Business Law

Assingment - A

Q1. Discuss the essential elements of a valid contract.

Ans: Section 2(h) of the Indian Contract Act, 1872 defines a contract as anagreement enforceable by law. Section 2(e) defines agreement as "everypromise and every set of promises forming consideration for each other." Section2(b) defines promise in the word: "When the person to whom the proposal ismade signifies his assent thereto, the proposal is said to be accepted. A proposalwhen accepted becomes a promise."

From the above definition of promise, it is obvious that an agreement is anaccepted proposal. The two elements of an agreement are:

1: - Offer of a proposal.2: - An acceptance of that offer or proposal. What agreement are

contracts? All agreements are not studied under the Indian Contract Act, assome of them are not contracts. The Contract Act is the law of thoseagreements, which create obligations, and in case of a breech of a promise byone party to the agreement, the other has a legal remedy. Thus, a contractconsists of two elements,

1. An agreement2. Legal Obligations i.e. It should be enforceable at law

However, there are some agreements, which are not enforceable in a law court.Such agreements donot rise to contractual obligations and are not contracts.

Essential Elements of Valid ContractsAll agreements are contracts if they are made by free consent of parties,Competent to contract, fora lawful consideration and with a lawful object and are not here by expresslydeclared to be void.Thus the essential elements of a valid contract can be summed up as follows:

1. Agreement2. Intensions to create legal relationships3. Free and genuine consents4. Parties competent to contract5. Lawful considerations6. Lawful Objects7. Agreements not declared void or illegal8. Certainty of meaning9. Possibility of performance

10. Necessary illegal formalities

Agreement: As already mentioned, to constitute a contract there must be anagreement. An agreement is composed of two elements, Offer and Acceptance.The party making the offer is known as a offeror, the party to whom the offer ismade is know as the offree. Thus, there are essentially to be two parties to anagreement. They both must be thinking of the same thing in the same sense. Inother words, there must be consensus-ad-idem.

Intensions to Create Legal Relationships: As already mentioned there shouldbe an intension on the part of the parties to the agreement to create a legalrelationship. An agreement is purely social or domestic nature is not a contract.Free and Genuine Consent: The consent of the parties to the agreement mustbe free and genuine. The consent of the parties should not be obtained bymisrepresentation, fraud, undue influence, coercion or mistake. If the consent isobtained by any of these flaws, then the contract is not valid.

Parties Competent to Contract: These parties to a contract should becompetent to enter to a contract. According to section 11, every person iscompetent to contract if he, (1) Is of the age of majority, (2) Is sound mind, and(3) Is not disqualified from contracting by any law to which he is subject. Thus,there may be a flaw in capacity of parties to the contract. The flaw in capacitymay be due to minority, lunacy, idiocy, drunkenness or status. If a party to acontract suffers from any of these flaws, the contract is an unenforceable exceptin certain exceptional circumstances.

Lawful Considerations: The agreement must be supported by consideration onboth sides. Each party to the agreement must give or promise something andreceive something or promise in return. Consideration is the price for which thepromise of the order is sought. However, this price need not be in terms ofmoney. In case promise is not supported by consideration, the promise will beNudum Pactum (a bare promise) and is not enforceable at law. Moreover theconsideration must be real and lawful.

Lawful Objects: The object of the agreement must be lawful and not one whichthe law dis-approves.

Agreements not Declared Illegal or Void: There are certain agreements,which have been expressly declared illegal or void by the law. In such cases,even if the agreement possesses all the element of a valid agreement, theagreement will not be enforceable at law.

Certainty of Meaning: The meaning of agreement must be certain or capable ofbeing certain otherwise the agreement will not be enforceable at law. For

instance, A agrees to sell 10 meters of cloth. There is nothing whatever to showwhat type of cloth was intended. The agreement is not enforceable for want ofcertainty of meaning. If, on other hand, the special description of the cloth isexpressly stated, say tarry cot (80:20), the agreement would be enforceable asthere is no uncertainty as to its meaning.

Possibility of Performance: The terms of the agreements should be capable ofperformance. An agreement to do an act impossible in itself it cannot beenforced. For instance, A agrees with B to discover the treasure by magic. Theagreement can’t be enforced.

Necessary Legal Formalities: A contract may be oral or in writing if, however,a particular type of contract is required by law to be in writing, it must complywith the necessary formalities as to writing, registration and attestation, ifnecessary. If these legal formalities are not carried out, then the contract is notenforceable at law.

Q2. What do you understand by the 'doctrine of caveat emptor'?Explain

Answer:Under the doctrine of caveat emptor, the buyer could not recover from the sellerfor defects on the property that rendered the property unfit for ordinarypurposes. The only exception was if the seller actively concealed latent defects.The modern trend in the US, however, is one of the Implied Warranty of Fitnessthat applies only to the sale of new residential housing by a builder-seller and therule of Caveat Emptor applies to all other sale situations (i.e. homeowner tobuyer). Many other jurisdictions have provisions similar to this.

Before statutory law, the buyer had no warranty of the quality of goods. In manyjurisdictions, the law now requires that goods must be of "merchantable quality".However, this implied warranty can be difficult to enforce, and may not apply toall products. Hence, buyers are still advised to be cautious.

In addition to the quality of the merchandise, this phrase also applies to thereturn policy. In most jurisdictions, there is no legal requirement for the vendorto provide a refund or exchange. In many cases, the vendor will not provide arefund but will provide a credit. In the case of software, movies and othercopyrighted material many vendors will only do a direct exchange for anothercopy of the exact same title. Most stores require proof of purchase and imposetime limits on exchanges or refunds. However, some larger chain stores will doexchanges or refunds at any time with or without proof of purchase- althoughthey usually require a form of picture ID and place quantity or dollar limitationson such returns.

