in company are freely tranferable unless its articles otherwise provide Share holder not an agent and has no powers to bind co. by Every member of company participates in management, unless provided otherwise A partner cannot transfer his share without consent of partners Each partner is an agent and inc

Management

Transferability of interest

Authority of members

Powers

Powers are limited to those allowed by the objects clause in its MOA Those in article of association of a company are effective as against public because it is public document

Can do anything which partners agree to do Restriction on the powers of a particular partner contained in partnership will not avail against outsiders

Restriction on powers

Insolvency of firm and winding up

Winding of co. does not make individuals insolvent

Insolvency of firm means insolvency of partners

Debts

If co. owns debt to any Cannot claim member he can claim payment out of its assets when it is wound up Comes to an end when it is wound up according to provisions of act The minimum in co. is 2 in private firm in private co is 2 and public is 7 MAX IMUM NO LIMIT It may be dissolved at any time

Dissolution

Number of members

minimum 2 Max 10 in banking and 20 in others

Maintenance of Bound by law to No such books maintain books statutory and accounts provision qualified by auditors

Statutory Companies * Created by special act of the legislature * Ex. RBI, LIC,Railways etc. * Mostly public utilities and of national importance * Provisions of company act 1956 applicable on them, if they are not inconsistent with the provisions of special act under which they are formed

Registered companies * These companies are formed and registered under companies act 1956. * Most commonly found companies are registered companies

Companies with Limited liability This is of two types 1. Companies limited by shares 2. Companies Limited by guarantee

Companies with Unlimited Liability

Companies limited by Shares: * The liability of members of a company is limited to the amount unpaid on the shares, such a company is known as one limited by shares. * The liability can be enforced during the existence of the company as also during the winding * If shares are fully paid liability is nil * It may be a private or a public company

Companies Limited by guarantee * Liability of members is limited to a fixed amount which the members undertake to contribute to the assets of the company in case of it being wound up. * Has a legal personality different from its members * The liability of members is limited * The articles of such a company must state the number of members with which the company is registered * They are not formed with the purpose of profit but for promotion of art ,culture etc.

Unlimited Companies * Sec 12 provides that any 7 or more persons (2 or more in case of pvt. Co.) may form an incorporated co. with or without limited liability. * * Co. without liability is known as unlimited co. Every member is liable for the debts of the co., as in ordinary partnership in proportion to the interest in the company * It may or may not have share capital * It may be public or private * Must have its own articles of association.

Private Company : It is also called close corporation A company which has a share capital of Rs. 1,00,000 or such higher paid up capital as may be prescribed and by its articles Restricts the right to transfer its shares if any, this meant to preserve the private character. Limits the number of members to 50 not including its employee members (present and past) Prohibits any invitation to public to subscribe fro any shares in or debenture of the company. Prohibits ant invitation or acceptance of deposit from persons other than its members, directors or relatives.

Every private company existing on commencement of companies (amendment) act 2000 with a paid up capital of less than Rs. 100,000 shall within a period of two years enhance its paid up capital to Rs. 100,000 The debenture holders in co. may excedd 50, only condition pvt. Co. cannot issue debenture to public at large. Joint holders are treated as a single member. Must have its own articles of association.

Public Company Means a company that has a minimum paid up capital of Rs.5 Lakh or such high paid up capital as may be prescribed: Is a private company which is a subsidiary of a company which is not a private company Every public company with a paid up of share capital of less 5 lakh shall within a period of two years from such commencement enhance its paid up capital to 5 lakh.

Difference

Private

Public

Minimum Capital
Minimum member Maximum Number

Rs.1 lakh
2 50

Rs. 5 Lakh
7 No restriction

dIFFERENCES

pUBLIC

pRIVATE

No. of Directors

Must have atleast 3

Must have 2 directors

Restriction on appointment of directors

Directors must file with Need not do so registrar a consent to act as director or sign an undertaking for qualification of shares Invites public to subscribe By its AOA prohibits such an invitation

Restriction on invitation to prescribe for shares Transferability shares and debentures

Are freely transferable Right to transfer restricted by article

Privileges

No such privileges

SOME SPECIAL PRIVILEGES

DIFFERENECE Public S Quorum

Private

Managerial Remuneration

If the articles of 2 in this case a company do not provide for a large quorum a minimum of 5 members Cannot exceed No such 11% of the net restriction profit

No. of members : May have only 2 members Allotment before minimum subscription: A private company can allot shares before the minimum subscription is subscribed or paid for Prospectus or statements in lieu of prospectus : A private co. may issue shares without issuing a prospectus or delivering to the registrar a statement in lieu of prospectus.

