PAPER – 2: BUSINESS LAWS AND BUSINESS CORRESPONDENCE AND REPORTING

SECTION A: BUSINESS LAWS

PART – I: RELEVANT AMENDMENTS APPLICABLE FOR MAY 2018 EXAMINATION

Applicability of Relevant Amendments/ Circulars/ Notifications/ Regulations etc.

For May 2018 examinations for Paper 2, Section A: Business Laws, the significant amendments
made in the respective subject for the period 1st May 2017 to 31st October, 2017 are relevant
and applicable for said examinations.
This RTP of May 2018 examination is very important to the students to update themselves with
the relevant amendments pertaining to the Business Laws.
Students are advised to refer the following publications -
1. Study Material (Edition July 2017) containing Legislative amendments issued
upto 30th April, 2017.
2. RTP of May 2018 examination containing a gist of all the significant notified
legislative amendments from 1st May 2017 to 31st October, 2017 along with the
suggested sample questions and answers for understanding and practice.

Following is the relevant amendment:

S. No. Subject Matter
1. The Ministry of Corporate Affairs vide Notification S.O. 3086(E) dated 20 th
September, 2017 has notified the proviso to clause (87) of section 2 of the
Companies Act, 2013 w.e.f. 20 th September, 2017.
[Proviso to clause (87) of Section 2 of the Companies Act, 2013 is covered on Page
No. 5.12, Chapter 5 of the study material]

PART II: QUESTIONS AND ANSWERS

QUESTIONS
The Indian Contract Act, 1872
1. (i) 'X' agreed to become an assistant for 2 years to 'Y' who was practicing Chartered
Accountant at Jodhpur. It was also agreed that during the term of agreement 'X' will
not practice as a Chartered Accountant on his own account within 20 kms of the office
of 'Y' at Jodhpur. At the end of one year, 'X' left the assistantship of 'Y' and started
practice on his own account within the said area of 20 kms.

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 2 FOUNDATION EXAMINATION: MAY, 2018

Referring to the provisions of the Indian Contract Act, 1872, decide whether 'X' could
be restrained from doing so?
(ii) A stranger to a contract cannot sue, however in some cases even a stranger to
contract may enforce a claim. Explain.
2. (i) PM Ltd., contracts with Gupta Traders to make and deliver certain machinery to them
by 30th June 2017 for ` 21.50 Lakhs. Due to labour strike, PM Ltd. could not
manufacture and deliver the machinery to Gupta Traders. Later Gupta Traders
procured the machinery from another manufacturer for ` 22.75 lakhs. Gupta Traders
was also prevented from performing a contract which it had made with Zenith Traders
at the time of their contract with PM Ltd. and were compelled to pay compensation
for breach of contract. Calculate the amount of compensation which Gupta Traders
can claim from PM Ltd., referring to the legal provisions of the Indian Contract Act,
1872.
(ii) A student was induced by his teacher to sell his brand new car to the latter at less
than the purchase price to secure more marks in the examination. Accordingly the
car was sold. However, the father of the student persuaded him to sue his teacher.
State on what ground the student can sue the teacher?
3. (i) Explain the term "coercion" and describe its effect on the validity of a contract?
(ii) “Though a minor is not competent to contract, nothing in the Contract Act prevents
him from making the other party bound to the minor”. Discuss.
(iii) A received certain goods from B promising to pay ` 1,00,000. Later on, A expressed
his inability to make payment. C, who is known to A, pays ` 60,000 to B on behalf of
A. However, A was not aware of the payment. Now B is intending to sue A for the
amount of ` 1,00,000. Discuss whether the contention of B is right?
4. Decide with reasons whether the following agreements are valid or void under the
provisions of the Indian Contract Act, 1872:
(i) Vijay agrees with Saini to sell his black horse for ` 3,00,000. Unknown to both the
Parties, the horse was dead at the time of the agreement.
(ii) Sarvesh sells the goodwill of his shop to Vikas for ` 10,00,000 and promises not to
carry on such business forever and anywhere in India.
(iii) Mr. X agrees to write a book with a publisher. After few days, X dies in an accident.
The Sale of Goods Act, 1930
5. (i) Explain the term “Delivery and its form” under the Sale of Goods Act, 1930.
(ii) Describe the consequences of “destruction of goods” under the Sale of Goods Act,
1930, where the goods have been destroyed after the agreement to sell but before
the sale is affected.

