Corporate & Other Law - Vol-2

INDEX
Sl.No Chapter Page No
1. Declaration & Payment of Dividend 7 - 16
2. Accounts of Companies 17 - 44
3. Appointment of Auditors 45 - 54
4. The Indian Contract Act, 1872
(i) Unit - 1 55 - 65
(ii) Unit - 2 66 - 77
(iii) Unit - 3 78 - 92
5. The Negotiable Instruments Act, 1881 93 - 126
6. The General Clauses Act, 1897 127 - 142
7. Interpretation of Statutes, Deed and Documents 143 - 152
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TESTIMONIAL
Mohit Sir is the teacher for law and audit.............Pankaj Ganeriwal
Fabulous teaching style......with FULL enthusiasm.......I have ever seen.............Vipul Singh
Mohit Sir makes us understand the core of every section and provision. SOme teachers run away from their
responsibilities by asking students to learn themselves and make them only mark but this is not with our Mohit
Sir. He puts huge efforts to make us understand learn in class itself thereby reducing our efforts at home.............
Rahul Agarwal
He makes us revise N no. Of times. Respect to your dedication and passion Sir.............Komal Jain
Best teaching in my life......the way of teaching is totally different form others.............Ronobijoy Paul
Best teacher ever for any subject of CS or CA!..He is the BEST!.............Aritra Nag
I have never seen such a didicated and hardworking mentor......I feel it was my life's best decision to study under
his guidance.............Madhuri Kumari
Sir, u saw something in me that I didn't see in myself......never forget this things u said to me.....Thank u sir.....
Really you're the best.............Sanu Raj
Just......Unmatchable and MOHIT Sir is best and a GURU of many.............Ishith Agarwal
The best law nd audit teacher till date!!!!!!.......his unique nd frank way of teaching draws ever 1s full cncntratn in
studies..!!!.............Indranil Pal Choudhury
Mohit sir is a best teacher for law in entire world .............Lalit Soni
He is not only a teacher but also a god of law and audit.............Ranajoy Majhi
The way of teaching fabulous#####.. I no comparision with other## I just love it.............Kumar Uttam
Sir u jzt awsum..i enjoy ur way of teaching it's the bst way we can study...thanks a lott sir.............Yukta Jaiswal
Great sir you ate mind blowing teacher superb, your way to trying to understand is really outstanding.............
Sriram Yadav
The best teacher I have ever seen.....I just love the way of his teaching.............Suchi Sourabh
I had saw only two videos nd its really amazing....So helpful.....Jo topic aaj tak clear nai hua wo aaj yaad ho
gaye... Thank you sir.............Sapna Vyas
Seriously no one is as good as Mohit sir......he is such a inspiration for all of us.............Sneha Shaw
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Dear Sir, thanks for not making us learn the way you wanted to teach, but teaching us the way we wanted to
learn.....Mohit sir is the greatest.............Meghna Soni
Words are not real so 2 such a devotional and motivational teaching if anything can be done is 2 prove it correct
once more by performing well.............Ankit Mishra
Mohit Sir is one of the best examples... of dedication, determination and hardwork......that let others to follow him
on the way to success....to be everything (rather whatever they want)......from nothing.............Jeet Bhattacharya
I used to hear from people....The only way to understand a subject is to fall in love with the subject......Mohit
Agarwal sir is the man because of whom I am learning how to fall in love with my studies.......#SAMJHE
BESHARMOO#Respect.............Reeju Shastri
MOHIT SIR is the KING OF company law...The best teacher ever..About any topic in law Mohit sir just nailed it I
am glad to have a teacher like him...A lot of respect and love for him.............Kuntal Chakraborty
One of the guide in India for law........before I don't like the law subject but now I love it.........thank you sir you
are amazing.............David Bajrai
Best teacher ever........he is not only making professionals but the good human also.......always motivating us......
feeling very lucky nd blessed that I got the opportunity to learn many things from him....!!!!.............Nidhi Gupta
The best teacher ever I have never seen any teacher like him......I am Glad to have a teacher like him in my
life.............Annu Sinha
I have never seen such a passionate teacher in my life.......Thank u so much Mohit bhaiya for making SEBI such
an interesting subject.......U r da best teacher in my life! Ur teaching skills made me fall in love with the SEBI
subject.....!.............Srishti Saluja
I can't explain, mohit bhaiya is one of the best teacher in india, in india a lot of well qualified any experience
teacher, but how to make any matter easy!!how any student can understand??this quality is only in mohit
bhaiya.............Anand Srivastav
If Sachin is GOd of cricket....Then Mohit Sir is the god of teaching....His unique teaching techniques are just
outstanding.............Bhakt Agarwal
He is the best teacher I have ever seen before.............Abhishek Singh
So far the best teacher I have ever seen....the way he speaks is just amazing.............Kusum Sharma
The echoes of your phonation brings an eerie feeling of an irreplaceable void nd it's sets off a trail of
reminiscence and retrospection for the magical and quintessentially blissful days spent in your ttion
so far. You are a self complacent, felicitous speaker, with an everlasting air of halcyon atmosphere
binding in with your eudemonic and corking nature. While it will take time to reach out to your
pinnacle of dreams, be honorifacbilitudinitatibus. You have been indeed, supercalifragilisticexpialidoc
ious. P. S. - best faculty ever.. Blissed to have u as my faculty.............Ayush Gupta
Mohit Bhaiya you are the best. You'r each classes is so awesome comprasing unique blend of teaching
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techniques that it makes each classes very interesting and enjoyable. Also one will not think of banking your
classes intentionally because it will make him/her feel guilty later."Thank you Mohit Bhaiya for your fruitful
teaching".............Rupesh Kumar
Privileged to be taught by Mohit sir at IPCC level. Every class of sir is as interesting as a Hollywood movie, be
that law or accounts you never going to get bored.............Abhishek Jha
Mohit Bhaiya is the best teacher in Kolkata. Best teacher for law. His technics of teaching are really very very
good. And facilities are damn good which are provided here.............Rohit Anand
I just loved the way of his teaching. What a dashing personality. OMG. Such a mind blowing teacher I have ever
seen.............Varsha Agarwal
His style of teaching makes us reduce our effort and stress n help us enjoy the class.............Niraj Jha
The most innovative way of teaching, where you yourself cannot sit without studying. Theory papers become so
interesting and colorful when taught by Mohit Sir. Love to b a part of Sir's classes.............Shivam Seth
An innovative and energetic teacher can take you to your aim. Mohit bhaiya is that teacher.............Aakash Banka
Every student must have a teacher like Mohit sir. He is awesome & I really wish that I can follow him.............
Jayanti Sukla
No one is better than Mohit bhaiya. I salute you bhaiya.............Amit Menon
Really Bhaiya, I have never seen a person like you. The way deliver your leacture went inside our without. When
I was giving my IPCC exam I was just remmerbered your leacture and written the answer and ITSM. No words
just followed your suggestion got 65 in ITSM. Ty bhaiya. May you live long and continue your with your teaching
style.............Abhishek Jain
Thee best teacher in my life i.e. Mohit Bhaiya.............Ankush Pugalia
Best teacher ever. Learn the way of studying and motivate me for achieving success in life. Hats off Bhaiya. You
are great.............Shikha Ginodia
Mohit sir is now one of my best teacher. Can remember each topic after each class of his. No need to open for
a day or so also. Thank you Bhaiya.............Anand Dubey
I like the way Mohit Bhaiya teaches and interact with their students. That is to say. He enjoy teaching students
and very much committed to his profession. It's ver unorthodox way of teaching which make him different from
other teachers. And the other thing that I liked the most was punctuality.............Aman Kumar Saha
Mohit sir is best faculty of India according to me. Sir we are blessed to have you as our guide right from the
beginning.............Mohul Maitra
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According to me it was never so easy to understand the subject before I met Mohit Sir.............Kumar Sanu Singh
Sir a student like me who was very much poor in law subjects came to know how interesting law subjects are,
all because of a teacher like you. Thanks tou you sir for making these papers very much easier for me.............
Munmun Saha Choudhury
Nobody can teach Law better than Mohit Sir.............Roshan Agarwal
This institute can fill any and every student with confident and enthusiasm.............Shiva Shukla
Transfers a lots of energies even you are in sleepy mood! trust me best teacher ever!.............Boubani Chatterjee
Bhaiyaaa you are my only role model. I always need ever wish to become like you.............Govind Kr Jha
Sir I just seen your demo of video classes it was really awesome and I eagerly waiting to do your live classes.............
Rohit Kumar Prasad
Sir me shantanu from guwahati.... Sir I was so much tensed how to pass in Capital market nd security laws...btt
after getting one of d best teacher in d world like you....I m feeling like that I wil not only pass on that subject bt I
wil pass with distintn... thank u so much sir nd I want to meet u sir... lov u sir nd wish ur all dreams wil cm true...
god bless u sir...we love u.............Santanu Das
Marvellous teacher I have ever met in my entire life. He puts tremendous effort n hard work to teach. Words
would be less to describe him. Rather I would say, Mohit bhaiya you are the best. There is no one else who could
just pass by your level of teaching. Best teacher of Audit, Law & Ethics and ITSM.............Riku Sarmah
Some dynamic ppl are born in the earth to make some innovation. I must say dat Mohit sir you are one of
them.............Anchor Sitanshu Mishra
Star The best faculty for law and audit. And a super tallented person.............Rahul Tibrewal
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6
Chapter - 1 DECLARATION & PAYMENT OF DIVIDEND
Section - 123 to 127
Section 123 Payment of dividend
Section 124 & Procedure for transfer of unpaid or unclaimed dividend to the investor education and
125 protection fund
Section 126 Right of dividend, rights shares and bonus shares to be held in abeyance pending registration
of transfer of shares
Section 127 Punishment for failure to distribute dividends
Meaning of Dividend
The term ‘dividend’ has been defined under Section 2(35) of the Companies Act, 2013. The term “Dividend”
includes any interim dividend.
PAYMENT OF DIVIDEND – SECTION 123
PAYMENT OF DIVIDEND WITHOUT PROVIDING FOR DEPRECIATION
Section 123 (1)(a) of the Companies Act, 2013 provides that no dividend shall be declared or paid by a company
for any financial year except out of the profits of the company for that year or out of the profits of the company
for any previous financial years arrived at after providing for depreciation in accordance with the provisions of
Schedule II to the Act and remaining undistributed, or out of both.
DECLARATION OF DIVIDEND OUT OF COMPANY’S RESERVES
A. The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by
it in the three years immediately preceding that year. However, this condition shall not apply to a company,
which has not declared any dividend in each of the three preceding financial year.
B. The total amount to be drawn from such accumulated profits shall not exceed one-tenth of the paid-up share
capital and free reserves as appearing in the latest audited financial statement.
Amount that can be withdrawn from 1/10 of (Paid up share capital +