Issue of new shares: A public company issues new shares after expiry of two years after its formation or at any time after the expiry of 1 year from the date of first allotment of shares whichever is earlier, private company has to offer these shares to existing share holders on pro rata basis. Kinds of shares : Can issue share capital of any kind and with such voting rights. Commencement of business : A private company can commence business immediately after formation

Index of members : Need not keep index of members Statutory meeting and statutory report : need hold and need not make reports Demand for poll : Even one member present and having voting right may demand poll Managerial remuneration :Rule of maximum remuneration does not apply to private company

No. of directors : Need not have more than 2 directors Rules regarding director : Rules are less stringent, need not file with registrar the consent of director to act as such.

Legal position of private company in most respects is similar to public company even if one person holds all the shares the company is a distinct person.

Conversion by default : When default is made by a private company in complying with essential requirements of a private company , the company ceases to enjoy the privileges. In such a case the provision of the companies act apply to it as if it were not a private company. Conversion by choice or Volition : If a company so alters its articles that they do not contain provision that makes it a private company , it shall cease to be a private company. It shall then file with registrar within 30 days either a prospectus or statement in lieu of propectus.

Thus a private company becomes public: * By filing with registrar * Taking steps to raise its membership to atleast 7. * Alter the regulation in articles to be consistent with public company

Conversion of public into private : A public company may become private by passing special resolution. The reslution should be to change the article to condition as prescribed to make the company private.

Holding Company : A company is known as holding company of another company when control is exercised by the latter over the former called a subsidiary company

A company is deemed to be holding company of another if but only if that the other is a subsidiary.

Subsidiary company A company is known as subsidiary company when control is exercised by the latter (called holding company) over the former called a subsidiary company. A company is deemed to be a subsidiary company of another company in the following 3 cases :

Company controlling composition of board of directors: Where a company controls the composition of board of directors of another company, the later becomes subsidiary of former. Holding of majority shares : Where a company holds more than half the nominal value of equity share capital of another it becomes subsidiary of former. Subsidiary of another subsidiary: Where a company is subsidiary of another company which is itself subsidiary of the controlling company , it becomes subsidiary if controlling company.

A government company means any company in which not less than 51% of the paid up capital is held by
The central government Any state government Partly by central and partly by any one of

the state governments

Appointment of auditor and audit reports: Auditor is appointed on the advice of CAG, The CAG would have the power to direct the manner in which the cos account shall be audited by the auditor.

Annual report to be placed in the parliament : A report is to be prepared within 3 months of AGM in which the audit report is placed, the report along with audit report is to be placed in the parliament, in case state govt. co owns it then it shall be placed before the sate govt legislature as well.

COMPANY LAW
PROSPECTUS Shruti Minocha

PROSPECTUS

Document which is used to raise the capital from public

Prospectus must be in writing

A private company is prohibited from making an invitation to public and hence it need not issue a prospectus.
Prospectus is the basis on which the prospective investors form their opinion and take decisions as to the worth of the company

FEATURES OF PROSPECTUS

Definition: Any document described or issued as a prospectus and includes any notice circular, advt., or other document inviting deposit from the public for subscription or purchase of any shares or debentures of a body corporate. Prospectus must be invitation to public Prospectus must be in writing It is an offer to public Public could be any section of public such as elected members ,debenture holders or as clients of the person issuing the prospectus Prospectus must be dated and date is taken as the date of publication of prospectus Signing of Prospectus must be signed by the proposed directors or by their agents. In the case of existing companies, it should be signed by all the directors

REGISTRATION OF PROSPECTUS
A

prospectus can be issued by a company only when the copy thereof has been delivered to the Registrar for registration The registration must be made on or before the date of publication thereof The copy must be signed by very person who is named there in as the director of the company or by his agent who is duly authorised. Every prospectus must state on the face of that a copy has been delivered to the Registrar for registration

REGISTRATION
The prospectus must be issued within 90 days of the date on which a copy is delivered for registration If prospectus is not registered, the company and every person, who is knowingly a party to the issue of the prospectus, shall be punishable with fine which may extend to Rs 50,000

SHELF PROSPECTUS
Prospectus issued by any financial institution or bank for one or more issues of the securities or class of securities specified in that prospectus A company filing a shelf prospectus with the registrar shall not required to file prospectus afresh at every stage of offer of securities by it within a period of validity of prospectus Any public sector company or schedule bank whose main object is financing shall file self prospectus. Financing means making loans to or subscribing in the capital of a private industrial enterprise engaged in infrastructural financing or such other company as the central government may notify in this behalf.