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6. (i) Describe the term “unpaid seller” under the Sale of Goods Act, 1930? When can an
unpaid seller exercise the right of stoppage of goods in transit?
(ii) Explain the “condition as to Merchantability” and “condition as to wholesomeness”
under the Sale of Goods Act, 1930.
7. (i) J the owner of a Fiat car wants to sell his car. For this purpose he hand over the car
to P, a mercantile agent for sale at a price not less than ` 50, 000. The agent sells
the car for ` 40, 000 to A, who buys the car in good faith and without notice of any
fraud. P misappropriated the money also. J sues A to recover the Car. Decide given
reasons whether J would succeed.
(ii) Explain the term “Caveat-Emptor” under the Sale of Goods Act, 1930? What are the
exceptions to this rule?
The Indian Partnership Act, 1932
8. (i) Whether a minor may be admitted in the business of a partnership firm? Explain the
rights of a minor in the partnership firm.
(ii) A & Co. is registered as a partnership firm in 2015 with A, B and C partners. In 2016,
A dies. In 2017, B and C sue X in the name and on behalf of A & Co., without fresh
registration. Decide whether the suit is maintainable. Whether your answer would be
same if in 2017 B and C had taken a new partner D and then filed a suit against X
without fresh registration?
9. (i) A, B and C are partners in a firm. As per terms of the partnership deed, A is entitled
to 20 percent of the partnership property and profits. A retires from the firm and dies
after 15 days. B and C continue business of the firm without settling accounts. Explain
the rights of A’s legal representatives against the firm under the Indian Partnership
Act, 1932?
(ii) State the differences between Partnership and Hindu Undivided Family.
The Limited Liability Partnership Act, 2008
10. (i) What do you mean by Limited Liability Partnership (LLP)? What are the advantages
for forming a LLP for doing business?
(ii) List the differences between the Limited Liability Partnership and the Limited Liability
Company.
The Companies Act, 2013
11. (i) Explain the concept of "Dormant Company" as envisaged in the Companies Act,
2013.
(ii) The Articles of Association of XYZ Ltd. provides that Board of Directors has authority
to issue bonds provided such issue is authorized by the shareholders by a necessary
resolution in the general meeting of the company. The company was in dire need of

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funds and therefore, it issued the bonds to Mr. X without passing any such resolution
in general meeting. Can Mr. X recover the money from the company? Decide referring
the relevant provisions of the Companies Act, 2013.
12. (i) State whether a non-profit organization be registered as a company under the
Companies Act, 2013? If so, what procedure does it have to adopt?
(ii) When a company is registered, it is clothed with a legal personality. Explain.

SUGGESTED ANSWERS / HINTS

1. (i) Agreement in Restraint of Trade: Section 27 of the Indian Contract Act, 1872 deals
with agreements in restraint of trade. According to the said section, every agreement
by which any person is restrained from exercising a lawful profession, trade or
business of any kind, is to that extent void. However, in the case of the service
agreements restraint of trade is valid. In an agreement of service by which a person
binds himself during the term of agreement not to take service with anyone else
directly or indirectly to promote any business in direct competition with that of his
employer is not in restraint of trade, so it is a valid contract.
In the instant case, agreement entered by ‘X’ with ‘Y’ is reasonable, and do not
amount to restraint of trade and hence enforceable.
Therefore, ‘X’ can be restrained by an injunction from practicing on his own account
in within the said area of 20 Kms for another one year.
(ii) Stranger to a contract cannot sue is known as a “doctrine of privity of contract”.
This rule is however, subject to certain exceptions. In other words, even a stranger
to a contract may enforce a claim in the following cases:
(1) In the case of trust, a beneficiary can enforce his right under the trust, though
he was not a party to the contract between the settler and the trustee.
(2) In the case of a family settlement, if the terms of the settlement are reduced
into writing, the members of family who originally had not been parties to the
settlement may enforce the agreement.
(3) In the case of certain marriage contracts, or arrangements, a provision may
be made for the benefit of a person. The person may enforce the agreement
though he is not a party to the agreement.
(4) In the case of assignment of a contract, when the benefit under a contract
has been assigned, the assignee can enforce the contract.
(5) Acknowledgement or estoppel – where the promisor by his conduct
acknowledges himself as an agent of the third party, it would result into a binding
obligation towards third party.

