CA FOUNDATION

BUSINESS LAW
Test Paper -7 (Solution)
Time: 3 Hours Marks:100

Answer. 1
(a) Subsequent or Supervening impossibility (Becomes impossible after entering into contract): When
performance of promise become impossible or illegal by occurrence of an unexpected event or a
change of circumstances beyond the contemplation of parties, the contract becomes void e.g. change
in law etc.
Also, according to section 65 of the Indian Contract Act, 1872, when an agreement is discovered to be
void or when a contract becomes void, any person who has received any advantage under such
agreement or contract is bound to restore it, or to make compensation for it to the person from whom
he received it.
In the given question, after Mr. X and Mr. Y have entered into the contract to supply 50 tons of sugar,
the event of flood occurred which made it impossible to deliver the sugar within the stipulated time.
Thus, the promise in question became void. Further, Mr. X has to pay back the amount of ` 50,000 that
he received from Mr. Y as an advance for the supply of sugar within the stipulated time. Hence, the
contention of Mr. Y is correct.

(b) A company that is registered under section 8 of the Companies Act, 2013, is prohibited from the
payment of any dividend to its members.
The company in question is a section 8 company and hence it cannot declare dividend. Thus, the
contention of members is incorrect.

(c) Ascertained Goods are those goods which are identified in accordance with the agreement after the
contract of sale is made. This term is not defined in the Act but has been judicially interpreted. In actual
practice the term 'ascertained goods' is used in the same sense as 'specific goods.' When from a lot or
out of large quantity of unascertained goods, the number or quantity contracted for is identified, such
identified goods are called ascertained goods.
Unascertained goods: The goods which are not specifically identified or ascertained at the time of
making of the contract are known as 'unascertained goods'. They are indicated or defined only by
description or sample.

Answer. 2
(a) According to section 31 of the Indian Contract Act, 1872, contingent contract means a contract to do
or not to do something, if some event, collateral to such contract, does or does not happen.
Example: Contracts of Insurance, indemnity and guarantee.
Essentials of a contingent contract
(a) The performance of a contingent contract would depend upon the happening or non-happening
of some event or condition. The condition may be precedent or subsequent.

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 (b) The event referred to, is collateral to the contract. The event is not part of the contract. The event
should be neither performance promised nor a consideration for a promise.
(c) The contingent event should not be a mere ‘will’ of the promisor. The event should be contingent
in addition to being the will of the promisor.
(d) The event must be uncertain. Where the event is certain or bound to happen, the contract is due
to be performed, then it is a not contingent contract.

(b) Essential elements to incorporate Limited Liability Partnership (LLP)- Under the LLP Act, 2008, the
following elements are very essential to form a LLP in India:
(i) To complete and submit incorporation document in the form prescribed with the Registrar
electronically;
(ii) To have at least two partners for incorporation of LLP [Individual or body corporate];
(iii) To have registered office in India to which all communications will be made and received;
(iv) To appoint minimum two individuals as designated partners who will be responsible for number
of duties including doing of all acts, matters and things as are required to be done by the LLP.
Atleast one of them should be resident in India.
(v) A person or nominee of body corporate intending to be appointed as designated partner of LLP
should hold a Designated Partner Identification Number (DPIN) allotted by Ministry of
Corporate Affairs.
(vi) To execute a partnership agreement between the partners inter se or between the LLP and its
partners. In the absence of any agreement the provisions as set out in First Schedule of LLP Act,
2008 will be applied.
(vii) LLP Name.
Steps to incorporate LLP:
1. Name reservation:

 The first step to incorporate Limited Liability Partnership (LLP) is reservation of name of
LLP.

 Applicant has to file e-Form 1, for ascertaining availability and reservation of the name of
a LLP business.
2. Incorporate LLP:

 After reserving a name, user has to file e- Form 2 for incorporating a new Limited Liability
Partnership (LLP).

 e-Form 2 contains the details of LLP proposed to be incorporated, partners’/ designated

partners’ details and consent of the partners/designated partners to act as partners/
designated partners
3. LLP Agreement

 Execution of LLP Agreement is mandatory as per Section 23 of the Act.

 LLP Agreement is required to be filed with the registrar in e-Form 3 within 30 days of
incorporation of LLP.

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Answer. 3
(a) (I) Rights which can be enjoyed by a minor partner:
(i) A minor partner has a right to his agreed share of the profits and of the firm.
(ii) He can have access to, inspect and copy the accounts of the firm.
(iii) He can sue the partners for accounts or for payment of his share but only when severing
his connection with the firm, and not otherwise.
(iv) On attaining majority, he may within 6 months elect to become a partner or not to
become a partner. If he elects to become a partner, then he is entitled to the share to
which he was entitled as a minor. If he does not, then his share is not liable for any acts
of the firm after the date of the public notice served to that effect.