SHELF PROSPECTUS

A company issuing shelf prospectus shall not require to file prospectus afresh at each stage of offer of securities. An information memorandum shall be issued to the public along with shelf prospects filed at the stage of the first offer of securities and prospectus will be valid for a year.

INFORMATION MEMORANDUM
Process

undertaken prior to the filing of prospectus Demand for securities proposed to be issued by a company is elicited, price and the terms of issue is assessed, by means of notice, circular, ad or document A public limited company can before issue of securities circulate information memorandum to the public prior to filing of a prospectus.

RED HERRING PROSPECTUS

Does

not have details of either price or number of shares being offered or amount of issue Price is not disclosed, the number of shares and upper and lower price bands are disclosed Issue price is stated and the number of shares are determined later In case of book built issues it is a process of price discovery and the pricing cannot be discovered until the bidding process is completed.

RED HERRING PROSPECTUS

An RHP and draft offer can be filed with the ROC without the price band, will notify the floor price or price band by way of ad one day prior to the opening of the issue In the case of book-built issues, on the completion of bidding process, the details of final price are included in the offer document

CONTENTS OF PROSPECTUS

Matters to be stated in Prospectus

Matters specified in Part I of Schedule II Reports specified in Part II of Schedule II

Part I of Schedule II
General information about the Company Capital Structure Terms of the present issue Particulars of the issue

CONTENTS OF PROSPECTUS
Company management and project Particulars of companies under the same management Outstanding litigation Management perception of risk factors

Part II of Schedule II
General Information Financial information Statutory and other information

LIABILITY FOR MISSTATEMENTS

Civil liability

Against the company Against the directors, promoters and experts

Criminal Liability

LIABILITY OF MISSTATEMENTS IN
PROSPECTUS

Civil Liability

Criminal liability

CIVIL LIABILITY
1.

Against the company

Rescission of contract

Claim for damages

RESCISSION OF CONTRACT
The contract must be a material mis representation The statement must have induced the share holders to take share The statement must be untrue: Giving false impression The deceived shareholder is an allottee and he must have relied on the statements in the prospectus The omission of material fact must be misleading before rescission is granted The proceeding of recission must be stated as soon as the allottee comes to know of a misleading staement.

DAMAGES FOR DECEIT

Any

person induced by a fradulent statement in a prospectus to take shares is entitled to sue the company for damages.

He

must prove the same matters in claiming damages for deceit as in claiming for rescission He cannot both retain shares and get damages against the company

REMEDIES AGAINST THE DIRECTORS,

PROMOTERS AND EXPERTS
The

person who are liable to pay compensation for any loss or damage to subscribers for any shares or debentures on the faith of a prospectus containing untrue statements are : Directors Persons who have authorised themselves to be named as directors Promoters Persons who have authorised the issue of prospectus

THE LIABILITIES OF DIRECTORS ETC ARE

Liability for damages for mis statement Liability for damages for non compliance

Liability under the general law

CRIMINAL LIABILITY
A

prsopectus found containing an untrue statement is punishable with imprisonment upto 2 years

Or

a fine upto Rs. 50,000

He

will not be liable if he can prove ; the statement was immaterial,he had reasonable reason to believe the statement was true.

Share Capital

Share capital
The capital of the company is divided into certain indivisible units of a fixed amount, these units are share Share is the interest of a shareholder in a company

share certificate ,
It is movable property, transferable in the manner provided by the articles of the company

Stock is the aggregate of fully paid up shares. A co.ltd by shares can convert a fully paid up shares into the stock by passing a ordinary resolution. Once converted ,notice of the same is to be given to registrar within 30 days. Registrar will than show the amount of stock held by each member instead of amount of shares.