Q3. Explain in detail the 'doctrines of Indoor Management' and'doctrines of constructive notice"

Answer:The doctrine of Indoor management, popularly known as the Turquand’s ruleinitially arose some 150 years ago in the context of the doctrine of constructivenotice. The rule of Doctrine of Indoor Management is conflicting to that of theprinciple of Constructive Notice. The latter seeks to protect the company againstoutsiders; the former operates to protect outsiders against the company. Therule of constructive notice is confined to the external position of the companyand, therefore, it follows that there is no notice as to how the company’s internalmachinery is handled by its officers. If the contract is consistent with the publicdocument, the person contracting will not be prejudiced by irregularities thatmay beset the indoor work of the company.

The Doctrine of Indoor Management lays down that persons dealing with acompany having satisfied themselves that the proposed transaction is not in itsnature inconsistent with the memorandum and articles, are not bound to inquirethe regularity of any internal proceeding. In other words, while personscontracting with a company are pre-sumed to know the provisions of thecontents of the memorandum and articles, they are entitled to assume that theprovisions of the articles, they are entitled to assume that the officers of thecompany have observed the provisions of the articles. It is no part of duty of anyoutsider to see that the company carries out its own internal regulations.

It is important to note that the notice of constructive notice can be invoked bythe company and it does not operate against the company. It operates againstthe person who has failed to inquire but does not operate in his favour. But thedoctrine of “indoor management” can be invoked by the person dealing with thecompany and cannot be invoked by the company.

Origination of The DoctrineThe rule had its genesis in the case of Royal Bank v Turquand. In this case theDirectors of the Company were authorized by the articles to borrow on bondssuch sums of money as should from time to time by a special resolution of theCompany in a general meeting, be authorized to be borrowed. A bond under theseal of the company, signed by two directors and the secretary was given by theDirectors to the plaintiff to secure the drawings on current account without theauthority of any such resolution. Then Turquand sought to bind the Company onthe basis of that bond. Thus the question arose whether the company was liableon that bond.

Doctrone of Constructive Notice

This doctrine provides that persons dealing with a company are deemed to haveknowledge of whatever is contained in the company's constitution and otherpublic documents of the company, especially as it relates to the powers,functions and duties of the company’s directors. The basis of this imputation isthat these are public documents and therefore open to inspection by anybody.

The doctrine operates on the assumption that people doing business with acompany will be sufficiently motivated to check the company's constitution orother public documents to ensure that the transaction they are entering into isnot only allowed but to determine whether there are any internal formalities thatmust be complied with.

The end result of the doctrine of constructive notice is that an individual orjuristic entity that deals with a company is presumed to be informed of anyrequired internal formalities or constraints prescribed by the company's publicdocuments, mainly the constitution, relating to the transaction and the authorityof the person representing the company in the transaction. The individual orentity is thus prohibited from denying knowledge of the formalities orconstraints.

Q4. Describe the kinds of Resolution passed by the BoardDirectors under the companies Act. 1956.

Answer:In the absence of any provision in the Act or the Company’s articles ofassociation, requiring that the exercise of a particular power of the directorsshould be only at Board Meeting, there is no reason why they cannot exercisethe same by passing resolution by circulation.

Further, the section enables any director to propose any resolution (other thanthose required to be passed only at Board Meeting) and have it passed bycirculation, and thus discharge his responsibilities effectively under the Act.

The passing of resolution by circulation does not, however, dispense with theneed for holding a meeting once at least in three months, as required by section285.

Pasting of resolution passed by circulation in minute bookWhere a resolution is passed by circulation the proper course will be for theresolution to be pasted in the minute book and minute also placed at the nextmeeting of the Board recording the fact of the resolution having been passed bycirculation. Or, the minute recording it may itself copy or reproduce the whole ofthe circular resolution or a separate book may be maintained for recording

resolutions passed by circulation. Whatever may be the mode of recording anysuch resolution, it should find a place in the minutes of the next Board Meeting,in order to ensure its authenticity.

Matters, which require sanction at Board Meetings, and not bycirculationThere are certain matters in reference to which the provisions of the act wouldrequire a resolution at an actual Board Meeting and not one by circulation. Theyare as follows:

S.No.

Provision/Section Matter

1. Section-262 Filling a casual vacancy in the Board

2. Section-292 The power to:

(i) make calls on shareholders;(ii) issue debentures;(iii) borrow moneys otherwise than on

debentures;(iv) invest the company’s funds;(v) make loans;

3. Section-297 Board’s sanction for certain contracts in whichparticular directors are interested;

4. Section-299 Disclosure to the Board of a director’s interestin a transaction of the company;

5. Section-308 Disclosure to the Board of a director’sshareholding

6. Section-316 &386

Approval to the appointment of a person asManaging Director or manager in more thanone company;

7. Section-372A Sanction for inter-corporate loan, investmentor giving of guarantees or providing security.

Regulation-81of table A is the Model Regulation pertaining to this section in theArticle of Association.

Text of Regulation-81of Table A:Save as otherwise expressly provided in the Act, a resolution in writing, signedby all the members of the Board or a committee thereof, for the time beingentitled to receive notice of a meeting of the Board or committee, shall be asvalid and effectual as if it had been passed at a meeting of the Board orcommittee, duly convened and held.

Circulation resolution required to be confirmed in the next BoardMeetingThere is no specific provision in the Act which requires that circulation resolutionshould be confirmed / recorded by the board at the next Board Meeting. Howeveras a good secretarial practice, the resolutions of directors passed by circulationshould be recorded at the next board meeting to ensure their authenticity.

Also the Secretarial Standard on Board Meeting (SS-1) issued by ICSI states thatcircular resolution should be placed before the next Board Meeting for noting andshould be reproduced as part of minutes of that meeting.