(II) A. (i) Liabilities of a minor partner before attaining majority:

(a) The liability of the minor is confined only to the extent of his share in the profits
and the property of the firm.
(b) Minor has no personal liability for the debts of the firm incurred during his
minority.
(c) Minor cannot be declared insolvent, but if the firm is declared insolvent his share
in the firm vests in the Official Receiver/ Assignee.
(ii) Liabilities of a minor partner after attaining majority:
Within 6 months of his attaining majority or on his obtaining knowledge that he had been
admitted to the benefits of partnership, whichever date is later, the minor partner has to
decide whether he shall remain a partner or leave the firm.
Where he has elected not to become partner he may give public notice that he has elected
not to become partner and such notice shall determine his position as regards the firm.
If he fails to give such notice he shall become a partner in the firm on the expiry of the
said six months.
OR
B. (i) When he becomes partner: If the minor becomes a partner on his own willingness or by
his failure to give the public notice within specified time, his rights and liabilities as given
in Section 30(7) of the Indian Partnership Act, 1932, are as follows:
(a) He becomes personally liable to third parties for all acts of the firm done since he
was admitted to the benefits of partnership.
(b) His share in the property and the profits of the firm remains the same to which
he was entitled as a minor.
(ii) When he elects not to become a partner:
(a) His rights and liabilities continue to be those of a minor up to the date of giving
public notice.
(b) His share shall not be liable for any acts of the firm done after the date of the
notice.
(c) He shall be entitled to sue the partners for his share of the property and profits.
It may be noted that such minor shall give notice to the Registrar that he has or
has not become a partner.

(b) (i) Parties must intend to create legal obligations: There must be an intention on the part of the parties to
create legal relationship between them. Social or domestic type of agreements are not enforceable in
court of law and hence they do not result into contracts.
In the given question, Mr. Ramesh promised to pay ` 50,000 to his wife so that she can spend the same
on her birthday. However, subsequently, Mr. Ramesh failed to fulfil the promise, for which Mrs. Lali
wants to file a suit against Mr. Ramesh. Here, in the given circumstance wife will not be able to recover
the amount as it was a social agreement and the parties did not intend to create any legal relations.

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 (ii) The offer should be distinguished from an invitation to offer. An offer is definite and capable of
converting an intention in to a contract. Whereas an invitation to an offer is only a circulation of an
offer, it is an attempt to induce offers and precedes a definite offer. Where a party, without expressing
his final willingness, proposes certain terms on which he is willing to negotiate, he does not make an
offer, but invites only the other party to make an offer on those terms. This is the basic distinction
between offer and invitation to offer.
The display of articles with a price in it in a self-service shop is merely an invitation to offer. It is in no
sense an offer for sale, the acceptance of which constitutes a contract. In this case, Ms. Lovely by
selecting the dress and approaching the shopkeeper for payment simply made an offer to buy the dress
selected by her. If the shopkeeper does not accept the price, the interested buyer cannot compel him
to sell.

Answer. 4
(a) Caveat Emptor
In case of sale of goods, the doctrine ‘Caveat Emptor’ means ‘let the buyer beware’. When sellers display
their goods in the open market, it is for the buyers to make a proper selection or choice of the goods.
If the goods turn out to be defective, he cannot hold the seller liable. The seller is in no way responsible
for the bad selection of the buyer. The seller is not bound to disclose the defects in the goods which he
is selling.
Exceptions: Following are the exceptions to the doctrine of Caveat Emptor:
1. Fitness as to quality or use: Where the buyer makes known to the seller the particular purpose
for which the goods are required, so as to show that he relies on the seller’s skill or judgment
and the goods are of a description which is in the course of seller’s business to supply, it is the
duty of the seller to supply such goods as are reasonably fit for that purpose [Section 16 (1) of
the Sales of Goods Act, 1930].
2. Goods purchased under patent or brand name: In case where the goods are purchased under its
patent name or brand name, there is no implied condition that the goods shall be fit for any
particular purpose [Section 16(1)].
3. Goods sold by description: Where the goods are sold by description there is an implied condition
that the goods shall correspond with the description [Section 15]. If it is not so then seller is
responsible.
4. Goods of Merchantable Quality: Where the goods are bought by description from a seller who
deals in goods of that description there is an implied condition that the goods shall be of
merchantable quality. The rule of Caveat Emptor is not applicable. But where the buyer has
examined the goods this rule shall apply if the defects were such which ought to have not been
revealed by ordinary examination [Section 16(2)].
5. Sale by sample: Where the goods are bought by sample, this rule of Caveat Emptor does not apply
if the bulk does not correspond with the sample [Section 17].
6. Goods by sample as well as description: Where the goods are bought by sample as well as
description, the rule of Caveat Emptor is not applicable in case the goods do not correspond with
both the sample and description or either of the condition [Section 15].
7. Trade Usage: An implied warranty or condition as to quality or fitness for a particular purpose
may be annexed by the usage of trade and if the seller deviates from that, this rule of Caveat
Emptor is not applicable [Section 16(3)].
8. Seller actively conceals a defect or is guilty of fraud: Where the seller sells the goods by making
some misrepresentation or fraud and the buyer relies on it or when the seller actively conceals
some defect in the goods so that the same could not be discovered by the buyer on a reasonable
examination, then the rule of Caveat Emptor will not apply. In such a case the buyer has a right
to avoid the contract and claim damages.

