SEM 1 - BUSINESS LAW
SEM 1 - BUSINESS LAW
SEM 1 - BUSINESS LAW
B M
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Y
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Business Law
V I D H I S H A H
C O N T E N T S
01 The Indian Contract Act 1872: Introduction to Law of Contract - Agreements & Contracts.
02 The Indian Contract Act 1872: Introduction to Law of Contract - Capacity of Parties to
Contract.
03 Free Consent and Contract.
04 Consideration - Lawful Consideration and Lawful Object.
05 Breach of Contract & Remedies for Breach of Contract.
06 Sale of Goods Act.
07 Earn Condition and Warranty (Section 11-17).
MODULE 2
11 Company Law.
MODULE 4
Modules at a Glance
No. of
Sr.No Modules
Lectures
03 Company Law. 15
Total - 60 lectures
Sr.No Modules / Units
Company Law.
03 • Company Law: What is company? – Incorporation of company – MOA, AOA,
Reference books
Business law
• Elements of mercantile Law – N.D.Kapoor
• Business Law – P.C. Tulsian
• Business Law – SS Gulshan
• Company Law – Dr.Avtar Singh
• Indian contract Act – Dr.Avtar Singh
• Law of Intellectual Property-V.K-Taraporevala
1. THE INDIAN CONTRACT ACT 1872 : INTRODUCTION TO LAW OF CONTRACT
- AGREEMENTS & CONTRACTS
Unit Structure :
1.0 Objectives
1.1 Introduction
1.2 Meaning of Agreements
1.3 Meaning of Contracts
1.4 Essential Elements of Valid Contract
1.5 Summary
1.6 Questions
1.0 OBJECTIVES
After studying the unit, the students will be able to:
• Understand the meaning of Law.
• Know the meaning of Agreement and kinds of Agreement.
• Explain the meaning Contract and essentials of valid contract.
1.1 INTRODUCTION
Business law may be defined as that branch of legal system that regulates business activates
and provides for an orderly conduct of business affairs and also for settlement of legitimate
disputes in a just and systematic manner. In commercial and ordinary life, promises are
made. Promise arises out of the acceptance of an offer or proposal. Sometimes, promises are
performed, sometimes breach is committed. The Law of Contract deals with such promises
which create legal obligations. This excludes those promises made in common life which may
be morally binding but create no legal obligation (binding). These promises are made without
a view to obtain the assent of the other.
The Law of Contract creates jus in personam and not jus in rem. Right in personam means a
right against a particular person or persons. Right in Rem on the other hand, is available
against the whole world.
‘Law in simple term means ‘rules or the system of rules which a particular country or
community recognizes as regulating the actions of its members and which it may enforce by
the imposition of penalties.
It is a very wide term and includes different sets of rules regulating external human actions
and conduct of individuals in their dealing with other individuals and with the Government.
Definition of Law:
Salmond defined law as “the body of principles recognized and applied by the State in the
administration of justice”
Holland defined law as “rule of external human action enforced by Sovereign Political
Authority”.
Austin has defined law as “A law is a rule of conduct imposed and enforced by the Sovereign”.
The Indian Contract Act was passed and implemented to control various kinds of commercial
and business activities. It deals with general principals of the Law of Contract and Special
Contract. The Contract Act came into force on 1stSeptember 1872. The act is applicable to the
whole of India except for the State of Jammu and Kashmir. The preamble of the Contract Act
states where it is expedient to define and amend certain parts of the law relating to contracts.
Therefore, this act is not a complete code of contracts.
The Law of Contract is the most important branch Business Law. It plays an important role in
our day to day life and more in case of Trade, Commerce and Industry. The partnership Act, The
sale of Goods Act, The Maharashtra Co-Operative Societies Act, The Negotiable Instruments Act,
The Companies Act, Corporate Laws, The Consumer Protection act belongs to the law of contract
but for technical reason are covered by separate Act.
Meaning of Business Law:
Business law may be defined as that branch of legal system that regulates business activates
and provides for an orderly conduct of business affairs and for settlement of genuine disputes
in a systematic manner. In commercial and ordinary life, promises are made. Promise arises
out of the acceptance of an offer or proposal. Sometimes, promises are performed, sometimes
breach is committed. The Law of Contract deals with such promises which create legal
obligations. This excludes those promises made in common life which may be morally binding
but create no legal obligation. These promises are made without a view to obtain the assent of
the other. No value is given to such promises made. Such promises are not covered by the Indian
Contract Act except for those provides under section 24 of the Act.
Certain promise do not create legal obligation. Promises which do not give rise to legal
obligations are not contracts. For example, A promise B to attend the dinner and fails to
attend. This promise certainly does not create a legal obligation on the part of A to enable B
to sue A for the price of non- consumed food. Law of Contract thus deals with agreements
which create obligation. The Law of Contract creates jus in personam and not jus in rem.
Right in personam means a right against a particular person or persons. Right in Rem on
the other hand, is available against the whole world.
Examples:
01. Amit Sells his Vehicle to Balram for Rs. 2 lakh. Amit has right to recover the price of the car
from Balram only. The right of Amit is a ‘‘right in personam’’ i.e against a particular person
Balram. This is jus in personam.
02. Savitri buys a Car and becomes the owner of the car. She has right to have a quiet
possession of the car and enjoy against the whole world. Nobody in the world can disturb her
right. The right of Savitri is jus in rem, i,e right against the whole world.
proposes to another, and the later agrees to the offer or proposal made. This results in an
agreement.
Example: P offers to take Q for Movie and Q agrees to with P this results in an agreement. in
the above example. P may be called an ‘Offeror’ or ‘Proposer’ or ‘Promisor’ While Q may be
Agreement can also be a set of Promises, like ‘ P’ offers to take ‘Q’ for movie and ‘Q’ agrees to
take ‘P’ to a restaurant after the show. Both agree. The scope of an agreement is infinite, as
one can enter into any kind of an agreement be it legal, illegal, impossible to perform etc.
Though one can enter into any kind of agreement, all agreements may not be enforceable in
the court of law if any party does not fulfill his obligation. In the above example if ‘Q’ fails to
turn up at the thereafter agreeing to come. ‘P’ cannot go to the court. On the other hand,
contract is an agreement which is enforceable. So Contract is an offer which when accepted
is enforceable in the court of law, if any of the party backs out of his obligation.
Hence : Contract = Offer + Acceptance+ Enforceability What is Enforceability?
It means an agreement which create some legal obligation; if this agreement is not followed
by any party to contract, he can be sued.
KINDS OF AGREEMENT :
01 Valid Agreement -
A valid agreement is one which is enforceable by law.
02 Void Agreement -
An agreement not enforceable by law is said to be void [U/s 2(g)]. It has not legal existence at
all and is without any legal effect. It does not give rise to any rights and obligations. Unlawful
agreements are examples of void agreements. A Void agreement is not enforceable by law as
they are opposed to the public policy like agreements in restraints of trade or in restraint of
marriage or in restraint of legal proceedings.
03 Enforceable Agreement -
A valid agreement is one which is enforceable by law.
04 Voidable Agreement -
A voidable agreement is one which is enforceable by law at the option of one or more of the
parties thereto but not at the option of the other or others. A Voidable agreement is valid so
long as it is not avoided by the party entitled to do so.
05 Unenforceable Agreement -
An unenforceable agreement is valid in law but is incapable of proof because of some
technical defect, for example, Promissory note which is not at all stamped or is insufficiently
stamped. Law recognizes the validity of the promissory note but cannot enforce the same due
An illegal agreement is something against the law and public policy. It is void ab-inito. Illegal
agreement often involves a commission of crime. They are opposed to the public morals and
as such, parties to such agreements are punishable under Indian Penal Code (IPC).
01 Offer and Acceptance.- In order to create a valid contract, there must be a ‘lawful offer’ by one
party and ‘lawful acceptance’ of the same by the other party.
02 Intention to Create Legal Relationship.- In case, there is no such intention on the part of
parties, there is no contract. Agreements of social or domestic nature do not contemplate
legal relations.
For Example: • P invites Q to have a dinner and Q accepts it. If P fails to serve the dinner, Q
cannot sue ‘P’ for non-performance. The invitation for dinner is a social agreement.
• An agreement to have a cup of tea at a friend’s house is a social agreement. A friendly
agreement cannot be called Contract.
• ‘A’ gives a promise to his son to give him a pocket allowance of Rupees one hundred every
month. In case A fails or refuses to give his son the promised amount, his son has no remedy
against A.
Case: -[Balfour vs. Balfour(1919)2 K.B.571].
Facts of the Case: A husband agreed to pay £30 to his wife every month while he was abroad.
As he failed to pay the promised amount, his wife sued him for the recovery of the amount.
Held: She could not recover as it was a social agreement and the parties did not intend to
create any legal relations.
03 Lawful Consideration:
In other words of Pollock, “Consideration is the price for which the promise of the another is
brought. “consideration is known as quid pro-quo or something in return. Consideration
must be real and lawful. An agreement to do something for others without getting
anything in return is not enforceable.
Example: P promises to pay Rs.1,00,000/- on a certain date to Q without any promise in
exchange. This is not a valid contract.
Example : A agrees to sell his pen to B for Rs.300/- . Here for A, the consideration for the
watch is the money he gets from B and for B, the consideration for the money he gives, is the
watch.
• Consideration may be …
• In cash or kind
• A promise to do or not to do something
04 Capacity of parties:
The parties to an agreement must be competent t contract. If either of the parties does not
have the capacity to contract, the contract is not valid.
According the following persons are incompetent to contract.
(a) Minors
(b) Persons of unsound mind, and
(c) Persons disqualified by law to which they are subject.
05 Free Consent:
‘Consent’ means the parties must have agreed upon the same thing in the same sense. A
contract is made when one person makes an offer and another person accepts the offer. This
acceptance of the offer should be made without any force or threat or coercion.
According to Section 14, Consent is said to be free when it is not caused by-(a) Coercion (b)
Undue influence (c) Fraud (d) Mis-representation, (e) Mistake.
An agreement should be made by the free consent of the parties.
06 Lawful Object:
The object of an agreement must be valid. Object has nothing to do with consideration. It
means the purpose or design of the contract. Thus, when one hires a house for use as a
gambling house, the object of the contract is to run a gambling house.
For Example: A promised to pay Rs.2,00,000/- to B to kill Q. The killing of a person is
punishable under the IPC. Therefore, the promise is unlawful and void.
The Object is said to be unlawful if-
(a) It is forbidden by law;
(b) It is of such nature that if permitted it would defeat the provision of any law;
(c) It is fraudulent;
(d) It involves an injury to the person or property of any other;
(e) The court regards it as immoral or opposed to public policy.
07 Legal Formalities:
An oral Contract is a perfectly valid contract, expect in those cases where writing, registration
etc. is required by some statute. In India writing is required in cases of sale, mortgage, lease
and gift of immovable property, negotiable instruments; memorandum and articles of
association of a company, etc. Registration is required in cases of documents coming within
the scope of section 17 of the Registration Act.
08 Certainty of Meaning:
According to Section 29,”Agreement the meaning of which is not certain or capable of being
made certain are void.” An agreement contains terms as decided by the parties. The terms of
agreement must be certain and unambiguous. If the terms of an agreement are uncertain, it
is not a valid contract.For Example: A agreed to pay Rs.3 lakh to B for an ultra-modern
decoration of his drawn room. The agreement is void because the
meaning of the term ‘ultra- modern’ is not certain.However, an agreement to agree is not a
concluded contract [Punit Beriwala v. Suva Sanyal AIR 1998 Cal. 44]
09 Possibility of Performance:
If the act is impossible in itself, physically or legally, if cannot be enforced at law.
For Example: Mr. A agrees with B to discover treasure by magic. Such Agreements are not
enforceable.
Not Declared to be void or Illegal:
10 The agreement though satisfying all the conditions for a valid contract must not have been
expressly declared void by any law in force in the country. Agreements mentioned in Section
24 to 30 of the Act have been expressly declared to be void for example agreements in
restraint of trade, marriage, legal proceedings etc. All the elements mentioned above must be
present, in order to make a valid contract. If any one of them is absent the agreement does
not become a contract.
1.5 SUMMARY
• Law of Contract is that branch of law which deals with making of legally valid agreements
and for interpreting these agreements.
• Every promise and set of promises, forming the consideration for each other is an
agreement.
• Contract = Offer + Acceptance+ Enforceability.
1.6 QUESTIONS
01 What is an agreement?
02 Distinguish between Agreement and Contract.
03 Distinguish between Void Contract and Voidable Contract.
04 Enumerate the essentials of Valid Contract.
05 Explain the following terms: a} Business. b} Law. c} Agreement. d} Contract.
e} Voidable Argument. f} Void Argument. g} Illegal Arguement. h} Unenforceable Agreement.
2. THE INDIAN CONTRACT ACT 1872: INTRODUCTION TO LAW OF CONTRACT -
CAPACITY OF PARTIES TO CONTRACT
Unit Structure :
2.0 Objectives.
2.1 Introduction.
2.2 Meaning of Capacity.
2.3 Minor's Contracts.
2.4 Agreements by persons of unsound mind.
2.5 Persons Disqualified by Law.
2.6 Summary.
2.7 Questions.
2.0 OBJECTIVES
After studying the unit, the students will be able to:
• Understand the meaning capacity of parties.
• Know the effects of agreements/contract entered into by incompetent persons.
2.1 INTRODUCTION
Section 11 of the Contract Act deals with the competency of parties and provides that "every
person is competent to contract who is of the age of majority according to the law to which he
is subject, and who is of sound mind and is not disqualified from disqualified from
Although the above-mentioned categories of persons are not competent to contract, yet they
may sometimes be making some bargains, taking some loans, or be supplied with some
goods by third parties, or be conferred with some benefits etc., the position of such person in
competent and Section 11 says that a minor is not a competent. But either section makes it
clear whether the contract entered into by a minor is void or voidable. Till 1903, court in India
wee not unanimous on this point the privy council made it perfectly clear that a minor is not
competent to a contract and that a contract by minor is void ab initio.The landmark case
relating to the effects of minor’s agreements is..
02 No ratification.
An agreement with the minor is completely void. A minor cannot ratify the agreement even
on attaining majority, because a void agreement cannot be ratified. A person who is not
competent authorize an act cannot give it validity by ratifying.
06 No insolvency.
A minor cannot be declared insolvent as he is incapable of contracting debts and dues are
payable from the personal properties of minor and he is not personally liable.
07 Partnership.
A minor being incompetent to contract cannot be a partner in a partnership firm, but under
Section 30 of the Indian Contract Act , he can be admitted to the benefits of partnership.
09 Minor as Shareholder.
A minor, being incompetent to contract cannot be a shareholder of the company. If by
mistake he become a member, the company can rescind the transaction and remove his
name from register. But, a minor may, acting through his lawful guardian become a
shareholder by transfer or transmission of fully paid shares to him.
10 Minor’s Liability for Necessaries.
A minor who enters into a contract to purchase food, shelter, clothing, medical attention,
and/or there goods or services necessary to maintain the minor’s well -being will generally
be liable for the reasonable value of those goods and services even if the minor
disaffirms the contract.
The case of necessaries supplied to a minor or to any other person whom such minor is
legally bound to support is governed by section 68 of the Indian Contract Act. A claim for
necessaries supplied to a minor is enforceable by law. But a minor not liable for any price
that he may promise and never for more than the value of the necessaries. There is no
personal liability of the minor, but only his property is liable.
2.4 AGREEMENTS BY PERSONS OF UNSOUND MIND.
As stated earlier, as per Section 11 of the Contract Act, for a valid contract, it is necessary that
each party to it must have a 'sound mind'.
Meaning of Sound Mind
Section 12 of the Contract Act defines the term 'sound mind' as follows: "A person is said to be
of sound mind for the purpose of making a contract, if, at the time when he makes it, he is
capable of understanding it and of forming a rational judgments as to its effects upon his
interests."
According to this Section, therefore, the person entering into the contract must be a person
who understands what he is doing and is able to form a rational judgment as to whether
what he is about to do is in his interest or not. The Section further states that:
(i) A person who is usually of unsound mind, but occasionally of sound mind, may make a
contract when he is of sound mind." Thus a patient in a lunatic asylum, who is at intervals of
(ii) A person who is usually of sound mind, but occasionally of unsound mind, may not make a
contract when he is of unsound mind." Thus, a same man, who is delirious from fever, or
who is so drunk that he cannot understand the terms of a contract, or form a rational
judgment as to its effect on his interest, cannot contract whilst such delirium or
drunkenness lasts.
Unsoundness of mind may arise from:
• Idiocy – (Congenital- by birth) : It is God given and permanent and congenital (by birth), and
therefore he can never understand the contract and make rational judgments. The mental
powers of an idiot are completely absent because of lack of development of the brain.
• Lunacy or Insanity - It is a disease of the brain. A lunatic loses the use of his reason due to
some mental strain or disease. Of course he may have lucid intervals of sanity.
• Drunkenness – Mere drinking is not hindrance to enter into a contract. But drunken state
of mind is a hindrance to enter into a contract. When a person is so drunk that he cannot
form rational judgments about the terms and conditions of the contract then such
contract is a void contract. But if he is at such a state of mind where he has consumed
alcohol but he can still understand the terms and conditions of the contract then that
contract is valid as he could understand the terms and conditions of the contract, that is why
permanently of unsound mind. He can enter into a contract during lucid intervals, i, e
during a period when he is not of sound mind.
The third type of incompetent persons, as per section 11, are those who are “disqualified from
contracting by any law to which they are subject.”
Who are disqualified Persons?
01 Alien Enemies:
An alien that is citizen of a foreign country living in India can enter into contracts with
citizens of India during peace time, by observing the restrictions imposed by the government
in that respect. On the declaration of a war between his country and India, he will become
an alien enemy and cannot enter into contracts.
02 Convicts:
A convict is a person, who is sentenced by any competent court to the imprisonment. A
convict cannot enter into a valid contract while he was undergoing sentence, His
incompetency is over, when the period of his sentence is over or his punishment is
suspended.
03 Foreign sovereigns and ambassadors:
While entering into contracts with foreign sovereigns and ambassadors, one must be
cautious because whereas they can sue others to enforce the contracts entered upon with
them, they cannot be sued without obtaining the prior sanction of the central Government as
they are in a privileged position and are ordinarily considered incompetent to contract.
04 Company/ Corporation:
Company is also a person in the eyes of law. It is the creation of law for performing certain
works. Such person has less significant capacity in comparison to natural person to make a
contract. It is empowered by its memorandum. Corporation or Company can involve in to a
contract within the jurisdiction of the memorandum and article of association if they cross
the jurisdiction of memorandum and article of association that would be void.
2.6 SUMMARY.
Following persons are not competent to contract
(a) A person who is a minor. (b) A person of unsound mind.(c) A person who is disqualified
from making a contract.
EFFECTS OF MINORS AGREEMENTS.
A minor's agreement being void is wholly devoid of all effects. When there is no contract there
contracting by any law to which they are subject.” Who are disqualified Persons? 1. Alien
Enemies:2. Convicts:3. Foreign sovereigns and ambassadors: 4. Company/ Corporation:
2.7 QUESTIONS.
Unit Structure :
3.0 Objectives.
3.1 Introduction : Consent.
3.2 Free Consent.
3.3 Coercion (Section 15).
3.4 Undue Influence (Section 16).
3.5 Fraud (Section 17).
3.6 Misrepresentation (Section 18).
3.7 Mistake (Section 20).
3.8 Summary.
3.9 Questions.
3.0 OBJECTIVES.
After studying the unit the students will be able to:
• Know the meaning of consent
• Explain the meaning and effects of Coercion
• Know the Meaning and effects of Undue influence.
• Understand the meaning and effects of Misrepresentation.
• Know the Meaning and effects of Mistake.
• Explain the meaning and effects of fraud.
3.1 INTRODUCTION
Section 13 of Indian Contract Act “Consent” has defined as -Two or more persons are said to
consent when they agree upon the same thing in the same sense (i, e Consensus ad idem)
The word Consent means agreeing that something should be happen. An agreement is valid
only when it is the result of the free consent of all the parties to it.
• Undue influence, as defined in section 16, or (3) fraud, as defined in section 17, or (4).
• Misrepresentation, as defined in section 18, or
• Mistake, subject to the provisions of sections 20, 21 and 22. Consent is said to be so caused
when it would not have been given but for the existence of such coercion, undue influence,
fraud, misrepresentation or mistake.
Free consent is one of the most important essential elements of a valid contract. The term
free consent refers to meeting of free and fresh minds of two parties of an agreement when
two parties take and understand, purpose, subject matter and terms and conditions of the
agreement in the same sense it is free consent. Both of them must take things in the same
way. They must not understand it in different way.Two persons are said to consent, when
they agree upon the same thing in the same sense. It is also known as consensus-ad- idem,
threat. Since the marriage has been brought about by coercion, such marriage is not valid.
In simple words, coercion is the threat used by one party against another for compelling him
to enter an agreement against his or her will. Section 15 of the Indian Contract Act defines
coercion as the committing or threatening to commit any act forbidden by Indian Penal Code
or an unlawful detaining or threatening to detain, any property of any person with the
intention of inducing any person to enter into an agreement. It is immaterial whether the
Indian Penal Code is or not in force in the place where the coercion is employed. When a
person was forced to enter into a contract by use or under the threat of use of physical force
by the other person committing or threatening to commit any act forbidden by Indian Penal
Code, Coercion is said to have Free Consent and Contract been employed.
EFFECT OF COERCION ON A CONTRACT:
• The contact becomes voidable at the option of the aggrieved person/party, the aggrieved
party has two options may compel the other party for performance.
• If the aggrieved party decides to set aside the contract, he must compensate any benefits
received by him under such contract.
threatening to commit any act which is contrary to law. The act is forbidden by Indian Penal
Code Coercion can be exercised by contracting party or third party:
It does not always requires that only contracting party should exercise the coercion. Any third
party on behalf of him can also exercise the same,
For Example: Mr. Amar employs Mr. Tapori to bit Mr. Sojwal to make Mr. Sojwal part with
Rs. 1,00,000/-Intention of causing the other party to enter into a contract:
It is required, that the coercion must be committed with the intention to make the person to
enter into the contract by inducing the party wrongfully for obtaining assent or consent.
Meaning :
It is a wrong pressure put on someone which prevents that person from acting
independently. (Section 16(2)) States that “A person is deemed to be in a position to
dominate the will of another.
For Example-Spiritual adviser inducing his/her devotee to gift over the property for securing
“moksha”.
Undue influence means and includes:
Under undue influence a party is compelled to enter into an agreement against his own will
as a result of unfair persuasion by other party. It includes mental, moral and physical
domination that deprives or makes unable the person to take his own judgement.