While recording the minutes of the Board Meeting, it must be ensured that thewhole of the resolution passed by circulation finds place in the minutes of theBoard meeting.

Q5. Define "goods". Explain the conditions and warranties impliedby law in a contract for sale of goods.

Answer:'Goods' means every kind of moveable property other than action able claimsand money; and include stocks and shares, growing crops, grass, and thingattach to or forming part of the land which are agreed to be severed before saleor under the contract of sale.

Thus, 'Goods' means every kind of moveable property other than actionableclaim or money. Things like goodwill, copyright, trademark, patient, water, gas,electricity are all goods and may be the subject matter of a contract of sale.Although, in general its only movables i.e. things which can carry from one placeto another that form goods. All such things, which are part of the land itself butare agreed to be severed from the land under the contract, are considered asgoods. Thus, where trees were sold, to be cut and then taken away by thebuyer; it was held that there was contract for sale of movable property.

Implied Conditions and warranties

Implied conditions and warranties are deemed to be incorporated in everycontract of sale of goods unless the terms of contract show contrary intentions.The following are the: -

Implied conditions1. Conditions as to title provides that in a contract of sale unless the

circumstances of the contract or such as to show a different intention thereis an implied condition on the part of the seller that in the case of a sale,he has the right to sell the goods at the time when the property is to pass.As the consequence of this if the title turns out to be defective, the buyer isentitled to reject the goods and claim refund of the price if paid plusdamages. This will be allowed even where the buyer has used the goods.

2. Sale by description Section 15. Where there is a contract for the sale ofgoods by description there is an implied condition that the good correspondwith the description. If the sale is by sample as well as description, thegoods must not only correspond with the sample but also with thedescription.

3. Condition as to quality or fitness. As a general rule a buyer is supposed tosatisfy himself about the quality of goods he purchases and also he ischarged with the responsibility of seeing for himself that the goods suit thepurpose for which he buys them. Thus, later on, if the goods purchase turnout to be unsuitable for the purpose for which he bought them, seller can'tbe asked to compensate. There are, however, certain exceptions are to thisgeneral rule. It's only in these exceptional circumstances that there is animplied condition as to quality or fitness. These circumstances are:A: Where the buyer, expressly or by implication, makes known to theseller the particular purpose for which the goods are required so as toshow, That the buyer relies on the seller's skill or judgment and the goodsor of a description which it is in the course of sellers business to supply(He is manufacturer or producer or not). There is an implied condition thatthe goods shall be responsible fit for such purpose. For the exception tooperate all the three conditions must be fulfilled:

Ø The purpose must have been disclosed.Ø The buyer must have relied on the seller's skill or judgment.Ø The seller business must be sell such goods.

B: Where goods are bought by description from a seller who deals in goodsof that description (whether he is manufacturer or producer or not)There is an implied condition that the goods shall be of merchantablequality, i.e. The goods shall be free from latent defects (Which are not aapparent or possible of detection by mere inspection.) Thus, thisexception shall be available where:

(I) Goods are bought by description

(II) From seller who deals in such goods

Where, However, the buyer has examine the goods, there shallbe no implied condition as regards defects which such examinationsought to have revealed.

C: A condition as to fitness for a particular purpose or as to quality may alsoarise on account of a custom of trade. 4. Merchantable quality. "What ismerchantable quality?" The term has never been defined. The best definitionwhich is probably the nearest the description of the term was given in Gardner V.Grey. It said that the article "Must be saleable in the market under thedenomination mentioned". In other words, the quality of the article should besuch that reasonable men would accept the article as performance of a promise.Implied Warranties

There are two implied warranties. These are:A: Warranty of quite possession (Section 14B). In a contract of sale, unlessIntention appears, there is an implied warranty that the buyer shall has and shallenjoyed quite possession of the goods. Thus, if the right of enjoyment orpossession of the buyer is distributed by the seller or any other person, thebuyer is entitled to sue the seller for damages.

B: Warranty of freedom from encumbrances (Section 14C). The Buyer is entitledto another warranty that the goods are free from any charge or encumbrance infavor of the third person, not declared to or known to buyer. Thus, this clausewill not be applicable where the buyer has been informed of the encumbrances orhad notice of the same. Further, it was held in Collinge V. Heywod (1839). 9A.and E.633, That the claim under this warranty shall be available only when thebuyer discharges the amount of encumbrance.

Assingment - B

Q1. Enumerate the duties of an Arbitrator: Differentiate domesticand foreign awards.

Answer

The duties of an arbitrator are as follows:

1: - He shall, with all reasonable dispatch enter into the reference and make an

award with in a prescribe time.

2: - He shall act judicially an impartially. He shall not secretly communicate with

any party or the party who has appointed him. He shall give a fair hearing to the

parties (section 18) and a responsible time and opportunity to them to

substantiate their respective claims.

3: - He shall stand indifferent between the parties and shall have no interest

direct or remote in the subject meter of the dispute or in the party. He shall,

from the time of his appointment and through out the arbitration proceedings.

Disclose in writing any circumstances likely to give six to justifiable doubts as to

his independence or impartiality (section 12).

4: - He shall, from the time of his appointment and through out the arbitration

proceedings.

Disclose in writing any circumstances likely to give six to justifiable doubts as to

his independence or impartiality (section 12).

5: - He shall not misconduct himself or the proceedings in any way, e.g by

accepting improper gratification or bribe from a party or by showing bies or

partiality towards to party.

6: - He shall encourage settlement of the dispute by mediation or conciliation or

other proceedings (section 30).

7: - he shall not exceed his authority and shell act with in the scope of

arbitration agreement thus, where an arbitrator has to decide whether a buyer

has the right to reject the goods as inferior in quality, and the arbitrator awards

that the buyer should take them with an allowance, or when an arbitrator has to

decide as to the boundaries of certain lands, any decide as to title, the arbitrator

acts in access of his authority.