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(6) In the case of covenant running with the land, the person who purchases
land with notice that the owner of land is bound by certain duties affecting land,
the covenant affecting the land may be enforced by the successor of the seller.
(7) Contracts entered into through an agent: The principal can enforce the
contracts entered by his agent where the agent has acted within the scope of
his authority and in the name of the principal.
2. (i) Section 73 of the Indian Contract Act, 1872 provides for compensation for loss or
damage caused by breach of contract. According to it, when a contract has been
broken, the party who suffers by such a breach is entitled to receive from the party
who has broken the contract, compensation for any loss or damage caused to him
thereby which naturally arose in the usual course of things from such breach or which
the parties knew when they made the contract, to be likely to result from the breach
of it.
Such compensation is not to be given for any remote and indirect loss or damage
sustained by reason of the breach.
It is further provided in the explanation to the section that in estimating the loss or
damage from a breach of contract, the means which existed of remedying the
inconvenience caused by the non-performance of the contract must be taken into
account.
Applying the above principle of law to the given case, PM Ltd. is obliged to
compensate for the loss of ` 1.25 lakhs (i.e. ` 22.75 lakhs – ` 21.50 lakhs) which
had naturally arisen due to default in performing the contract by the specified date.
Regarding the amount of compensation which Gupta Traders were compelled to
make to Zenith Traders, it depends upon the fact whether PM Ltd. knew about the
contract of Gupta Traders for supply of the contracted machinery to Zenith Traders
on the specified date. If so, PM Ltd. is also obliged to reimburse the compensation
which Gupta Traders had to pay to Zenith Traders for breach of contract. Otherwise
PM Ltd. is not liable for that.
(ii) Yes, the student can sue his teacher on the ground of undue influence under the
provisions of Indian Contract Act, 1872. A contract brought as a result of coercion,
undue influence, fraud or misrepresentation would be voidable at the option of the
person whose consent was caused.
3. (i) “Coercion” is the committing or threatening to commit any act forbidden by the Indian
Penal Code 1860, or the unlawful detaining or threatening to detain any property, to
the prejudice of any person whatever, with the intention of causing any person to
enter into an agreement. (Section 15 of the Indian Contract Act, 1872).
It is also important to note that it is immaterial whether the Indian Penal Code, 186 0
is or is not in force at the place where the coercion is employed.

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Effects on validity: According to section 19 of the Act, when consent to an