In dealings between parent and child, husband and wife, attorney and client, Free Consent
and Contract or doctor and patient, undue influence is generally presumed to have been
exercised unless proven otherwise.
Following situation or circumstances, a person is deemed to be in a position to dominate the
will of others.
• Where he holds a real or apparent authority over the other. For example, an employer may
be deemed to be having authority over his employee.
• Master and Servant
absolutely, or if the party who was entitled to avoid it has received any benefit there under.
Only a party to the contract can avoid or rescind the contract. This right does not lie in the
hands of a third party.
Illustrations :
01 A’s son has forged B’s name on a promissory note. B, under threat of prosecuting A’s son,
obtains a bond from A, for the amount of the forged note. If B sues on this bond, the Court
may set it aside.
bond aside ordering B to repay Rs 100 with such interest as may seem just.
Basics Coercion Undue Influence
Meaning :
“Fraud” means and includes any act or an active concealment of material facts or
misrepresentation made knowingly by a party to a contract, or with his connivance, or by his
agent, with intent to deceive another party thereto of his agent or to induce him to enter into
the contract.“A false representation of fact made with the knowledge of its falsehood
without belief in truth with intention that it should be acted upon by the party and actually
inducing him to act upon it.”
Section 17 of the Contract Act states,
“Fraud means and any of the acts stated committed by a party to a contract or with his
connivance, or by his agent, with intent to deceive another party thereto or his agent, or to
induce him to enter into a contract.” It must have been committed by a party to the contract
or by his agent in order to deceive the other party.
Example 1: Mr. Shah purchases the lan d from Mr. Khan, who has already sold his land to Mr.
Rahul.
In this example, Mr. Khan had committed fraud because he did not tell to Mr. Shah that i have
false. According to Section 17, fraud means and includes any of the following acts done with
intent to deceive or to induce a person to enter into a contract.
duty to disclose it, it will be a case of fraud. Mere non- disclosure is not a fraud, where there
is no duty to disclose.
Active Concealment of
False representation.
Material facts.
ESSENTIAL
ELEMENTS OF
FRAUD
Actually Deceived. Suffered Loss.
duty to speak is such cases and silence does not amount to fraud. Similarly, there is no duty
to disclose facts which are within the knowledge of both parties.
Example : H sold to W some pings which to his knowledge suffering from fever. The pings
were sold ‘with all faults’ and H did not disclose the facts of fever to W. Held there was no
fraud. [Word v. Hobhs.) (1878) 4 AC 13]
Section 17 makes it clear that mere silence as to the facts likely to affect the willingness of a
person to enter into a contract is not fraud unless the circumstances of the case are such
that regard being had to them it is the duty of person keeping silence to speak, or unless
silence is equivalent to speech.
1 Mere silence is not fraud:
A person is not bound to disclose the defect of his articles.
Example: A sells by auction to B, a horse which A knows to be unsound. A says nothing to B
about the horse’s unsoundness. It is not fraud.
having any information regarding the subject-matter which is likely to affect the willingness
of the other party to enter into transactions, is bound to disclose the information.
Following contracts are included in this category:
1 Contracts of insurance:
In contracts of insurance, the insured is required to disclose all material facts concerning
the insurance which are likely to affect the risk and thus the willingness of the insurer.
Failure to do so will result in avoidance of the policy. The policy can be avoided even if the
mistake is innocent.
2 Contract of immovable property:
Under Sec. 55(i) (a) of the Transfer of Property Act, 1882, the seller is under an obligation to
disclose to the buyer any material defect in the property or in the seller’s title of which the
seller is aware and the buyer is not aware, nor he (Buyer) could know with ordinary care.
Example: A knows that there is a crack in the Furniture. He sells this Furniture to B but does
not disclose this defect to B. It is fraud .B can avoid the sale when he comes to know of the
defect.
3 Allotment of shares in companies:
Companies Act requires the directors to make fullest possible disclosure in the prospectus to
protect public interest, If the directors do not disclose the specified facts, the agreement to
take shares can be avoided.
4 Contract of marriage:
Each party to an agreement for marriage is duty bound to disclose every material fact,
otherwise the party is justified in breaking off the engagement.
When consent to an agreement is caused by fraud, the agreement is a contract voidable at the
option of the party whose consent was so caused. A party whose consent to an agreement was
caused by fraud has two remedies, namely:
• He may rescind the contract, or
• He may insist that the contract shall be performed and that he shall be put in the position in
which have been, if the representation made had been true.
Example: A fraudulently informs B that A’s estate is free from encumbrance. B thereupon
buys the estates. The estate is subject to a mortgage. B may avoid the contract or may insist
on its carried out and the mortgage debt repaid by A.
Apart from the above, the person defrauded may obtain rescission, restitution for damages.
The aforesaid remedies are subject to an exception. A contract cannot be avoided on the
ground of misrepresentation or silence amounting to fraud. If a party to whom an untrue or
misleading statement was made had the means of discovering the truth with reasonable
diligence. The party whose consent was obtained by fraud has the following rights:
In case of fraudulent silence, he cannot avoid if he had the means to discover the truth.
Thus, misrepresentation means false representation made innocently with an honest belief
as to its truth by a party without any intention to deceive.The leading case on this point is :
DERRY V. PEEK (1889)
Facts of the Case: A representation in the prospectus of the Company that the company has
been authorized by a special Act of Parliament to runs trams by steam or mechanical power.
The authority to use steam was, in fact, subject to the approval of the board of Trade, but no
mention was made of this. The Board refused consent and consequently the company was
wound up. The plaintiff having bought some shares, sued the directors for fraud. But they
were held not liable.There is no fraud and they were not guilty of fraud as they honestly
believed that once the parliament has authorized the use of steam, the consent of the board
was practically concluded.
Essential Requirements of Misrepresentation:
FRAUD MISREPRESENTATION
Defined Under Section 2 (17) of the Indian Defined Under Section 2 (18) of the Indian
Contract Act, 1872 Contract Act, 1872
Meaning :
Mistake may be defined under Section 20 of Indian Contract Act, 1872, as “an erroneous
belief about something”. If the agreement is carried under an erroneous belief, it cannot be
said that the parties enjoyed free consent i.e. both the parties shall understand the same
thing in the same sense.
Mistake may be of two types:
1 Mistake of law:
Mistake of law does not mean mistake in provisions of law but it means there is mistake in
understanding or interpreting the provisions of any law by the party to contract. Hence
mistake of law is where you are mistaken or ignorant about the law.
2 Mistake of fact:
A mistake of fact is just that: a mistake pertaining to some fact. For example, if you are 35
years old but I think you are 34, I have made a mistake of fact.A mistake of fact can act as a
defense. Mistake of fact can be further divided as bilateral and unilateral mistake.
A] Bilateral Mistake:
As per Section 20 of the Act, where both the parties to an agreement are under a mistake as
to a matter of fact essential to the agreement, the agreement shall be void”.
Example: A agrees to purchase B’s Car for Rs. 90,000/- as a consideration. The day before
execution of Contract the said car was destroyed by fire along with the garage. Both the party
was unaware of the fact and still want to make a contract. This is a bilateral mistake from
both the side and contract is not valid but void as the subject matter is destroyed.
B] Unilateral Mistake:
If the mistake is on the part of one person ( One of the parties to the contract) the contract is
valid.Example: Amita brought Pickle from the shop keeper a sample of which had been
shown to Amita. Erroneously Amita thought the pickle was old. The pickle was however new.
Hence bilateral mistake would avoid the contract whereas, unilateral mistake cannot.
Therefore, one party to the contract is under a mistake of fact, the contract is not voidable.
Unilateral mistakes do not affect the validity of the contract unless they concern some
A contract shall be void if a party to the contract without any fault of his own makes a
mistake about the changing nature of the contract. It may be because of blindness, illiteracy,
or of the person entered the contract or due to the tactics or deliberate misrepresentation as
horse had already died at the time of making of the Contract. Is it a valid contract? Why
Effects of Mistakes.
A contract is not voidable because it was caused by a mistake as to any law in force in India:
but a mistake as to law not in force in India has the same effect as a mistake of fact.
Illustration:
A and B make a contract grounded on the erroneous belief that a particular debt is barred by
It is expected that everyone is supposed to know the law of the land. Ignorance of law is no
excuse. If a person wants to avoid the contract for the reason that there was a mistake, the
relief will not be granted to him.
• Agreement void where both parties are under mistake as to matter of fact.
Examples:
• ‘A’ agrees to buy from ‘B’ a certain horse. The horse was dead at the time of the contract,
though both the party was aware of the fact. The agreement is void.
• ‘A’ being entitled to an estate for the property of ‘B’ , agrees to sell it to ‘C’ . ‘B ‘was dead at
the time of the agreement, but both the parties were ignorant of the fact. The agreement is
void.
When the type of mistake contemplated is section 20 is present in an agreement, the
Provisions are applicable under section Provisions are applicable under section
22. 20.
3.8 SUMMARY
• Section 13 of Indian Contract Act “Consent” has defined as -Two or more persons are said to
consent when they agree upon the same thing in the same sense (i, e Consensus ad idem)
• Consent must be free from Coercion, Misrepresentation, Fraud, Undue Influence, and
Mistake.
• “Coercion” is the committing, or threatening to commit, any act forbidden by the Indian
Penal Code under (45 of 1860),
• Undue Influence- “A person is deemed to be in a position to dominate the will of another.
• “Fraud” means and includes any act or an active concealment of Free Consent and Contract
material facts or misrepresentation made knowingly by a party to a contract.
• Therefore, Misrepresentation is a false statement which the person making it honestly,
believes to be true or which he does not know to be false.
• Mistake may be defined under Section 20 of Indian Contract Act, 1872, as “an erroneous
belief about something”.
3.9 QUESTIONS.
Unit Structure :
4.0 Objectives.
4.1 Introduction.
4.2 Meaning and Definitions & Importance of consideration.
4.3 Legal Rules of Consideration.
4.4 No Consideration No Contract Exceptions.
4.5 Types of Consideration.
4.0 OBJECTIVES.
After studying the unit, the students will be able to:
• Understand the meaning and definition of Consideration
• Know the essentials of valid consideration.
• Discuss the cases where an agreement though made without consideration will be valid.
• Explain the types of consideration.
• Know the meaning of Stranger to Contract and strange to consideration.
4.1 INTRODUCTION
Consideration is the foundation stone of every contract. The law enforces only those promises
which are made for valid consideration. Where one party promises to do something, it must
get something in return. This ‘something in return’ is called consideration. Consideration is
the life-blood of every contract.If a promise is to be enforced as creating legal obligations, the
law insists on the existence of consideration. A promise without consideration is null and void.
It is called a naked promise or “Nudum Pactum.” Thus, if A promise to pay B Rs. 1000 without
anything in return, this constitutes a bare promise and gives no right of action. For a contract
to be binding there must be valid consideration. Consideration is the promise given by both
parties as the “price” of entering into the agreement. Without consideration there will be no
contract.
For example, if Anil entered into an agreement with Bhanu for purchase of a Motor Car in
exchange of nothing. Here there is no contract as the consideration value is nil.
In other case Anju entered into an agreement with Manu for Purchase of Motor car for Rs.
80,000/-, here the motor car is consideration for Manju and Rs.80,000/- is consideration for
Anju. Hence here is a valid contract.
Consideration is in Latin term quid pro quo means something in return, it means Price for
the Promise.
abstained from dong or (ii) does or abstains from doing, or (iii) promises to do or to abstain
from doing something, such act or abstinence or promise is called a consideration for the
promise’.
Section 23 provides that agreement without consideration is void.
Definition : Consideration has been defined in many ways. According to pollock”
Consideration is the price for which the promise of some other is brought and the promise
thus given for value is enforceable.”
According to Section 2 (d) of the Indian Contract Act defines consideration as
(a) when at the desire of the promisor,
(b) the promise or any other person,
(c) has done or abstained from doing, or does or abstain from doing, or promises to do or
abstain from doing,
(d) something, such act or abstinence or promise is called a consideration for the promise.
Example:- A agrees to dell his horse to B for Rs. 1000. Here A’s promise to sell his horse is for
B’s consideration to pay Rs. 1000 is A’s consideration to sell his horse to B.
4.3 LEGAL RULES OF CONSIDERATION.
Presence of consideration is one of the requisites of Valid Contract. Consideration must be of
two directional natures. That means both parties should get benefited mutually. Then only the
Contract becomes capable of creating legal relations. Consideration may be in the form of
cash, goods, act or Abstinence.
“Economics”. Prof. Vinayak has done nothing at the desire of the appointing authority i,e
Promisor.
• The consideration which is sent before formation of contract is called past consideration.
• The consideration which gets passed at the time of formation of contract is called Present
Consideration.
• The Consideration which is to be passed in future i.e. after the contract is called Future
Consideration. As per Indian Law three types of considerations are Valid. But as per England
law Past Consideration is not valid.
Consideration must be lawful. Presence of unlawful consideration makes the contract illegal
and hence Void.
Example: There is a Contract between X and Z according to which Z has to murder Y for a
Consideration of Rs. 10000 from X. Here Consideration from Z to X is unlawful and it is illegal
contract.
5 Consideration must be real and not illusory:
Consideration must be real and of some value in the eyes of law. Consideration is not real
when it is uncertain illusory or when it is physically or legally impossible to perform. Hence
consideration should be possible to perform. An act does not recognize impossible
performance. It may be physically impossible or can be legal impossible.
Example: Ajay promises to discover treasure by magic if Atul pays him Rs.5000/-
Consideration from Ajay is void because it is impossible to perform the promise.
agreement made without consideration is void and is unenforceable except in certain cases.
Section 25 specifies the cases where an agreement though made without consideration will be
valid. They are as follow:
1 Natural love and affection [Sec. 25(1)]
(c) The promisor must be in existence at the time when the act was done;
(d) The promisor must agree now to compensate the promisee.
3 Time-barred debt [Sec. 25(3)]
A promise to pay a time-barred debt is also enforceable. But the promise must be in writing
and be signed by the promisor or his agent authorized in that behalf. The promise may be to
pay the whole or part of the debt. An oral promise to pay a time-barred debt is unenforceable.
4 Promise to Charities:
enforceable by law.
For Example: Shravan promises to pay Rs.50,000/- to the Management Committee of the
Hospital by way of donation. The Management on the basis of Shravan’s Promise, gets a
Water Purifier system installed in the Hospital at the cost of Rs. 45,000/- on credit. Now
Shravan refuses to pay the donation.In the above case Shravan will have to pay Rs. 45,000/- to
the school on account of donation as the management had incurred a liability on the faith of
Shravan. Here is valid contract even though the consideration is absent.
When something is done before the date of the agreement, at the desire of the promisor, it is
called ‘past consideration.
Example: A teaches the son of B at B’s request in the month of January, and in February B
promises to pay A a sum of Rs 200 for his services. The services of A will be past
consideration.
2 Present consideration.
Consideration which moves simultaneously with the promise, is called ‘present consideration’
or ‘executed consideration’.
Example : A sells and delivers a book to B, upon B’s promise to pay for it at a future date. The
consideration waiting from A is present or executed consideration since A has done his act of
delivering the book simultaneously with the promise of B.
3 Future Consideration.
When the consideration on both sides is to move at a future date, it is called ‘future
consideration’ or ‘executory consideration’. It consists of an exchange of promises and each
Unlawful consideration of object includes acts that are categorically punishable by the law.
This also includes those that the appropriate authorities restricted through various rules and
regulations.
Example: A received a license from the Excise Department Forest Department to sell a liquor
in a certain area. The authorities at the department told him he cannot pass on such interest
to another person. But the Excise Act has no such statute. So, A sold his interest to B and the
contract was held as valid.
Consideration / Object Defeats the Provisions of the Law.
When the contract is defeats the intention of the law and the court finds the actual intention of
the parties to agreement is to defeat the provisions of the law the said contract will keep aside
Agreement involving unlawful and fraudulent consideration or objects are void by nature.
For example: Amar decides to sell new born baby to Bankim which he had stolen from the
nearby maternity home and smuggle the outside the country. This is a fraudulent transaction
as so it is void. Now Bankim cannot recover the money under the law if Amar does not deliver
on his promise.
If Consideration is Immoral
If the court has regarded that the object or consideration is immoral, then such object and
consideration are treated as immoral.
For example
Arvind lent money to Mala to obtain a divorce from her husband Kumar. It was agreed once
Mala obtains the divorce Arvind would marry her. But the court passed the judgement that
Arvind cannot recover money from Mala since the contract is void on account of unlawful
consideration.
Consideration is Opposed to Public Policy
We prohibit certain contracts in the name of public policy for the betterment of the
community.
Examples:
4.7 SUMMARY.
• Consideration is the foundation stone of every contract. Where one party promises to do
something, it must get something in return. This ‘something in return’ is called
Unit Structure :
5.0 Objectives.
5.1 Introduction.
5.2 Meaning of Breach of Contract.
5.3 Remedies for Breach of Contract.
5.4 Summary.
5.5 Questions.
5.0 OBJECTIVES.
After studying the unit, the students will be able to:
• Understand meaning of performance of contract and Breach of Contract.
• Understand the remedies of breach of contract.
5.1 INTRODUCTION
An agreement enforceable by law is called contract. Each and all parties in the contract are
required to full fill their respective obligations to finalize the contract and if they fulfill their
respective obligations the contract is performed and the contract comes to an end. If the
parties to the contract denies to perform their promised obligation/s is known as contract is
discharged by breach.
In simple terms, a breach of contract occurs when promises are broken or someone fails to
provide required things that are included as the essential terms of the agreement.
Breach of Contract
Branch of contacts may be of two types:
1. Actual breach of contact.
2. Anticipatory breach of contact.
1 Actual breach:
Actual breach means promisor fails to perform the contractual obligation on due date of
performance. When a promisor fails or refuses to perform the promise upon the due date for
performance then it is called actual breach of contract.
Example: Dinkar Seth promise to supply 500 litter Oil to Ms Ranjana on the day of marriage
of her daughter falls on 06.06.2021. If he fails to supply on that day it lead to actual breach of
contract.
2 Anticipatory breach of contact:
It occurs when a party to executory contract declares his intension of not performing the
contract before the performance is due.
Example: A” agrees to sell crops to B” by 30th June 2021, however before the due date that is
on 28th June 2021, he wrote a letter to “B” stating his inability to deliver the crops as
promised.
When a promise is breached by any of the parties, means it is a breach of contract. So, when
either of the parties does not keep their end of the agreement or does not fulfil their obligation
as per the terms of the contract, it is a breach of contract. There are a remedies for breach of
contract available to the wronged party.
• Recession of Contract : When one of the parties to a contract does not perform his
obligations, then the other party can cancel/ rescind the contract and deny the
performance of his obligations. Provisions under section 65 of the Indian Contract Act, the
party that rescinds the contract must restore any benefits he got under the said agreement.
And section 75 states that the party that rescinds or cancels the contract is entitled to have
damages and/or compensation for such a cancellation.
• Sue for Damages : Section 73 provides that the party who had suffered, since the other
party has not kept the promises, can claim compensation for loss or damages resulted to
them in the normal course of business.Such damages will not be payable if the loss is
abnormal in nature, i.e. not in the ordinary course of business. There are two types of
damages according to the Act.
Damages for the Loss Suffered
‘Damages’ means that financial compensation collectable by the defaulting party to the
affected party for the loss suffered by him once the agreed contract was broken. Therefore,
the aggrieved party could bring an action for damages against the party who are guilty of the
breach The party is guilty of the Breach and is liable to pay damages/ compensation to the
aggrieved party.
Types of Damages :
Damages that arise within the normal course of events from the Breach of Contract are
referred to as normal damages.
2 Special Damages.
Special damages are those damages that are collectable for the loss arising on account of
some special or uncommon circumstances. That is, they undue the natural and probable
consequences of the Breach of the Contract. Special damages can be recovered only when the
other party, while signing the contract, is informed of the special circumstances which are
responsible for the special losses. Subsequent knowledge of special circumstances will
not create any special liability.
3 Exemplary or Vindictive Damages.
Such damages are awarded against the party who has committed a Breach of the Contract
with the thing of grueling the fallible as a defaulting party and to compensate the aggrieved
party. Generally, these damages are awarded just in case of action on loss
Examples:
1A libel was committed by an author and its publisher against a distinguished naval officer.
2. The bank disobeyed the customer’s order to stop payment of a particular cheque and as a
consequence another cheque for £ 25,000 was dishonored due to inadequate funds. The court
awarded £ 250 as damages to the plaintiff.
4 Nominal Damages.
These damages are in very less quantity. It is awarded merely to acknowledge the corrective
measures of the party to say damages for the Breach of the Contract. Sometimes, the
damages are not an adequate remedy for Breach of the Contract. In such cases, the Court
could, at the suit of the party not in Breach, direct the party in Breach to hold out his
promise as per the terms of the Contract.
Example: Aman contracted to purchase a Car from Bamman, a dealer. But he failed to
purchase the Car. However, the demand for the Car far exceeded the supply, and Bamman
could sell the Car agreed to be purchased without loss of profit. Bamman is entitled only to
nominal damages.
• Sue for Specific Performance.
The party in breach will actually have to carry out his duties according to the contract. In
certain cases, the courts may insist that the party carry out the agreement or perform in
accordance with agreed terms of contract.
If, any of the parties fails to perform the contract, the court may order them to act according
An injunction is an order or the court, like a decree for specific performance. It simply means
to prevent the person from doing something. An injunction is a court order restraining a
person from doing a particular act.
So, a court may grant an injunction to stop a party of a contract from doing something he
promised not to do. In a prohibitory injunction,
the court stops the commission of an act and in a binding injunction, it will stop the
continuance of an act that is unlawful.
• Quantum Meruit
Quantum meruit is a Latin phrase meaning “what one has earned”. In the context of contract
law, it means something along the lines of “reasonable value of services”
At times when one party of the contract is prevented or interrupted from completing his
performance of the contract by the other party, he can claim quantum meruit.
In this circumstances party must be paid a reasonable remuneration for the part of the
contract he has already performed. This could be the remuneration of the services he has
provided or the value of the work he has already done.
5.4 SUMMARY.
If the parties to the contract denies to perform their promised obligation/s is known as
contract is discharged by breach.
Types of Breach: 1. Actual breach of contact.2. Anticipatory breach of contact.
Types of Damages.
5.5 QUESTIONS.
1 What is a Breach of Contract?
2 Explain the remedies for breach of contract.
3 Write a note on various types of damages.
6. SALE OF GOODS ACT.
Unit Structure :
6.0 Objectives.
6.1 Introduction.
6.2 Scope of the Acts.
6.3 Fundamental Concepts.
6.4 Formation of Contract of sale/ Essentials of Valid Sales.
6.5 Distinguish Between a Sale and an agreement to Sell.
6.6 Summary.
6.7 Questions.
6.0 OBJECTIVES.
After studying the unit, the students will be able to:
• Define the fundamental concepts in the Sale of Goods ACT.