8: - He shall observe the rules of nature justice. The chief rules of natural justice

are:

A: - To act fairly, in good faith with out bias and in a judicial temper.

B: - To give each party the opportunity of adequately stating his case. And

correcting or contradicting any relevant statement prejudicial to his case.

C: - Not to here 1 party behind the back of the other party. 9: - He Shall

give a final award (Section 31) on all the maters referred to him, unless he is

empowered to makes several awards he shall also sign and file the award with in

due time.

Q1. Nagendra issued a cheque in favour of Happy-home, acharitable institution, as his share of charitable subscription. Thebanker returned the cheque for the reason of insufficiency of fundsin the drawer's account. The demand for payment by way ofwritten notice to Nagendra by Happy-home should be made withinhow many days from the date of receipt of information of thedishounour to initiate an action under section 138 of theNegotiable Instruments Act, 1881?

Answer:

As per the amendment of 2002 to section 138 of Negotiable Instrument Act alegal notice shall be issued to the drawer by payee within 30 days of the receiptof the information of the dishonour of the cheque by banker to initiate the legalaction. Prior to this amendment the time frame was 15 days to initiate such legalaction.

However in the given situation here it doesn’t attract the provision of sec 138 ofNegotiable Instrument Act since Nagendra is neither a debtor nor he is liable forany amount to the payee. The said section applies only for the legallyenforceable debt or liability. Whereas in the given case it is clear thatMr.Nagendra issued the cheque as his share of charitable subscription which isgiven out of free will and not by any liability. However the burden of proving thathe has no liability would upon drawer where payee initiates legal action.

Because section 138of said Act articulates as follows:-

138. Dishonour of cheque for insufficiency, etc., of funds in the accounts

Where any cheque drawn by a person on an account maintained by him with abanker for payment of any amount of money to another person from out of thataccount for the discharge, in whole or in part, of any debt or other liability, isreturned by the bank unpaid, either because of the amount of money standing tothe credit of that account is insufficient to honour the cheque or that it exceedsthe amount arranged to be paid from that account by an agreement made withthat bank, such person shall be deemed to have committed an offence and shallwithout prejudice to any other provisions of this Act, be punished withimprisonment for 2["a term which may extend to two year"], or with fine whichmay extend to twice the amount of the cheque, or with both:

Provided that nothing contained in this section shall apply unless-

Ø The cheque has been presented to the bank within a period of sixmonths from the date on which it is drawn or within the period of itsvalidity, whichever is earlier.

Ø The payee or the holder induce course of the cheque, as the case maybe, makes a demand for the payment of the said amount of money bygiving a notice, in writing, to the drawer, of the cheque, 3["within thirtydays"] of the receipt of information by him from the bank regarding thereturn of the cheques as unpaid, and

Ø The drawer of such cheque fails to make the payment of the saidamount of money to the payee or, as the case may be, to the holder indue course of the cheque, within fifteen days of the receipt of the saidnotice

Explanation: For the purpose of this section, "debt or other liability" means alegally enforceable debt or other liability].

Hence it is not appropriate for the charitable institution to initiate a legal actionu/s 138 of Negotiable instrument Act against Nagendra.

Q2. Baiju, a singer, enters into a contract with Alok, the manager of atheatre, to sing at his theatre three nights in every week during the nextthree months, and Alok promises to pay him Rs.5,000 for each night'sperformance. On the seventh night, Baiju willfully absents himself from thetheatre. Can Alok put an end to the contract?

Answer:

In the given situation it is clear that Biju has agreed to sing at Mr. Alok’s theatrethree nights in every week. But it is not clear which are the days that Biju is

supposed to perform his show at Alok’s theatre. There could be three scenariosover here. One is flexibility for the singer to choose three days as he wishes.Another one is option of theatre owner. The last probability is oral or mutualagreement or consensus between the parties on subsequent days.

However in this case in the strict spirit of contract law we find the very contractis legally enforceable one.

Hence one should go by the terms and condition of the said agreement to arriveat a correct conclusion as to the remedies available in case of the breach byeither party.

Thus it can be concluded that as per the contract law the other party will be atthe flexibility to rescind the contract where the opposite party breach thecontract.

In the said case the theatre manager can put an end to the contract with thesinger giving a due notice to the singer if the singer has breached the terms andcondition of the contract.

Assingment - C

1. Which of the following contracts, in order to be valid under the Indian Contract Act,1872, must be in writing, stamped and registered?(a) Creation of a trust under the Indian Trust Act(b) A promise to pay a time barred debt(c) Cheque(d) Contracts for sale of immoveable property(e) Bill of exchangeAnswer: (d)Reason: It must be noted that a contract need not be in writing, unless there is specific provision inlaw that it should be in writing. Certain contracts must be in writing, otherwise they are notenforceable in law. Following are the examples of such contracts.• Contract for sale of immoveable property must be in writing, stamped and registered.• Certain other contracts do not require registration, yet must be in writing like the following:- Bills of exchange- Promissory notes- Cheques- A trust created under the Indian Trust Act- A promise to pay a time-barred debt- Contracts made without consideration with natural love and affection. Hence, (d) is correctanswer.

2. Under the Indian Contract Act, 1872, “every promise or set of promises forming theconsideration for each other” is known as(a) Offer(b) Contract(c) Agreement(d) Consideration(e) Acceptance.Answer: (c)Reason: According to section 2(e) of the Indian Contract Act, 1872, “Every promise and every set ofpromises, forming the consideration for each other”, is known as an agreement.