agreement is caused by coercion, the contract is voidable at the option of the party,
whose consent was so caused. The aggrieved party, whose consent was so caused
can enforce the agreement or treat it as void and rescind it. It is seen that in all these
cases though the agreement amounts to a contract, it is voidable. The injured party
might insist on being placed in the same position in which he might have been had
the vitiating circumstances not been present.
Where a contract is voidable and the party entitled to avoid it decides to do so by
rescinding it, he must restore any benefit which he might have received from the other
party. He cannot avoid the contract and at the same time enjoy the benefit under the
rescinded/avoided contract. (Section 64)
(ii) Minor can be a beneficiary or can take benefit out of a contract: Though a minor
is not competent to contract, nothing in the Contract Act prevents him from making
the other party bound to the minor.
For example: A promissory note duly executed in favour of a minor is not void and
can be sued upon by him, because he though incompetent to contract, may yet accept
a benefit.
A minor cannot become partner in a partnership firm. However, he may with the
consent of all the partners, be admitted to the benefits of partnership (Section 30 of
the Indian Partnership Act, 1932).
(iii) As per Section 41 of the Indian Contract Act, 1872, when a promisee accepts
performance of the promise from a third person, he cannot afterwards enforce it
against the promisor. That is, performance by a stranger, accepted by the promise e,
produces the result of discharging the promisor, although the latter has neither
authorized nor ratified the act of the third party. Therefore, in the present instance,
B can sue only for the balance amount i.e. ` 40,000 and not for the whole amount.
4. (i) As per Section 20 of the Indian Contract Act, 1872, an agreement under by mistake
of fact are void. In this case, there is mistake of fact as to the existence of the subject-
matter, i.e., with respect to the selling of horse which was dead at the time of t he
agreement. It is unknown to both the parties. Therefore, it is a void agreement.
(ii) As per Section 27 of the Indian Contract Act, 1872, an agreement in restraint of trade
is void. However, a buyer can put such a condition on the seller of goodwill, no t to
carry on same business, provided that the conditions must be reasonable regarding
the duration and place of the business. Since in the given case, restraint to carry on
business was forever and anywhere in India, so the agreement in question is void.
(iii) As per section 2(j) of the Contract Act, “A contract which ceases to be enforceable by
law becomes void when it ceases to be enforceable”. In the present case, Mr. X
agrees to write a book with a publisher. After few days, X dies in an accident. Her e
the contract becomes void due to the impossibility of performance of the contract.

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5. (i) Delivery and its forms: Delivery means voluntary transfer of possession from one
person to another [Section 2(2)]. As a general rule, delivery of goods may be made
by doing anything, which has the effect of putting the goods in the possession of the
buyer, or any person authorized to hold them on his behalf.
Forms of delivery: Following are the kinds of delivery for transfer of possession:
(a) Actual delivery: When the goods are physically delivered to the buyer.
(b) Constructive delivery: When it is effected without any change in the custody
or actual possession of the thing as in the case of delivery by attornment
(acknowledgement) e.g., where a warehouseman holding the goods of A agrees
to hold them on behalf of B, at A’s request.
(c) Symbolic delivery: When there is a delivery of a thing in token of a transfer of
something else, i.e., delivery of goods in the course of transit may be made by
handing over documents of title to goods, like bill of lading or railway receipt or
delivery orders or the key of a warehouse containing the goods is handed over
to buyer.
(ii) Destruction of Goods-Consequences: In accordance with the provisions of the
Sale of Goods Act, 1930 as contained in Section 7, a contract for the sale of specific
goods is void if at the time when the contract was made; the goods without the
knowledge of the seller, perished or become so damaged as no longer to answer to
their description in the contract, then the contract is void ab initio. This section is
based on the rule that where both the parties to a contract are under a mistake as to
a matter of fact essential to a contract, the contract is void.
In a similar way Section 8 provides that an agreement to sell specific goods becomes
void if subsequently the goods, without any fault on the part of the seller or buyer,
perish or become so damaged as no longer to answer to their description in
agreement before the risk passes to the buyer. This rule is also based on the ground
of impossibility of performance as stated above.
It may, however, be noted that section 7 and 8 apply only to specific goods and not
to unascertained goods. If the agreement is to sell a certain quantity of unascertained
goods, the perishing of even the whole quantity of such goods in the possession of
the seller will not relieve him of his obligation to deliver the goods.
6. (i) Unpaid Seller : According to Section 45 of the Sale of Goods Act, 1930 the seller of
goods is deemed to be an ‘Unpaid Seller’ when-
(a) the whole of the price has not been paid or tendered.
(b) a bill of exchange or other negotiable instrument has been received as
conditional payment, and it has been dishonoured.