• Explain the essentials of Valid Sales.
• Distinguish between Sale and Agreement to Sale.
6.1 INTRODUCTION
The sale of Goods Act 1930 deals with the law relating to sale of goods. The term Goods means
every kind of movable property, other than Money and Actionable claims. The sale of Goods
Act, 1930 is mainly based on the English Sale of goods Act, 1893. Before the Sale of Goods
Act,1930, the law relating to sale of goods was covered under the Chapter VII of Indian
contract act, 1872, the provision of which were not suffice the purpose or not adequate.
Therefore, new act called Sale of Goods Act, 1930 was passed. The presently act containing 66
sections came into force from 1stJuly, 1930 which extends to whole of India except the state of
Jammu & Kashmir.
‘Contract of sale’ is a generic term which includes both a sale as well as an agreement to sell.
6.3 FUNDAMENTAL CONCEPTS
Definition of Contract of sale of goods:
Section 2(1) of the Act defines a contract of sale of goods as: a contract by which the seller
transfers or agrees to transfer the property in goods to the buyer for a money consideration,
called the price. Subsections (3) and (4) give different names to two transactions:(3) Where
under a contract of sale the property in the goods is transferred from the seller to the buyer
the contract is called a sale.
(4) Where under a contract of sale the transfer of the property in the goods is to take place at a
future time or subject to some condition later to be fulfilled the contract is called an
agreement to sell.
Important Concepts:
1 Buyer [Section.2(1)]:
2 Seller:-[Section 2(13)]:
Seller means a person who sells or agrees to sell the goods.
Example: - Mr. Kashif sells the shop to Mr. Zahir. Mr. Kashif is a seller and Mr. Zahir is a
buyer in this case.
3 Goods: - [Section 2(7)]:
Goods have been defined by Section 2, sub-section 7 of the Sale of Goods Act 1930 as “every
kind of movable property, other than actionable claims and money; and includes stock and
shares, growing crops, grass and things attached to or forming part of land which are
agreed to be served before sale or under a contract of sale.
is called an actual delivery. If the seller has received the price but does not deliver the goods
to the buyer. The buyer can sue the seller for price with reasonable interest.
Example:- An agreement between Mrs. Sapna and Vasu for sale of car. Car has delivered to
Mr. Vasu. This is called actual delivery.
b. Symbolic Delivery:
If the key of any store is delivered to any person, it will bemconsidered the goods in the store
are also delivered to that person. It is a symbolic delivery.
Example :- Mr. Ram sells the car to Mr. Bharat which are kept in the “Show Room”. Mr. Ram
gives the key of show room tomMr. Bharat . It is a symbolic delivery.
c. Constructive Delivery:
When there is a change in the legal character without any visible change in actual and visible
property has changed. Now Mr. Narayana agrees to hold on behalf of the buyer. It is called
constructive delivery.
5 Price:
Price must be the consideration in the contract of sale. If goods are exchanged with goods, it is
barter and not a contract of sale.
Example :- “X” sells a book to “Y” for Rs. 300. It is a contract of sale.
6 Transfer of Ownership:
To constitute the sale, contract the seller must transfer or agree to transfer the property
ownership to the buyers. So, possession and ownership both will be transferred to buyer.
Example :- “X” sells the car to “Y” for 6 lac. The possession and ownership both will transfer
to “Y”.
7 Sale:
When ownership and possession of the goods is immediately transferred from seller to buyer
it is called contract of sale.
Example:- “X” buys a pen from the “Y” and pays the whole price on his hand. It is a sale.
8 Agreement to Sell:
The contract is called agreement to sell, when the transfer of ownership in the goods is to take
place at a future date.
Example :- Mr. X agrees to purchase Mr. Nitoo’s bus for Rs. 30 lac. But the transfer of bus will
Rs. 3,000. It is an agreement to sell, since A agrees to transfer the ownership of the scooter to
B at a future time.
(b) A agrees to purchase B’s car for Rs. 50000, provided B stands surety for him with C. It is
an agreement to sell for B. It becomes a sale when the condition is fulfilled by B.
Section 4(1) of the Sale of Goods Act defines a contract of sale of goods as “a contract whereby
the seller transfers or agrees to transfer the property in goods to the buyer for a price.”
This definition reveals the following essential characteristics of contract of sale of goods:
1 Two parties:
The first essential is that there must be two definite parties to a contract of sale, viz.., a buyer
and a seller, as a person cannot buy his own goods.
2 Parties:
‘Property’ here means ownership. Transfer of property in the goods is another essential of a
contract of sale of goods. A mere transfer of possession of the goods cannot be termed as sale.
To form a contract of sale the seller must either transfer or agree to transfer the property
in the goods to the buyer.
4 Goods:
The subject-matter of the contract of sale must be ‘goods’, According to Section 2(7), “goods
means every kind of movable property other than actionable claim and money; and
• Includes stock and shares,
• Growing crops, grass,
• And things attached to or forming part of the land which are agreed to be severed before sale
or under the contract of sale.
Goodwill, trademarks, copyrights, patents right, water, gas, electricity, decree of a court of
law, are all regarded as goods. Shares and stock are also included in goods.
5 Consideration:
The consideration for a contract of sale must be money consideration called the price. If goods
are sold or exchanged for other goods, the transaction is barter, governed by the Transfer of
Property Act and not a sale of goods under this Act. If goods are sold partly for money and
Where under a contract of sale, the property in the goods is immediately transferred at the
time of making the contract from the seller to the buyer, the contract is called a ‘sale’ [Sec.
4(3)]. It refers to an absolute sale. There is immediate transfer of the ownership and
mostly of the subject-matter of the sale as well (delivery may also be given in future). It is an
executed contract.
Distinguish between a Sale and Agreement to sell.
Basis of
Sale Agreement to sell
distinction
Transfer of ownership of
Transfer of Transfer of ownership of goods is to take place at a
ownership. goods takes place immediately. future time or subject to
fulfilment of some condition.
6.6 SUMMARY.
Sale and Agreement to Sell: Under Transfer of ownership of goods takes place immediately
but in respect of agreement to sell the transfer of ownership takes place at a later stage.
Secondly Sale is a executed contract but agreement to sell is executory nature. Under Sale
Seller can sue the buyer for the price even though the goods are in his possession. Whereas
under Agreement to sell Seller can sue the buyer for damages even though the goods are in
the possession of the buyer.
6.7 QUESTIONS.
Unit Structure :
7.0 Objectives.
7.1 Introduction.
7.2 Implied Conditions.
7.0 OBJECTIVES.
After studying the unit, the students will be able to:
• Understand the fundamental concept of Condition and Warranty under Sale of Goods Act.
• Distinguish between condition and warranties.
• Explain the term Unpaid Seller and Rights of Unpaid Seller.
7.1 INTRODUCTION
A condition is a stipulation essential to main purpose of the contract and hence it is the plinth
or foundation of the contract. The effect of a breach of condition is that it gives the right to the
distressed (an aggrieved) party to treat the contract as void and also to claim damages
(compensation), if any. A warranty is a term which is collateral to the main purpose of the
contract and hence is only a subsidiary. The breach of warranty does not give right to the
aggrieved party to treat the contract as void but entitles him to claim damages
(Compensation) only.
In the following cases, the breach of a condition will be treated as breach of warranty only.
• When the buyer waives the condition or
• When the buyer treats the breach of condition as a breach warranty and does not treat the
contract as void or
• Where the contract of sale is inseparable and the buyer has accepted the goods or part
thereof or
• Where the contract is for specific goods, the property in which has passed to the buyer.
Condition and warranties may be express or implied, when they are written in the contract,
they are called express conditions and warranties. When they are not written, they are called
implied conditions and warranties, in the contract and applied to the contract either by
operation of law or by trade custom.
“A stipulation essential to the main purpose of the contract, the breach of which gives rise to
a right threat the contract as repudiated”.
The actual meaning of a condition is an obligation which requires being fulfilled before
another proposition takes place. A warranty is a surety given by the seller regarding the state
of the product.
Example: Sumit buys from General stores ‘ Ghee’ claimed to a pure cow ghee. It was found
that the Ghee was mixed with ‘Dalda’.Sumit can return the ghee to the shop keeper
,repudiate the contract and claim refund of price. Implied Conditions in a contract that is not
expressly stated or written. It maybe implied by fact and deed, viz. the parties’ acting; or it
may be implied by law, either case law or statute. Following are the implied conditions.
The implied condition is that the goods delivered must correspond with the description.
Example: Where a machine was described as almost new and used very little but when
delivered, was found to be an old and repaired one, it was held that the buyer was entitled to
reject the machine.
3 Sale by Sample: (Section 17)
The implied condition is:
• That the goods delivered shall correspond with the sample
• That the buyer shall have a reasonable opportunity of comparing the bulk with the sample
and
• That the goods shall be free from any defect rendering them un-merchantable, which
would not be apparent on reasonable examination of the sample.
4 Sale by sample as well as description:
In the case of sale of goods by sample as well as description, the goods delivered must
The general rule is “Caveat Emptor”, i.e. let the buyer beware. So, the seller need not disclose
the faults in the goods he sells nor need the guarantee that the goods are fit for the purposes
of the buyer. So, the buyer takes them as they come. But in the following cases, there
is an implied condition as to quality or fitness of goods for any particular purpose.
• Where the buyer makes known the purpose to the seller, who is ordinarily dealing with sale
of goods of that description and the buyer, relies on the judgments of the seller.
• Where the seller does not disclose the faults in his goods and such faults cannot be detected
on reasonable examination.
• Where the seller makes a statement and the buyer relies upon it.
Case Law: A purchased a motor car from B for using it as a tourist car. B, the seller knew the
purpose. The car turned out to be unfit for the purpose. Held, A the buyer could repudiate the
contract. But there is not implied condition as to fitness or quality of goods when they are
sold under the patent or trade name.
6 Conditions as to Merchant ability:(Section 16)
In case of sale of good by description, there is an implied condition that the goods shall
correspond with the description and also that they shall be of merchantable quality.
Brant V/S Australian Knitting Mills Ltd.:
The buyer was supplied woolen underpants by the manufacturers. The buyer wore them for
some time and contracted a skin disease. Held, that the buyer was entitled to damages.
Exception: If the buyer has examined the goods, there is not implied condition as to quality of
7 Conditions as to wholesomeness:
In the case of the implied condition is that the goods must be suitable for human
consumption and are fit for immediate use.
For Example: A, purchased a bun from B and injured his teeth by biting a stone in the bun. B
was held liable.
2. The buyer accepts the goods or a part thereof, or is not in a position to dismissed the goods
for being faulty.
nuisance, in favour of any third party or known to buyer before or inference at the time when
the contract is made.
Example: A, the owner of the watch, pledges it with B. After a week, A obtains possession of
the watch from B for some limited purpose and sells it to C. B approaches C and tells him
about the pledge affair. C has to make payment of the pledge amount to B. There is breach of
this warranty and C is entitled to claim compensation from A.
3 Warranty of disclosing the dangerous nature of goods to the ignorant buyer:
The third implied warranty on the part of the seller is that in case the goods sold are of
dangerous nature he will warn the ignorant buyer of the probable danger.
Example: C purchases a tin of disinfectant powder from A. A knows that the lid of the tin is
defective and if it is opened without special care, it may be dangerous, but tells nothing to C.
C opens the tin in the normal way whereupon the disinfectant powder flies into her eyes
and causes injury. A is liable in damages to C as he should have warned C of the probable
danger.
A condition is a stipulation
The warranty is collateral to
Stipulation. essential to the main purpose
the main purpose of contract.
of a contract.
An unpaid seller has the following rights against the goods notwithstanding the fact that the
property in the goods has passed to the buyer:
A. Right of lien;
the price due in respect of them is paid or tendered. An unpaid seller in possession of goods
sold is entitled to exercise his lien on the goods in the following
cases:
• Where the goods have been sold without any stipulation as to credit;
• Where the goods have been sold on credit, but the term of credit has expired:
• Where the buyer becomes insolvent, even though the period of credit may not have yet
expired.
transit, to regain possession and to retain them till the full price is paid. The essential
feature of stoppage in transit is that the goods should be in the possession of a middleman or
some other person intervening between the vendor who has parted with and the
purchaser who has not received them.
C] Right of Resale.
The right of resale is a very valuable right given to an unpaid seller. In the absence of this
right, the unpaid seller’s other rights against the goods, namely, ‘lien’ and ‘stoppage in
transit,’ would not have been of much use because these rights only entitle the unpaid
seller to retain the goods until paid by the buyer. If the buyer continues to remain in default,
then should the seller be expected to retain the goods indefinitely, especially when the goods
When the buyer of goods does not pay his dues to the seller, the seller becomes an unpaid
seller. And now the seller has certain rights against the buyer. Such rights are the seller
remedies against the breach of contract by the buyer. Such rights of the unpaid seller are
additional to the rights against the goods he sold.
A. Suit for Price.
B. Suit for damages for non-acceptance.
Under the contract of sale if the property of the goods is already passed but he refuses to pay
for the goods the seller becomes an unpaid seller. In such a case. the seller can sue the buyer
for wrongfully refusing to pay him his due. But say the sales contract says that the price will
be paid at a later date irrespective of the delivery of goods,. And on such a day the
if the buyer refuses to pay, the unpaid seller may sue for the price of these goods. The actual
delivery of the goods is not of importance according to the law.
B] Suit for Damages for Non-Acceptance.
If the buyer wrongfully refuses or neglects to accept and pay the unpaid seller, the seller can
sue the buyer for damages caused due to his non-acceptance of goods. Since the buyer
refused to buy the goods without any just cause, the seller may face certain damages. The
measure of such damages is decided by the Section 73 of the Indian Contract Act 1872, which
deals with damages and penalties. Take for example the case of seller A. He agrees to sell
to B 100 liters of milk for a decided price. On the day, B refuses to accept the goods for no
justifiable reason. A is not able to find another buyer and the milk goes bad. In such a case, A
can sue B for damages.
C] Repudiation of Contract before Due Date.
If the buyer repudiates the contract before the delivery date of the goods the seller can still
sue for damages. Such a contract is considered as a rescinded contract, and so the seller can
sue for breach of contract. This is covered in the Indian Contract Act and is known as
7.6 SUMMARY.
Meaning: The actual meaning of a condition is an obligation which requires being fulfilled
before another proposition takes place. A warranty is a surety given by the seller regarding
the state of the product.
Implied Conditions:
Conditions as to Title to Goods: [Section 14(a)]: 2. Sale by Description:(Section 15) 3. Sale by
Sample: (Section 17) 4. Sale by sample as well as description: 5. Conditions as to Quality or
Fitness: 6. Conditions as to Merchant ability:(Section 16) 7. Conditions as to wholesomeness:
Implied Warranties:
A condition becomes a warranty when— 1. The buyer waives the conditions or opts to deal
the breach of the condition as a breach of warranty; or 2. The buyer accepts the goods or a
part thereof, or is not in a position to dismissed the goods for being faulty.
Implied Warranties:
Unit Structure :
8.0 Objectives.
8.1 Introduction, Definition and Meaning.
8.2 Characteristics of Negotiable Instrument.
8.3 Promissory Notes and Bills of Exchange
8.4 Summary.
8.5 Questions.
8.0 OBJECTIVES.
After studying the unit, the students will be able to:
• Understand the meaning of Negotiable Instruments.
• Understand the various types of Negotiable Instruments and their functions.
The term “negotiable instrument” means a document transferable from one person to
another. However, the Act has not defined the term. It merely says that “A. negotiable
instrument” means a promissory note, bill of exchange or cheque payable either to order or to
bearer. [Section 13(1)] The objectives of the Negotiable Instruments Act, is to legalise the system
by which the instrument pass from one hand to other through negotiation. As the commercial
activities and trading increases at alarming rate the growing demand for money was not
possible to meet with the current supply of coins in the time of British rule in India. To cope
up with the scarcity of the coins the instruments of credit took the function of money.
Negotiable instruments are those documents which are generally use in commercial
transaction and dealing of money.
Negotiable Instruments must be written and signed by the parties according to the rules
relating to Promissory Notes, Bills of Exchange and Cheques. Demand Drafts are also
construed as Negotiable Instruments in the limiting case as they have the same property as
Negotiable Instrument.
2 Money:
Negotiable instruments are payable by legal tender money of India. The liabilities of the
parties of Negotiable Instruments are fixed and determined in terms of legal tender money.
3 Negotiability:
Negotiable Instruments can be transferred from one person to another by a simple process.
In the case of bearer instruments, delivery to the transferee is sufficient. In the case of order
instruments two things are required for a valid transfer: endorsement (i.e., signature of the
holder) and delivery. Any instrument may be made non-transferable by using suitable words,
e.g., “pay to X only.”
4 Title:
The transferee of a negotiable instrument, when he fulfils certain conditions, is called the
holder in due course. The holder in due course gets a good title to the instrument even in cases
where the title of the transferor is defective.
5 Notice:
It is not necessary to give notice of transfer of a negotiable instrument to the party liable to
pay. The transferee can sue in his own name.
6 Presumptions:
Certain presumptions apply to all negotiable instruments. Example: It is presumed that there
is consideration. It is not necessary to write in a promissory note the words “for value
received” or similar expressions because the payment of consideration is presumed. The
Promissory Note:
• A promissory note has been defined by Sec. 4 of the Act as follows : A “promissory note” 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.
3. “I promise to pay Z Rs, 1800, and all other sums which shall be due to him.”
4. “I promise to pay Y Rs. 1800 seven days after my marriage with C.”
5. “I promise to pay Y Rs. 1800 on D’s death, provided D leaves me enough to pay that sum.”
6. “I promise to pay Y Rs. 1800 and to deliver to him my black horse on 1 st January next.”
Promissory Note:
Mumbai
RS 21,000/-
August 15, 2022
"I acknowledge myself to be indebted to Ms. Jaya Singh in RS 21,000/- [Rupees Twenty One
Thousand Only], to be paid on demand, for value received."
(Affix Stamp)
(Signaure)
Mr. Sanjay Roshan
F- 401, Sea View Soc.,
Bandra, Mumbai, 400050
(Maker)
To,
Ms. Jaya Singh
D- 704, Top Apartments,
Juhu, Mumbai, 400049
(Payee)
Writing:
Promissory note must be in writing. Writing includes print and typewriting. Oral promise a
valid promissory note. Generally, consideration, Place and date of making is not essential
Other formalities:
Promissory note must be stamped according to the Indian Stamp Act, otherwise it will be
inadmissible in evidence. However, other formalities like place of making the instrument, date
or the words, “value received” are not necessary.
Form of Promissory Note:
The law has not given any specific from of a promissory note. As such it may be in any form
but it must satisfy all the essential conditions mentioned above. Sum payable must be certain.
Examples: - “I promise to pay Ketan , Rs. 12,000, and all other sums which shall be due’’ is not
where it is considered expedient to make the officials severally liable. For Example, In the case
of Limited Companies, it is essentials that the directors or managing agents of
the company should be made personally liable to bring home to them their personal liability in
order to introduce a further element of security to the bank’s advance.
Meaning:
Section 5 defines a bill of exchange as…
• an instrument in writing.
• containing an unconditional order.
• signed by the maker.
• directing a certain person to pay.
• a certain sum of money only to or.
It must contain an express order to pay. The bill of exchange is an unconditional order. Hence,
the instrument shall have the instruction i.e., an order to pay to certain person or to the order
of.
It must be signed by the drawer. The drawer of the bill of exchange shall sign the instrument
otherwise it would be invalid and not enforceable. He is the one who gives the order to pay. 4 It
must contain an unconditional order to pay. The bill of exchange must not include an.
There must be three parties to the instrument. Bill of exchange always has three parties to it.
The drawer who makes the bill of exchange. The drawee who shall accepts the bill of exchange
and eventually who becomes an acceptor. And finally, the payee who receives the sum of
money as specifies in the instrument.
The parties must be certain. The names mentioned in there in the bill of exchange shall be
certain. The parties shall be identifiable and when that is not the case the bill of exchange is
not valid.
The order must be to pay a certain sum of money: The sum of money must be certain.
In addition to the same of subtractions shall not be accepted unless there is an interest clause
and the same shall be mentioned in percent. Other conditions to the sum of money shall be
treat as void.
The instrument must contain an order to pay money and money only: The instrument must
not contain any thing apart from money. It must contain money and money only.
It must be stamped: The stamp is affixed on every bill of exchange, except bill payable on
demand. The value of stamp depends on the amount of the bill.
Sixty days after date pay to Shri Sanjay Bonare, Vaijapur or his order the sum of rupees
fifteen thousand only for the value received.
PTED
ACCE -
SD/ AV
Shri Vijay Jadhav, ADH 13]
VIJ A Y J SD/-
Sanket, M.G. Road, , 20
h M ARCH MAHESH PATIL
[20 t
Pune - 11
Inland Bills :
The bill drawn between two parties residing in the same country and payable also in that
same country is known as inland bills.
Foreign Bills:
The bill drawn between two parties residing in two different countries is known as foreign
bills. For instance, a bill is drawn in the USA where the seller is situated, and the buyer lives
in the UK. So, the bill will be payable in the UK, the drawee or buyer’s location.
Basis of
Bill of Exchange Promissory note
comparison
There are Three parties, i.e. There are Two parties, i.e.
Parties.
drawer, drawee and payee. drawer and payee
8.4 SUMMARY.
Meaning :
It is an unconditional written promise by one person to another in which the maker (Payer)
promises to pay on demand on any future date, a stated sum of money to the specified person
or to the bearer of the instrument.
Essential Features and Characteristics of Promissory Notes :
Writing: Promise to pay: Unconditional Promise: Signed by the maker: Payee to be a certain
person: Payment of Money only: Certain some of money: Other formalities:
Types of Promissory Notes:
Promissory Note Payable on Demand: After Sight Payable after Date, Joint Promissory Note:
Joint and Several Demand Promissory Note:
BILL OF EXCHANGE:
Meaning :
It must be in writing; it must contain an express order to pay. It must be signed by the
drawer. It must contain an unconditional order to pay. The parties must be certain, the order
must be to pay a certain sum of money.
The instrument must contain an order to pay money and it must be stamped.
8.5 OUESTIONS.
1 Explain the term ‘Negotiable Instrument’ What are the essential feature and characteristics of
of Negotiable Instruments?