A share has a nominal value (per unit value), whereas stock has no value Stock is always fully paid shares, shares may not be so Stock is transferable in small fractions while shares can be transferred in round numbers All shares have of equal denomination, stock may be of unequal amounts The fractions or parts of stock do not bear distinctive numbers while shares always bear distinctive numbers Shares can be issued directly issued to public but stock cannot be directly issued to public. Only fully paid shares can be converted to stock

Two types of shares can be issued by a company

Preference shares Equity shares

Preference share are shares which has 2 characteristics

Preferential rights to dividend during lifetime of the company Preferential rights to return of capital when company goes into liquidation (closure)

Equity shares means shares which are not preference shares Sweat equity shares means equity shares issued at a discount or for consideration other than cash,

1) Cumulative preference shares type of shares on which dividend goes on accumulating till it is fully paid off. The co. is bound to pay the dividend only if it has sufficient profit available for distribution. If co. goes into liquidation, the arrear of dividend are to be paid only if the article contain express provision in this regard. 2) Non Cumulative preference shares - type of shares on which dividend does not go on accumulating. If there are no profits or inadequate profits in any year, these shares gets no dividend or get a partial dividend 3) Participating preference shares not only entitled to fixed rate of dividend but also to share in the surplus profits after the dividends are paid to equity shareholders 4) Non- Participating preference shares entitled only to fixed rate of dividend. 5) Convertible preference shares these shares entitles the holders to convert them into equity shares within a certain period

6) Non- Convertible preference shares these shares does not entitles the holders to convert them into equity shares 7) Redeemable preference shares Preference shares which can be redeemed

General provision: Proper authority: An allotment must be made by a resolution of the BOD of the co. This duty cannot be delegated by the director unless there is a provision in the article for the same. Reasonable Time: allotment must be made within the reasonable time otherwise applicant is not bound to accept the same.

Communication: the allotment must be communicated to the person making the application so that it is legally complete,. Absolute and Unconditional: if an application is conditional and condition is not fulfilled ,the applicant is not bound to take the shares.

Revocation: An offer to take shares may be withdrawn any time before communication of its acceptance is complete against the applicant.

Special provisions: When no public offer is made: It need not to issue the prospectus ,only a statement in lieu of prospectus has to be issued that is to provide information contained in schedule III of the act.It must be signed by every person who is named therein as a director or proposed director of the co. or his agent authorized in writing.

When public offer is made; Registration of prospectus Making initial public offer of any security for sum of rs. 10 crore or more ,shall issue the same only in dematerialized form complying with provisions of depository act ,1996.

Minimum subscription No allotment shall be made of any share capital offered to the public for subscription unless a) the amount stated in the prospectus as the minimum amount has been subscribed

b) the sum payable on application for such amount has been paid to and received by the company
A company must receive a minimum of 90% of subscription against the entire issue before allotment of shares or debentures. If the minimum subscription is not received, the entire amount will have to refunded to the applicants to shares.

Application money amount payable on application should not be less than 5% of the nominal amount of the shares The capital issued should be fully paid up within 12 months from the date of allotment of shares

All moneys received from applicants for shares shall be deposited and kept deposited in a scheduled bank a) until the certificate of commencement of business is obtained b) where such certificate has been received, until the minimum subscription has been received

Section 108 to 112 deals with transfer of shares, provisions are given below Transfer not be registered except on production of transfer deed Every transfer deed shall be in the prescribed form Period of delivery of transfer deed before the date on which the register of members is closed Transfer by legal representative of deceased member is valid Application for registration of shares of a company may be made either by the transferor or by the transferee Companies should give reasons before they refuse transfer of shares

An instrument of shares on which the signature of the transferor is forged is called a forged instrument and any transfer happens on the forged instrument is forged transfer A forged transfer is a nullity. It does not pass any legal title to the transferee Blank transfer is a transfer of shares which is executed without the name of the transferee filled in the transfer form, which a transferor hands over to a purchaser. The transferor also hands over the share certificate to the buyer along with the blank transfer form. The transferor fills in his name and signs it.

Memorandum of association Shruti Minocha

Memorandum of association
Under section 2(28) of companies act a memorandum

is a memorandum of association of a company as originally framed or altered from time to time in pursuance of any previous company law or any of this act.

Memorandum of Association
It is a fundamental document
Great importance and relevance to the company Contains fundamental conditions upon which

alone the company was incorporated It defines the boundaries of the company. It regulates the external affairs of the company.

Purpose of MOA
The prospective shareholders can know the purpose for which their money is being used and the risk associated in making the investment
The outsiders shall know with certainty the object of the company and to contemplate whether the contractual relation they are entering into is within the objects of the company or not

Printing and signing of Memorandum

It shall be printed Divided into numbers and paragraphs numbered consequently Signed by 7 ( 2 in case of private company) Each subscriber shall sign and in presence of atleast 1 witness who shall attest the signature and give his identity proof. The MOA printed on computer should be accepted by registrar of a company provided it is neat and legible.