3. Under the Indian Contract Act, 1872, if all the parties to a contract substitute a newcontract for an existing contract, it is known as(a) Rescission(b) Restitution(c) Novation(d) Remission(e) Waiver.Answer: (c)Reason: If a new contract is substituted for an existing contract, it is called novation.• When a contract becomes void, any benefit derived out of the contract by one party is required tobe restored to the other. This is called restitution.

• Rescission means cancellation. In a contract, the injured party can cancel the contract and refusethe performance of contract.• Remission means giving relief.• Waiver means the act of giving up a claim or right. Hence, correct answer is (c).

4. Which of the following agreements is voidable under the Indian Contract Act, 1872?(a) Agreements by incompetent parties(b) Agreements where consent is obtained by way of coercion(c) Agreements under mutual mistake of fact material to the agreement(d) Agreements in restraint of marriage(e) Agreements with unlawful consideration.Answer: (b)Reason: A contract is voidable when the consent of a party to a contract is obtained by fraud,misrepresentation, coercion or undue influence. In all the other options the contract is void. Hence, (b)is correct answer.

5. Under the Indian Contract Act, 1872, which of the following agreements is not consideredto be opposed to public policy?(a) Agreements restricting the enforcement of rights(b) Agreements curtailing the period of limitation(c) Agreement to refer to arbitration any disputes which have arisen or which may arise infuture(d) Agreements in restraint of marriage(e) Agreements in restraint of trade.Answer: (c)Reason: An agreement to refer to arbitration any disputes which have arisen or which may arise infuture is valid.• Agreements in restraint of legal proceedings renders void two kinds of agreements namely:• Agreements restricting the enforcement of rights;• Agreements curtailing period of limitation.Agreements in restraint of marriage and agreements in restraint of trade are also considered asagreements opposing the public policy. Hence, (c) is correct answer.

6. Under the Indian Contract Act, 1872, the damages which are usually assessed on thebasis of the actual loss suffered by the plaintiff are known as(a) General damages(b) Special damages(c) Vindictive damages(d) Nominal damages(e) Exemplary damages.Answer: (a)Reason: General or ordinary damages are damages which naturally arise in the usual course of thingsfrom breach of contract. General Damages are usually assessed based on the actual loss suffered.Hence, (a) is correct answer.

7. Under the Indian Contract Act, 1872, in which of the following circumstances a continuingguarantee may not be revoked?(a) By novation(b) By death of surety in respect of transactions prior to the date of death(c) Release or discharge of principal debtor(d) Compounding by the creditor with the principal debtor(e) Loss of security by the creditor.Answer: (b)Reason: In the absence of any contract to the contrary, death of surety operates as a revocation ofcontinuing guarantee so far as regards to future transactions. (Section 131). The liability of the suretyfor previous transactions however remains. Hence, (b) is correct answer.

8. Abhimanyu purchased a Ford Ikon car and obtained a comprehensive insurance policyfrom Continental Insurance Company. This type of contract is known as(a) A wagering contract(b) A contract of guarantee(c) A voidable contract(d) A contract of indemnity(e) A contingent contract.Answer: (d)Reason: It is a contract of indemnity wherein one party promises to save the other from loss causedto him by the conduct of indemnified himself or any other person. Hence, (d) is correct answer.

9. Under the Indian Contract Act, 1872, the bailment of goods as security for payment of adebt is known as(a) Lien(b) Mortgage(c) Charge(d) Pledge(e) Assignment.Answer: (d)Reason: The bailment of goods as security for a debt or performance of a promise is called pledge.• Lien is a right exercised by one person to retain that, which is in his possession, belonging toanother, until some debt or claim is paid. Bankers, factors have general lien.• A mortgage is the transfer of an interest in specific immovable property for the purpose ofsecuring a loan• Hypothecation means creation of claim in movable goods for a loan without transferring thepossession of goods to the lender.• Assignment of security to a third party is done to borrow, which is secured by that debt. Thecorrect answer is (d).

10. Under normal circumstances which of the following statements is false regarding contract ofagency?(a) An agent should not set up an adverse title to the goods which he receives from the principal asan agent(b) An agent is duty bound to pay sums received to the principal on his account

(c) An agent is bound to render proper accounts to his principal on demand(d) An agent should protect and preserve the interests of the principal in case of his death orinsolvency(e) An agent can delegate his authority to a sub-agent.Answer: (e)Reason: An agent can not delegate his authority to a sub-agent. Duties of an agent include thefollowing:• An agent should not set up an adverse title to the goods which he receives from the principal asan agent,• An agent is duty bound to pay sums received to the principal on his account,• An agent is bound to render proper accounts to his principal on demand and• An agent should protect and preserve the interests of the principal in case of his death orinsolvency.Hence, the answer is (e).

11. Which of the following agents is considered as a non-mercantile agent under the IndianContract Act, 1872?(a) Auctioneer(b) Broker(c) Banker(d) Factor(e) Insurance agent.Answer: (e)Reason: The definition of mercantile agents covers factors, brokers, auctioneers, commission agents,Del credere agents and bankers. Insurance agents, advocates, etc., are considered as non-mercantileagents. Hence, (e) is correct answer.

12. Which of the following is not considered as a payment in due course under the NegotiableInstruments Act, 1881?(a) Payment made in accordance with the apparent tenor of the instrument(b) Payment made on an instrument before the date of maturity(c) Payment made to a person who is in possession of the instrument as a holder(d) Payment made in good faith and without negligence(e) Payment made to a person in possession of an instrument ‘payable to bearer’.Answer: (b)Reason: An instrument should be payable either at maturity or after the date of maturity. Aninstrument paid before the date of maturity is not a payment in due course. It was held in Burbridge vs.Manners that a bill paid before maturity and subsequently endorsed is valid in the hands of a bona fideendorsee. Hence, (b) is correct answer.