2 Explain the meaning of ‘Promissory note’ and its features.
3 Write an elaborate note on ‘Bills of Exchange’.
4 Distinguish between Promissory Note and Bills of Exchange.
9. CHEQUES.
Unit Structure :
9.0 Objectives.
9.1 Meaning of Cheques.
9.2 Characteristics of Cheques.
9.3 Concept of Crossing of Cheques and Types of Crossing.
9.4 Dishonour of cheques and Criminal Penalties
9.5 Summary.
9.6 Questions.
9.0 OBJECTIVES.
After studying the unit, the students will be able to:
• Understand the meaning Of Cheque.
• Understand the various types of Cheques.
• Understand difference between the Cheque and Bills of Exchange
• Understand the term “Dishonour of cheque” and its Criminal Penalties’.
Cheque- Section -6
Section 6 of Negotiable Instrument Act defines Cheque as “a bill of exchange drawn on a
specified banker and not expressed to payable otherwise than on demand and it includes the
electronic image of a truncated cheque and a cheque in the electronic form.”
1 Payable on Demand:
It should be payable whenever the holder chooses to present it to the drawee that is banker.
2 Cheque in Electronic Form:
Cheque drawn by using any computer resource and signed in a secure system with a digital
Means a cheque which is truncated during the course of clearing cycle, either by clearing
house or by bank whether paying or receiving payment immediately on generation of the
electronic image for transmission, substituting the further physical movement of the cheque
in writing.
Specimen of a Cheque :
DATE :
PAY :
RS.
A cheque must be in writing. An oral order to pay does not constitute a cheque.
2 An unconditional order:
The drawer issues cheque directing to a particular bank having deposit in it to pay the
amount of cheque.
4 Signed by the maker:
The cheque should be signed by the account holder. A cheque does not carry any validity
unless signed by the original drawer. It should be dated as well.
5 Amount in words and figures:
Cheque should contain an express order to pay money and money only, request made in the
cheque invalidate the instrument.
8 The sum contained in the order must be certain:
The sum contain in the cheque must be certain. Uncertainty leads to instrument invalid.
9 It does not require acceptance and stamp:
Like a bill of exchange, a cheque does not required acceptance from the drawee. There is, a
custom among banks to mark cheques as ‘good’ for the purpose of clearance. But this
marking is not an acceptance, further no revenue stamp is required to be affixed on cheques.
10 Validity:
A cheque is generally valid for six months from the date it bears. Thereafter it is termed as
stale cheque. A post-dated or antedated cheque will not be invalid. In both cases, the validity
of the cheque is presumed to commence from the date mentioned on it.
Crossing Of Cheques
Meaning:
Crossing of cheques means an instruction to the drawee that is the paying bank that the
payment is not to be made at the counter but through a bank. When a cheque bears across its
face two parallel transverse lines, or of two parallel transverse lines simply (either with or
without the word, not negotiable) that addition shall be deemed a crossing and the cheque
the bank, or a crossed cheque that is a cheque with a special direction to at the paying banker
to make payment only through a particular
banker and not to pay it at the counter. Crossing of a cheque in general does not stop its
negotiability but if words like ‘Not Negotiable’ ‘or A/c. Payee only’ are used then it cannot be
negotiated freely.
Parties to a cheque.
1 Drawer :
The person who draws the cheque.
2 Drawee :
The banker on whom the cheque has been drawn, the payee, holder, Endorser, and Endorsee
are the same as in a bill.
TYPES OF CHEQUE.
1 Open Cheques / Bearer Cheques:
An open or bearer is a cheque which is payable at the counter of the drawee bank on
presentation of the cheque. When the cheque is lost or stolen, it is not possible easily to trace
the person who has received the payment.
2 Crossed Cheque:
A crossed cheque is a cheque which is payable only through a specified banker and not
directly at the counter of the bank. Crossing ensures security to the holder of the cheque as
only the particular banker credits the funds 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.
• A crossed cheque does not affect the negotiability of the instrument.
• It can be negotiated the same way as any other negotiable instrument.
Hence Crossed cheque is a cheque which is not paid on the counter of a Cheques bank. The
amount is credited by the bank to the account of payee. The significance of different types of
crossed cheques is different in style.
Types of Crossing of Cheques:
A] General Crossing: Section 123
A cheque is said to be crossed generally when it bears across its face any of the following:
• Two transverse parallel lines.
• Two transverse parallel lines with the word “And Company” or “And Co”.
• Two transverse parallel lines with any abbreviation of the word “& Company”.
LE
AB
E
YE
TI
.
CO
GO
PA
&
NE
C
A/
T
NO
Significance of General Crossing.
• The effect of general crossing is that it gives a direction to the paying banker.
• The direction is that, the paying banker should not pay the cheque at the counter.
• It must be presented to the paying banker through any other bank and not the payee
It is a cheque in which the name of the bank is written between the two parallel lines and
hence it can be paid to that specific banker only. Inclusion of the name of a banker is
essential in special crossing. Special Crossing can never be converted to General Crossing. In
Special Crossing paying banker to honor the cheque only when it is presented through the
bank mentioned in the crossing and no other bank.
Essentials of special crossing :
1 Two parallel transverse lines are not at all essential for a special crossing.
2 The name of banker must be necessary specified across the face of the cheque.
3 It must appear on the left-hand side preferably on the corner. It should not be obliterate the
printed number of the cheque.
4 The two parallel transverse lines and the words? Not negotiable? may be added to a special
crossing.
C] Restrictive crossing:
Besides the above two types of statutory crossing in recent years the practice of crossing
cheques with the words Account payee only has sprung up. Such a crossing is termed as
restrictive crossing.
AYEE
A/C P
1 The two transverse parallel lines across the face of the cheque.
2 It must be presented in order to constitute any cheque as a crossed cheque.
3 The cheque will not be taken as a crossed cheque if this has not been done.
D] Double crossing:
When a cheque bears two separate special crossing, it is said to have been doubly crossed.
Thus a paying bank shall pay a cheque doubly crossed only when the second banker is acting
only the agent of the first collecting banker and this has been made clear on the instrument.
D IA A NK
IN LB
OF NA
A NK TI
O
B NA
A TE JA
B
N
ST PU
9.4 DISHONOUR OF CHEQUE.
There was no effective legal provision before the year 1888 to restrict people from issuing
cheques without having sufficient amount in their account or any harsh provision to punish
them in the event of such cheque not being honoured by their bankers and returned unpaid.
Dishonour of cheques is a civil liability accrued.
The processes to seek civil justice becomes a time consuming or a process of unusual length,
and recovery by way of a civil matters takes a long time. To ensure immediate remedy
against defaulters and to ensure credibility of the holders of the negotiable instrument a
criminal remedy of penalty was introduced in Negotiable Instruments Act, 1881 in form of the
Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act,
1988 which were further modified by the Negotiable Instruments (Amendment and
Miscellaneous Provisions) Act, 2002.
If the cheque is issued in favour of a person and the same is dishonoured due to insufficiency
of the funds in the account of the drawer ( Who draw a cheque) a person suffers a lot. To
avoid or stop such dishonour, it has been made an offence by an amendment of the
Negotiable Instrument Act by the Banking, Public Financial Institution and Negotiable
Instrument Laws (Amendment ) Act, 1988.
A new Chapter VII consisting of Sections 138 to 142 has been inserted in the Negotiable
Instrument Act.
Section 138 makes the dishonour of cheque an offence. The payee or holder in due course can
have recourse against the drawer, who may be held liable for the offence.
The Negotiable Instruments Act, 1881 was amended in the year 1988 to add – Chapter XVII
which pertains to penal provisions in case of dishonour of cheques for insufficiency of funds
in the accounts.
Under Section 138 –
Where any cheque drawn by a person on an account maintained by him with a banker for
payment of any amount of money to another person from out of that account for the
discharge, in whole or part, of any debt or other liability, is returned by the bank unpaid,
either because of the amount of money standing to the credit of that account is insufficient to
honour the cheque or that it exceeds the amount arranged to be paid from that account by an
agreement made with that bank, such person shall be deemed to have committed an offence
and shall, without prejudice to any other provision of this Act be punished with
imprisonment [a term may be extended to 2 years], or with fine which may extend to twice
the amount of the cheque, or with both.
Basic Essentials Of Section 138.
1 Cheque Drawn by the person who has a account in the Bank i.e existence of Bank-Customer
Relationship.
• Either the balance was insufficient – or it exceeded the amount arranged to be paid for
overdraft.
9 Cause of Action arises on 16th Day. (S.12(1) Limitation Act – excludes 16th Day)
If the above conditions are fulfilled the offence u/s 138 is made out – the Cheques Cognizance
of which would then be taken by Metropolitan Magistrate/ Judicial Magistrate 1st Class as per
S.142.
Punishment/S: Maximum 2 years (earlier it was 1 year – to make the act more stringent
vide 2002 Amendments – to was extended to the present 2 years. Up to twice the amount of
cheque as FINE.
9.5 SUMMARY.
Essential Features and Characteristics of Cheque :
It must be in writing: An unconditional order: Drawn upon a Specified Banker: Signed by the
maker: Amount in words and figures: Payable on demand: It must contain an express order
to pay, the sum contained in the order must be certain. It does not require acceptance and
stamp: Validity
Crossing of Cheque :
Meaning: Crossing of cheques means an instruction to the drawee that is the paying bank
that the payment is not to be made at the counter but through a bank.
Types of Crossing of the Cheque :
General Crossing: Section 123, Special Crossing: Section 124, Restrictive crossing, Non-
Negotiable Crossing
Dishonour of Cheque :
Section 138 makes the dishonour of cheque an offence. The payee or holder in due course can
have recourse against the drawer, who may be held liable for the offence.
9.6 QUESTIONS.
1 What is cheque? What are its characteristics?
2 What are the different types of crossing of cheques?
3 Explain the criminal penalties in respect of ‘Dishonour of Cheque’
Unit Structure :
10.0 Objectives.
10.1 Introduction.
10.2 Reasons for Enactment of Act.
10.3 Objectives and Reasons.
10.4 Concepts and Definition.
10.5 Summary.
10.6 Questions.
10.0 OBJECTIVES.
After studying the unit the students will be able to:-
• Understand rationale for enactment of specific act
• Understand the Objectives of the Act.
• Understand various concepts and definitions pertaining to the Consumer Protection Act.
10.1 INTRODUCTION.
The Consumer Protection Act, 1986 seeks to provide for better protection of the interests of
consumers and for that purpose to make provision for the establishment of consumer
councils and other authorities for the settlement of consumer’s disputes and for matters
connected therewith. The interests of consumers were also protected even earlier under the
provisions of several legislations but these legislations failed to protect the ultimate
consumer from defective goods or deficient services, overcharging of prices and
unscrupulous exploitation. Further, there is ignorance of the consumer of his rights. The
consumers have not yet organised themselves into a powerful movement. The consumer
needed better protection which led to the enactment of the Consumer Protection Act of 1986.
The Act is a very important socio-economic legislation with its main thrust on giving speedy
redressal and compensation to the consumer.
10.2 REASONS FOR ENACTMENT OF ACT.
Rationale behind the enactment of the consumer protection act.
• Sellers were engaged in many unfair practices which tend to the rise of Consumer
Movement by the dissatisfied customers.
• To give the protestation to the consumers from the exploitation in the marketplace, there
was no legal system was available.
• In the 1960s, the consumer movement started rising in an organised form due to the
rampant adulteration of edible oil and food, black marketing, hoarding, and rampant food
shortages.
• Multiple Laws were prevailing, like Indian Contract Act. Like, Indian Contract Act, Sale of
Goods Act, The Essential Commodities Act etc. The common consumer used to get confused
which law should apply.
• Holding exhibitions and writing articles were largely the methods used till the 1970s, by the
consumer organisations.
• To investigate the malpractices in ration shops and overcrowding of public road transports,
consumer groups were formed.
• In the recent past, India saw a big rise in the number of consumer groups.
• Due to the above-mentioned efforts, the Government was forced to bring in legislation to
protect the consumers from unfair business practices.
• Doctrine of Caveat Emptor gives the rise to Consumer Protection Movement. This doctrine
used to hold buyer totally responsible though the seller knows the fault in the goods.
Therefore, a need felt that there should be appropriate law to provide requisite and urgent
remedy to the aggrieved consumer which is compensatory in nature. Observing this
• The right to be protected against marketing of goods which are hazardous to life and
property;
• The right to be informed about the quality, quantity, potency, purity, standard and price of
of goods to protect the consumer against unfair trade practices.
• The right to be assured, wherever possible, access to an authority of goods at competitive
prices.
• The right to be heard and to be assured that consumers interests will receive due
consideration at appropriate forums.
• The right to seek redressal against unfair trade practices or unscrupulous exploitation of
consumers.
• Right to consumer education.
• Protection from spurious goods or fostering deceptive practices in the provision of services.
2. These objects are sought to be promoted and protected by the Consumer Protection Council
to be established at the Central and State level.
3. To provide speedy and simple redressal to consumer disputes, a quasi-judicial machinery
is sought to be setup at the district, State and Central levels. These quasi-judicial bodies will
undertake the principles of natural justice and have been authorized to give relief of a
specific nature and to award, wherever appropriate, compensation to consumers. Penalties
for non-compliance of the sanctions or orders given by the quasi-judicial bodies have also
been provided.
person, who :
(a) Buys any goods for consideration which has been paid or promised or partly paid and
partly promised or under any system of deferred payment.
(b) Includes any user of such goods other than the person who buys them, when such use is
made with the approval of the buyer. The person claiming himself as ‘consumer’ should
satisfy that
(i) There must be a sale transaction between the seller and the buyer.
(ii) The sale must be of goods.
(iii) The buying of goods must be for consideration.
(iv) The consideration has been paid or promised or partly paid and partly. Promised or
under any system of deferred payment,
(v) The user of the goods may also be a consumer when such use is made with the approval of
the buyer.
Who is not a consumer?
A person is not a consumer if he obtains goods for resale or for any commercial purpose.
Commercial purpose does not include by a consumer of goods bought by and used by him
exclusively for the purpose of earning his livelihood, by means of self- employment for e.g.
buying a car to run it as a taxi or a widow purchasing a sewing machine for her lively hood
etc. When the manufacturer sells the goods to the wholesaler, who in turn sells the goods to a
retailer, the wholesaler will be excluded from the definition of the word consumer as he has
brought the goods for ‘resale’ or for ‘commercial purpose’. A person buying the goods for
Explanation: When the goods are sub standard or engaged with some inappropriate fault or
imperfection in it is known as defects in the goods. In short when the goods are not in
accordance with the standard sets by the law the goods called imperfect or defective.
• Supply of contaminated agricultural products which contain pesticides and harmful soil
particles, which caused to food poisoning.
• Product made for children that contains choking hazards
• Products like a helmet that cracks or breaks from small impact
• Unstable structures, such as tables or chairs that collapse
• Mechanical defects on cars and other electronic goods.
• Defects in the clothing materials. Etc.
• Contaminated Packed Food and Water.
3. Deficiency: Sec.2(1)(g)
“Deficiency means any fault, imperfection or shortcoming or inadequacy in the quality,
nature and manner of performance which is required to be maintained or has been
undertaken to be performed by a person in pursuance of a contract or otherwise in relation
to any service “.
Complaint means any allegation in writing made by a complainant regarding one or more of
the following:
(i) an unfair trade practices or a restrictive trade practice has been adopted by any trader.
(ii) the goods bought by him or agreed to be bought by him, eager suffer from one or more
defects.
(iii) the service hired or availed of or agreed to be hired or availed of by him suffer from
deficiency in any respect.
(iv) a trader has charged for the goods mentioned in the complaint a price in excess of the
price fixed by or under any law for the time being in force or displayed on the goods or any
package containing such goods.
(v) goods which will be hazardous to life and safety when used, are being offered for sale to
the public in contravention of the provision of any law for the time being in force requiring
traders to display information regarding the contents, manner, and effect of use of such
goods.
10.5 SUMMARY.
Rationale behind the enactment of the Consumer Protection Act
• Sellers were engaged in many unfair practices which tend to the rise of Consumer
Movement by the dissatisfied customers.
• To give the protestation to the consumers from the exploitation in the marketplace, there
was no legal system was available.
• seller knows the fault in the goods.
Objectives and Reasons: The right to be protected against marketing of goods which are
hazardous to life and property; The right to be informed about the quality, quantity, potency,
purity, standard and price of goods to protect the consumer against unfair trade practices;
Service [Sec.2 (1)(o)] “Service” means service of any description which is made available to
potential users.
Consumer [Sec.2(1)(d)] Under Sub-Clause (i) of Section 2(1)(d), a consumer for the purpose of
goods means any person, who :
Buys any goods for consideration which has been paid or promised or partly paid and partly
10.6 QUESTIONS.
1 Explain the need for enactment of Consumer Protection Act.
2 Who can file a complaint under the consumer protection act and under what circumstances?
3 Who is a consumer and who is not a consumer under the consumer protection act?
4 What are an unfair trade practices?
5 Write a Short Note on :-
a. Consumer Dispute.
b. Deficiency.
c. Defects.
d. Service.
e. Goods.
11. COMPANY LAW.
Unit Structure :
11.0 Objectives.
11.1 Definition, meaning and features of Company.
11.2 Incorporation of Company.
11.0 OBJECTIVES.
• To study the meaning and features of the company Law.
• To understand about the Incorporation and membership of the company.
• To Understand the memorandum and Articles of Association.
• To study about the prospectus.
The word ‘company’ is derived from the Latin word (Com=with or together; panis =bread),
and it originally referred to an association of persons who took their meals together. In the
leisurely past, merchants took advantage of festive gatherings, to discuss business matters.
Nowadays, business matters have become more complicated and cannot be discussed at
festive gatherings. Therefore, the company form of organization has assumed greater
importance. It denotes a joint-stock enterprise in which the capital is contributed by several
people. Thus, in popular parlance, a company denotes an association of like minded persons
formed for the purpose of carrying on some business or undertaking.
A company is a corporate body and a legal person having status and personality distinct and
separate from the members constituting it.
It is called a body corporate because the persons composing it are made into Company Law
one body by incorporating it according to the law and clothing it with legal personality. The
word ‘corporation’ is derived from the Latin term ‘corpus’ which means ‘body’. Accordingly,
‘corporation’ is a legal person created by a process other than natural birth. It is, for this
reason, sometimes called an artificial legal person. As a legal person, a corporation can enjoy
many of the rights and incurring many of the liabilities of a natural person. An incorporated
company owes its existence either to a special Act of Parliament or to company law. Public
corporations like Life Insurance Corporation of India, SBI etc., have been brought into
existence by special Acts of Parliament, whereas companies like Tata Steel Ltd., Reliance
Industries Limited have been formed under the Company law i.e. Companies Act, 1956 which
acquires a corporate character and falls within the meaning of a company by reason of a
license issued under Section 8(1) of the Act.
A company is not merely a legal institution. It is rather a legal device for the attainment of the
social and economic end. It is, therefore, a combined political, social, economic and legal
institution. Thus, the term company has been described in many ways. “It is a means of
cooperation and organization in the conduct of an enterprise”.
It is “an intricate, centralized, economic and administrative structure run by professional
managers who hire capital from the investor(s)”.
Lord Justice Lindley has defined a company as “an association of many persons who
contribute money or money’s worth to common stock and employ it in some trade or business
and who share the profit and loss arising therefrom. The common stock so contributed is
denoted in money and is the capital of the company.
The persons who contributed in it or form it, or to whom it belongs, are members. The
proportion of capital to which each member is entitled is his “share”. The shares are always
transferable although the right to transfer them may be restricted.”
From the foregoing discussion, a company has its own corporate and legal personality
distinct which is separate from its members. A brief description of the various attributes is
given here to explain the nature and characteristics of the company as a corporate body.
Historical Development
As we all know that India has drawn a lot of legislation from England. Similarly, in the case
of Companies law, India enacted company law based upon the company law enacted in
England. The three phases which influenced the Company legislations may be divided as
i) Colonization era;
ii) Period after World War II &
iii) Opening up of Indian markets in the year 1990.
Legislation Enacted
In the year 1850, the first Company enactment for the registration of the joint-stock company
was introduced in India. This enactment as mentioned before was based upon the English
Companies Act, 1844.Later in the year 1857, the concept of limited liability was recognized in
the companies legislation but the said limited liability was not extended to the banking
company. The concept of limited liability into the Companies Act was introduced earlier in the
English Companies Act of 1856. But by the year of 1858, the concept of limited liability was
extended to banking company even in India.
In the year 1866 Companies Act was yet again passed for consolidating and amending the
laws relating to incorporation, regulation and winding up of trading companies and other
associations. This Act was based upon the Companies Act 1862 of England. This Act was
recast in the year 1882 and was in use until 1913. In the year 1913 another Indian Companies
Act was enacted based upon English Companies Consolidation Act, 1908.
Companies Act of 1913 was amended in the year 1914, 1915, 1920, 1926, 1930 and 1932. But the
major amendment to the Companies Act of 1913 who was made in the year 1936 this
amendment was based upon the English Companies Act. 1929. The act of 1913 regulated the
Indian business company until 1956.
Major Changes brought forth by the Companies Act 1956
• Promotion and growth of Companies.
• Capital structure of the Companies.
• Company meetings and procedures.
• Company accounts and its presentation & powers and duties of the auditors of the
company.
• Inspection and investigations of the affairs of the Company.
• The constitution of the Board of Directors, Powers and functions of directors, Managing
Amendment Bill, 2020 was introduced to amend the Companies Act, 2013 with the intent of
improving the ease of doing business in India, de-criminalizing various minor offences and
regulating producer companies, amongst other aspects. On September 28, 2020, this Bill
received the President’s assent and was notified in the official gazette on the same date as
the Companies (Amendment) Act, 2020.
Since a corporate body (i.e. a company) is the creation of law, it is not a human being it is an
artificial juridical person (i.e. created by law); it is clothed with many rights, obligations,
powers, and duties prescribed by law; it is called a ‘person’. Being the creation of law, it
possesses only the powers conferred upon it by its Memorandum of Association which is the
charter of the company. Within the limits of powers conferred by the charter, it can do all acts
as a natural person may do.
The most striking characteristics of a company are:
(i) Corporate personality.
A company incorporated under the Act is vested with a corporate personality so it redundant
bears its own name, acts under a name, has a seal of its own and its assets are separate and
distinct from those of its members. It is a different ‘person’ from the members who compose
it. Therefore, it is capable of owning property, incurring debts, borrowing money, having a
bank account, employing people, entering into contracts and suing or being sued in the same
manner as an individual.
Its members are its owners however they can be its creditors simultaneously. A shareholder
cannot be held liable for the acts of the company even if he holds virtually the entire share
capital. A Company is an artificial person created by law. It is not a human being, but it acts
through human beings. It is considered as a legal person which can enter contracts, possess
properties in its own name, sue and can be sued by others etc. It is called an artificial person
since it is invisible, intangible, existing only in the contemplation of law. It can enjoy rights
and being subject to duties.