Contents of Memorandum
The name Clause The name of the company establishes its existence , the

following rule applies: 1. Undesirable name to be avoided Too similar to another company name Misleading suggesting it is connected with a particular business 2. Injunction if identical name is adopted 3. Limited or private limited : In case co. has been formed for promotion of art the this can be excluded 4. Prohibition of use of certain names : The schedule prevents use of ceratin logos, emblems, words etc

5.

Use o some key words according to authorized capital :

Corporation 5 crore International globe, Universal , Asiatic being first word 1 crore If any words used above with first word type then 50 lakh Hindustan , Bharat being first word 50 lakh Hindustan used with with name 5 lakhsg industries udyog 1 crore enterprise products,business 10 lakh

Every company shall paint or affix its namr details etc.

 The registered office clause

Every company shall have a registerde office from day one or from the 30 th day of its incorpration all communications to be addressed to this registered office notice of address or change of address is to be given to registrar within 30 days of incorporation if defaulted company may be fined the situation of the office determines the domicile

 The Objects clause

the objects of a company shall clearly be set forth in memorandum a company can do what is within or incidental to the objects stated in the memorandum. defines and confines the scope of the company powers and once registered it can only be altered as provided by the act.

 The purpose of object clause:

to enable subscribers to the memorandum to know the uses to which their money may be put

to enable creditors and persons dealing with the company to know what is permitted range of enterprise
the objects clause in memorandum of every company has to state main objects to be pursued other objects of company not included in clause

 The capital clause

Shall state the share capital This is called registered ,authorised or nominal capital Cannot issue more shares than are authorized Can only be equity or preference capital Cannot have disproportionate rights A pvt company which is not a subsidiary may issue shares with disproportionate rights

 The liability clause

Limited by shares or by guarantee, shall also state liability of its members members can only be called upon to pay the unpaid amount or the amount to which they have committed There is an exception and this is contained in Sec 45.

 The association Clause

It states we the several persons whose names and addresses are subscribed are desirous of being formed into a company in pursuance of this memorandum of association and we respectfully agree to take the number of shares in the capital of the company set opposite our names Followed by name and address and description of subscribers It should be signed by minimum 7 and 2 in Public and pvt company respectively. The signature shall be attested

Alteration of memorandum
Change of name

By special resolution and with approval of govt of India. Small changes like addition or deletion of words like private etc , does not need approval of government. Some times when it has inadverently registered under a similar name can change by an ordinary resolution. Shall change a name if Govt. directs

 Change of registered office

Can change the address within a state provided approved by the regional director The confirmation shall be communicated to co. in four weeks The company shall then file the new address within 2 months from date of confirmation The registrar shall register the same within a month If the company has to change state then it has change it through special resolution

Procedure for Alteration when changing state

Special resolution Confirmation by national company law tribunal Notice to affected parties Notice to registrar Power of tribunal to confirm change discretionary Right and interest of members, creditors to be taken care Copy of spl. Resolution and order of tribunal to be filed with registrar

 Alteration of Object

This is the most important clause The company exists for achieving the objectives The power of alteration has two limits 1. Substantive or physical limit 2. Procedural limit

 Substantive limit

1. To carry business more economically and efficiently 2. To attain main purpose by new and improved means 3. To change or enlarge local area of its operation 4. to carry on some business which may be convieniently carried on with objects specified in current business


1. 2. 3.

Procedural limit
To restrict or abandon any of the objects specified in the memorandum To sell or dispose off any or whole part of the undertaking or of any undertaking To amalgamate with any co. or body of persons

 Change in liability clause

Cannot change the liablity of members unless all of them write together and agree to change.
Change in capital clause : this will be discussed in

share capital chapter

Doctrine of Ultravires
A co. shall do what it is authorised by co. act
It shall do all that is reasonable to achieve the

objectives of the company All acts that are reasonably fair and incidental to acts of objectives of the company Ultra vires means beyond powers

 The purpose of this doctrine is to protect :

Investors in the company so that they know the objects Creditors by ensuring that the companies funds are not wasted.

Ultravires act is void : if an act is ultravires the co., it does not create legal relationship. Such an act is absolutely void and even the whole body of shareholders cannot ratify it and make it binding on the company. if an act is ultravires it may or may not be legal.