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 (b) (i) Generally, the effect of the death of a partner is the dissolution of the partnership, but the rule in regard
to the dissolution of the partnership, by death of partner, is subject to a contract between the parties
and the partners are competent to agree that the death of one will not have the effect of dissolving the
partnership as regards the surviving partners unless the firm consists of only two partners. In order
that the estate of the deceased partner may be absolved from liability for the future obligations of the
firm, it is not necessary to give any notice either to the public or the persons having dealings with the
firm.
In the light of the provisions of the Act and the facts of the question, Mr. X (creditor) can have only a
personal decree against the surviving partners (Mr. A and Mr. B) and a decree against the partnership
assets in the hands of those partners. A suit for goods sold and delivered would not lie against the
representatives of the deceased partner. Hence, the legal heirs of Mr. C cannot be held liable for the
dues towards Mr. X.
Analyses the above situation in terms of the provisions of the Indian Partnership Act, 1932 and decide
whether the legal heirs of Mr. C can also be held liable for the dues towards Mr. X.
(ii) A retiring partner continues to be liable to third party for acts of the firm after his retirement until
public notice of his retirement has been given either by himself or by any other partner. But the retired
partner will not be liable to any third party if the latter deals with the firm without knowing that the
former was partner.
Also, if the partnership is at will, the partner by giving notice in writing to all the other partners of his
intention to retire will be deemed to be relieved as a partner without giving a public notice to this
effect.
Also, as per section 28 of the Indian Partnership Act, 1932, where a man holds himself out as a partner,
or allows others to do it, he is then stopped from denying the character he has assumed and upon the
faith of which creditors may be presumed to have acted.
In the light of the provisions of the Act and facts of the case, Mr. P is also liable to Mr. X.
(7 Marks)
Answer. 5
(a) 1. According to section 44 of the Sales of Goods Act, 1932, when the seller is ready and willing to deliver
the goods and requests the buyer to take delivery, and the buyer does not within a reasonable time
after such request take delivery of the goods, he is liable to the seller for any loss occasioned by his
neglect or refusal to take delivery and also for a reasonable charge for the care and custody of the
goods.
The property in the goods or beneficial right in the goods passes to the buyer at appoint of time
depending upon ascertainment, appropriation and delivery of goods. Risk of loss of goods prima facie
follows the passing of property in goods. Goods remain at the seller's risk unless the property there in
is transferred to the buyer, but after transfer of property therein to the buyer the goods are at the
buyer's risk whether delivery has been made or not.
In the given case, since Mr. G has already intimated Mr. H, that he wanted to store some other goods
and thus Mr. H should take the delivery of goods kept in the godown of Mr. G, the loss of goods damaged
should be borne by Mr. H.
2. If the price of the goods would not have settled in cash and some amount would have been pending
then Mr. G will be treated as an unpaid seller and he can enforce the following rights against the goods
as well as against the buyer personally:
(a) Where under a contract of sale the property in the goods has passed to the buyer and the buyer
wrongfully neglects or refuses to pay for the goods according to the terms of the contract, the
seller may sue him for the price of the goods. [Section 55(1) of the Sales of Goods Act, 1930]
(b) Where under a contract of sale the price is payable on a day certain irrespective of delivery and
the buyer wrongfully neglects or refuses to pay such price, the seller may sue him for the price
although the property in the goods has not passed and the goods have not been appropriated
to the contract. [Section 55(2) of the Sales of Goods Act, 1930].