(ii) Limited Liability.
The privilege of limited liability for business debts is one of the principal advantages of doing
business under the corporate form of organization. The company, being a separate person, is
the owner of its assets and bound by its liabilities. The liability of a member as a shareholder
extends to the contribution to the capital of the company up to the nominal value of the shares
held and not paid by him. Members, even as a whole, are neither the owners of the company’s
undertakings nor liable for its debts. There are various exceptions to the principle of limited
liability.For example, if X holds shares of the total nominal value of 10000 and has already
paid 4000/- as part payment at the time of allotment, he cannot be called upon to pay more
than 6000/-, the amount remaining unpaid on his shares even if the company suffers losses
worth crores of rupees. If he holds fully-paid shares, he has no further liability to pay even if
the company is declared insolvent. In the case of a company limited by guarantee, the liability
all its property is vested, and by which it is controlled, managed and disposed of. Their
Lordships of the Madras High Court in R.F. Perumal v. H. John Deavin, A.I.R. 1960 Mad. 43
held that “no member can claim himself to be the owner of the company’s property during its
existence or in its winding-up”. A member does not even have an insurable interest in the
held by the members are movable property and can be transferred from one person to
another in the manner provided by the articles. If the articles do not provide anything for the
transfer of shares and the Regulations contained in. A member may sell his shares in the
open market and realize the money invested by him. This provides liquidity to a member (as
he can freely sell his shares) and ensures stability to the company (as the member is not
withdrawing his money from the company). The Stock Exchanges provide adequate facilities
for the sale and purchase of shares. Further, as of now, in most of the listed companies, the
shares are also transferable through Electronic mode i.e. through Depository Participants in
dematerialized form instead of physical transfers. However, there are restrictions with
respect to transferability of shares of a Private Limited.
a common seal of the company, when the resolution passed by the Board, for its execution
requires the common seal to be affixed is not authentic and shall have no legal force behind
it.However, a person duly authorized to execute documents pursuant to a power of attorney
granted in his favour under the common seal of the company may execute such documents
and it is not necessary for the common seal to be affixed to such documents. The person,
authorized to use the seal, should ensure that it is kept under his personal custody and is
used very carefully because any deed, instrument or a document to which seal is improperly
or fraudulently affixed will involve the company in legal action and litigation.
A company is a body corporate, can sue and be sued in its own name. To sue means to
institute legal proceedings against (a person) or to bring a suit in a court of law. All legal
proceedings against the company are to be instituted in its name. Similarly, the company
may bring an action against anyone in its own name. A company’s right to sue arises when
some loss is caused to the company, i.e. to the property or the personality of the company.
Hence, the company is entitled to sue for damages in libel or slander as the case may be
[Floating Services Ltd. v. MV San Fransceco Dipaloa (2004) 52 SCL 762 (Guj)]. A company, as a
person distinct from its members, may even sue one Company Law of its own members. A
company has a right to seek damages where a defamatory material published about it,
affects its business. Where video cassettes were prepared by the workmen of a company
showing, their struggle against the company’s management, it was held to be not actionable
unless shown that the contents of the cassette would be defamatory.
The court did not restrain the exhibition of the cassette. [TVS Employees Federation v. TVS
and Sons Ltd., (1996) 87 Com Cases 37]. The company is not liable for contempt committed by
its officer. [Lalit Surajmal Kanodia v. Office Tiger Database Systems India (P) Ltd., (2006) 129
Com Cases 192 Mad].
his company; he is neither a party to the contract nor be entitled to the benefit derived
from of it, as a company is not a trustee for its shareholders. Likewise, a shareholder cannot
be sued on contracts made by his company. The distinction between a company and its
members is not confined to the rules of privity but permeates the whole law of contract. Thus,
if a director fails to disclose a breach of his duties towards his company, and in consequence,
a shareholder is induced to enter into a contract with the director on behalf of the company
which he would not have entered into had there been disclosure, the shareholder cannot
rescind the contract. Similarly, a member of a company cannot sue in respect of torts
committed against the company, nor can he be sued for torts committed by the company.
[British Thomson-Houston Company v. Sterling Accessories Ltd., (1924) 2 Ch. 33]. Therefore,
the company as a legal person can take action to enforce its legal rights or be sued for breach
of its legal duties. Its rights and duties are distinct from those of its constituent members.
The members may derive profits without being burdened with the management of the
company. They do not have effective and intimate control over its working, and they elect
their representatives as Directors on the Board of Directors of the company to conduct
corporate functions through managerial personnel employed by them.In other words, the
company is administered and managed by its managerial personnel.
A company is a voluntary association for profit. It is formed for the accomplishment of some
stated goals and whatsoever profit is gained is divided among its shareholders or saved for
the future expansion of the company. Only a Section 8 company can be formed with no profit
motive.
• Prospectus.
companies. The most commonly used corporate form is the limited company, unlimited
companies being relatively uncommon. A company is formed by registering the
Memorandum and Articles of Association with the State Registrar of Companies of the state
in which the main office is to be located. Foreign companies engaged in manufacturing and
trading activities abroad are permitted by the Reserve Bank of India to open branch offices in
India for the purpose of carrying on the following activities in India:
• To represent the parent company or other foreign companies in various matters in India,
for example, acting as buying/selling agents in India, etc.
• To conduct research work in which the parent company is engaged provided the results of
a Public Company. The application should mention at least four suitable names of the
proposed company, in order of preference. In the case of a private limited company, the name
of the company should end with the words "Private Limited" as the last words. In case of a
public limited company, the name of the company should end with the word "Limited" as
the last word. The ROC generally informs the applicant within seven days from the date of
submission of the application, whether or not any of the names applied for is available. Once
a name is approved, it is valid for a period of six months, within which time Memorandum of
Association and Articles of Association together with miscellaneous documents should be
filed. If one is unable to do so, an application may be made for renewal of name by paying
additional fees. After obtaining the name approval, it normally takes approximately two to
three weeks to incorporate a company depending on where the company is registered.
not to approach the public for the necessary capital and obtains it privately, it can file a
"Statement in Lieu of Prospectus" with the ROC. On fulfillment of these requirements, the
ROC issues a Certificate of Commencement of Business to the public company. The company
can commence business immediately after it receives this certificate.
deposit (exceeding Rs. 5 lakh), contract for sale or purchase of securities (exceeding Rs. 10
lakh), to name a few.
Rules Applicable
• Companies (Central Governments') General Rules and Forms,1956
• Filing Registering/Approving Authority
• One copy has to be submitted along with a forwarding letter addressed to the concerned
Registrar of Companies.
Enclosures
The declaration must be submitted with the following annexure
• Document evidencing payment of fee
• Memorandum and Articles of Association
• Copy of agreement if any, which the proposed company wishes to enter into with any
individual for appointment as its managing or whole-time director or manager
• Form 18
• Form 32 (except for section 25 company)
• Form 29 (only in case of public companies)
• Power of Attorney from subscribers
• Letter from Registrar of Companies making names available
• No objection letters from directors/promoters
• Requisite fees either in cash or demand draft
Fees
Fee payable depends on the nominal capital of the company to be registered and may be paid
in one of the following modes. Cash/postal order (upto Rs.501- ), demand draft favouring
Registrar of Companies/Treasury Challan should be payable into specified branches of
Punjab National Bank for credit Time-Limit. It should be submitted before incorporation or
within 6 months of the name being made available.
Top Requirements
The declaration has to be signed by an advocate of Supreme Court or High Court or an
attorney or pleader entitled to appear before the High Court or a secretary or chartered
accountant in wholetime practice in India who is engaged in the formation of the proposed
company or person named in the articles as director, manager or secretary. The Registrar of
Companies has to be satisfied that not only the requirements of section 33(1) and (2) have
been complied with but be also satisfied that provisions relating to number of subscribers,
lawful nature of objects and name are complied with. The Registrar will check whether the
documents have been duly stamped and also whether the requirements of other laws are
met. Any defect in any of the documents filed has to be rectified either by all the
subscribers or their attorney, or by any one subscriber holding the power of attorney on
by all the companies at, the time of registration, public or private. The place of Registration
No. of the company should be filled up by mentioning New Company therein. The Registrar of
Companies will now accept computer laser printed Company Law documents for purposes of
registration provided the documents are neatly and legibly printed and comply with the other
requirements of the Act. This will be an additional option available to the public to use laser
print besides offset printing for submitting the memorandum and articles for the
registration of companies. Where the executants of a memorandum of association is
illiterate, he shall give his thumb impression or marks which should be described as such by
the subscriber or person writing for him. An agent may sign a memorandum on behalf of a
subscriber if he is authorised by a power-of attorney to do so. In the case of an illiterate
subscriber to the memorandum and articles of association, the thumb impression or mark
duly attested by the person writing for him should be given. The person attesting the thumb
mark should make an endorsement on the document to the effect that it has been read and
explained to the subscriber. The Registrar of Companies will not accept zerox copies of the
memorandum and articles of association for the purposes of registration of companies.
This declaration is to be presented by the person signing the declaration or by his bearer at
the counter of the Registrar of Companies office.
Managerial Remuneration
• Any person in order to be appointed as the Managing Director of the company should be a
resident of India. Any person, being a non-resident in India, must obtain an Employment
Visa from the concerned Indian mission abroad at the time of their appointment as the
Managing Director.
• Whereas private companies are free to pay any remuneration to its directors, public
companies can remunerate their directors only within the specified limits.
• In case of public companies, in the event of absence or inadequacy of net profits in any
company filed along with the declaration duly stamped with the requisite value of adhesive
stamps from the State/ Union Territory Treasury (For value of stamps to be affixed see
Schedule printed in Part III Chapter 23). Below the subscription clause the subscribers to the
Memorandum should write in his own handwriting his full name and father's, or husband's
full name in block letters, full address, occupation, e.g., ‘business executive, engineer,
housewife, etc. and number of equity shares taken and then put his or her signatures in the
column meant for signature. Similarly, at the end of the Articles of Association the
subscriber should write in his own handwriting: his full name and father's full name in block
letters, full address, occupation.
The signatures of the subscribers to the Memorandum and the Article of Association should
be witnessed by one person preferably by the person representing the subscribers, for
registration of the proposed company before the Registrar of Companies. Under column
'Total number of equity shares' write the total of the shares taken by the subscribers e.g., 20
(Twenty) only. Mention date e.g. 5th day of August 1996. Place-e.g., 'New Delhi'.
• With the stamped copy, one spare copy each of the Memorandum and Articles of Association
of the proposed company.
• Original copy of the letter of the Registrar of Companies intimating the availability of name.
Thereafter, the accounts should be drawn from date of last account upto the day not
preceding the AGM date by more than 6 months subject to the extension of the time limit in
certain cases. The accounts of the company must relate to a financial year (comprising of 12
months) but must not exceed 15 months. The company can obtain an extension of the
accounting period to the extent of 18 months by seeking a prior permission from the ROC.
The annual accounts must be filed with the ROC within 30 days from the date on which the
Annual General Meeting (AGM) of the company was held or where the AGM is not held, then
within 30 days of the last date on which the AGM was required to be held.
Books of accounts to be kept by company
Every company is required to maintain proper books of account with respect to all sums of
money received and expended, all sales and purchases of goods, the assets and liabilities.
Central Government may also specifically require the maintenance of certain additional
particulars with respect to certain classes of Companies. The books of account relating to
eight years immediately preceding the current year together with supporting vouchers
are required to be preserved in good order. Every profit and loss account and balance sheet of
the company (together referred to as financial statements) is required to comply with the
accounting standards issued by the Institute of Chartered Accountants of India. Any
deviations from the accounting standards, including the reasons and consequent financial
effect, is required to be disclosed in the financial statements. The responsibility for the
preparation of financial statements on a going concern basis is that of the management. The
management is also responsible for selection and consistent application of appropriate
accounting policies, including implementation of applicable accounting standards along with
proper explanation relating to any material departures from those accounting standards.
The management is also responsible for making judgements and estimates that are
reasonable and prudent so as to give a true and fair view of the state of affairs of the entity at
the end of the financial year and of the profit or loss of the entity for that period.
Annual Return
Every company having a share capital is required to file an annual return with the ROC
within 60 days from the date on which the AGM of the company was held or where the AGM is
not held, then within 60 days of the last date on which the AGM was required to be held.
Currently, domestic companies are taxable at the rate of 35.875% (inclusive of surcharge of
2.5%) on its taxable income. Foreign companies are taxed at a marginally higher rate of 41%
(including surcharge of 2.5%). However, in case where the income tax liability of the company
under the provisions of the domestic tax laws works out to less than 7.5% of the book profits
(derived after making the necessary adjustments), a Minimum Alternate Tax of 7.6875%
(including a surcharge of 2.5%) on the book profits, would be payable. Domestic companies
are required to pay a dividend distribution tax of 12.8125% (including surcharge of 2.5%) on
the dividends distributed during the year. Companies are required to withhold tax under the
domestic law from certain payments including salaries paid to employees, interest,
professional fee, payments to contractors, commission, winnings from games / lottery /
horse races etc. Moreover, taxes have to be withheld from all payments made to non-
residents at the lower of rates specified under the domestic law or under the applicable tax
treaty, if any.
Penalty
• Imprisonment up to two years and fine
• Person liable for default
• Person signing the declaration
Certificate of Incorporation
After the duly stamped Memorandum of Association and Articles of Association, documents
and forms are filed and the filing fees are paid, the ROC scrutinizes the documents and, if
necessary, instructs the authorised person to make necessary corrections. Thereafter, a
Certificate of Incorporation is issued by the ROC, from which date the company comes into
existence. It takes one to two weeks from the date of filing Memorandum of Association and
Articles of Association to receive a Certificate of Incorporation. Although a private company
can commence business immediately after receiving the certificate of incorporation, a public
company cannot do so until it obtains a Certificate of Commencement of Business from the
ROC.
Memorandum of Association
A company is formed when a number of people come together for achieving a specific
purpose. This purpose is usually commercial in nature. Companies are generally formed to
earn profit from business activities. To incorporate a company, an application has to be filed
with the Registrar of Companies (ROC). This application is required to be submitted with a
number of documents. One of the fundamental documents that are required to be submitted
with the application for incorporation is the Memorandum of Association.
Definition of Memorandum of Association
Section 2(56) of the Companies Act, 2013 defines Memorandum of Association. It states that a
“memorandum” means two things:
Association. The section also states that the alterations must be made in pursuance of any
previous company law or the present Act. In addition to this, according to Section 399 of the
Companies Act, 2013, any person can inspect any document filed with the Registrar in
pursuance of the provisions of the Act. Hence, any person who wants to deal with the
company can know about the company through the Memorandum of Association.
Meaning of Memorandum of Association
Memorandum of Association is a legal document which describes the purpose for which the
company is formed. It defines the powers of the company and the conditions under which it
operates. It is a document that contains all the rules and regulations that govern a company’s
relations with the outside world. It is mandatory for every company to have a Memorandum
of Association which defines the scope of its operations. Once prepared, the company cannot
operate beyond the scope of the document. If the company goes beyond the scope, then the
action will be considered ultra vires and hence will be void. It is a foundation on which the
company is made. The entire structure of the company is detailed in the Memorandum of
Association. The memorandum is a public document. Thus, if a person wants to enter into
any contracts with the company, all he has to do is pay the required fees to the Registrar of
Companies and obtain the Memorandum of Association. Through the Memorandum of
Association, he will get all the details of the company. It is the duty of the person who indulges
in any transactions with the company to know about its memorandum.
Object of registering a Memorandum of Association or MOA
Memorandum of Association is an essential document that contains all the details of the
company. It governs the relationship between the company and its stakeholders. Company
Law. Section 3 of the Companies Act, 2013 describes the importance of memorandum by
stating that, for registering a company,
a) In case of a public company, seven or more people are required.
b) In case of a private company, two or more people are required.
in Tables A, B, C, D, and E of Schedule 1. The Tables are of different kinds because of different
kinds of companies.
Table A – It is applicable to a company limited by shares.
Table B – It is applicable to a company limited by guarantee and not having a share capital.
Table C – It is applicable to a company limited by guarantee and having a share capital.
Table D – It is applicable to an unlimited company not having a share capital.
Table E – It is applicable to an unlimited company having a share capital.
The memorandum should be printed, numbered and divided into paragraphs. It should also
be signed by the subscribers of the company.
Content of Memorandum of Association.
Section 4 of the Companies Act, 2013 states the contents of the memorandum. It details all the
essential information that the memorandum should contain.
Name Clause
The first clause states the name of the company. Any name can be chosen for the company.
But there are certain conditions that need to be complied with. Section 4(1)(a) states:
• If a company is a public company, then the word ‘Limited’ should be there in the name.
Example, “Robotics”, a public company, its registered name will be “Robotics Limited”.
• If a company is a private company, then ‘Private Limited’ should be there in the name.
“Secure “a private company, its registered name will be “Secure Private Limited”.
• This condition is not applicable to Section 8 companies.
What are Section 8 companies?
• If there is an intentional spelling mistake in the name or phonetic changes in the name.
Illustrations: Greentech is same as Greentek.
• Internet related designations are used like .org, .com, etc.
Illustration: Greentech Solution Ltd. is same as Greentech Solutions.com Ltd.
Exception: The name will not be disregarded if the existing company by a board of resolution
allows it.
• Change in order of combination of words.
Illustration: Shah Builders and Contractors is same as Shah Contractors and Builders.
Exception: The name will not be disregarded if the existing company by a board of resolution
allows it.
• Addition of a definite or indefinite article.
International etc. are also not allowed to be chosen. Names which in any way indicate that the
company is working for the government are also not allowed.
Reservation of a Name
Section 4(5)(i) of the Act states that for formation of the Company, the Registrar on receiving
the required documents can reserve a name for 20 days. If the application is made by an
existing company, then once the application is accepted, the name will be reserved for 60 days
from the date of application. The company should get incorporated with the reserved
name in these 60 days.If after making the reservation of a name, it is found that some wrong
information is given. Then two cases arise.
• In case the company has not been incorporated. In this case, the Registrar can cancel the
reservation of the name and impose a fine of Rupees 1,00,000.
• In case the company has been incorporated. In this case, after hearing the reasons of the
company, the Registrar has 3 options. These are :
*On being satisfied, he can give 3 months’ time to the company to change the name by
passing an ordinary resolution.
He can strike off the name from the Register of Companies.
He can file a petition of winding up of the company.
Rule 8 and 9 of the Company (Incorporation) Rules, 2014 state that the application for
reservation of name under section 4(4) should be filed on Form INC – 1.
Registered Office Clause Company Law
The Registered Office of a company determines its nationality and jurisdiction of courts. It is
a place of residence and is used for the purpose of all communications with the company.
Section 12 of the Companies Act, 2013 talks about Registered Office of the company. Before
incorporation of the company, it is sufficient to mention only the name of the state where the
company is located. But after incorporation, the company has to specify the exact location of
the registered office. The company has to then get the location verified as well, within 30 days
of incorporation. It is mandatory for every company to fix its name and address of its
registered office on the outside of every office in which the business of the company takes
place. If the company is a one-person company, then “One-person Company” should be
written in brackets below the affixed name of the company. Change in place of Registered
Office should be notified to the Registrar within the prescribed time period.
Object Clause
Section 4(c) of the Act details the object clause. The Object Clause is the most important clause
of Memorandum of Association. It states the purpose for which the company is formed. The
object clause contains both, the main objects and matters which are necessary for achieving
the stated objects also known as incidental or ancillary objects. The stated objects must be
well defined and lawful according to Section 6(b) of the Companies Act, 2013. By limiting the
scope of powers of the company. The object clause provides protection to:
Shareholders – The object clause clearly states what operations will the company perform.
This helps the shareholders know their investment in the company will be used for what
purpose.
Creditors – It ensures the creditors that capital is not at risk and the company is working
within the limits as stated in the clause.
Public Interest – The object clause limits the number of matters the company can deal with
thus, prohibiting diversification of activities of the company.
Doctrine of Ultra Vires
If the company operates beyond the scope of the powers stated in the object clause, then the
action of the company will be ultra vires and thus void.
Consequences of Ultra Vires
1. Liability of Directors: The directors of the company have a duty to ensure that company’s
capital is used for the right purpose only. If the capital is diverted for another purpose not
stated in the memorandum, then the directors will be held personally liable.
2. Ultra Vires Borrowing by the Company: If a bank lends to the company for the purpose not
stated in the object clause, then the borrowing would be Ultra Vires and the bank will not be
able to recover the amount.
3. Ultra Vires Lending by the Company: If the company lends money for an ultra vires
purpose, then the lending would be ultra vires.
4. Void ab initio – Ultra Vires acts of the company are considered void from the beginning.
5. Injunction – Any member of the company can use the remedy of injunction to prevent the
company from doing ultra vires acts.
Liability Clause
The Liability Clause provides legal protection to the shareholders by protecting them from
being held personally liable for the loss of the company.
There are two kinds of limited liabilities:
Limited by Shares – Section 2(22) of the Companies Act, 2013 defines a company limited by
shares. In a company limited by shares, the shareholders only have to pay the price of the
shares they have subscribed to. If for some reason they have not paid the full amount for the
shares and the company winds up, then their liability will only be limited to the unpaid
amount.
Limited by Guarantee – It is defined in Section 2(21) of the Companies Act, 2013.A company
limited by guarantee has members instead of shareholders. These members undertake to
contribute to the assets of the company at the time of winding up. The members give
guarantee of a fixed amount that they will be liable for.
Non-profit Organizations and other charities usually have a structure of companies limited
by guarantee.
Capital Clause
It states the total amount of share capital in the company and how it is divided into shares.
The way the amount of capital is divided into what kind of shares. The shares can be equity
shares or preference shares.
Illustration: The share capital of the company is 80,00,000 rupees, divided into 3000 shares
of 4000 rupees each.
Subscription Clause Company Law
The Subscription Clause states who are signing the memorandum. Each subscriber must
state the number of shares he is subscribing to. The subscribers have to sign the
memorandum in the presence of two witnesses. Each subscriber must subscribe to at least
one share.
Association Clause
In this clause, the subscribers to the memorandum make a declaration that they want to
associate themselves to the company and form an association.
private companies will be applicable on one-person company. Section 2(62) of the Companies
Act, 2013 defines one-person company. A one-person company is a separate legal entity from
its owner. It is mandatory for the company to be converted into a private limited company
in case its annual turnover crosses the 2 Crore mark. In case of one-person-company, in
addition to all the other clauses, the Memorandum of Association contains a clause called the
Nomination Clause. This clause mentions the name of an individual who will become the
member in case the subscriber dies or becomes incapacitated. The nominee must be an
Indian citizen and resident of India i. e. he must have been living in India for at least 182 days
in the preceding year. A minor cannot be a nominee. The individual whose name is mentioned
should give his consent in written form and it is required to be filed with the Registrar of
Companies at the time of incorporation. If the nominee wants to withdraw, he shall give it in
writing and the owner of the company will have to nominate a new person within 15 days.