 The main feature is that the company being a corporate

should not be mulcted(Fined or punished) for its own acts or acts of its agents, if they are beyond its powers and privileges.
When a company exceeds its authority the act is good to

the extent of the authority and bad as to the excess.

If the excess cannot be separated from the authority

conferred on the company by the memorandum the whole transaction would be affected by the doctrine of ultravires and would be void.

 Ultravires the ditrectors :

if an act is ultravires the directors (beyond power of director, within power of co.) the shareholders can ratify it by resolution in g.m or even acquiescence provided they have knowledge of the facts leading to the transaction to be ratified, if act is within power of co, irregularities can be cured by passing resolution
Ultravires the articles:

if any act is ultravires the articles the co. can ratify by altering the articles by special resolution, if act is done irregularly it can be validated by consent of shareholders provided within rights of the company.

Articles of association
They are the rules , regulation and by laws for internal

mgmt. of affairs of the company.

They are framed with the objects of carrying out the aims

and objects as set out in M.O.A They are next in importance to the MOA.which contains the fundamental conditions upon which alone a company is allowed to be incorporated. They are subordinate and controlled by MOA. In framing articles care should be taken so that the regulations framed do not go beyond the powers of the company itself as contemplated by the MOA.

Contents of Articles: It contains provisions relating the follwing: Share capital, rights of share holders,payment of comission,share certificate etc Lien on shares Call on share Transmission Forefeit Share warrants Alteration of share capital G.m and proceeding threat Voting rights Directors their appointments Manager secretary Dividend and reserves Accounts and audit and borrowing power Capitalization of profits Winding up.

Type of companies which must have their own articles

Unlimited companies Companies limited by guarantee Private companies limited by shares
A public company may have its own A.OA or if it does not have may adopt Table A given in schedule 1 of the act. The articles should be signed by the subscribers of the memorandum and registered along with the memorandum.

Regulation in case of unlimited ,limited by guarantee and private .

Unlimited

* Shall state the no. of members with which the co. is to be registered *If it has share capital, the amount of share capital with which the co. is to be reistered. Co.Ltd. By guarantee shall state the number of members with which it will be registered. Private co.: If it has share capital , it shall contain provisions which *Restricts the right of transfer of shares *Limit the no. of members to 50 *Prohibit any invitation to public to subscribe.

 Adoption and application of Table A:

There are 3 alternate forms in which a public company may adopt articles

* It may adopt whole * It may wholly exclude A and make its own articles * It may frame its own articles and adopt part of table A.

Alteration of Articles
Companies have wide powers to alter their articles
The right to alter is so important that the co. cannot in any

manner either be express provisions in the articles or by an independent contract deprive itself of the power to alter its articles. articles is invalid.

Any clause in article that restricts or prohibits alteration of If the articles of the company contain any restriction that

the company shall not alter its articles it will be contrary to companies act and inoperative.b

Procedure for alteration

May alter by passing a resolution
Any article which are lawful can be included A copy of resolution should be filed with registrar

within 30 days of passing Any alteration is valid as if originally contained in articles

Limitations towith the companies act. Example company alteration 1. Must not be inconsistent
2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

cannot have rights to purchase its own shares. Must not conflict with memorandum. Must not sanction anything illegal Must be for benefit of the company Must not increase the liability of members unless they agree. Alteration by special resolution Approval of central government when a public company is converted into a private company Breach of contract Must not result in expulsion of any member No power of tribunal to amend the articles Alteration may be with retrospective effect

MOA AND AOA Distinctions

MOA AOA

It is the charter of the co. indicating They are regulation for the internal the nature of business, defines management of the co. and are relationship with outside world subsidiary to MOA
Defines scope of activity of They are the rules for carrying out company or area beyond which the objects of the company as set the actions of the company cannot out in the memorandum go It being charter is supreme document of the company They are subordinate to memorandum, if there is a conflict between articles and MOA, the latter shall prevail

There are strict v restrictions on its alteration some of the conditions of incorporation contained in it cannot be altered except with the sanction of the national company law tribunal

They can be altered by a special resolution to any extent provided they do not conflict with MOA and companies act.

Any act of company which is ultravires the memorandum is wholly void and cannot be ratified evnen by the whole body of shareholders

Any act of the company which is ultravires the articles (but is intravires the memorandum) can be confirmed by the shareholders.

MOA AND AOA Relationship

The articles are subordinate to MOA.