13. Which of the following statements is false in respect of presumptions of a negotiableinstrument under the Negotiable Instruments Act, 1881?(a) Every negotiable instrument is drawn for consideration irrespective of the considerationmentioned in the document(b) Every bill is accepted within reasonable time before maturity(c) Every accepted bill is transferred before its maturity

(d) The instruments were not endorsed in the order in which they appear on the instrument(e) The holder of the instrument is holder in due course.Answer: (d)Reason: According to Sections 118 and 119 of the Negotiable Instruments Act, 1881, negotiableinstruments are subject to the following presumptions:• Every negotiable Instrument is drawn for consideration irrespective of consideration mentionedin the document.• Every bill is accepted within reasonable time before maturity and is transferred before maturity• The instruments were endorsed in the order in which they appear on the instrument The holderof the instrument is holder in due course. Hence, (d) is correct answer.

14. The pecuniary jurisdiction of State forum and National forum are:(a) Rs 5 Lakh to10 lakh and 10-20 lakh(b) Rs 20Lakhs -1 crore and 1 crore and above(c) Below Rs 20Lakhs and 20 lakh to 1 crore(d) Rs 20 Lakh -50 Lakh and 75 Lakh &above(e) None of theseAnswer: (b)Reason:Ø In cases where the value of goods and services involved is less than Rs. 20 Lakhs in value, you

will have to file the complaint in the District Forum constituted in the specified districts of aState.

Ø In cases where the value of goods and services involved is more than Rs. 20 Lakhs in value butdoes not exceed Rs 1 crore you will have to file the complaint with the State Commissionconstituted in the capital cities of the different states

Ø In cases where the value of goods and services involved is more than 1 crore in value then youcan file a complaint with the National Commission which has been constituted only in NewDelhi.

15. Veedol Ltd. was incorporated on May 3, 2007. However, the company could obtain itscertificate to commence business only on September 25, 2007. The company, in the meanwhilehad entered into contracts with suppliers for import of machinery. Such contracts entered intoafter incorporation but before obtaining certificate of commencement of business are consideredas(a) Voidable contracts(b) Provisional contracts(c) Pre-incorporation contracts(d) Illegal contracts(e) Void contracts.Answer: (b)Reason: A contract entered after incorporation but before obtaining certificate for commencement ofbusiness is a provisional contract. It automatically gets confirmed as soon as certificate forcommencement of business is obtained. No further ratification is necessaryIn case of a private company, it does not require any certificate of commencement of business, assection 149 is not applicable to private company. Hence question of provisional contract does not arisein case of a private company.

16. Which of the following instances isnottreated as 'crossing' under the Negotiable InstrumentsAct, 1881?(a) A cheque bearing across its face the words 'account payee' without two transverse parallellines(b) A cheque bearing across its face the words 'not negotiable' with two transverse parallel lines(c) A cheque bearing across its face the words 'not exceeding rupees two hundred within twotransverse parallel lines(d) A cheque bearing across its face the words 'State Bank of India, Karol Bagh Branch, New Delhi'within two transverse parallel lines(e) A cheque bearing across its face the words 'Andhra Bank, Daryaganj Branch, New Delhi'Wthouttwo transverse parallel lines.Answer: (a)Reason: In case of a special crossing (i.e. from one bank to another) the crossing is permitted evenwithout two traverse lines. But in case of general crossing or any other crossing there should twotransverse lines. The instances cited in (b), (c), (d) and (e) are “crossing” under the NegotiableInstruments Act, 1881. Hence (a) is correct answer.

17. The term ‘goods’ under the Sale of Goods Act, 1930, does not include(a) Stocks and shares(b) Actionable claims(c) Growing crops(d) Grass(e) Every kind of movable property.Answer: (b)Reason: The term ‘goods’ under Sale of Goods Act, 1930 does not include Actionable claims andmoney.

18. Under the Sale of Goods Act, 1930, in case of breach of a warranty in a contract of sale, thebuyer can(a) Repudiate the contract(b) Claim damages only(c) Reject the goods(d) Refuse to pay the price(e) Not only reject the goods but also claim damages.Answer: (b)Reason: A warranty is a stipulation collateral to the main purpose of the contract, the breach of whichgives rise to a claim for damages but not a right to reject the goods and treat the contract as repudiated.[Section 12(3)]

19. The right of lien available to an unpaid seller by implication of law under the Sale of GoodsAct, 1930 is to(a) Retain the possession of goods for the price(b) Recover the possession of goods(c) Recover the price(d) Recover the damages

(e) Make use of the goods.Answer: (a)Reason: The right of lien exercised by an unpaid seller is to retain the possession of goods, if he hasnot parted the goods . Hence, (a) is correct answer.

20. With reference to the Sale of Goods Act, 1930 which of the following statements is false?(a) A breach of warranty can give rise only to a claim for damages(b) Warranties are obligations which need to be performed(c) A breach of a condition can be treated as a breach of warranty(d) A breach of warranty can be treated as a breach of condition(e) A particular stipulation is a condition or a warranty will depend upon the facts andcircumstances of each case.Answer: (d)Reason: The breach of warranty cannot be treated as a breach of condition. All other options are trueunder the Sale of Goods Act, 1930.

21. In which of the following cases corporate veil need not be lifted by a Court of law under theCompanies Act, 1956?(a) Where a company has been formed for defrauding the creditors(b) Where a company is used to evade taxes and other legal obligations(c) Where a company is used for the furtherance of welfare legislation(d) Where there is a complaint of oppression by the shareholders(e) Where there is a need to determine the enemy character of the company.Answer: (c)Reason: Principally, company has identity separate and independent from its members. Though thisprinciple behind the judgment of ‘Solomon vs. Solomon & Co. Ltd.’ is still valid, now such puristapproach is not taken. Often, people behind the company who really control the affairs of the companyare looked into. This is termed as ‘lifting of the corporate veil’. Many Statutes also now provide forsuch lifting of corporate veil. Courts also often look behind the corporate veil and see the persons whoare controlling the company.