What’s the use of Memorandum of Association?
1. It defines the scope & powers of a company, beyond which the company cannot operate.
2. It regulates company’s relation with the outside world.
3. It is used in the registration process; without it the company cannot be incorporated.
4. It helps anyone who wants to enter into a contractual relationship with the company to
gain knowledge about the company.
5. It is also called the charter of the Company, as it contains all the details of the company, its
required are 2.
• Public Company: In case of a public company, 7 or more subscribers are required.
• One-Person-Company: In case of one-person-company, only one person is required.
Who can Subscribe?
Rule 13 of the Companies (Incorporation) Rules, 2014 describes the provisions of subscribing
to the memorandum. There are specific kinds of persons (natural or artificial) who can
subscribe to the memorandum.
These are:
• Individuals – An individual or a group of individuals can subscribe to the memorandum.
• Foreign citizens and Non-Resident Indians – Rule 13(5) of the Companies (Incorporation)
Rules, states that for a foreign citizen to subscribe to a company in India, his signature,
address and proof of identity will need to be notarized.
The foreign national must have visited India and should have a Business Visa.
For a Non-Resident Indian, the photograph, address and identity proof should be attested at
the Embassy with a certified copy of a passport. There is no requirement of Business Visa.
1 Minor – A minor can only be a subscriber through his guardian.
2 Company incorporated under the Companies Act – The company can be a subscriber to the
memorandum. The Director, officer or employee of the company or any other person
authorized by the board Company Law of resolution.
3 Company incorporated outside India – Foreign Company is defined in Section 2(42) of the
act; it states that a foreign company is a company incorporated outside India. A company
registered outside India can also subscribe to the memorandum by fulfilling the additional
formalities.
5 Limited Liability Partnership – A partner of a limited liability partnership can sign the
memorandum with the agreement of all the other partners.
6 Body corporate incorporated under an Act of Parliament or State Legislature can also be a
subscriber to the memorandum.
Subscription to Memorandum of Association
Every subscriber should sign the memorandum in presence of at least one witness. The
2 Address
3 Description
4 Occupation
If the signature is in any other language then, then an affidavit is required that declares that
the signature is the actual signature of the person.According to Circular No. 8/15/8, dated 1-9-
1958. The subscriber can also authorize another person to affix the signature by granting a
power of attorney to the person. Department Circular No. 1/95, dated 16th February
1995 states that only one power of attorney is required. The person who is granted the power
of attorney may be known as an agent. He should also state the following particulars in the
memorandum:
2 Address.
3 Description.
4 Occupation.
Particulars to be Mentioned in Memorandum of Association.
Rule 16 of the Companies (Incorporation) Rules, 2014 details the particulars that are to be
mentioned in the memorandum.
Every Subscriber’s following details should be mentioned.
1 Name (includes last name and family name), a photograph should be affixed and scanned
with the memorandum.
2 Father’s Name and Mother’s Name.
3 Nationality.
4 Date of Birth.
5 Place of Birth.
6 Qualifications.
7 Occupation.
8 Permanent Account Number.
9 Permanent and Current Address.
10 Contact Number.
11 Fax Number (Optional).
12 2 Identity Proofs in which Permanent Account Number is mandatory.
13 Residential Proof (not older than 2 months).
1 Corporate identity number of the company or registration number of the body corporate.
2 Global location number, which is used to identify the location of the legal entity. (Optional)
3 The name of the body corporate.
4 The registered address of the business.
5 Email address.
In case the body corporate is a company, then a certified copy of Board resolution which
authorizes the subscription to the memorandum. The particulars required in this case are,
2 If the person subscribing to the document is illiterate, he can either authorize an agent to
sign the document through Power of Attorney or he can put his thumb impression on the
column for signatures. The person’s name, address, occupation and the number of shares he
is subscribing to should be written by a person who has been allowed to write for him. The
person who is writing for the illiterate person should read and explain the contents of the
4 Where the person subscribing to the memorandum is a foreign national who does not reside
in India but in a country,
in any part of the Commonwealth, his signatures and address on the memorandum and
proof of identity shall be notarized by a Notary (Public) in that part of the
Commonwealth.
in a country which is a signatory to The Hague Apostille Convention, 1961, his signature
and proof of identity and address on the memorandum shall be notarized before the
Notary (Public) of the country of his origin and be duly approved in accordance with the
said Hague Convention.
in a country outside the Commonwealth and which is not a party to the Hague Apostille
Convention, 1961, his signatures and address on the memorandum and proof of identity,
shall be notarized before the Notary (Public) of such country and the certificate of the
Notary (Public) shall be authenticated by a Diplomatic or Consular Officer empowered in
this behalf under section 3 of the Diplomatic and Consular Officers (Oaths and Fees) Act,
1948 (40 of 1948).
Section 3 of the Diplomatic and Consular Officers states that, every Diplomat or any officer in
a foreign country can perform the functions of a notary public.
• Where there is no Diplomatic or Consular officer by any of the officials mentioned in section
6 of the Commissioners of Oaths Act, 1889.
• If the foreign national visited India and intended to incorporate a company, in such a case
the incorporation shall be allowed if, he is having a valid Business Visa.
Section 15 of the Companies Act, 2013 states that the memorandum should be in printed form.
The Ministry of Corporate Affairs has clarified that a document printed in form laser
printers will be considered valid provided it is legible and fulfills other requirements as well.
The submission of xerox copies is not allowed. The xerox copies can be submitted to the
members of the company.
Alteration, Amendment & Change in Memorandum of Association under Companies
Act, 2013.
The term “alter” or “alteration” is defined in Section 2(3) of the Act, as any additions,
omissions or substitutions. A company can alter the memorandum only to the extent as
permitted by the Act. According to Section 13, the company can alter the clauses in the
memorandum by passing a special resolution. A resolution is a formal decision taken in a
meeting. There are two kinds of resolutions, ordinary and special. A special resolution is one
which requires at least 2/3rd majority to be effective. The alteration to the clauses also
Company Law requires the approval of the Central Government in writing.
The alteration of memorandum can happen for a variety of reasons. The alteration can be
made if,
1 Alteration to the Name Clause: To alter the name of the company, a special resolution is
required. After the resolution is passed, the copy is sent to the registrar. For changing the
name, the application needs to be filed in Form INC- 24 with the prescribed fees. After the
name is changed, a new certificate of incorporation is issued.
2 Alteration to the Registered Office Clause: The application for changing the place for
Registered Office of the company shall be filed with the Central Government in Form INC- 23
with the prescribed fees.
If the company is changing its Registered Office from one to another, then the approval of the
Central Government is required. The Central Government is required to dispose off the
matter within 60 days and should ensure that the change of place has the consent of all the
stakeholders of the company.
• Alteration to the Object Clause: To alter the object clause, a special resolution is required to
be passed. The changes must be confirmed by the authority. The document which confirms
the changes by authority with a printed copy of the altered memorandum should be
filed with the Registrar. If the company is a public company, then the alteration should be
published in the newspaper where the Registered Office of the company is located. The
changes to the object clause must also mentioned on the company’s website.
• Alteration to the Liability Clause: The Liability clause of the memorandum cannot be altered
except with the written consent of all the members of the company. By altering the liability
clause, the liability of the directors of the company can be made unlimited. In any case, the
liability of the shareholders cannot be made unlimited. Changes in the liability clause can be
made by passing a special a special resolution and sending a copy of the resolution to the
Registrar of Companies.
Alteration to the Capital Clause: The capital clause of a company can be altered by an
ordinary resolution.
The company can,
1. Increase its authorised share capital.
2. Convert the shares into stock.
3. Consolidate and divide all of its shares.
4. Cancel the shares which have not been subscribed to.
The Companies Act, 2013 defines ‘articles’ as the “articles of association of a company
originally framed, or as altered from time to time in pursuance of any previous company
laws or of the present.” The Articles of Association of a company are that which prescribe the
rules, regulations and the bye-laws for the internal management of the company, the
conduct of its business, and is a document of paramount significance in the life of a
company. The Articles of a company have often been compared to a rule book of the
company’s working, that regulates the management and powers of the company and its
officers. It prescribes several details of the company’s inner workings such as the manner of
making calls, director’s/employees’ qualifications, powers and duties of auditors,
forfeiture of shares etc. In fact, the articles of association also establish a contract between
the members and between the members and the company. This contract is established,
governs the ordinary rights and obligations that are incidental to having membership in the
company. It must be noted, however, that the articles of association, are subordinate to the
memorandum of association of a company, which is the dominant, fundamental
constitutional document of the company. Further, as laid down in Shyam Chand v. Calcutta
Stock Exchange, any and all articles that go beyond the memorandum of association will be
deemed ultra vires. Therefore, there should not be any provisions in the articles that go
beyond the memorandum. In the event of a conflict between the memorandum and the
articles, the provisions in the memorandum will prevail. In case of any ambiguity or
uncertainty regarding details in the memorandum, it should be read along with the articles.
Nature and Content of Articles of Association
As per the Companies Act, 2013, the articles of association of different companies are
supposed to be framed in the prescribed form, since the model form of articles is different
for companies limited by shares, companies limited by guarantee having share capital,
companies limited by guarantee not having share capital, an unlimited company having
share Company Law capital and an unlimited company not having share capital.
who are further required to add their names, addresses and occupation, in the presence of at
least one witness, who must attest the signatures with his own signature and details.
• Where a subscriber is illiterate, he must affix a thumb impression in place of his signature
and appoint a person to authenticate the impression with his signature and details. This
appointed person should also read out the content of the documents to the illiterate
subscriber for his understanding.
• Where a subscriber is a body corporate, the memorandum and articles must be signed by
any director of the body corporate who is duly authorised to sign on behalf of the body
corporate, by a passing a resolution of the board of directors of the body corporate.
• Where the subscriber is a Limited Liability Partnership, the partner of the LLP who is duly
authorised to sign on the behalf of the LLP by a resolution of all the partners shall sign.
Provisions for Entrenchment.
The concept of Entrenchment was introduced in the Companies Act, 2013 in Section 5(3)
which implies that certain provisions within the Articles of Association will not be alterable by
merely passing a special resolution and will require a much more lengthy and elaborate
process. The literal definition of the word “entrench” means to establish an attitude, habit, or
belief so firmly that bringing about a change is unlikely. Thus, an entrenchment clause
included in the Articles is one which makes certain changes or amendments either
impossible or difficult. Provisions for entrenchment can only be introduced in the articles of
a company during its incorporation, or an amendment to the articles brought about by a
special resolution in case of a public company, and an agreement between all the members in
case of a private company.
Alteration of Articles of Association
Section 14 of the Companies Act, 2013, permits a company to alter its articles, subject to the
conditions contained in the memorandum of association, by passing a special resolution.
This power is extremely important for the functioning of the company. The company may
of the Tribunal. Further, a copy of the special resolution must be filed with the Registrar of
Companies within 30 days of passing it. Further, a company must then file a copy of the
altered, new articles of association, as well as the approval order of the Tribunal
with the Registrar of Companies within 15 days of the order being received.
A private company into a public company
For a company wanting to convert from its private status to public, it may do so by
removing/omitting the three clauses as per section 2(68) which defines the requisites of a
private company. Similar to the conversion of the public to a private company, a copy of the
resolution and the altered articles are to be filed with the Registrar within the stipulated
period of time.
Limitations on power to alter articles.
• The alteration must not contravene provisions of the memorandum, since the
memorandum supersedes the articles, and the memorandum will prevail in the event of a
conflict.
• The alteration cannot contravene the provisions of the Companies Act, or any other company
law since it supersedes both the memorandum and the articles of the company.
• Cannot contravene the rules, alterations or suggestions of the Tribunal.
• The alteration cannot be illegal or in contravention with public policy.
Further, it must be for the bona fide benefit and interest of the company. The alterations
cannot be an effort to constitute a fraud on the minority and must be for the benefit of the
company as a whole.
• Any alteration made to convert a public company into a private company, cannot be made
until the requisite approval is obtained from the Tribunal.
• A company may not use the alteration to cover up or rectify a breach of contract with third
parties or use it to escape contractual liability.
• A company cannot alter its articles for the purpose of expelling a member of the board of
company. However, while the company’s articles have a binding effect, it does not Company
Law have as much force as a statute does. The effect of binding may work as follows:
Binding the company to its members.
The company is naturally completely bound to its members to adhere to the articles. Where
the company commits or is in a place to commit a breach of the articles, such as making
ultra vires or otherwise illegal transaction, members can restrain the company from doing
so, by way of an injunction. Members are also empowered to sue the company for the purpose
of enforcement of their own personal rights provided under the Articles, for instance, the
right to receive their share of declared divided.It should be noted, however, that only a
shareholder/member, and only in his capacity as a member, can enforce the provisions
contained in the Articles. For instance, in the case of Wood v. Odessa Waterworks Co., the
articles of Waterworks Co. provided that the directors can declare a dividend to be paid to the
members, with the sanction of the company at a general meeting. However, instead of paying
the dividend to the shareholders in cash a resolution was passed to give them debenture
bonds. It was finally held by the court, that the word “payment” referred to payment in cash,
and the directors were thus restrained from acting on the resolution so passed.
Members bound to the company.
Each member of the company is bound to the company and must observe and adhere to the
provisions of the memorandum and the articles. All the money that may be payable by any
member to the company shall be considered as a debt due. Members are bound by the articles
just as though each and every one of them has signed and contracted to conform to their
provisions. In Borland’s Trustees v. Steel Bros. & Co. Ltd., the articles the company provided
that in the event of bankruptcy of any member, his shares would be sold at a price affixed by
the directors. Thus, when Borland went bankrupt, his trustee expressed his wish to sell these
shares at their original value and contended that he could do so since he was not bound by
the articles. It was held, however, that he was bound to abide by the company’s articles since
been known to make exceptions and extend the articles to constitute a contract even between
individual members. In the case of Rayfield v Hands Rayfield was a shareholder in a
particular company., who was required to inform directors if he intended to transfer his
shares, and subsequently, the directors were required to buy those shares at a fair value.
Thus, Rayfield remained in adherence to the articles and informed the directors. The
directors, however, contended that they were not bound to pay for his shares and the articles
could not impose this obligation on them. The courts, however, dismissed the directors’
argument and compelled them to buy Rayfield’s shares at a fair value. The
court further held that it was not mandatory for Rayfield to join the company
to be allowed to bring a suit against the company’s directors.
No binding in relation to outsiders.
Contrary to the above conditions, neither the memorandum nor the articles constitute a
contract between the company and any third party. The company and its members are not
bound to the outsiders with respect to the provisions of the memorandum and the articles.
For instance, in the case of Browne v La Trinidad, the articles of the company included a
clause that implied that Browne should be a director that should not be removed or
removable. He was, however, removed regardless and thus brought an action to restrain the
company from removing him. Held that since there was no contract between Browne and the
company, being an outsider, he cannot enforce articles against the company even if they talk
about him or give him any rights. Therefore, an outsider may not take undue advantage of
the articles to make any claims against the company.
The doctrine of Constructive Notice
When the Memorandum and Articles of Association of any company, are registered with the
Registrar of Companies they become “public documents” as per section 399 of the Act. This
implies that any member of the general public may view and inspect these documents at a
prescribed fee. A member of the public may make a request to a specific company, and the
company, in turn, must, within seven days send that person a copy of the memorandum, the
articles and all agreements and resolutions that are mentioned in section 117(1) of the Act. If
the company or its officers or both, fail to provide the copies of the requisite documents, every
defaulting officer will be liable to a fine of Rs.1000, for every day, until the default continues,
or Rs. 1,00,000 whichever is less. Therefore, it is the duty of every person that deals with the
company to inspect these public documents and ensure in his own capacity that the
workings of the company are in conformity with the documents. Irrespective of whether a
person has actually read the documents or not, it is assumed that he familiar with the
contents of these documents, and that he has understood them in their proper meaning. The
memorandum and articles of association are thus deemed as notices to the public, hence a
‘constructive notice’.
Illustration: If the articles of Company A, provided that any bill of exchange must be signed by
a minimum of two directors, and the payee receives a bill of exchange signed only by one, he
will not have the right to claim the amount.
DIFFERENCE BETWEEN BILLS OF EXCHANGE AND PROMISSORY NOTE.
Meant for the benefit and clarity of the Regulate the relationship between the
public and the creditors, and the company and its members, as well
shareholders. amongst the members themselves..
Lays down the area beyond which the Articles establish the regulations for
company’s conduct cannot go. working within that area.
Memorandum lays down the parameters Articles prescribe details within those
for the articles to function. parameters.
Acts done beyond the memorandum are Acts done beyond the Articles can be
ultra vires and cannot be ratified even by ratified by the shareholders as long as the
the shareholders. act is not beyond the memorandum.
held liable. The share certificate was held to be in nullity and hence, the doctrine of indoor
management could not be applied. The wrongful an unauthorized use of the company’s seal
is also included within this exception. Further, this doctrine cannot include situations where
there was third agency involved or existent. For example, in the case of Varkey Souriar v.
Keraleeya Banking Co. Ltd. this doctrine could not be applied where there was any scope of
power exercised by an agent of the company. The doctrine cannot be implied even in cases of
Oppression.
11.5 PROSPECTUS.
The Companies Act, 2013 defines a prospectus under section 2(70). Prospectus can be defined
as “any document which is described or issued as a prospectus”. This also includes any
notice, circular, advertisement or any other document acting as an invitation to offers from
the public. Such an invitation to offer should be for the purchase of any securities of a
corporate body. Shelf prospectus and red herring prospectus are also considered as a
prospectus.
Essentials for a document to be called as a prospectus.
For any document to considered as a prospectus, it should satisfy following conditions.
• The document should invite the subscription to public share or debentures, or it should
invite deposits.
• Such an invitation should be made to the public.
• The invitation should be made by the company or on the behalf company.
• The invitation should relate to shares, debentures or such other instruments.
Statement in lieu of prospectus.
Every public company either issue a prospectus or file a statement in lieu of prospectus. This
is not mandatory for a private company. But when a private company converts from private
to public company, it must have to either file a prospectus if earlier issued or it has to file a
statement in lieu of Company Law prospectus.
The provisions regarding the statement in lieu of prospectus have been stated under section
70 of the Companies Act 2013.
Advertisement of prospectus.
Section 30 of the Companies Act 2013 contains the provisions regarding the advertisement of
the prospectus. This section states that when in any manner the advertisement of a
prospectus is published, it is mandatory to specify the contents of the memorandum of the
company regarding the object, member’s liabilities, amount of the company’s share capital,
signatories and the number of shares subscribed by them and the capital structure of the
company. Types of the prospectus as follows.
• Shelf Prospectus
• Red Herring Prospectus
• Abridged prospectus
• Deemed Prospectus
Shelf Prospectus.
Shelf prospectus can be defined as a prospectus that has been issued by any public financial
institution, company or bank for one or more issues of securities or class of securities as
mentioned in the prospectus. When a shelf prospectus is issued then the issuer does not need
to issue a separate prospectus for each offering, he can offer or sell securities without
issuing any further prospectus. The provisions related to shelf prospectus has been
discussed under section 31 of the Companies Act, 2013. The regulations are to be provided by
the Securities and Exchange Board of India for any class or classes of companies that may
file a shelf prospectus at the stage of the first offer of securities to the registrar. The
prospectus shall prescribe the validity period of the prospectus and it should be not be
exceeding one year. This period commences from the opening date of the first offer of the
securities. For any second or further offer, no separate prospectus is required.
While filing for a shelf prospectus, a company is required to file an information
memorandum along with it.Information Memorandum [Section 31(2)]. The company which is
filing a shelf prospectus is required to file the information memorandum. It should contain
all the facts regarding the new charges created, what changes have undergone in the
financial position of the company since the first offer of the security or between the two
offers. It should be filed with the registrar within three months before the issue of the second
or subsequent offer made under the shelf prospectus as given under Rule 4CCA of section
60A(3) under the Companies (Central Government’s) General Rules and Forms, 1956. When
any company or a person has received an application for the allotment of securities with
advance payment of subscription before any changes have been made, then he must be
informed about the changes. If he desires to withdraw the application within 15 days, then the
money must be refunded to them. After the information memorandum has been filed, if any
offer or securities is made, the memorandum along with the shelf prospectus is considered
as a prospectus.
Red herring prospectus.
Red herring prospectus is the prospectus which lacks the complete particulars about the
quantum of the price of the securities. A company may issue a red herring prospectus prior
to the issue of prospectus when it is proposing to make an offer of securities. This type of
prospectus needs to be filed with the registrar at least three days prior to the opening of the
subscription list or the offer. The obligations carried by a red herring prospectus are same as
a prospectus. If there is any variation between a red herring prospectus and a prospectus,
then it should be highlighted in the prospectus as variations. When the offer of securities
closes then the prospectus has to state the total capital raised either raised by the way of debt
or share capital. It also has to state the closing price of the securities. Any other details which
have not been included in the prospectus need to be registered with the registrar and SEBI.
The applicant or subscriber has right under Section60B (7) to withdraw the application on
any intimation of variation within 7 days of such intimation and the withdrawal should be
communicated in writing.
Abridged Prospectus.
The abridged prospectus is a summary of a prospectus filed before the registrar. It contains
all the features of a prospectus. An abridged prospectus contains all the information of the
prospectus in brief so that it should be convenient and quick for an investor to know all the
useful information in short. Section 33(1) of the Companies Act, 2013 also states that when
any form for the purchase of securities of a company is issued, it must be accompanied
by an abridged prospectus. It contains all the useful and materialistic information so that the
investor can take a rational decision and it also reduces the cost of public issue of the capital
document will be considered as a deemed prospectus through which the offer is made to the
public for sale. The document is deemed to be a prospectus of a company for all purposes and
all the provision of content and liabilities of a prospectus will be applied upon it. In the case of
SEBI v. Kunnamkulam Paper Mills Ltd., it was held by the court that where a rights issue is
made to the existing members with a right to renounce in the favour of others, it becomes a
deemed prospectus if the number of such others exceeds fifty.
Process for filing and issuing a prospectus.
Application forms.
As stated under section 33, the application form for the securities is issued only when they
are accompanied by a memorandum with all the features of prospectus referred to as an
abridged prospectus.
The exceptions to this rule are:
• When an application form is issued as an invitation to a person to enter into underwriting
agreement regarding securities.