<
accumulated profits Free reserves)
C. The amount so drawn shall first be utilised to set off the losses incurred in the financial year in which
dividend is declared before any dividend in respect of equity shares is declared.
D. The balance of reserves after such withdrawal shall not fall below 15% of its paid up share capital as
appearing in the latest audited financial statement.
E. Depositing of amount of dividend : In terms of Section 123 (4), the amount of the dividend, including interim
dividend, shall be deposited in a scheduled bank in a separate account within five days from the date of
declaration of such dividend.
C Mohit Educomp Pvt. Ltd. Corporate & Other Law 7

This sub – section shall not apply to a Government Company in which entire paid up share capital is held by the
Central Government, or by any state Government or Governments or by the Central Government and one or
more State Governments.
F. Payment of dividend : According to Section 123 (5)
(1) Dividends are payable in cash. Dividends that are payable to the share holder in cash may be paid by
cheque or warrant or in any electronic mode.
(2) Dividends shall be payable only to the registered share holder of the share or to his order or to his
banker.
(3) Nothing in sub – section 5 of Section 123, shall prohibit the capitalisation of profits or reserves of a
company for the purpose of issuing fully paid up bonus shares or paying up any amount for the time
being unpaid on any shares held by the members of the company.
Vide Notification no. 465(E) dated 5th June 2015, this sub – section shall apply to the Nidhis company, subject to
that any dividend payable in cash may be paid by crediting the same to the account of the member, if the dividend
is not claimed within 30 days from the date of declaration of the dividend.
G. Prohibition on declaration of dividend : The Act by virtue of Section 123 (6) specifically provides that a
company which fails to comply with the provisions of Section 73 (Prohibition on acceptance of deposits from
public) and Section 74 (Repayment of deposits, etc., accepted before the commencement of this Act) shall
not, so long as such failure continues, declare any dividend on its equity shares.
INTERIM DIVIDEND
PROCEDURE FOR DECLARATION AND PAYMENT OF INTERIM DIVIDEND
1. Verify from company’s Articles of Association

2. Issue notice for holding a meeting of the Board of directors of the company to consider the matter.
3. In case of listed companies, notify stock exchange(s) where the securities of the company are listed, at least
2 working days in advance of the date of the meeting of its Board of Directors at which the declaration of
interim dividend is to be considered.
4. At the Board meeting, the Board of Directors considers in detail all the matters with regard to the declaration
and payment of an interim dividend.
5. In case of listed company, publish notice of book closure in a news paper circulating in the district in which
the registered office of the company is situated at least seven days before the date of commencement of
book closure.
6. Close the register of members and the share transfer register of the company.
7. Hold a Board/committee meeting for approving registration of transfer/ transmission of the shares of the
company, which have been lodged with the company prior to the commencement of book closure.
8. Round off the amount of interim dividend to the nearest rupee and where such amount contains part of a
rupee consisting of paise then if such part is fifty paise or more, it should be increased to one rupee and if
such part is less than fifty paise, it should be ignored.
8 Corporate & Other Law C Mohit Educomp Pvt. Ltd.