Ø Statutory provisions for lifting of the veil: -Ø Holding and Subsidiary companyØ Foreign Investment control under ‘FEMA’Ø SEBI’s take over regulationsØ When the number of members fall bellow statutory minimumØ Tax liability of directors of a private companyØ Punishment provisions.

Judicial Decisions regarding lifting of corporate veil:-Courts also lift the corporate veil to see the realstate of affairs. It may be noted that the corporate veil can be lifted for benefit of the company as wellas for purposes of penalizing the company.Some cases where courts did lift the veil are as follows:

1. Prevention of Fraud2. Decide foreign character.3. Decide whether company is a joint venture4. Decide company is partnership in subsistence5. To deicide complaint of oppression

6. Tax avoidance device7. Production of subsidiary can be own production8. To ascertain true nature of transaction if alleged as sham.9. Device to avoid welfare legislation10. If opposed to justice or public interest11. Experience of directors is experience of the company.12. Punishing for contempt of court13. Abuse of process of law.

22. As per section 591 of the Companies Act, 1956, a foreign company means(a) A company incorporated outside India and having place of business in India(b) A company incorporated in India and having place of business outside India(c) A company incorporated outside India and having place of business outside India(d) A company incorporated in India and having place of business in India(e) A company incorporated in India but not commenced its business.Answer: (a)Reason: As per section 591 of the Companies Act, 1956, a foreign company means a companyincorporated out side India and having place of business in India.

23. Under the Companies Act, 1956, a public company which never commenced business isknown as a/an(a) Private company(b) Closely held public company(c) Unlimited company(d) Widely held company(e) Defunct company.Answer: (e)Reason: Under section 560 of the Companies Act, 1956, a public company which never commencedbusiness is known as a defunct company.

24. The Doctrine of Constructive Notice’ is used to protect(a) Company against outsiders(b) Outsiders against company(c) Directors against outsiders(d) Directors against company(e) Outsiders against directors.Answer: (a)Reason: The doctrine of constructive notice is to protect company against outsiders, while doctrinesof indoor management and ostensible authority to protect outsiders against the company.

25. The directors of a newly floated company want to name it as Zeneca Finance Corporation.Under the Companies Act, 1956, in order to use the keyword ‘Corporation’ in its name thecompany must have a minimum authorized capital of(a) Rs. 1 crore(b) Rs. 2 crore(c) Rs. 5 crore

(d) Rs.10 crore(e) Rs.25 crore.Answer: (c)Reason: The Department of Company Affairs in its circular dated 7-3-1989, has clarified that if acompany uses any of the following keywords in its name under Sections 20 and 21, it must have aminimum authorized capital mentioned against the keywords:

Keywords Required AuthorizedCapital (Rs.)

1.

Corporation 5 crore2. International, Globe, Universal, Continental, Inter

Continental, Asiatic, Asia, being the first word of thename

1 crore

3. If any of the words at (2) above is used within the name(with or without brackets)

50 lakh

4. Hindustan, India, Bharat, being the first word of thename

50 lakh

5. If any of the words at (4) above is used within the name(with or without brackets)

5 lakh

6. Indus tries/Udyog 1 crore7. Enterprises, Products, Business, Manufacturing 10 lakhHence (c) is correct answer.

26. The lock in period of minimum promoter’s contribution in case of a public issue is(a) 1 year(b) 2 years(c) 3 years(d) 4 years(e) 5 years.Answer: (c)Reason: In a public issue the minimum promoter’s contribution shall be locked in for a period of 3years.

27. Under the Companies Act, 1956, if a public company does not register its own set ofarticles, then(a) The regulations contained in Table A of Schedule I to the Act automatically apply(b) The regulations contained in Table C of Schedule I to the Act automatically apply(c) The regulations contained in Table D of Schedule I to the Act automatically apply(d) The regulations contained in Table E of Schedule I to the Act automatically apply(e) The company cannot be incorporated under the Companies Act, 1956.Answer: (a)Reason: Under the Companies Act, 1956, if a public company does not register its own set of articles,then the regulations contained in Table A of Schedule I to the Act automatically apply.

28. The maximum number of public companies to which an individual can be appointed as a directorat a time under section 276 of the Companies Act, 1956, is(a) 10 companies

(b) 15 companies(c) 20 companies(d) 25 companies(e) 50 companies.Answer: (b)Reason: As per section 276 of the Companies Act, 1956, an individual cannot be director of morethan fifteen public companies at a time.

29. Which of the following statements is false under the Companies Act, 1956?(a) A director must be a member of the company(b) Minimum seven persons are required for incorporation of a public company(c) Proxy has no right to speak in the general meeting(d) Company having profits need not declare dividends(e) A private company cannot issue prospectus.Answer: (a)< T

Reason: Director need not be member of the company, if the company’s articles so provide to takequalification shares then the directors are required to take shares in the company otherwise for thedirectors to become members of the company is absolutely optional.

30. Section 292A of Companies Act, 1956 lays down compulsory constitution of ‘AuditCommittee’ by certain public companies. Which of the following companies are required toconstitute such committees?(a) A public company having a paid-up capital of not less than Rs.1 crore(b) A public company having a authorised capital of not less than Rs.1 crore(c) A private company having a paid-up capital of not less than Rs.1 crore(d) A foreign company having a paid-up capital of not less than Rs.3 crore(e) A public company having a paid-up capital of not less than Rs.5 crore.Answer: (e)< T

Reason: Section 292A of Companies Act, 1956, lays down compulsorily constitution of AuditCommittee by certain public companies. A public limited company having a paid-up capital of not lessthan Rs.5 crore is required to constitute such committees.