• Application issued for the securities not offered to the public.
Contents
For filing and issuing the prospectus of a public company, it must be signed and dated and
contain all the necessary information as stated under section 26 of the Companies Act,2013 :
1 Name and registered address of the office, its secretary, auditor, legal advisor, bankers,
trustees, etc.
3 Statements of the Board of Directors about separate bank accounts where receipts of issues
are to be kept.
4 Statement of the Board of Directors about the details of utilization and non-utilisation of
receipts of previous issues.
As stated under sub-section 4 of section 26 of the Companies Act, 2013, the prospectus is not
to be issued by a company or on its behalf unless on or before the date of publication, a copy
of the prospectus is delivered to the registrar for registration.The copy should be signed by
every person whose name has been mentioned in the prospectus as a director or proposed
director or the assigned attorney on his behalf.
Delivery of copy of the prospectus to the registrar.
As per section 26(6) of the Companies Act 2013, the prospectus should mention that its copy
has been delivered to the registrar on its face. The statement should also mention the
document submitted to the registrar along with the copy of the prospectus.
Registration of prospectus.
Section 26(7) states about the registration of a prospectus by the registrar. According to this
section, when the registrar can register a prospectus when:
• It fulfils the requirements of this section, i.e., section 26 of the Companies Act, 2013; and
• It contains the consent of all the persons named in the prospectus in writing.
Issue of prospectus after registration.
If a prospectus is not issued before 90 days from the date from which a copy was delivered
before the registrar, then it is considered to be invalid.
Contravention of section.
If a prospectus is issued in contravention of the provision under section 26 of the Companies
Act 2013, then the company can be punished under section 26(9). The punishment for the
contravention is:
• Fine of not less than Rs. 50,000 extending up to 3,00,000. If any person becomes aware of
such prospectus after knowing the fact that such prospectus is being issued in contravention
of section 26 then he is punishable with the following penal provisions.
• Imprisonment up to a term of 3 years, or
• Fine of more than Rs. 50,000 not exceeding Rs. 3,00,000.
general meeting, which is the mandatory meeting of the members that every company is
required to convene each year. However, there exists no embargo on holding more than
one general meeting of the members, which are called the extra-ordinary general meetings.
The meetings of the directors are called the Board meetings and the meetings of the
committees of the directors are the Committee meetings. Other meetings include creditors
meetings and class meetings.
The focus of the Companies Act, 2013 has been on enhancing transparency, shareholders’
democracy and protection of the interest of the investors. It has made few changes for
regulating meetings for example, the requirement of holding a statutory meeting of
members at the time of commencement of business of a company for any public company
(required under the Companies Act, 1956) has been done away with, the concepts of video-
conferencing and e-voting have been introduced.
Board of Directors.
The Board of directors of a company is a nucleus, selected according to the procedure
prescribed in the Act and the Articles of Association. Members of the Board of directors are
known as directors, who unless especially authorised by the Board of directors of the
Company, do not possess any power of management of the affairs of the company. The Board
of Directors oversees how the management serves and protects the long-term interests of all
the stakeholders of the company. The institution of Board of Directors is based on the
premise that a group of trustworthy people look after the interests of the large number of
shareholders who are not directly involved in the management of the company. The position
of board of directors is that of trust as the board is entrusted with the responsibility to act in
the best interests of the company. Acting collectively as a Board of directors, they can exercise
all the powers of the company except those, which are prescribed by the Act to be specifically
exercised by the company in general meeting. The Board formulate policies and establish
organisational set up for implementing those policies and to achieve the objectives contained
in the Memorandum, muster resources for achieving the company objectives and control,
guide, direct and manage the affairs of the company. Section 2(10) of the Companies Act, 2013
defines that “Board of Directors” or “Board”, in relation to a company, means the collective
body of the directors of the company. The term ‘Board of Directors’ means a body duly
constituted to direct, control and supervise the affairs of a company. As per Section 149 of the
Companies Act, 2013, the Board of Directors of every company shall consist of individual only.
Thus, no body corporate, association or firm shall be appointed as director.
Directors’ Meetings.
Board Meetings [Section 173 read with Rules 3 and 4 of the Companies (Meetings of Board and
its Powers), 2014]. The Board of directors of a company are responsible for overseeing the
management of the company and thereby exercise their power of day-to-day decision making
by convening and holding Board meetings. Within 30 days of their incorporation, the
companies must hold their first board meeting. Thereafter, the companies must hold at least
four board meetings in a year, where there must not be more than 120 days’ gap between two
consecutive meetings. One of the striking features of the present legislation is that it allows
the directors to take part in the board meeting through videoconferencing or any other
audio-visual means. However, there is an embargo from dealing certain matters through the
video-conferencing or audio-visual mode. A notice of at least seven days must be given to
each of the director for a board meeting. In case of urgency a shorter notice may be given
where at least one independent director is present at such meeting.The notice of a board
meeting must be sent to all the directors, otherwise the proceedings of the meeting and the
resolution passed thereat may be declared as invalid by the Court of law. Also, it has been
held in the case of Dankha Devi Agarwal v. Tara Properties Private Limited that a decision
taken in a meeting without due notice of such meeting for removal or induction would be
instance of oppression and mismanagement. At least two directors or one-third of the total
strength (higher of the two) constitutes quorum for a board meeting. Here the directors, both
personally attending or through the audio-video means would be counted for the purposes of
the quorum (section 174).
Board Composition Company Law.
Minimum/Maximum Number of Directors in a Company [Section 149(1)] Section 149(1) of the
Companies Act, 2013 requires that every company shall have a minimum number of 3
directors in the case of a public company, two directors in the case of a private company, and
one director in the case of a One Person Company. A company can appoint maximum 15
fifteen directors without any specific compliance. A company may appoint more than fifteen
directors after passing a special resolution in general meeting. The restriction of maximum
number of directors shall not apply to section 8 companies. Minimum number of directors;
• Public Company - 3 Directors
• Private Company - 2 directors
• One Person Company (OPC) - 1 Director
Maximum Number of Director is 15, which can be increased by passing a special resolution.
Section 8 companies can have more than 15 directors.Section 149(3) provides that every
company shall have at least one director who has stayed in India for a total period of not less
than one hundred and eighty-two days in the previous calendar year.
Further, Second proviso to Section 149(1) read Rule 3 of Companies (Appointment and
Qualification of Directors) Rules, 2014 following class of companies must have at least one
Women Director. Alternate directorship shall also be included while calculating the
directorship of 20 companies. Section 8 company will not be counted for the purpose of
maximum number of Directorship Maximum limit on total number of directorship has been
fixed at 20 companies and the maximum number of public companies in which a person can
be appointed as a director shall not exceed ten. The members of a company may, by special
resolution, specify any lesser number of companies in which a director of the company may
act as director.
Quorum for Board meeting Requirement.
• Quorum for Board Meeting = 1/3rd of its Total strength or two directors, whichever is higher
• A Director participating through video conferencing/audio visual modes will also be counted
for quorum.
• Any fraction of a member will be rounded off as one
• Total strength shall not include directors whose places are vacant.
Power of Board [Section 179].
Section 179 of the Act deals with the powers of the board; all powers to do such acts and
things for which the company is authorised is vested with board of directors. But the board
can act or do the things for which powers are vested with them and not with general
meeting. The following [Section 179(3) read with Rule 8 of Companies (Management &
Administration) Rules, 2014] powers of the Board of directors shall be exercised only by
means of resolutions passed at meetings of the Board, namely :-
3. to make calls on shareholders in respect of money unpaid on their shares;
4. to authorise buy-back of securities under section 68;
5. to issue securities, including debentures, whether in or outside India;
6. to borrow monies;
7. to invest the funds of the company;
8. to grant loans or give guarantee or provide security in respect of loans;
9. to approve financial statement and the Board’s report;
10. to diversify the business of the company;
11. to approve amalgamation, merger or reconstruction;
12. to take over a company or acquire a controlling or substantial stake in another company;
13. to make political contributions; Lesson 15 Board Constitution and its Powers 533
14. to appoint or remove key managerial personnel (KMP);
15. to appoint internal auditors and secretarial auditor; The Board may, by a resolution
passed at a meeting, delegate to any committee of directors, the managing director, the
manager or any other principal officer of the company or in the case of a branch office of the
company, the principal officer of the branch office, the powers specified in (4) to (6) above on
such conditions as it may specify. The banking company is not covered under the purview of
this section.
Restriction on Powers of Board.
[Section 180] The board can exercise the following powers only with the consent of the
company by special resolution, namely – (a) to sell, lease or otherwise dispose of the whole or
substantially the whole of the undertaking of the company or where the company owns more
than one undertaking, of the whole or substantially the whole of any of such undertakings. (b)
to invest otherwise in trust securities the amount of compensation received by it as a result of
any merger or amalgamation; (c) to borrow money, where the money to be borrowed,
together with the money already borrowed by the company will exceed aggregate of its paid-
up share capital, free reserves and securities premium apart from temporary loans obtained
from the Company Law company’s bankers in the ordinary course of business; (d) to remit,
or give time for the repayment of, any debt due from a director.
held that an undertaking in a complete and complex weft and the various types of business
and assets are threads which cannot be taken a part from the weft. ( b) To remit or give time
for payment of any debt to the company by a director,12 except in the case of renewal or
continuance of an advance made by a banking company to its directors in the ordinary
course of business. (c) To invest (excluding trust securities) the amount of compensation
received in respect of the compulsory acquisition of any undertaking or property of the
company. (d) To borrow moneys and where the moneys to be borrowed (together with the
moneys already borrowed by the company) are more than paid up capital of the company and
its free reserves. That is to say reserves in the share premium account, general reserve,
profit and a loss account, and capital redemption account).The amount of temporary loans
raised from banks in the ordinary course of business is excluded. This, however, does not
include loans raised for the purpose of financing expenditure of a capital-' nature. (e) To
contribute to charitable and other funds not directly relating to the business of the company
or the welfare of its employees, amounts exceeding in any financial year, fifty thousand or 5
percent of the average net profits of the three preceding financial years, whichever is greater.
Power of directors to allot the shares.
Directors of a company have powers to allot shares but this power must be exercised
bonafide for the benefit of the company as a whole because this power is t / a fiduciary one. In
Grant v. John Grant& Sons Ltd, it was held that when the company not in need of further
capital and the directors issued shares only to maintain their control or for defeating the
wishes of the existing majority of the shareholders, the allotment was improper. In another
case of Punt v. Symons &Co Ltd, the directors used the shares with the object of creating a
sufficient majority to enable them to pass a special resolution depriving other shareholders
special rights conferred on them by the company’s articles. It was held that when issue of
shares to persons who are, obviously meant and intended to secure the necessary statutory
majority in a particular interest, it could not be fair and bonafide exercise of the power.
Similarly, in the case of Pierey v. S Mills &Co Ltd, the directors had issued shares to enable
them to resist the election of three additional directors which would have put the existing
directors in a minority on the board. The issue was held to be improper.
Power of Directors to Make Calls on Shares.
The Articles of Association of companies generally provide that the power to make calls in
advance from the shareholders in respect of unpaid amount on shares vest in the directors.
The power to make calls is a fiduciary one and shall not be used by the directors for their own
benefit. This power cannot be delegated by the directors to any committee of directors, the
managing agent, secretaries, treasurers or the manager, In Poiner Alkali Works Ltd v.
Amiruddins. Tayyabji, it was held that where the articles provide that every shareholder shall
be liable to pay the amount of every call to the persons and at the time and place appointed by
the directors, the resolution should specify the time, place and amount of the payment of the
call. In East and West Insurance Co Ltd v. Mrs. Kamla Jayanti Lsl Mehta, it was held that
when the time for the payment of the call is not fixed by the board of directors, the call is valid
although there was an omission in specifying the place and person whom the call is to be
paid. A valid resolution making a call must state; (a) The amount of the call, (b) The time
when the call should be paid, (c) The person to whom the payment is to be made and (d) The
place where the payment is to be made.
Committee Meetings
The Companies Act, 2013 provides for four mandatory committees of the board of directors
under the Act which are namely, Audit Committee, Nomination & Remuneration Committee,
Stakeholders Relationship Committee and Corporate Social Responsibility Committee. The
committees so formulated are not to be appointed by every company but they get triggered or
are required to be formulated based on certain thresholds.
i. Audit Committee meeting is required to be convened by every listed company and only
those public companies which have a paid up share capital of Rs. 10 crore or more or have a
turnover of Rs. 50 crore or more or have aggregate outstanding loan, debenture and deposit
exceeding INR 50 Crore or more. The terms of reference of such a committee include
monitoring auditor’s appointment, remuneration and his performance etc. Every minutes of
the meeting of the Audit Company Law Committee shall be noted in the ensuing meeting of
the Board of Directors and also, a distinct minutes’ book shall be maintained for the meeting
of the Committee. The Chairman of the Audit Committee is required to address the concerns
of the shareholders at the Annual General Meeting.
ii. Nomination and Remuneration Committee meeting are also a mandate for every
listed company and only those public company which have a paid-up share capital of Rs. 10
crore or more or have a turnover of R. 100 crore or more having aggregate outstanding loan,
debenture and deposit exceeding INR 50 Crore or more. The committee is required to ensure
that the level and composition of remuneration is reasonable and sufficient to attract, retain
and motivate directors of the quality required to run the company successfully.
iii. Stakeholders Relationship Committee meetings are required to address the
grievances of the stakeholders of the company. This committee is to be constituted by every
company which has the strength of more than 1000 shareholders, debenture-holders,
deposit-holders and any other security holders at any time during the financial year.
iv. Corporate Social Responsibility Committee meeting shall take all decisions as
regards the CSR policy of the company in its meetings. Such committee shall consist of at
least three directors, of which at least one director shall be an independent director.
Members’ meetings
Annual General Meeting (Section 96): One of the opportunities annually given to the members
of a company is to take part in the business of the company by exercising their power to take
decisions. For this purpose, each year every company is required to hold at least one meeting
of its members’ which is known as an annual general meeting (AGM). An exemption from
holding an annual general meeting is only given to a one-person company. The first general
meeting of a company must be held within nine months from the date of closing the financial
year of the company, and then the company need not hold any annual general meeting in its
year of incorporation. The subsequent annual general meetings shall take place within six
months of the date of closing of the financial year. The time prescribed for the first annual
general meeting cannot be extended, however, the time period for subsequent annual general
meetings may be extended to a maximum of three months with the leave of the Registrar of
companies. Following chart depicts the date, time and venue for holding an annual general
meeting. Here the Central Government is empowered to exempt, subject to conditions, any
company from the holding such meeting in accordance with the date, time and venue as
prescribed.
When a company defaults in holding an annual general meeting as required, the Tribunal
has the power to call such meeting upon receipt of an application from any member of the
company. The Tribunal may even direct to hold a one-member meeting. Such meetings shall
be deemed as an annual general meeting as per provisions of this Act. Upon such default, the
company and every officer in default would be liable for punishment as prescribed.
Business to be transacted at an annual general meeting (section 102).
The business transacted at the annual general meeting is called the ordinary business (this is
the reason a general meeting is also referred to as an ordinary meeting). Items of ordinary
business constitutes consideration of financial statements, Board reports and auditor’s
report, declaring dividends, appointment of directors and appointment and salary fixation of
the auditors of the company.
Extra-Ordinary general meeting (Section 100).
All other general meetings convened and held in a company besides the annual general
meeting are regarded as extraordinary general meetings. All the business transacted at an
extra-ordinary general meeting is called special business (all other businesses except
ordinary business). The following diagram
illustrates, who all can call an extraordinary general meeting:
The Tribunal. The Board.
The shareholders making a requisition must possess at least one-tenth of the Company Law
paid up share capital of the company and where the company is without the share capital, the
shareholders must possess at least one-tenth of the voting powers of the company. Such
share-holders, requisitioning a general meeting, must sign upon the matters required to be
addressed at the meeting. The Board upon receipt of such valid requisition must call a
general meeting within 21 days. The date of the meeting in any case must not be later than
45 days from such requisition. In case these dead-lines are not met by the Board, the
shareholders making requisition may go ahead to call and hold a general meeting
themselves. They can do so within 3 months from the requisition date. All the reasonable
expenses incurred by the shareholders on holding such meeting, are to be reimbursed to
them by the company by deducting such amounts from the fees of the defaulting directors.
In LIC of India v. Escorts Ltd, the Supreme Court observed that every shareholder of a
company possesses a right to call/requisition an extra-ordinary general meeting, subject to
the provisions of the Act. Once the requisition is made in compliance of the prescribed law,
the shareholder cannot be restrained from calling such meeting. In another case, Rathnavelu
within the prescribed time, the shareholders themselves requisitioned the meeting. The
venue of the meeting was decided as the registered office of the company. However, on the
day of the meeting, the registered office was locked, thus the meeting was held at some other
place. The court held such meeting to be a validly convened meeting. The Tribunal may also,
under certain circumstances order to hold and convene a meeting (other than an annual
general meeting).
Here the Tribunal may on its own motion or upon the application made by any director or
members having voting rights may call such a meeting. The Tribunal may give necessary
directions for conduct of the meeting including the permission for holding one member
meeting in person or through proxy (section 98).
Notice of the meeting (Section101)
For calling a general meeting a notice is required to be given to every member of the
company or to his legal representative (in case of a deceased member), every director and
auditor of the company. Such notice must be given to the aforesaid parties at least 21 clear
days before the meeting. The notice can be sent either in writing or through electronic means.
The requirement of 21 days’ notice can be done away with, if at least 95 percent of the
members voting at the meeting agree to a shorter notice for such meeting. The notice of a
meeting must provide for the date, time and venue of the meeting along with the statement of
the business to be dealt at the meeting. It is necessary to send such notice of the meeting as
prescribed, however inadvertent failure to send notices or in case any member or other
persons do not receive the notice shall not per se affect the validity of the meeting.
Quorum (Section 103)
For holding a valid meeting, a minimum requisite number of members must attend the
meeting to transact the business, which constitutes quorum of the meeting. Following charts,
provides at a glance, the quorum required to be present at general meetings:
QUORUM OF A
GENERAL MEETING.
A chairman is elected by the members personally present at a meeting by the show of hands.
Such chairman is required for orderly conduct of the meeting. In case a poll is demanded for
electing a Chairman, the provisions of the Act shall apply and the earlier chairman shall
continue unless a new one is appointed.
Section 105 of the Act, further deliberates upon the provisions for appointing a proxy. A
member can revoke his proxy by a notice in writing.A member can appoint more than one
proxies for the same meeting, in case he possesses different shares of that company. But in
case, the said member appoints more than one proxies for the same bunch of shares, then all
the proxies shall be jointly and severally liable.
Voting at a meeting (section106)
A member can participate in the decision-making process of the company by voting at the
meetings. Such a right to vote can only be restricted by the articles of a company, where it
stipulates that the shares in respect of which any call money or sums remains due or shares
upon which the company has exercised any lien, such shareholders do not have right to vote.
Voting by show of hands (Section 107)
When a resolution is to be passed at a general meeting, voting takes place by show of hands
unless the members ask for a poll or voting happens electronically. Such voting is evidenced
though the Chairman’s declaration and an entry to this effect in the minutes of the meeting.
Voting through electronic means [Section 108 read with Rule 20 Companies
(Management and Administration) Rules, 2014]
The Central Government may prescribe in accordance with the Rule 20, certain class or
classes of companies and also the manner in which a member may vote by the electronic
means.
Demand for a Poll (Section 109 read with Rule 21 Companies (Management and
votes and to prepare a report in accordance with the Rule 21 of Companies (Management and
Administration) Rules, 2014). The Chairman has the power to regulate the poll in accordance
with the said rules.
Postal Ballot (Section 110 read with Rule 22 Companies (Management and
Administration) Rules, 2014)
A Central Government notification may declare certain business items (excluding the items of
ordinary business) to be dealt vide the postal ballot. A resolution passed by the required
majority by a postal ballot shall be deemed to be passed at a duly convened general meeting.
Ordinary and Special resolution (Section 114)
Decisions in a company are taken by passing resolutions to that regard. The resolutions can
be ordinary, special and resolutions requiring special notice, depending upon the nature of
the decision to be taken. Ordinary resolution is said to be passed when the votes cast by
the eligible members in favour exceed the votes casted against any resolution. Here the
members can either vote in person or through proxy. The Chairman of the meeting possesses
a casting vote in case of a tie. Whereas a special resolution is said to be passed for a
resolution when a notice duly given for the purpose clearly specifies that the resolution to be
passed is a special one. Such resolutions require that the votes by the eligible members must
be three times in favour in comparison to the votes cast against the resolution.
Here the person can either vote in person or through a proxy.
Resolution requiring
special note.
RESOLUTIONS
Resolutions requiring special notice (Section 115 read with Rule 23 Companies
(Management and Administration) Rules, 2014)
There are certain resolutions which require special notice. According to section 115, any such
notice required to be given shall be brought at the instance of member(s) holding not less
than one percent of total voting power (in case of company not having share capital) or
member(s) holding shares on which an aggregate sum of not exceeding five lakh rupees, paid
up on the date of notice. Rule 23 further provides the time and means of sending such special
notice.
Minutes of the meeting (section 118 read with Rule 25 Companies (Management and
Administration) Rules, 2014)
Companies are required to maintain and keep the records of the proceedings of every
meeting called the minutes of the meeting, which are to be prepared according to the
provisions of this Act and the Secretarial Standards. The minutes of each of the meeting are
to be recorded succinctly including all the details like the new appointments made. The
minutes prepared in the loose sheets must be signed by the Chairman within 30 days of the
meeting in the form of a book with pages consecutively numbered. The minute book
of each kind of company viz. the general meetings, creditors’ meetings are to be kept
separately.
The minutes of the meetings shall have an evidentiary value for the Company Law
proceedings mentioned therein.
Distribution of powers between Board of Directors and Shareholders
Company’s powers can be exercised by the board of directors and at meetings of members of
a company. Except for the powers which are expressly required to be exercised by the
company in general meeting, in all other cases the directors can exercise all the company’s
powers. This division of company’s powers has been dealt with Greer L J, in John Shaw
and Sons {Salford Ltd), v. Shaw, in the following words: “A company is an entity distinct from
its shareholders and its directors. Some of its powers may according to its articles, be
exercised by directors, certain other powers may be reserved for the shareholders in general
meeting. If powers of management are vested in the directors, they and they alone can
exercise these powers. The only way in which the general body of the shareholders can control
the exercise of the powers vested by the articles, in the directors is by altering the articles, or
if the opportunity arises under the articles by refusing to re -elect the directors whose actions
they disapprove.” The shareholders cannot usurp the powers which by the articles are vested
in the directors any more than the directors can usurp the powers vested by the articles in
general body of shareholders. The powers of directors include to issue preference shares,
borrow money by mortgaging the company’s property and to do acts necessary for the
management of the company. The power to sell the assets of the company is vested in the
board and if the board thinks that it is not.