9. Prepare a statement of dividend
10. Ensure that the dividend tax is paid to the tax authorities within the prescribed time.
11. No RBI approval is required for payment of dividend to shareholders abroad, in case of investment made on
repatriation basis.
12. Confirm the interim dividend in the next Annual General Meeting.
13. The amount of dividend (final as well as interim) shall be deposited in a separate bank account within 5 days
from the date of declaration. [Section 123(4)].
14. Dividend has to be paid within 30 days from the date of declaration.
15. If dividend has not been paid or claimed within the 30 days from the date of its declaration, the company is
required to transfer the total amount of dividend which remains unpaid or unclaimed, to a special account to
be opened by the company in a scheduled bank to be called “Unpaid Dividend Account”. Such transfer shall
be made within 7 days from the date of expiry of the said period of 30 days.
Procedure for transfer of unpaid or unclaimed dividend to the investor education and protection fund –
Section 124 & 125
(1) Section 124(5) of the Act, provides that any money transferred to the unpaid dividend account of a company
which remains unpaid or unclaimed for a period of seven years from the date of such transfer is required
to be transferred by the company alongwith interest accrued, if any, thereon to the Investor Education and
Protection Fund (IEPF) established under Section 125.
(2) The company shall send a statement of amount credited to Investor Education and Protection Fund in Form
DIV 5 to the authority which administer the fund and the authority shall issue a receipt to the company as
evidence of such transfer.
CLAIMING OF UNCLAIMED/UNPAID DIVIDEND
The claimant shall make an application in prescribed form under his own signature or through a person holding
a valid power of attorney granted by him.
The application shall be accompanied by the following documents
(i) Indemnity Bond in prescribed format (not required in case applicant is Central/State Government, a
Government Company or a public financial institution within the meaning of Companies Act, 2013
(ii) Authority may on its satisfaction about the title to the money, allow the claim upto rupees 5000/- without
Indemnity bond
(iii) Documents in support of the claim i.e. dividend warrant/ letter issued by the company etc.
(iv) Proof of Identity & Proof of Address.
Any money transferred to the unpaid dividend account of a company in pursuance of section 124 which remains
unpaid or unclaimed for a period of seven years from the date of such transfer shall be transferred by the
company to the Investor Education and Protection Fund and the company shall file a statement in “Form DIV-5”
to the Authority constituted under the Act to administer the fund and such authority shall issue a receipt to the
company as evidence of such transfer. [Section 124(5)]

If the company delays the transfer of the unpaid/unclaimed dividend amount to the unpaid dividend account, it
shall pay interest @ 12% p.a. till it transfers the same and the interest accruing on such amount shall ensure
to the benefit of the members of the company in proportion to the amount remaining unpaid to them. [Section
124(3)]
Right of dividend, rights shares and bonus shares to be held in abeyance pending registration of transfer
of shares – Section 126
Section 126 of the Companies Act 2013, came into force from 1st April 2014, which provides for Right of dividend,
rights shares and bonus shares to be held in abeyance pending registration of transfer of shares. According to
this section :
Where any instrument of transfer of shares has been delivered to any company for registration and the transfer
of such shares has not been registered by the company, the company shall –
A. Transfer the dividend in relation to such shares to the unpaid dividend account referred to in section 124
unless the company is authorised by the registered holder of such share in writing to pay such dividend to
the transferee specified in such instrument of transfer; and
B. keep in abeyance in relation to such shares any offer of rights shares under clause (a) of sub – section (1)
of Section 62 and any issue of fully paid up bonus shares in pursuance of first provision to sub – section (5)
of Section 123.
Punishment for failure to distribute dividends – Section 127
Section 127 of the Companies Act, 2013 came into force on 12th September, 2013 which provides for punishment
for failure to distribute dividends on time. According to this section :
(i) Where a dividend has been declared by a company but has not been paid or the warrant in respect thereof
has not been posted within thirty days from the date of declaration to any shareholder entitled to the payment
of dividend, every director of the company shall, if he is knowingly a party to the default, be punishable with
imprisonment which may extend to two years.
(ii) He shall also be liable for a fine which shall not be less than 1,000 rupees for every day during which such
default continues.
(iii) The company shall also be liable to pay simple interest at the rate of 18% p.a. during the period for which
such default continues.
(iv) However, the following are the exceptions under which no offence shall be deemed to have been committed:
(a) Where the dividend could not be paid by reason of the operation of any law,
(b) Where a shareholder has given directions to the company regarding the payment of the dividend and
those directions cannot be complied with and the same has been communicated to him;
(c) Where there is a dispute regarding the right to receive the dividend;
(d) Where the dividend has been lawfully adjusted by the company against any sum due to it from the
shareholder,
or

(e) Where, for any other reason, the failure to pay the dividend or to the post the warrant within the period
under this section was not due to any default on the part of the company.
Vide Notification no. 465(E) dated 5th June 2015, this section shall apply to the Nidhis company, subject to that
where the dividend payable to a member is not hundred rupees or less, it shall be sufficient compliance of the
provisions of this section, if the declaration of dividend is announced in the local language in one local newspaper
of wide circulation and announcement of the said declaration is also displayed on the notice board of the nidhis
for at least three months.
Payment of
dividend
Payable in Payable to Nidhi Co.
Cash Cheque Warrant Any The registered to his to his Any dividend payable
electric shareholder of order, or banker in cash may be paid
mode the share, or by crediting the same
to the account of the
member, if the dividend
is not claimed within
30 days from the date
of declaration of the
dividend
Declared Dividend Dividend Not Paid/ Claimed