The articles cannot give powers to a company which are not conferred by the memorandum nor can they purport to create rights which are inconsistent with memorandum.this is because the object of the company is to state purpose but article provide manner in which the internal management of co. is carried.

 The memorandum must be read in conjunction with

articles: This is the case when it is necessary * To explain any ambiguity in the terms of the memorandum. * to supplement the memorandum upon any matter about which it is silent as regards matters which must by statue be provided by the memorandum. The article may explain or supplement the memorandum but cannot extend or enlarge it.

 The terms of the memorandum cannot be modified or

controlled by the articles.

Legal Effect of Memorandum and Articles

The articles and memorandum when registered bind a company and the members thereof to the same extent as if they had been signed by the company and each member. The effect of these provisions is to constitute through the memorandum and the articles of a company a contract between each member and the company.
The legal implications of these documents may be discussed as to how far these documents bind:

 Members to the company: Each member is bound to the

company as if each member has actually signed the memorandum and articles.

Company to members : A company is bound to the

individual memebers in terms of their ordinary rights as members eg. the right to receive notice of GBM, right to receive dividend. The company can exercise its rights as against any member only in accordance with the provisions in the memorandum and articles. An member by an injunction restraining the company from doing an ultravires act.

 Members Interse : As between members interse (among

themselves) the memorandum and articles constitute a contract between them and are also binding on each member as against the other or others. Such a contract can however be enforced through the medium of the company. contract as between a company and an outsider. An outsider cannot take advantage of the articles to found a claim against the company. This is based on the general rule of law that a stranger to a contract cannot acquire any rights under the contract. Thus if a right is conferred by the articles on a person in any capacity other than that of the member, it cannot be enforced against the company.

Company to outsiders : The articles do not constitute any binding

Constructive Notice of Memorandum and articles

Every outsider dealing with the company is deemed to have notice of the contents of MOA and AOA.
These documents on registration with ROC, assume the form of public documents This is known a doctrine of constructive notice.

Office of registrar
The MOA and AOA are accessible to all
It is duty of every person dealing with co. to inspect these

docs. And see that it is within the powers of the company to enter into proposed contract
Resolutions passed y the company also become part of

public document.
There is a presumption that outsider has read the MOA

AND AOA.

Doctrine of Indoor Management

There is one limitation on the doctrine of constructive notice of the memorandum and articles of a company.
The outsider dealing with the company are entitled to assume that as far as the internal proceeding of the company are concerned everything has been regularly done. They are presumed to have read these docs. And to see that the proposes dealing are is not in consistent there with, but they are not bound to do more. They need not inquire into the regularity of the internal proceedings as

required by the MOA and AOA.They can presume everything is done regularly.

The limitation of the doctrine of constructive notice is known as the doctrine of indoor management.

Doctrine of Indoor Management

The doctrine of constructive notice protects the

company from outsiders , the doctrine of indoor management protects the outsiders against the company.

Exceptions to Doctrine of Indoor Management

Knowledge of irregularity When a person has actual knowledge of irregularity as regards internal management he cannot claim the benefit under the doctrine of indoor management. Negligence Where a person dealing with a company could discover the irregularity had he made reasonable inquiry, he cannot claim the benefit of the rule of indoor management

Doctrine of Indoor Management

Forgery

The case does not apply when a person relies on document that turns out to be forged since nothing can validate forgery
Act outside the scope of apparent authority

If an officer enters into a contract that is outside his and beyond scope of his authority then the company is not bound.

Meetings Shruti Minocha

Meetings
A meeting may be generally defined as a gathering

,assembly or getting together of a number of person for transacting some lawful business, for entertainment or law. For any meeting to be valid it must comply with the provisions stated under companies act 1956.

Essentials of Valid meeting

Proper authority

BOD Shareholders: Special circumstances Extraordinary meeting. company law Board: In case of default can call AGM. Must specify the date ,time and place of meeting must state nature of business must be in manner as per AOA For general meeting of any kind at least 21 days notice must be given to the members.

Proper Notice:

Essentials of Valid meeting

Chairman : He has been designated as a in charge

and to conduct the proceedings of meetings. in case of his absence a temporary chairman is given a charge and on his arrival he replace the temporary chairman. Quorum : It means minimum number of members who must be present at the meeting. It is as followed as per the provisions of AOA. In case provision missing Its 5 in case of public and 2 in case of prvt.