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 (b) Corporate Veil refers to a legal concept whereby the company is identified separately from the
members of the company.
However, this veil can be lifted which means looking behind the company as a legal person, i.e.,
disregarding the corporate entity and paying regard, instead, to the realities behind the legal facade.
Where the Courts ignore the company, and concern themselves directly with the members or
managers, the corporate veil may be said to have been lifted. Only in appropriate circumstances, the
Courts are willing to lift the corporate veil and that too, when questions of control are involved rather
than merely a question of ownership.
Lifting of Corporate Veil
The following are the cases where company law disregards the principle of corporate personality or
the principle that the company is a legal entity distinct and separate from its shareholders or members:
 Trading with enemy: If the public interest is likely to be in jeopardy, the Court may be willing to
crack the corporate shell
 Where corporate entity is used to evade or circumvent tax, the corporate veil may be lifted
 Where companies form other companies as their subsidiaries to act as their agent
 Company is formed to circumvent welfare of employees
 Where the device of incorporation is adopted for some illegal or improper purpose: Where the
device of incorporation is adopted for some illegal or improper purpose, e.g., to defeat or
circumvent law, to defraud creditors or to avoid legal obligations.

Answer. 6
(a) Modes of revocation of Offer
(i) By notice of revocation
(ii) By lapse of time: The time for acceptance can lapse if the acceptance is not given within the
specified time and where no time is specified, then within a reasonable time.
(iii) By non-fulfillment of condition precedent: Where the acceptor fails to fulfill a condition
precedent to acceptance the proposal gets revoked.
(iv) By death or insanity: Death or insanity of the proposer would result in automatic revocation of
the proposal but only if the fact of death or insanity comes to the knowledge of the acceptor.
(v) By counter offer
(vi) By the non- acceptance of the offer according to the prescribed or usual mode
(vii) By subsequent illegality

(b) Dissolution by the Court (Section 44 of the Indian Partnership Act, 1932):
Court may, at the suit of the partner, dissolve a firm on any of the following ground:
(1) Insanity/unsound mind: Where a partner (not a sleeping partner) has become of unsound
mind, the court may dissolve the firm on a suit of the other partners or by the next friend of the
insane partner.
(2) Permanent incapacity: When a partner, other than the partner suing, has become in any way
permanently incapable of performing his duties as partner, then the court may dissolve the
firm. Such permanent incapacity may result from physical disability or illness etc.
(3) Misconduct: Where a partner, other than the partner suing, is guilty of conduct which is likely
to affect prejudicially the carrying on of business, the court may order for dissolution of the
firm, by giving regard to the nature of business.
(4) Persistent breach of agreement: Where a partner other than the partner suing, wilfully or
persistently commits breach of agreements relating to the management of the affairs of the
firm or the conduct of its business, or otherwise so conduct himself in matters relating to the
business that it is not reasonably practicable for other partners to carry on the business in
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 partnership with him, then the court may dissolve the firm at the instance of any of the
partners. Following comes in to category of breach of contract:
• Embezzlement,
• Keeping erroneous accounts
• Holding more cash than allowed
• Refusal to show accounts despite repeated request etc.
(5) Transfer of interest: Where a partner other than the partner suing, has transferred the whole
of his interest in the firm to a third party or has allowed his share to be charged or sold by the
court, in the recovery of arrears of land revenue, the court may dissolve the firm at the instance
of any other partner.
(6) Continuous/Perpetual losses: Where the business of the firm cannot be carried on except at a
loss in future also, the court may order for its dissolution.
(7) Just and equitable grounds: Where the court considers any other ground to be just and
equitable for the dissolution of the firm, it may dissolve a firm. The following are the cases for
the just and equitable grounds-
(i) Deadlock in the management.
(ii) Where the partners are not in talking terms between them.
(iii) Loss of substratum.
(iv) Gambling by a partner on a stock exchange.

(c) Doctrine of Indoor Management: The Doctrine of Indoor Management is the exception to the doctrine
of constructive notice. The doctrine of constructive notice does not mean that outsiders are deemed to
have notice of the internal affairs of the company. For instance, if an act is authorised by the articles or
memorandum, an outsider is entitled to assume that all the detailed formalities for doing that act have
been observed.
The doctrine of Indoor Management is important to persons dealing with a company through its
directors or other persons. They are entitled to assume that the acts of the directors or other officers
of the company are validly performed, if they are within the scope of their apparent authority. So long
as an act is valid under the articles, if done in a particular manner, an outsider dealing with the
company is entitled to assume that it has been done in the manner required.
In the given question, Mr. X has made payment to Mr. Z and he (Mr. Z) gave to receipt of the same to
Mr. X. Thus, it will be rightful on part of Mr. X to assume that Mr. Z was also authorised to receive
money on behalf of the company. Hence, Mr. X will be free from liability for payment of goods
purchased from M/s ABC Limited, as he has paid amount due to an employee of the company.