30 Days
7 Days
Pay Interest @ 12% Deposit the unpaid/ Unclaimed dividend Transfer to

p.a. (from the date of amount in Bank (Called Unpaid IEPF (Unpaid/
default) If not Dividend Account) 7 Years Unclaimed
done dividend +
90 Days interest)
Prepare Statement (Name, Last known

address, unpaid dividend amount)
Website approved by Govt. for this

Website of Co.
purpose

Dividend could not be paid by reason of operation of any law;
Shareholder gave directions regarding payment of dividend,

Exception under 127
AND
Those directions cannot be complied with

and the same has been communicated to
him;
Dispute regarding right to receive dividend;
Dividend has been lawfully adjusted against any sum due from
shareholder to Co.; or
For any other reason, the failure to pay/ post dividend/ warrant
with in presc ribed time, was not due to any default on the part
of the company.
Q.1 The shareholders at an annual general meeting passed a resolution for payment of dividend at a rate
higher than that recommended by the directors. Discuss the validity of the resolution under the Companies
Act, 2013.
Ans.
Under section 102 (2) of the Companies Act, 2013 one of the businesses transacted thereat is the declaration
of dividend. The dividend approved by the shareholders must be at the rate recommended by the Board of
Directors. The shareholders do not have the right to modify the rate. They can only approve the dividend as
recommended by the Board; hence the resolution is invalid in the given case.
Q.2 Advise on the following situations as per the Companies Act, 2013:
(i) A company wants to transfer more percentage of profits to reserves.
(ii) A company wants to declare dividends out of past reserves instead of current year profits.
Ans.
(i) The first proviso to 123 (1) of the Companies Act, 2013 provides that a company may, before the declaration
of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may
consider appropriate to the reserves of the company. Therefore, under the Companies Act, 2013 the amount
transferred to reserves out of profits for a financial year has been left at the discretion of the company acting
vide its Board of Directors. Therefore, the company is free to transfer any part of its profits to reserves as it
deems fit.

(ii) The second proviso to section 123 (1) of the Companies Act, 2013 permits a company to declare dividend
out of the accumulated profits earned by it in previous years and transferred by the company to the reserves
subject to the rules prescribed in this behalf. The Companies (Declaration and Payment of Dividend) Rules,
2014 provide for the rules for declaring dividends out of the reserves as under:
(a) The rate of dividend declared does not exceed the average of the rates at which dividend was declared
by it in the 3 years immediately preceding that year. However, this rule will not apply if a company has
not declared any dividend in each of the three preceding financial year.
(b) The total amount to be drawn from the accumulated profits earned in previous years and transferred
to the reserves does not exceed an amount equal to 1/10th of the sum of its paid-up capital and free
reserves as appearing in the latest audited financial statement.
(c) The amount so drawn must first be utilized to set off losses incurred in the financial year before any
dividend in respect of equity shares is declared.
(d) The balance of reserves after such drawl shall not fall below 15% of its paid-up capital as appearing in
the latest audited financial statement.
Q.3 The Board of Directors of Nimbahera Chemicals Limited proposes to transfer more than 10% of the profits
of the company to the reserves for the current year. Advise the Board of Directors of the said company
mentioning the relevant provisions of the Companies Act, 2013.
Ans.
The first proviso to 123 (1) of the Companies Act, 2013 provides that a company may, before the declaration of
any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider
appropriate to the reserves of the company. Therefore, under the Companies Act, 2013 the amount transferred
to reserves out of profits for a financial year has been left at the discretion of the company acting vide its Board
of Directors.
Therefore the company is free to transfer any part of its profits to reserves as it deems fit.
Q.4 A Public Company has been declaring dividend at the rate of 20% on equity shares during the last 3 years.
The Company has not made adequate profits during the year ended 31st March, 2015, but it has got
adequate reserves which can be utilized for maintaining the rate of dividend at 20%. Advise the Company
as to how it should go about if it wants to declare dividend at the rate of 20% for the year 2014-15 as per
the provisions of the Companies Act, 2013.
Ans.
As per Rule 3 of the Companies (Declaration and Payment of Dividend) Rules), 2014, in the event of adequacy
or absence of profits in any year, a company may declare dividend out of surplus subject to the fulfilment of the
following conditions:
a. The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it
in the three years immediately preceding that year; Provided that this sub-rule shall not apply to a company,

b. The total amount to be drawn from such accumulated profits shall not exceed one-tenth of the sum of its
paid-up share capital and free reserves as appearing in the latest audited financial statement;
c. The amount so drawn shall first be utilised to set off the losses incurred in the financial year in which
dividend is declared before any dividend in respect of equity shares is declared;
d. The balance of reserves after such withdrawal shall not fall below 15% of its paid up share capital as
appearing in the latest audited financial statement.
In the given case therefore, the company can declare a dividend of 20% provided it has therequired residual
reserve, after such payment, of 15% of its paid up capital as appearing it its latest audited financial statement.
The company should have the dividend recommended by the Board and put up for the approval of the members
at the Annual General Meeting as the authority to declare lies with the members of the company.
Q.5 The agenda for the meeting of the Board of directors of M/s Brilliant Enterprises Ltd. held on 20-6-2014
for adopting the annual accounts for the year ended 31-3-2014 included an item relating to payment of
dividend. At the meeting it became apparent that the profits made during the year ended 31-3-2014 were
inadequate to declare dividend. The Board was keen to maintain the rate of 20% dividend on the equity
shares as declared in the previous years so as to maintain the image of the company. The company
has some accumulated profits earned in previous years, which were transferred to reserves. Advise the
company as to how it should go about to achieve the objective to pay dividend at the rate of 20% on the
equity shares.
Ans.
Payment of Dividend out of the accumulated profits : In the present case the company has inadequate profits in
the year and hence the only recourse left is to pay dividend from reserves created out the transfer of past profits.
Under the second proviso to section 123 (1) of the Companies Act, 2013 and the Companies (Declaration and
Payment of Dividend) Rules, 2014 in the event of adequacy or absence of profits in any year, a company may
declare dividend out of reserves by fulfilling the following conditions:
a. The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it
in the three years immediately preceding that year; Provided that this sub-rule shall not apply to a company,
b. The total amount to be drawn from such accumulated profits shall not exceed one-tenth of the sum of its
paid-up share capital and free reserves as appearing in the latest audited financial statement;
c. The amount so drawn shall first be utilised to set off the losses incurred in the financial year in which
dividend is declared before any dividend in respect of equity shares is declared;
d. The balance of reserves after such withdrawal shall not fall below fifteen per cent of its paid up share capital
as appearing in the latest audited financial statement.
In the given case therefore, if the company complies with the above conditions, it should have the dividend
recommended by the Board and put up for the approval of the members at the AGM as the authority to declare
lies with the members of the company.