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Right of stoppage of goods in transit

When the unpaid seller has parted with the goods to a carrier and the buyer has
become insolvent, he can exercise this right by asking the carrier to return the goods
back, or not to deliver the goods to the buyer.
However, the right of stoppage in transit is exercised only when the following
conditions are fulfilled:
(a) The seller must be unpaid.
(b) The seller must have parted with the possession of goods.
(c) The goods must be in the course of transit.
(d) The buyer must have become insolvent.
(e) The right is subject to provisions of the Act.
(ii) Condition as to Merchantability [Section 16(2) of the Sale of Goods Act, 1930]:
Where goods are bought by description from a seller who deals in goods of that
description (whether he is the manufacturer or producer or not), there is an implied
condition that the goods shall be of merchantable quality.
Provided that, if the buyer has examined the goods, there shall be no implied
condition as regards defects which such examination ought to have revealed .
The expression “merchantable quality”, though not defined, nevertheless connotes
goods of such a quality and in such a condition a man of ordinary prudence would
accept them as goods of that description. It does not imply any legal right or legal title
to sell.
Example: If a person orders motor horns from a manufacturer of horns, and the horns
supplied are scratched and damaged owing to bad packing, he is entitled to reject
them as unmerchantable.
Condition as to wholesomeness: In the case of eatables and provisions, in addition
to the implied condition as to merchantability, there is another implied condition that
the goods shall be wholesome.
Example: A supplied F with milk. The milk contained typhoid germs. F’s wife
consumed the milk and was infected and died. Held, there was a breach of condition
as to fitness and A was liable to pay damages.
7. (i) The problem in this case is based on the provisions of the Sale of Goods Act, 1930
contained in the proviso to Section 27. The proviso provides that a mercantile agent
is one who in the customary course of his business, has, as such agent, authority
either to sell goods, or to consign goods, for the purpose of sale, or to buy goods, or
to raise money on the security of goods [Section 2(9)]. The buyer of goods from a
mercantile agent, who has no authority from the principal to sell, gets a good title to
the goods if the following conditions are satisfied:

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(1) The agent should be in possession of the goods or documents of title to the
goods with the consent of the owner.
(2) The agent should sell the goods while acting in the ordinary course of business
of a mercantile agent.
(3) The buyer should act in good faith.
(4) The buyer should not have at the time of the contract of sale notice that the
agent has no authority to sell.
In the instant case, P, the agent, was in the possession of the car with J’s consent for
the purpose of sale. A, the buyer, therefore obtained a good title to the car. Hence,
J in this case, cannot recover the car from A.
(ii) Caveat emptor’ means “let the buyer beware”, i.e. in sale of goods the seller is under
no duty to reveal unflattering truths about the goods sold. Therefore, when a person
buys some goods, he must examine them thoroughly. If the goods turn out to be
defective or do not suit his purpose, or if he depends upon his skill and judgment and
makes a bad selection, he cannot blame any body excepting himself.
The rule is enunciated in the opening words of section 16 of the Sale of Goods Act,
1930 which runs thus: “Subject to the provisions of this Act and of any other law for
the time being in force, there is no implied warranty or condition as to the quality or
fitness for any particular purpose of goods supplied under a contract of sale”
The rule of caveat emptor does not apply in the following cases:
(a) Fitness for buyer’s purpose: Where the buyer, expressly or by implication,
makes known to the seller the particular purpose for which he requires the goods
and relies on the seller’s skill or judgment and the goods are of a description
which it is in the course of the seller’s business to supply, the seller must supply
the goods which shall be fit for the buyer’s purpose. [Section16(1)].
(b) Sale under a patent or trade name: In the case of a contract for the sale of a
specified article under its patent or other trade name, there is no implied
condition that the goods shall be reasonably fit for any particular purpose
[Section 16(1)].
(c) Merchantable quality: Where goods are bought by description from a seller
who deals in goods of that description (whether he is in the manufacturer or
producer or not), there is an implied condition that the goods shall be of
merchantable quality. But if the buyer has examined the goods, there is no
implied condition as regards defects which such examination ought to have
revealed. [Section 16(2)].
(d) Usage of trade: An implied warranty or condition as to qualify or fitness for a
particular purpose may be annexed by the usage of trade. [Section 16(3)].