31. Under the Companies Act, 1956, a public financial institution whose main object is financingshall file which of the following with the Registrar of Companies for issue of its securities?(a) Statement in lieu of prospectus(b) Information memorandum(c) Red-herring prospectus(d) Abridged prospectus(e) Shelf prospectus.Answer: (e)< T

Reason: Under the Companies Act, 1956, a public financial institution whose main object isfinancing shall file a shelf prospectus with the Registrar of Companies for issue of its securities.

32. Which of the following statements is false in respect of a proxy under the Companies Act,1956?(a) Proxy need not be a member of a company(b) A member of a private company cannot appoint more than one proxy to attend the samemeeting(c) A proxy can vote only on poll(d) Where the NCLT directs under Section 167 or 186 of the Companies Act, 1956 one memberpresent in person or by proxy can constitute a quorum in a meeting(e) The period fixed for depositing proxies cannot be extended beyond 72 hours before themeeting.Answer: (e)< T

Reason: According to the provisions of Companies Act, 1956 relating to proxies, the period fixed fordepositing proxies cannot be extended beyond 48 hrs before the meeting.

33. The maximum maturity period for deposits accepted by a public company under theCompanies (Acceptance of Deposits) Rules, 1975, cannot exceed(a) 12 months(b) 24 months(c) 36 months(d) 48 months(e) 60 months.Answer: (e)< T

Reason: The minimum tenure for which public deposits can be accepted or renewed is 12 months(earlier 6 months). It is also stipulated that the maximum maturity period for the deposits cannotexceed 60 months (earlier 36 months).

34. Where more than one companies are merged together, it is known as(a) Arrangement(b) Compromise(c) Reorganization(d) Reconstruction(e) Amalgamation.Answer: (e)Reason:Ø Where one or more companies are merged together it is known as Amalgamation.Ø The term compromise indicates the existence of a dispute between two parties, which needs to

be settled amicably. The dispute usually relates to the rights of the parties.Ø Section 390(B) of the Companies Act, 1956 defines the term arrangement to include

reorganization of the share capital of a company by consolidation of shares of different classesor by the division of shares into shares of different classes or by both of these methods.

Ø The reconstruction is said to have taken place when an undertaking is being carried on by acompany and is in substance transferred, not to an outsider, but to another company consistingsubstantially of the same shareholders with a view to its being continued by the transfereecompany. Hence, (e) is correct answer.

35. The debentures, which are similar to share warrants are known as(a) Registered debentures(b) Secured debentures(c) Bearer debentures(d) Naked debentures(e) Irredeemable debentures.Answer: (c)Reason: Bearer debentures are similar to share warrants in that they too are negotiable andtransferable by mere delivery.

36. Which of the following is not a ground for winding up of a company by National CompanyLaw Tribunal under section 433 of the Companies Act, 1956?(a) Default in holding statutory meeting by a public company limited by shares(b) Default in holding annual general meeting(c) Failure to commence business within a year of its incorporation(d) Inability to pay its debts(e) Reduction of number of members below statutory minimum.Answer: (b)Reason: Default in holding Annual General Meeting is not a ground for issue of winding up order byNational Company Law Tribunal. All other grounds in options (a), (c), (d) and (e) are the grounds forissue of winding up order.

37. As per the provisions the Companies Act, 1956, an alternate director can be appointed, inplace of the original director during his absence for a period not less than 3 months, by(a) Securities Exchange Board of India(b) Board of directors(c) Financial Institutions(d) The Central Government(e) Share holders of the company.Answer: (b)Reason: Section 313 of the Companies Act, 1956, lays down that the Board of Directors of acompany can appoint an alternate director in place of the original director during his absence for aperiod not less than three months from the date in which the board meetings are held. This power canbe exercised, only if authorized by the articles or by a resolution passed by the company in a generalmeeting.

38. Under the Companies Act, 1956, the amount held under unpaid dividend account of acompany which remains unpaid or unclaimed for a period of 7 years from the date of suchtransfer must be transferred by the company to(a) Securities premium account(b) General reserve(c) Revaluation reserve(d) Investor education and protection fund(e) Debenture redemption reserve.Answer: (d)Reason:

• Share premium account represents the amount of premium collected by the company from theshareholders for every share issued at premium.• General reserve represents the amount of profits ploughed back as reserve.• Revaluation reserve represents the surplus generated by revaluing the fixed assets of thecompany.• Amount held under unpaid dividend account of a company which remains unpaid or unclaimedfor a period of 7 years from the date of such transfer is to be transferred to Investor education andprotection fund• Debenture redemption reserve fund represents the reserve fund created out of profits every year,to redeem the debentures on the due date.

39. Which of the following statements is true with respect to the requirement of quorum for ageneral meeting of a company under the Companies Act, 1956?(a) Quorum is required at the end of the meeting of the company(b) Quorum is required only at the beginning of the meeting of the company(c) Quorum is required throughout the meeting of the company(d) Quorum is not required for the meeting of the company(e) Quorum is required only for the listed companies.Answer: (b)Reason: The Articles of Association of a company require the presence of the quorum at the timewhen the meeting proceeds to business then such requirement will be deemed to be complied with ifthe quorum is present at the beginning of the meeting. This means quorum need not present throughoutthe meeting or when the meeting proceeds to vote. Hence option (b) is correct.

40. Which of the following category of directors cannot be removed by the members of thecompany in general meeting under section 284 of the Companies Act, 1956?(a) The director appointed in casual vacancy(b) The director appointed as additional director(c) The director appointed as alternate director(d) The director appointed by the Central Government(e) Director appointed as regular director in a general meeting.Answer: (d)Reason: The director appointed by the Central government cannot be removed by the members undersection 284 of the Act and all others can be removed by the members in general meeting.