Q.6 SKD an employee of Moreh Ltd. met with an accident and died. The accident occurred when SKD was
on Company’s duty. He held one hundred shares partly paid. Normally the Company has a first and
paramount lien on the shares. The Board of Directors, however, relaxed the said provision with regard to
the hundred shares held by SKD as a goodwill gesture on the part of the Company. Is the action of the
Company valid? State the reasons. Also state whether the Company’s lien can be extended to dividend
payable on such shares.
Ans.
A Company cannot have lien on shares unless provided in the Articles of Association. Therefore provision to this
effect should be in the articles. As per Regulation 9 of Table F of the First Schedule to the Companies Act, 2013
in which standard Articles of Association of a company limited by shares are given, the company has first and
paramount lien on every share (which has not been fully paid up for all monies (whether presently payable or not)
called or payable at a fixed time in respect of that share and on all shares which are not fully paid up standing
registered in the name of a single person, for all moneys presently payable by him or his estate to the Company.
However, companies are free to frame their own Articles of Association and need not follow the Table F. The
key point is that lien is permissible only on partly paid shares and only if provided in the Articles of the company.
The Board of Directors may, however, at any time declare any share to be wholly or in part exempt from the said
lien. Hence the decision of the Board of Directors of M/s Moreh Ltd to relax the provisions of lien in respect of
shares held by SKD is in order and valid. Further, the Company’s lien is extended to all dividends payable on
such shares if provided for in the Articles or if Table F is adopted by the company.
Q.7 The Annual General Meeting of ABC Limited declared a dividend at the rate of 30 percent payable on
paid up equity share capital of the Company as recommended by Board of Directors on 30th April, 2014.
But the Company was unable to post the dividend warrant to Mr. Ranjan, an equity shareholder of the
Company, up to 30th June, 2014. Mr. Ranjan filed a suit against the Company for the payment of dividend
along with interest at the rate of 20 percent per annum for default period. Decide in the light of provisions
of the Companies Act, 2013, whether Mr. Ranjan would succeed? Also state the directors' liability in this
regard under the Act.
Q.8 The Annual General Meeting of ABC Limited declared a dividend at the rate of 30 percent payable on
paid up equity share capital of the Company as recommended by Board of Directors on 30th April, 2017.
But the Company was unable to post the dividend warrant to Mr. Ranjan, an equity shareholder of the
Company, up to 30th June, 2017. Mr. Ranjan filed a suit against the Company for the payment of dividend
along with interest at the rate of 20 percent per annum for default period. Decide in the light of provisions
of the Companies Act, 2013, whether Mr. Ranjan would succeed? Also state the directors’ liability in this
regard under the Act.

Q.9 The Board of Directors of XYZ Company Limited at its meeting declared a dividend on its paid-up equity
share capital which was later on approved by the company`s Annual General Meeting. In the meantime,
the directors at another meeting of the Board decided by passing a resolution to divert the total dividend
to be paid to shareholders for purchase of investments for the company. As a result, dividend was paid to
shareholders after 45 days. Examining the provisions of the Companies Act, 2013, state:
(i) Whether the act of directors is in violation of the provisions of the Act and also the consequences that
shall follow for the above act of directors?
(ii) What would be your answer in case the amount of dividend to a shareholder is adjusted by the
company against certain dues to the company from the shareholder?
Q.10 Referring to the provisions of the Companies Act, 2013, examine the validity of the following :
The Board of Directors of ABC Limited proposes to declare dividend at the rate of 20% to the equity
shareholders, despite the fact that the company has defaulted in repayment of public deposits accepted
before the commencement of this Act.
Q.11 Star Ltd. declared and paid dividend in time to all its equity holders for the financial year 2015-16, except
in the following two cases:
(i) Mrs. Sheela, holding 250 shares had mandated the company to directly deposit the dividend amount
in her bank account. The company, accordingly remitted the dividend but the bank returned the
payment on the ground that there was difference in surname of the payee in the bank records. The
company, however, did not inform Mrs. Sheela about this discrepancy.
(ii) Dividend amount of `50,000 was not paid to Mr. Mohan, deceased, in view of court order restraining
the payment due to family dispute about succession.
You are required to analyse these cases with reference to provisions of the Companies Act, 2013 regarding
failure to distribute dividends.

Chapter - 2 ACCOUNTS OF COMPANIES
Section - 128 - 138
Section 128 Requirement of keeping books of account
Section 129 Financial Statement
Section 130 Reopening and recasting of accounts
Section 131 Voluntary revision of accounts
Section 132 NFRA
Section 133 Accounting Standards
Section 134 Authentication of Financial Statement & Board Report
Section 135 Corporate Social Responsibility
Section 136 Circulation of Annual Accounts
Section 137 Filling of Accounts with ROC
Section 138 Internal Audit
REQUIREMENT OF KEEPING BOOKS OF ACCOUNT - SECTION 128
Maintenance of books of account would mean records maintained by the company to record the specified
financial transaction. It has been specifically provided that every company shall keep proper books of account.
This section specifies the main features of proper books of account as under -
(i) The company must keep the books of account with respect to items specified in clauses (i) to (iv) of sub-
section 2(13) of the Companies Act, 2013 hereinafter referred as Act, which defines "books of account".
(ii) The books of account must show all money received and expended, sales and purchases of goods and the
assets and liabilities of the company.
Place of Keeping Books of Account
Section 128(1) requires every company to prepare and keep the books of account and other relevant books and
papers and financial statements at its registered office. However, all or any of the books of accounts may be kept
at such other place in India as the Board of directors may decide. When the Board so decides the company is
required within seven days of such decision to file with the Registrar a notice in writing giving full address of that
other place.
Maintenance of Books of account in electronic form
The maintenance of books of account and other books and papers in electronic mode is permitted and is optional.
Such books of accounts or other relevant books or papers maintained in electronic mode shall remain accessible
in India so as to be usable for subsequent use (the Companies (Accounts) Rules, 2014 hereinafter referred in
this Chapter as Rule) (Rule 3(1)).