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(e) Consent by fraud: Where the consent of the buyer, in a contract of sale, is
obtained by the seller by fraud or where the seller knowingly conceals a defect
which could not be discovered on a reasonable examination, the doctrine of
caveat emptor does not apply.
8. (i) Minor as a partner: A minor is incompetent to do the contract and such contract is
void-ab-initio. Therefore, a minor cannot be admitted in the business of the
partnership firm because the partnership is formed on a contract. Though a minor
cannot be a partner in a firm, he can nevertheless be admitted to the benefits of
partnership under section 30 of the Indian Partnership Act, 1932. He may be validly
have a share in the profit of the firm but this can be done with the consent of all the
partners of the firm.
Rights of the minor in the firm:
(a) a minor has a right to his agreed share of the profits and of the firm.
(b) he can have access to, inspect and copy the accounts of the firm.
(c) he can sue the partners for accounts or for payments of his share but only, when
severing his connection with the firm, and not otherwise. The amount of share
shall be determined by a valuation made in accordance with the rules upon a
dissolution.
(d) on attaining majority he may within 6 months elect to become a partner or not to
become a partner. If he elects to become a partner, then he is entitled to the
share to which he was entitled as a minor. If he does not, then his share is not
liable for any acts of the firm after the date of the public notice served to that
effect.
(ii) As regards the question whether in the case of a registered firm (whose business
was carried on after its dissolution by death of one of the partners), a suit can be filed
by the remaining partners in respect of any subsequent dealings or transactions
without notifying to the Registrar of Firms, the changes in the constitution of the firm,
it was decided that the remaining partners should sue in respect of such subsequent
dealings or transactions even though the firm was not registered again after such
dissolution and no notice of the partner was given to the Registrar.
The test applied in these cases was whether the plaintiff satisfied the only two
requirements of Section 69 (2) of the Act namely,
(a) the suit must be instituted by or on behalf of the firm which had been registered;
(b) the person suing had been shown as partner in the register of firms. In view of
this position of law, the suit is in the case by B and C against X in the name and on
behalf of A & Co. is maintainable.
Now, in 2017, B and C had taken a new partner, D, and then filed a suit against X
without fresh registration. Where a new partner is introduced, the fact is to be notified

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to Registrar who shall make a record of the notice in the entry relating to the firm in
the Register of firms. Therefore, the firm cannot sue as D’s (new partner’s) name has
not been entered in the register of firms. It was pointed out that in the second
requirement, the phrase “person suing” means persons in the sense of individuals
whose names appear in the register as partners and who must be all partners in the
firm at the date of the suit.
9. (i) Section 37 of the Indian Partnership Act, 1932 provides that where a partner dies or
otherwise ceases to be a partner and there is no final settlement of account between
the legal representatives of the deceased partner or the firms with the property of the
firm, then, in the absence of a contract to the contrary, the legal representatives of
the deceased partner or the retired partner are entitled to claim either.
(1) Such shares of the profits earned after the death or retirement of the partner
which is attributable to the use of his share in the property of the firm; or
(2) Interest at the rate of 6 per cent annum on the amount of his share in the
property.
Based on the aforesaid provisions of Section 37 of the Indian Partnership Act, 1932,
in the given problem, A’s Legal representatives shall be entitled, at their option to:
(a) the 20% shares of profits (as per the partnership deed); or
(b) interest at the rate of 6 per cent per annum on the amount of A’s share in the
property.
(ii) Differences between the Partnership & Joint Hindus Family.
Basis of Partnership Joint Hindu family
difference
Mode of creation Partnership is created The right in the joint family is
necessarily by an agreement. created by status means its
creation by birth in the family.
Death of a Death of a partner ordinarily The death of a member in the
member leads to the dissolution of Hindu undivided family does
partnership. not give rise to dissolution of
the family business.
Management All the partners are equally The right of management of
entitled to take part in the joint family business generally
partnership business. vests in the Karta, the