11.8 SUMMARY.
Corporate law (also known as business law, company law or enterprise law) is the body of law
governing the rights the rights, relations, and conduct of persons, companies, organizations
and businesses. The term refers to the legal practice of law relating to corporations, or to the
theory of corporations. Corporate law often describes the law relating to matters which
derive directly from the life-cycle of a corporation.[1] It thus encompasses the formation,
funding, governance, and death of a corporation. The Companies Act, 2013 received the
assent of the President on August 29, 2013 and was notified in the Gazette of India on
30.08.2013. The Companies Act, 2013 introduced new concepts supporting enhanced
disclosure, accountability, better board governance, better facilitation of business and so on.
It includes associate company, one-person company, small company, dormant company,
independent director, women director, resident director, special court, secretarial standards,
secretarial audit, class action, registered valuers, rotation of auditors, vigil mechanism,
corporate social responsibility, E-voting etc.
11.9 QUESTIONS.
1 What is a company? Enumerate different types of companies and characteristics.
2 What are the advantages and disadvantages of incorporation?
3 State different types of Companies?
4 What are Articles of Association?
5 Compare the Articles of Association with memorandum of Association?
6 What are the different Categories of meetings of a company?
7 What is meant by Transfer of shares?
8 Explain the various points of distinction between transfer of shares and transmission of
shares?
9 Write Short notes on: -
A) Transfer of Shares.
B) Transmission of shares.
C) Statutory Meeting
D) Notice of a meeting
E) Annual General meeting.
F) Prospectus
G) Clause of Memorandum.
H) Articles of Association
I) Certificate of Incorporation.
J) Promoter.
Objective Questions.
Fill in the blanks with correct words from the statements against each of the following
questions :
a) Memorandum
b) members.
c) directors.
10 The registered address of a company may be altered from one state to another state by
a) a resolution at its annual meeting.
b) a resolution at its board of directors meeting.
c) alternation of the memorandum of Association.
F Void ab initio.
H Voidable.
Match correctly the word of the following group “A” with those in Group "B"
H Easily transferable.
I Unlimited liability.
11.10 REFERENCES.
Company Law Dr S. R. Myneni 5th Edition Asia Law House Hyderabad
From Wikipedia, the free encyclopaedia.
Company Law S Chand P.P.S GOGNA.
Company Law Douglas Smith. 1st Edition
Business Laws | V.K. Jain,Shashank Sharma
12. INTELLECTUAL PROPERTY RIGHTS.
Unit Structure :
12.0 Objectives.
12.1 Meaning and Definition.
12.2 Patent definition.
12.3 Trademarks.
12.4 Infringement and Passing Off.
12.5 Infringement of Trademark.
12.6 Copy right definition.
12.7 Summary.
12.8 Questions.
12.0 OBJECTIVES.
• IPR Awareness: Outreach and Promotion - To create public awareness about the economic,
social and cultural benefits of IPRs among all sections of society.
• Generation of IPRs - To stimulate the generation of IPRs.
• Legal and Legislative Framework - To have strong and effective IPR laws, which balance
the interests of rights owners with larger public interest.
• Administration and Management - To modernize and strengthen service-oriented IPR
administration.
• Commercialization of IPRs - Get value for IPRs through commercialization.
• Enforcement and Adjudication - To strengthen the enforcement and adjudicatory
mechanisms for combating IPR infringements.
• Human Capital Development - To strengthen and expand human resources, institutions
and capacities for teaching, training, research and skill building in IPRs.
literary works, inventions or discoveries or a symbol or design for a specific period of time.
Intellectual property owners are given certain rights by which they can enjoy their Property
without any disturbances and prevent others from using them, although these rights are
also called monopoly rights of exploitation, they are limited in geographical range, time and
scope. As a result, intellectual property rights can have a direct and substantial impact on
industry and business, as the owners of IPRs one can enforce such rights and can stop the
manufacture, use, or sale of a product to the public. IP protection encourages publication,
distribution, and disclosure of the creation to the public, rather than keeping it a secret and
to encourage commercial enterprises to select creative works for exploitation.
Definition
The definition of intellectual property rights is any and all rights associated with intangible
assets owned by a person or company and protected against use without consent. Intangible
assets refer to non-physical property, including right of ownership in intellectual property.
Examples of intellectual property rights include:
• Patents
• Domain names
• Industrial design
• Confidential information
• Inventions
• Moral rights
• Database rights
• Works of authorship
• Service marks
• Logos
• Trademarks
• Design rights
• Business or trade names
• Commercial secrets
• Computer software
12.2 PATENT DEFINITION.
A patent is an exclusive right granted for an invention, which is a product or a process that
provides, in general, a new way of doing something, or offers a new technical solution to a
problem. To get a patent, technical information about the invention must be disclosed to the
public in a patent application.
What is Patentable?
1 Utility Patents
Under federal statute, any person who "invents or discovers any new and useful process,
machine, manufacture, or composition of matter, or any new and useful improvement
thereof, may obtain a patent."
• A "process" is defined as a process, act, or method, of doing or making something, and
primarily includes industrial or technical processes.
• A "machine" would be anything that would commonly be considered such, from a clockwork
to a tractor to a computer.
• The term "manufacture" refers to articles which are made, and includes all manufactured
articles.
• A "composition of matter" is a chemical composition, and may include mixtures of
ingredients as well as new chemical compounds.
These classes of subject matter, taken together, include practically everything that is made
and their processes for production.
2 Design Patents.
A "design patent" protects the way an article looks. Since most manufactured items possess
both functional and ornamental characteristics, both utility and design patents may be
required to protect the invention.
For example, Apple Computers introduced a unique, decorative computer called an iMac,
which featured a curved case incorporating the CPU, drives, and monitor, and which was
made of white translucent plastic and colored transparent plastic. While various aspects of
the computer itself may have already been patented, the design characteristics, which are
wholly separate from the iMac's function, were themselves patentable.
3 Plant Patents
A plant patent may be granted when a new variety of plant is discovered and asexually
reproduced. This does not include a tuber-propagated plant or a plant simply found in an
uncultivated state. The patent protects the inventor's right to exclude others from asexually
reproducing, selling, or using the plant so reproduced.
How the Government Decides Which Inventions are Patentable?
1 Useful
The term "useful" means that the subject matter has a useful purpose. It also requires that
the item is operable, since a machine that can not perform its intended purpose cannot be
considered useful in the ordinary.
2 Novel
however. For example, tire makers have long known the formulas for making tire rubber.
But what if an inventor found a way to make tire rubber twice as long-lasting by slightly
changing the chemical composition? This could well be a patentable improvement as long as
the difference was not obvious.
3 Nonobvious
Even if a new invention differs in one or more ways from another patented invention, a
patent may still be refused if differences would be obvious. Nonobviousness is defined as a
sufficient difference from what has been used or described before that a person having
ordinary skill in area of technology related to the invention would not find it obvious to make
change.
For example, sodium chloride (table salt) and potassium chloride (a chemically similar salt)
can often be used interchangeably. A chemist working to improve road salt would consider it
obvious to substitute potassium chloride for sodium chloride, so a formula that simply made
this substitution in an already patented road salt formula would not be patentable.
What is not Patentable?
1 An invention, that is frivolous or that claims anything obviously contrary to well established
natural laws;
2 An invention, the primary or intended use of which would be contrary to law or morality or
of a known process, machine or apparatus unless such known process results in a new
beings or animals.
10 Plants and animals in whole or any part thereof other than microorganisms.
11 Mathematical or business method or a computer program per se or algorithms.
12 Literary, dramatic, musical or artistic works, cinematographic works, television productions
traditional knowledge.
12.4 TRADEMARKS.
A trademark can be any word, phrase, symbol, design, or a combination of these things that
identifies your goods or services. It’s how customers recognize you in the marketplace and
distinguish you from your competitors.
The word “trademark” can refer to both trademarks and service marks. A trademark is used
for goods, while a service mark is used for services.
A trademark: Intellectual Property Rights
Service Mark
Service mark is similar to the product mark but a service mark is used to represent a service
rather than a product. The main purpose of the service mark is that it distinguishes its
proprietors from the owners of other services. Trademark applications filed under
trademark class 35-45 could be termed as a service mark, as they represent services.
Collective Mark
Collective mark is used to inform the public about certain distinguished features of a product
or service used to represent a collective. A group of individuals can use this mark so that they
are collectively protecting a goods or service. The mark holder can be an association or can
be a public institution or can also be a Section 8 Company. In a collective mark, normally the
standards of the products are fixed by the regulator owing the mark. Others associated with
the collective are held responsible to adhere to certain standards while using the mark in the
course of business. A commonly known collective mark in India is the Chartered Accountant
designation.
Certification Mark
Certification mark is a sign that denotes a products origin, material, quality or other specific
details which are issued by the proprietor. The main purpose of certification mark is to bring
out the standard of the product and guarantee the product to the customers. A certification
mark can also be used to uplift the product’s standard amongst the customers by showing
that the product had undergone standard tests to ensure quality. Certification marks are
usually seen on packed foods, toys and electronics.
Shape Mark
Shape Mark is exclusively used to protect the shape of the product so that the customers find
it relatable to a certain manufacturer and prefer to buy the product. The shape of a
particular product can be registered once it is recognized to have a noteworthy shape. An
example of a shape is the Coca-Cola bottle or Fanta bottle, which have a distinctive shape
identifiable with the brand.
Pattern Mark
Pattern marks are those products that have specific designed patterns that come out as the
distinguishing factor of the product. Patterns which fail to stand out as a remarkable mark
is generally rejected since it does not serve any purpose. For a pattern to be registered, it has
to show evidence of its uniqueness.
Sound Mark
Sound mark is a sound that can be associated with a product or service originating from a
certain supplier. To be able to register a sound mark, when people hear the sound, they easily
identify that service or product or a shows that the sound represents. Sound logos are called
as audio mnemonic and is most likely to appear at the beginning or end of a commercial. The
most popular sound mark in India is the tune for IPL.
12.5 INFRINGEMENT AND PASSING OFF.
It is creating some false representation that is likely to lead someone to believe that the goods
or services are those of someone else. In layman terms, passing off occurs when a trader
/businessperson/or another person makes a false representation to their customer or
consumer to lead them in believing that the goods or services they are delivering are property
of another person. The Law of Passing-Off, which covers Intellectual Property Rights in
India, was created to prevent this conduct. Section 134 1 (c) of the Trademark Act 1999
establishes the law of passing off. A common law remedy is provided by Section 27 of the
Trademark Act 1999. Unregistered trademark rights are subject to this common-law tort ( a
trademark that has not been registered under a trademark or patent office is known as an
unregistered trademark). The law of passing off prohibits one person from impersonating
another’s goods or services. The concept of passing off was not very broad at first, and it has
evolved significantly over time. The rule of passing off was originally solely applicable to
products. That no single person may misrepresent the goods of others. At a later time, this
was extended to include goods, businesses, and services. Intellectual Property Rights Passing
off was then expanded to include professions and non-trading activities. In today’s world, it
also refers to unfair commerce and unfair competition in which one person’s actions harm
another person’s or group of people’s goodwill. The basic question in passing off law is
whether a person’s actions are intended to deceive the public or to cause confusion between
Passing off arises when there are false claims and harm to the existing reputation or
goodwill of the owner.
What is necessary for a Passing Off action?
In a Passing off action, user must prove that the trademark they are using has a distinct
identity for product. However, if someone uses same thing, it will create confusion in minds
of people and will cause harm to their business reputation.
Features of Passing-Off
There are three main features of passing off the trademark:
• Reputation.
12.6 INFRINGEMENT OF TRADEMARK.
When a person uses a trademark or service mark without permission, it is trademark
a possibility for a probability of chaos among the public. If the consumers are probable to
confuse among the two marks, there is an infringement case.
• Registered Trademark
You can only violate a registered trademark. For an unrecorded Trademark, the standard
law idea of passing off will involve.
• Goods/ Services
To prove infringement, even the goods/ services of the person must match or be similar to the
goods that the trademark denotes. Any unauthorized use of the complete statutory ownership
Musical work was defined as “a work consisting of music and includes any graphical
notation of such work but does not include any work or any action intended to be sung,
spoken or performed with the music”. In 2012 Amendment, there was a grant of statutory
license for cover versions. A song typically contains both literary and musical work.
Therefore, the tune and lyrics together forms the song. Lyric of a song is the literary part and
it is protected as a literary work and the writer of the lyrics is the author of the work. Music
accompanying the song is treated as a musical work and the author of the musical work is
the composer of the musical work. So, in the song there can be two rights that are set of
rights in the literary work and rights in the musical work and they are owned by different
people. The author of this right is different people.
Original literary work –
Literary work refers to works that are in writing. The Act does not classify literary work, but
we understand that as work that are captured in writing. The act says that literary work
includes computer programmes, tables, and compilations including computer databases.
The literary work need not have any literary merit and it is not the job of the courts to look
into the literary merit of copyright work. So, courts have found that football fixture lists,
mathematical tables, tombola tickets, etc. are capable of copyright protection. The number of
words in a copyrighted material is not an indicator of quality and the author of copyrighted
work is the author who makes the work or who creates the work. There are certain things
that cannot be protected under a copyright. or instance, phrases, names, invented words and
slogans cannot form a part of copyright protections. The names especially used in commerce
or in trade are protected by trademarks and invented work and slogans, for example the
slogan which Pepsi used a while ago “Yeh Dill Mange more”, which is an advertising slogan
was held something that can not protected under the copyright Act. Secondary or derivative
works can also be protected. They can be prospected only if, it involves the right kind of labor,
it should be of such a nature that the effort brings a material change in the work. Therefore,
the work should get changed based on the effort that change should be of the right kind and
the prior work should be different from the secondary work. When the author assigns the
copyright to another person, the new work will be entitled to a copyright as well. Adaptations
and abridgment of existing works can have a copyright; translations can also be entitled to a
copyright. Compilations and collective works can have copyrights. A copyright can subsist in
the individual item as well as in the collection as a whole. For computer programs the source
code can be protected as a literary work.
Original dramatic work –
visual recording and sound recording accompanying such visual recording and
“cinematograph” shall be construed as including any work produced by any process
that, the person has to be a human being and so far intellectual property rights have only
covered Intellectual work of humans.
Sound recordings –
It means a recording of sound from which such sounds may be produced regardless of the
medium on which such recording is made or the method by which the sounds are produced.
The author of sound recording is the producer of the sound recording. The sound recording
may involve musicians, it may involve singers, but the author is the producer. The term of
copyright varies depending on the kind of work that is protected. Literary, musical, dramatic
and artistic works are protected for the life of the author and after the death for a period of
60 years. For posthumous work published after the death of the author. It is 60 years from
the time the work is first published. Therefore, cinematograph films sound recording,
government works, works of international organizations all are prospected for 60 years
from the work first published.Here the ownership in copyright may vest in different persons
under different circumstances. Like of a work is created by an employee in the course of his
or her employment, the employer owns the copyright. If the work is created by an
independent contractor and the independent contractor signs a written agreement stating
that the work shall be “made for hire,” the commission person or organization owns the
copyright only if the work is part of the larger literary work, such as an article in a magazine
or a poem or story in anthology; part of a motion picture or other audiovisual work, such as
screenplay, a translation, a supplementary work, such as an Intellectual Property Rights
The question involved was whether there is any copyright in the reporting of the judgment of
a court. The Delhi High court held that it is not denied that under section 2(k) of the Copyright
Act, a work which is made or published under the direction or control of any Court, tribunal
or other judicial authority in India is a Government work. Under section 52(q), the
reproduction or publication of any judgment or order of a court, tribunal or other judicial
authority shall not constitute infringement of copyright of the government in these works. It
is thus clear that it is open to everybody to reproduce and publish the government work
including the judgment/ order of a court. However, in case, a person by extensive reading,
careful study and comparison and with the exercise of taste and judgment has made
certain comments about judgment or has written a commentary thereon, may be such a
comment and commentary is entitled to protection under the Copyright Act. The court further
observed: In terms of section 52(1)(q) of the Act, reproduction of a judgment of the court is an
exception to the infringement of the Copyright. The orders and judgments of the court are in
the public domain and anyone can publish them. Not only that being a Government work, no-
copyright exists in these orders and judgments. No one can claim copyright in these
judgments and orders of the court merely on the ground that he had first published them in
his book. Changes consisting of elimination, changes of spelling, elimination or addition of
quotations and corrections of typographical mistakes are trivial and hence no copyright
exists therein.
the scope of copyright. The Copyright Act defines only two requirements for copyrightability:
original authorship (“originality”) and fixation. “Original” means a work created through the
“fruits of intellectual labor.” “Originality” therefore requires not only that the author has not
copied the work from another, but also that there is “at least some minimal degree of
creativity.” “Originality” is a constitutional requirement for copyright applicability even
though it was first stated explicitly by statute only with the introduction of the 1976 Copyright
Act. In the case of Feist Publications, Inc. v. Rural Telephone Service, the U.S. Supreme Court
explained that the requirement of originality is not particularly stringent and is comprised of
two elements: that the work be independently created by the author (as opposed to copied
from other works) and that it possesses at least some minimal degree of creativity. A work
satisfies the “independent creation” element so long as it was not literally copied from
another, even if it is fortuitously identical to an existing work. The “creativity” element sets
an extremely low bar that is cleared quite easily. It requires only that a work possess some
creative spark, no matter how crude, humble, or obvious it might be.
Authors and Owners
Ownership of Copyright.
Ownership in Copyright is different from other ownership in physical material in which work
is fixed. A person owning a book may not be the owner of the Copyright of the book. As per the
general rule, the author is the first owner of Copyright of a work. The Copyright Laws provide
certain exceptions to the general rule mentioned above, which are necessary to clearly
examine the two different concepts of Ownership and Authorship of Copyright in India. To
clear the above point, if a painting, photograph, or a portrait is made at the instance of any
other person for a valuable consideration, such other person is the first owner of the
Copyright in such a case. The creator/inventor of an idea of creation/invention is also not the
true owner of Copyright in work, unless he/she is the creator/inventor of the work. Therefore,
any person is having any brilliant idea, and he/she communicates the idea to a dramatist
who later on goes on to make a play on the same idea, the originator/creator of idea has no
right in the product of the dramatist, as a Copyright subsists in a tangible form and not in a
mere idea.
Section 17 of the Copyright Act, 1957, provides for provisions of acquiring Ownership of
Copyright. The Ownership right is available only if the person qualifies the provision of the
Copyright Act, 1957. In other laws prevailing in India, no other remedy is available to
counter the violation of Ownership of Copyright.
Authorship of Copyright
An author is an individual who writes, collects, composes, and draws the work in issue,
although the whole idea of the work was suggested by some other person. The rationale
behind the concept of an author is that the originator of a brilliant idea is not the Copyright
owner in the work, unless he/she is also the creator of the work. The nationality of an author
is not the prime factor to determine the right of an author to a Copyright under the
Copyright Act, 1957. Though, the existence of Copyright has certain essential requirements
under Section 13 (2) of the Copyright Act, 1957. The essential requirements under Section
• In the case of an artistic work other than the photographs, the artist of the work is the
author.
• In the case of a photograph, the person who takes a photograph is the author.
• In the case of cinematographic films, the producer of the work is the author.
• In the case of sound recordings, the producer of the work is the author, and
• In the case of literary, dramatic, musical, or artistic works, which is computer-generated,
the person who causes the works to be created is the author.
As per Section 2 (ffa) of the Copyright Act, 1957, a “Composer” in relation to a musical work
means any person who composes the music irrespective of the fact that whether he/she
records the musical works in any form of graphical notation. Though, the definition of the
composer may not enable him/her to prove his/her authorship except the composition of
musical work is recorded in any form of musical notation or otherwise. As per Section 2 (p) of
the Copyright Act, 1957, a “Musical work” means a work comprising of music and contains
any graphical notation of such work but does not include any words or actions intended to be
spoken, sung or performed with the music.
Geographical indications.
It is a name or sign used on certain products which corresponds to a geographic location or
origin of the product, the use of geographical location may act as a certification that the
product possesses certain qualities as per the traditional method. Darjeeling tea and basmati
rice are a common example of geographical indication. The relationship between objects and
place becomes so well known that any reference to that place is reminiscent of goods
originating there and vice versa. It performs three functions. First, they identify the goods as
origin of a particular region or that region or locality; Secondly, they suggest to consumers
that goods come from a region where a given quality, reputation, or other characteristics of
the goods are essentially attributed to their geographic origin, and third, they promote the
goods of producers of a particular region. They suggest the consumer that the goods come
from this area where a given quality, reputation or other characteristics of goods are
essentially attributable to the geographic region.
It is necessary that the product obtains its qualities and reputation from that place. Since
those properties depend on the geographic location of production, a specific link exists
between the products and the place of origin. Geographical Indications are protected under
the Geographical Indication of Goods (Registration and Protection) Act, 1999.
12.8 SUMMARY.
The concept of a trademark is as old as the ancient Harapan civilization, in which marks of
trade with foreign countries such as Mesopotamia, and Babylon were found embosses on
articles, 2006 (33) PTC 281,299). The law of trademark was enacted to register trademarks,
which guarantee (1) an exclusive right to its owner and trader to deal in his goods and
services using a symbol, a sign or a mark to distinguishes goods and services from similar
goods and services, sold by other traders and service traders and service providers in the
market and (2) to provide relief in case of its infringement by any other person. A patent is an
exclusive right granted for an invention, which is a product or a process that provides, in
general, a new way of doing something, or offers a new technical solution to a problem. To
get a patent, technical information about the invention must be disclosed to the public in a
patent application.
12.9 QUESTIONS.
1 Define Copyright.
2 What are the rights of the owner of Copyright?
3 Define the concept of intellectual property rights and state their objectives?
4 What is a patent? Explain the difference between patentable and non-patentable?
5 Write short notes on:
a) Invention.
b) Patentable
c) Not patentable.
d) Concept of copyright.
e) Registration of geographical indication of goods.
Objective Questions:
State whether the following statements are True or False and correct, if these are false:
1 Copyright subsists in the process or method of construction of a work of architecture.
2 Copyright shall not subsist cinematograph films.
3 The term of copyright in anonymous and pseudonymous works shall be sixty years.
4 The term of copyright in photographs shall be sixty years.
5 Intellectual property rights are in the nature of monopoly rights.
6 A patent is a grant by the Government of a state for discovery.
7 The patents Act, 1970 is based on the USA Patent Act,1950.
8 Every invention, without an exception, can be patented.
“Group A” “Group B”