Manner of maintenance of books of account etc. in electronic form
The Books of account and other relevant papers may be kept in electronic mode in such manner as may be
prescribed.
Rule 3 of the Companies (Accounts) Rules, 2014 prescribes the following manner :
(a) The books of account and other relevant books and paper maintained in electronic mode shall remain
accessible in India so as to be usable for subsequent reference.
(b) The books of account and other relevant books and papers shall be retained completely in the format in
which they were originally generated, sent or received, or in a format which shall present accurately the
information generated, sent or received and the information contained in the electronic records shall remain
complete and unaltered.
(c) The information received from branch offices shall not be altered and shall be kept in a manner where it shall
depict what was originally received from the branches.
(d) The information in the electronic records of the document shall be capable of being displayed in a legible
form.
(e) There shall be a proper system for storage, retrieval, display or printout of the electronic records as the
Audit Committee, if any, or the Board may deem appropriate and such records shall not be disposed of or
rendered unusable, unless permitted by law.
(f) The back – up of the books of account and other books and papers of the company maintained in the
electronic mode, including at a place outside India, if any, shall be kept in servers physically located in India
on a periodic basis.
(g) The company shall intimate to the Registrar on an annual basis at the time of filling of financial statements –
Ø The name of the service provider;
Ø The internet protocol address of service provider;
Ø The location of the service provider (wherever applicable);
Ø Where the books of account and other books and papers are maintained on cloud, such address as
provided by the service provider.
Accounts in Electronic Mode
On periodic basis, back up has to be taken inservers physically located in

India.
Company shall intimate to the Registrar, on an annual basis at the time of

filing the accounts, the name, internet protocol address and location.

Keeping of Books of Accounts
At the registered office of the company
Any other place(s) in India as decided by the Board of Directors
Within 7 days of such decision the full address of the place other than registered office
of the company, shall be intimated to the Registrar of the Companies
If the company has any branch office within or outside India where proper books are
maintained, proper summarized returns shall be sent to head office or to the place where
books of accounts are kept, at maximum interval of 3 months
To be kept for last 8 years, (including vouchers): books of accounts shall be open for
inspection to a director.
MD/ Director(finance)/CFO and any other person responsible for keeping accounts may
be punishable/ fined.
Inspection of Accounts (During Business Hours)
Registrar of
Companies
To be furnished within
15 days of request SEBI( in
only to be made by case of issues relating
the director. to public issue and
listing matters)
The following
Any director entities can inspect
of the company. May books of accounts: Central
require information Govt. authorized
maintained outside officer
India.
Holding
company with
approval of Board Shareholders, if
(sec.128) provided in articles

Laying of Accounts
Audited financial statement along with attachments required under law shall be laid before the Annual General
Meeting(AGM) for the adoption of the shareholders within six months of the close of the financial year (nine
months from the date of incorporation in case of 1st AGM)
Directors/officers responsible for the above shall be punishable for non compliance
Books of Account in Respect of Branch Office
The branches of the company, if any, in India or outside India shall also keep the books of account in the same
manner as specified in sub- section (1), for the transaction effected at the branch office. Further the branch
offices are required to send the proper summarized return at quarterly intervals to the company at its registered
office and kept open to directors for inspection.
Accrual basis and Double-entry system of accounting
According to sub-section (1), books of account are required to be kept on accrual basis and in accordance with
the double entry system of accounting.
Inspection by directors
As provided in sub-section (3), any director can inspect the books of accounts and other books and papers of the
company during business hours. The expression "Books and Papers" has been defined in section 2(12) which
includes accounts, deeds, vouchers, writings and documents. The company is, therefore, required to make
available the aforesaid books and papers for inspection by any directors. Such inspection may be done by any
type of director- nominee, independent, promoter or whole time.
Period for which books to be preserved
The books of accounts, together with vouchers relevant to any entry in such books, are required to be preserved
in good order by the company for a period of not less than eight years immediately preceding the relevant
financial year.
Persons responsible to maintain books
The person responsible to take all reasonable steps to secure compliance by the company with the requirement
of maintenance of books of accounts etc. shall be: (sub-section 6)
(i) Managing Director,
(ii) Whole-Time Director, in charge of finance
(iii) Chief Financial Officer
(iv) Any other person of a company charged by the Board with duty of complying with provisions of section 128.

Punishment for Contravention
1 year imprisonment, + or
Fine : Minimum – Rs. 50000
Maximum – Rs. 500000, or both
Financial Statement – Section 129
Form and Content
Form and contents of financial statement

Shall be in form(s) as may be Banking / insurance/electricity or any Due regard to the general
provided different classes of such other company prescribed by instructions for preparation of
companies as per schedule III to the Central Government; may have balance sheet and statement
the Act. other form of presenting financial of profit and loss account as
statement mentioned under schedule III.
Consolidated Financial Statement
Where company has one or more subsidiaries, joint ventures or associated companies, it
shall, apart from preparing the financial statement of the company in form AOC 4, , prepare
consolidated financial statement of the holding company and all the subsidiaries in form
AOC-1
The holding company shall also attach a separate statement containing salient features of
the financial statement of its subsidiary / subsidiaries.
CG may exempt any company on the method of presentation of accounts or consolidation.
The auditors report shall be attached to every Financial Statement.
Definition of Financial Statement
Financial Statement is defined under Section 2 (40), to include -

Ø Balance Sheet
Ø Profit and Loss account or Income and Expenditure account
Ø Cash flow Statement
Ø Statement of change in equity, if applicable
Ø Any explanatory notes annexed to or forming part of financial statements, giving information required to be
given and allowed to be given in the form of notes.

True and Fair view
Ø Financial statements and items contained should comply with accounting standards notified under section
133;
Ø Financial statement shall be in form or forms as provided for different class or classes of companies in
Schedule III;
Ø In the case of an insurance company, any matters which are not required to be disclosed by the Insurance
Act, 1938, or the Insurance Regulatory and Development Authority Act, 1999;
Ø In the case of a banking company, any matters which are not required to be disclosed by the Banking
Regulation Act, 1949;
Ø In the case of a company engaged in the generation or supply of electricity, any matters which are not
required to be disclosed by the Electricity Act, 2003;
Other Requirements for financial statements
(a) Financial statements shall lay before the board of the directors in every annual general meeting of a company.
(b) Where a company has one or more subsidiaries, in additional to financial statement provided in sub-section
2, it shall prepare a consolidated financial statement of the company with salient features of financial
statements of subsidiary and subsidiaries in such form as prescribed and the same shall be laid before
board in annual general meeting.
Persons responsible for compliance
The persons responsible to take all reasonable steps to secure compliance by the company with the requirement
of Section 129 are (sub-section 7)-
Ø Managing Director
Ø Whole-Time Director
Ø CFO
Ø Other person of a company charged by the Board with the duty of complying with requirements of section
129.
Where any of the aforementioned officers are absent, all the directors shall be responsible and punishable.
Punishment for Contravention
1 year imprisonment, + or
Fine : Minimum – Rs. 50000
Maximum – Rs. 500000, or both