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governing male member or

female member of the family.1
Authority to bind Every partner can, by his act, The Karta or the manager, has
bind the firm. the authority to contract for the
family business and the other
members in the family.
Liability In a partnership, the liability of In a Hindu undivided family,
a partner is unlimited. only the liability of the Karta is
unlimited, and the other co-
partners are liable only to the
extent of their share in the
profits of the family business.
Calling for A partner can bring a suit On the separation of the joint
accounts on against the firm for accounts, family, a member is not
closure provided he also seeks the entitled to ask for account of
dissolution of the firm. the family business.
Governing Law A partnership is governed by A Joint Hindu Family business
the Indian Partnership Act, is governed by the Hindu Law.
1932.
Minor’s capacity In a partnership, a minor In Hindu undivided family
cannot become a partner, business, a minor becomes a
though he can be admitted to member of the ancestral
the benefits of partnership, business by the incidence of
only with the consent of all birth. He does not have to wait
the partners. for attaining majority.
Continuity A firm subject to a contract A Joint Hindu family has the
between the partners gets continuity till it is divided. The
dissolved by death or status of Joint Hindu family is
insolvency of a partner. not thereby affected by the
death of a member.
Number of In case of Partnership Members of HUF who carry on
Members number of members should a business may be unlimited
not exceed 50 in number.

1 Joint Hindu Family: The amendment in the Hindu Succession Act, 2005, entitled all adult members – Hindu
males and females to become coparceners in a HUF. They now enjoy equal rights of inheritance due to this
amendment. On 1st February 2016, Justice Najmi Waziri gave a landmark judgement which allowed the eldest
female coparceners of an HUF to become its Karta.

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Share in the In a partnership each partner In a HUF, no coparceners has

business has a defined share by virtue a definite share. His interest is
of an agreement between the a fluctuating one. It is capable
partners. of being enlarged by deaths in
the family diminished by births
in the family.

10. (i) LLP: A LLP is a new form of legal business entity with limited liability. It is an
alternative corporate business vehicle that not only gives the benefits of limited
liability at low compliance cost but allows its partners the flexibility of organising their
internal structure as a traditional partnership. The LLP is a separate legal entity and,
while the LLP itself will be liable for the full extent of its assets, the liability of the
partners will be limited.
LLP is an alternative corporate business form that gives the benefits of limited liability
of a company and the flexibility of a partnership.
Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership
firm structure’ LLP is called a hybrid between a company and a partnership.
Advantages of LLP form:
(a) LLP is organized and operates on the basis of an agreement.
(b) It provides flexibility without imposing detailed legal and procedural
requirements
(c ) It enables professional/technical expertise and initiative to combine with
financial risk taking capacity in an innovative and efficient manner.
(d) It is easy to form
(e) In LLP form, all partners enjoy limited liability
(f) Flexible capital structure is there in this form
(g) It is easy to dissolve
(ii) Distinction between LLP and Limited Liability Company: The points of distinction
between a limited liability partnership and Limited Liability Company are tabulated as
follows:
Basis LLP Limited Liability
Company
1. Regulating Act The LLP Act, 2008. The Companies Act, 2013.
2. Members/Partners The persons who The persons who invest the
contribute to LLP are money in the shares are
known as partners of the known as members of the
LLP. company.