Essentials of Valid meeting

Rules for discussion of meeting: By voice notice: Yes and No By division: In favor and against .count with help of secretary By show of hands By ballot

Kinds of General meetings

Statutory Meeting : It is held once during the lifetime It is the first meeting This is to let the know the early financial position and prospects of the co. it contains information on total shares allotted. the name ,address and occupation of BOD and auditors. any arrear due to director or manager. any commission or brokerage paid in regard of shares,

Kinds of General meetings

Annual general Meeting:

Held once in a year first meeting is held within 18 months from date of incorporation The gap between the two AGM must not be more than 15 months. Extension of time between the two AGM can be granted to max of 3 months under special circumstances. must be held within the registrar office or within the same state. 21 days notice is to be given in case of default company law board can call for AGM. In case of default penalty may extend to 50 k

Kinds of General meetings

Extraordinary General Meeting: This is the meeting which is being held between the two AGM It is held for some urgent issue which may arise between the two AGM. It is called for transacting some important business which cannot be postponed till the next agm.
It may be convened by Borad of directors on its won By the requisitionists themselves on the failure of board of

directors themselves to call the meeting

Resolutions
The question that come in consideration at the general meeting is in the form of proposal called motions. A motion may be propsed by chairman or any other member. It may either be carried or rejected
once the motion has been put to the members and they have

voted in favour of it ,it becomes a resolution. There are three types of resolutions;
ordinary Resolution

special resolution
resolution requiring special notice

Ordinary resolution
is a resolution passed by majority of the members

voting at a general meeting . ordinary resolution can be pass only for following reasons:
Alteration of authorized capital Declaration of dividend appointment of auditors

Fixation of their remunerations

election of directors

Special Resolutions
An intention to propose a special resolution need to be

specified in notice calling for general meeting A notice must be given at least 21 days before. The votes cast in favour are not less than three times cast against
Matters for which special resolution can be passed are: . To alter object clause of memorandum To change registered office of co. from one state to another. To reduce share capital of co. To alter AOA.

Resolution Requiring special Notice

If its there in companies act or article, that a special

notice is required to be passed. Notice must be given at least 14 days before the meeting. It must be passed for following reasons:
a resolution appointing an auditor other than retiring

one. a resolution that retiring auditor shall not be reappointed. removing director before expiry of the period. to appoint another director in place of another director.

Director
Is a person having control over the direction, conduct

,management of the affairs of a company. No body corporate ,association or firm can be appointed as director of a co. only an individual can be appointed. Public co. shall have minimum of 3 directors. Private co. shall have minimum of 2 directors.

Appointment of director
First Director : Is stated in Article. If not stated in

article than the name of proposed director is taking in writing by subscribers or a majority of them. If not appointed through above manner than subscribers only will act as director until appointed.

Remuneration of Directors
Remuneration to a managerial person ie.director or

manager may take the form of monthly payment i.e salary. remuneration may be paid to a director who is either in the whole-time employment of the company or a managing director, at a specified percentage of the net profits of the company : such percentage shall not exceed five for any one such director, or where there is more than one such director, ten for all of them together."

Remuneration of Directors
Remuneration shall also includes:
Rent free accommodation telephone charges, car facility

any life insurance policy

pension

Managing director
Is the one who is entrusted with substantial powers.
He can afffix common seal of the co to any document

or draw any cheque on account of the co., to sign any share certificate . The power given to him is by virtue of an agreement with the co. or a resolution passed by a co. in general meeting.

Appointment of a managing director

Every public co. or a private co. which is a subsidiary

of public co. having a paid up share capital of rs. 5 crores. Or more shall have a managing or whole time director or a manager. In case the appointment is made in accordance with the provisions mentioned in schedule XIII than no approval is required by central government

Appointment of a managing director

But if it does not satisfy the provisions under schedule

XIII than approval of central government is required. Conditions under schedule XIII are :
he had not been imprisonment

he had not been detained for any period under

conservation of foreign exchange and prevention of smuggling activities. He has completed the age of 25 and has not attained age of 70 Is resident in India.

Prevention of oppression and Mis management

The majority share holder may apply to:

Tribunal for winding up Tribunal for appropriate relief The central govt. for appropriate relief Prevention of oppressioon (Sec 397) Relief by tribunal: Tribunal gives relief by its opinion of : Conduct of company affairs In a manner prejudicial to public interest In a manner oppressive to any member Facts justify compulsory winding To wound up would be unfairly prejudice the applicants

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Prevention of mismanagement
Sec 398 provides for relief against mismanagement
Application to tribunal Relief by the tribunal