Statement containing sailent features of the subsidiary
The company shall also attach along with its financial statements, a separate statement containing the salient
features of the financial statements of its subsidiary or subsidiaries in such form as may be prescribed.
Rule 5 of the Companies (Accounts) Rules, 2014 prescribes Form AOC – 1 for this purpose.
Re-opening of accounts on court’s or tribunal orders [section 130]
This section seeks to provide for the opening of books of accounts and recasting its financial statements.
Application to be made by:
Central Govt. IT authorities SEBI Statutory regulatory body Any other person
Application made to Court / tribunal passes an

Court / Tribunal order to the effect that
Earlier accounts Affairs of company

prepared in were mismanaged
fraudulent manner related to accounts
Notice to be served to
applicants
Take Representation into

consideration, if any
Pass order to revise/ recast

the accounts
(1) Apply to court for re-opening of accounts — A company shall not re-open its books of account and not
recast its financial statements, unless an application in this regard is made by-
(a) The Central Government,
(b) The Income-tax authorities,

(c) The Securities and Exchange Board,
(d) Any other statutory regulatory body or authority or any person concerned and an order is made by a
court of competent jurisdiction or the Tribunal to the effect that—
(i) The relevant earlier accounts were prepared in a fraudulent manner; or
(ii) The affairs of the company were mismanaged during the relevant period, casting a doubt on the
reliability of financial statements:
Serving of notice : Provided that the court or the Tribunal, as the case may be, shall give notice to the Central
Government, the Income-tax authorities, the Securities and Exchange Board or any other statutory regulatory body
or authority concerned and shall take into consideration the representations, if any, made by that Government
or the authorities, Securities and Exchange Board or the body or authority concerned before passing any order
under this section.
(2) Revised accounts shall be final : The accounts so revised or re-cast, shall be final.
Voluntary revision of financial statements or board’s report [section 131]
Where director appears
FS and Board report not in

complaince with section 129 & 134
On approval and order

of tribunal
Prepare revised Revise report (any 3

FS P.F.Y.)
Copy of order of revised

FS & Report to be filed with Registrar
(1) Preparation of revised financial statement or revised report on the approval of Tribunal : If it appears
to the directors of a company that—
(a) The financial statement of the company; or
(b) The report of the Board,
do not comply with the provisions of section 129 or section 134, they may prepare revised financial statement
or a revised report in respect of any of the three preceding financial years after obtaining approval of the

Tribunal on an application made by the company in such form and manner as may be prescribed and a
copy of the order passed by the Tribunal shall be filed with the Registrar :
Tribunal to serve the notice : Provided that the Tribunal shall give notice to the Central Government
and the Income tax authorities and shall take into consideration the representations, if any, made by that
Government or the authorities before passing any order under this section :
Number of times of revision and recast : Financial statement provided further that such revised financial
statement or report shall not be prepared or filed more than once in a financial year :
Reason for revision to be disclosed : Provided also that the detailed reasons for revision of such financial
statement or report shall also be disclosed in the Board’s report in the relevant financial year in which such
revision is being made.
(2) Limits of revisions : Where copies of the previous financial statement or report have been sent out to
members or delivered to the Registrar or laid before the company in general meeting, the revisions must be
confined to—
(a) The correction in respect of which the previous financial statement or report do not comply with the
provisions of section 129 or section 134; and
(b) The making of any necessary consequential alternation.
(3) Framing of rules by the Central Government in relation to revised financial statement or director’s
report : The Central Government may make rules as to the application of the provisions of this Act in relation
to revised financial statement or a revised director’s report and such rules may, in particular—
(a) Make different provisions according to which the previous financial statement or report are replaced or
are supplemented by a document indicating the corrections to be made;
(b) Make provisions with respect to the functions of the company’s auditor in relation to the revised financial
statement or report;
(c) Require the directors to take such steps as may be prescribed
Constitution of national financial reporting authority [section 132] (yet to be notified)
Section 132 of the Companies Act, 2013 empowers the Central Government to form a Committee for
recommendations on Accounting Standards which is National Advisory Committee on Accounting Standards
(NACAS). This is now being renamed with enhanced independent oversight powers and authority as National
Financial Reporting Authority (NFRA). It shall have the powers to recommend, enforce and monitor the compliance
of accounting and auditing standards.
Accounting Standards - Section 133
The standards of accounting recommended by ICAI and prescribed by Central Govt.

(CG) in consultation with National Advisory Committee on Accounting Standards. (under
the new law this committee will be substituted by National Financial Authority which shall
be constituted by CG.

However any accounting standard (AS) issued by ICAI shall be deemed to be Accounting
Standard prescribed by CG
Where accounts do not comply with AS, company shall disclose the deviations with
effects of such reasons, and financial deviation.
National Financial Reporting Authority
Central Govt.(CG) may constitute by notification
Functions:
(a) Recommend CG on formulation and application of accounting and auditing stand-

ards;
(b) Monitor and enforce the compliance of such accounting and auditing standards;
(c) Oversee the quality of professionals associated with compliance and measures to
improve the quality of service
Shall have the power of a civil court.

Authentication of Financial Statement – Section 134
Financial statement including consolidated statements are to be approved by the Board of

Directors.
By chairperson, where he is authorized or by two

directors, one of whom shall be the Managing Director
By the CFO and Secretary, if they are in place.
and CEO where there is one and is member of the
Board.
A board report is an attachment to the balance sheet, with respect to:
(i) State of company affairs; (ii) Proposed transfer to reserves; (iii) recommendation of dividend;
Material changes and commitments after the balance sheet date and date of the board report;
(iv) conservation of energy, technology (v) changes in the nature of company’s business, its
absorption; subsidiaries and the class business;
Director’s Responsibility Statement – Section 134(5)
Board has to make a statement in Boards’ report to be

called "Directors’ Responsibility Statement" mentioning:
(i) In preparation of annual (ii) Proper Accounting (iii) Adequate accounting

accounts, applicable Standards (AS) have records have been kept
accounting standards have been selected and to safeguard the assets
been followed and material applied and judgment and fraud detection, if
departures, if any, have and estimates have any.
been explained; been prudently made;
Directors have prepared the accounts on going concern basis
In case of listed company, directors had laid down financial controls to be followed by the
company and such control are adequate and operating properly.
Directors have devised proper system to ensure compliance of applicable laws and such
system is adequate and operating successfully.