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 14 FOUNDATION EXAMINATION: MAY, 2018

3. Internal governance The internal governance The internal governance

structure structure of a LLP is structure of a company is
governed by contract regulated by statute (i.e.,
agreement between the Companies Act, 2013).
partners.
4. Name Name of the LLP to Name of the public
contain the word “Limited company to contain the
Liability partnership” or word “limited” and Pvt. Co.
“LLP” as suffix. to contain the word “Private
limited” as suffix.
5. No. of Minimum – 2 members Private company:
members/partners Maximum – No such limit Minimum – 2 members
on the members in the Maximum 200 members
Act. The members of the Public company:
LLP can be individuals/or
Minimum – 7 members
body corporate through
the nominees. Maximum – No such limit
on the members.
Members can be
organizations, trusts,
another business form or
individuals.
6. Liability of Liability of a partners is Liability of a member is
members/partners limited to the extent of limited to the amount
agreed contribution in unpaid on the shares held
case of intention is fraud. by them.
7. Management The business of the The affairs of the company
company managed by are managed by board of
the partners including the directors elected by the
designated partners shareholders.
authorized in the
agreement.
8. Minimum number of Minimum 2 designated Pvt. Co. – 2 directors
directors/designated partners. Public co. – 3 directors
partners
11. (i) Dormant Company (Section 455 of the Companies Act, 2013)
Where a company is formed and registered under this Act for a future project or to
hold an asset or intellectual property and has no significant accounting transaction,
such a company or an inactive company may make an application to the Registrar in
such manner as may be prescribed for obtaining the status of dormant company.

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 PAPER – 2 : BUSINESS LAWS AND BUSINESS CORRESPONDENCE AND REPORTING 15

“Inactive company” means a company which has not been carrying on any business
or operation, or has not made any significant accounting transaction during the last
two financial years, or has not filed financial statements and annual returns during
the last two financial years.
“Significant accounting transaction” means any transaction other than –
(a) payment of fees by a company to the Registrar;
(b) payments made by it to fulfil the requirements of this Act or any other law;
(c) allotment of shares to fulfil the requirements of this Act; and
(d) payments for maintenance of its office and records.
(ii) According to the Doctrine of Indoor Management, if an act is authorised by the articles
or memorandum, an outsider is entitled to assume that all the detailed formalities for
doing that act have been observed. As per the case of the Royal British Bank vs.
Turquand [1856] 6E & B 327, the directors of R.B.B. Ltd. gave a bond to T. The
articles empowered the directors to issue such bonds under the authority of a proper
resolution. In fact, no such resolution was passed. Notwithstanding that, it was held
that T could sue on the bonds on the ground that he was entitled to assume that the
resolution had been duly passed. This is the doctrine of indoor management,
popularly known as Turquand Rule.
Since, the given question is based on the above facts, accordingly here in this case
Mr. X can recover the money from the company considering that all required
formalities for the passing of the resolution have been duly complied.
12. (i) Yes, a non-profit organization be registered as a company under the Companies Act,
2013 by following the provisions of section 8 of the Companies Act, 2013. Section 8
of the Companies Act, 2013 deals with the formation of companies which are formed
to
 promote the charitable objects of commerce, art, science, sports, education,
research, social welfare, religion, charity, protection of environment etc.
Such company intends to apply its profit in
 promoting its objects and
 prohibiting the payment of any dividend to its members.
The Central Government has the power to issue license for registering a section 8
company.
(a) Section 8 allows the Central Government to register such person or association
of persons as a company with limited liability without the addition of words
‘Limited’ or ‘Private limited’ to its name, by issuing licence on such conditions as
it deems fit.

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 16 FOUNDATION EXAMINATION: MAY, 2018

(b) The registrar shall on application register such person or association of persons
as a company under this section.
(c) On registration the company shall enjoy same privileges and obligations as of a
limited company.
(ii) When a company is registered, it is clothed with a legal personality. It comes to have
almost the same rights and powers as a human being. Its existence is distinct and
separate from that of its members. A company can own property, have bank account,
raise loans, incur liabilities and enter into contracts.
(a) It is at law, a person different altogether from the subscribers to the
memorandum of association. Its personality is distinct and separate from the
personality of those who compose it.
(b) Even members can contract with company, acquire right against it or incur
liability to it. For the debts of the company, only its creditors can sue it and not
its members.
A company is capable of owning, enjoying and disposing of property in its own name.
Although the capital and assets are contributed by the shareholders, the company
becomes the owner of its capital and assets. The shareholders are not the private or
joint owners of the company’s property.

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