Board of Directors Report
Following informations
Extract of Annual return No. of meetings of Board
Directors responsibility Report Details of fraud reported by auditors
Companies policy on directors appointment

Declaration by ID s
and remuneration
Comments by board on remarks made by Particulars of loans, guarantees or

auditor and CS investments
Particulars of contracts or arrangements State of Company affairs
Amounts carrying reserves or Material change affecting on financial

paid by way of dividend position
Conservation of energy, technology Development and implementation of

absorption, foreign exchange Risk management
CSR policy and initiatives Other matters as prescribed
Listed /other public companies (paid up share capital

of 25 cr or more) shall contain statement of annual
evaluation of performances of Board, committees and
individual directors.
Contents of Board Report – Section 134
As per Section 134(3) of the Companies Act, 2013 read with Companies (Accounts) Rules, 2014 the Board’s
Report shall include :
(a) The extract of the annual return as provided under sub-section (3) of section 92 in prescribed Form MGT-9;
(b) Number of meetings of the Board;
(c) ‘Directors’ Responsibility Statement as per section 134(5)
(d) A statement on declaration given by independent directors under sub-section (6) of section 149;
(e) In case of a company covered under sub-section (1) of section 178, company’s policy on director’s appointment
and remuneration including criteria for determining qualifications, positive attributes, independence of a
director and other matters provided under sub-section (3) of section 178;
(f) Explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer
made –

Ø By the auditor in his report; and
Ø By the company secretory in practice in his secretarial audit report;
(g) Particulars of loans, guarantees or investments under section 186;
(h) Particulars of contracts or arrangements with related parties referred to in sub-section (1) of section 188 in
the prescribed Form AOC – 2;
(i) The state of the company’s affairs;
(j) The amounts, if any, which it proposes to carry to any reserves;
(k) The amounts, if any, which it recommends should be paid by way of dividend;
(l) Material changes and commitments, if any, affecting the financial position of the company which have
occurred between the end of the financial year of the company to which the financial statements relate and
the date of the report;
(m) The conservation of energy, technology absorption, foreign exchange earnings and outgo, in the manner as
prescribed in Rule 8(3) of the Companies (Accounts) Rules, 2014 [Chapter IX];
(n) A statement indicating development and implementation of a risk management policy for the company
including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the
existence of the company;
(o) The details about the policy developed and implemented by the company on corporate social responsibility
initiatives taken during the year;
(p) In case of a listed company and every public company having paid-up share capital of twenty five crore
rupees or more, calculated at the end of the preceding financial year, a statement indicating the manner
in which formal annual evaluation has been made by the Board of its own performance and that of its
committees and individual directors;
(q) Such other matters as may be prescribed.
As per Section 134(5) of the Companies Act, 2013, the Directors Responsibility Statement shall state that –
(1) In the preparation of the annual accounts, the applicable accounting standards had been followed along
with proper explanation relating to material departures;
(2) The directors had selected such accounting policies and applied them consistently and made judgments
and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the
company at the end of the financial year and of the profit and loss of the company for that period;
(3) The directors had taken proper and sufficient care of the maintenance of adequate accounting records in
accordance with the provisions of this Act safeguarding the assets of the company and for preventing and
detecting fraud and other irregularities;
(4) The directors had prepared the annual accounts on a going concern basis; and
(5) The directors, in the case of a listed company, had laid down internal financial controls to be followed by the
company and that such internal financial controls are adequate and were operating effectively.
(6) The directors had devised proper systems to ensure compliance with the provisions of all applicable laws
and that such systems were adequate and operating effectively.

Signing of Board’s Report [Section 134(6)]
The Board’s report and any annexures thereto shall be signed by its chairperson of the company if he is authorised
by the Board and where he is not so authorised, shall be signed by at least two directors, one of whom shall be
a managing director, or by the director where there is one director.
Contravention [Section 134(8)]
Persons liable Punishment for contravention of any provision of this section

Company Fine which shall not be less than `50,000 but which may extend to `25 Lacs
Every officer of the (1) Imprisonment for a term which may extend to 3 years; or
company who is in (2) Fine which shall not be less than `50,000 but which may extend to `5 Lacs; or
default (3) Both with imprisonment and fine
Corporate Social Responsibility – Section 135
1. Applicability
(a) Section 135 applies to a company (including a foreign company) only if it satisfies one or more of the
following criterion during any FY :
(i) The net worth of the company is Rs. 500 crore or more.
(ii) The turnover of the company is Rs. 1,000 crore or more.
(iii) The net profit of the company is Rs. 5 crore or more.
(b) Every company which ceases to fulfil the above criteria for 3 consecutive FYs shall not be required to –
(i) constitute CSR Committee; and
(ii) comply with the provisions contained in Section 135, till such time it meets the criteria specifid above.
2. Constitution of CSR Committee
(a) Every company to which Section 135 is applicable, shall constitute a Corporate Social Responsibility
Committee of the Board (CSR Committee).
(b) The CSR Committee shall consist of 3 or more directors.
(c) Out of the 3 directors, at least 1 director shall be an independent director.
(d) An unlisted public company or a private company which is not required to appoint an independent director
(as per section 149 of the Companies Act, 2013), shall have its CSR Committee without any independent
director.
(e) A private company having only 2 directors on its Board, shall constitute its CSR Committee with 2 directors
only.
(f) In case of a foreign company, the CSR Committee shall comprise of at least 2 persons of which one person

shall be a person resident in India authorised to accept on behalf of the foreign company service of notices
and other documents, and the other person shall be nominated by the foreign company.
3. Duties of the CSR Committee
(a) The CSR Committee shall formulate and recommend to the Board, a CSR Policy. CSR Policy shall indicate
the activities to be undertaken by the company as specified in Schedule VII.
(b) CSR Committee shall recommend the amount of expenditure to be incurred on the CSR activities to be
undertaken by the company.
(c) CSR Committee shall monitor the CSR Policy of the company from time to time.
(d) The CSR Committee shall institute a transparent monitoring mechanism for implementation of the CSR
projects or programs or activities undertaken by the company.
4. Duties of the Board
(a) The Board shall, after taking into account the recommendations made by the CSR Committee, approve the
CSR Policy for the company.
(b) The Board shall ensure that the activities as are included in CSR Policy are undertaken by the company.
(c) The Board shall ensure that the company spends in every FY, at least 2% of the average net profits of
the company made during the 3 immediately preceding FYs, in pursuance of its CSR Policy. “Average net
profit” shall be calculated in accordance with the provisions of Section 198 of the Companies Act, 2013.
The company shall give preference to the local area and areas around it where it operates, for spending the
amount year marked for CSR activities.
5. Disclosure in Board’s Report
The Board’s report shall disclose :-

(a) The composition of the CSR Committee;
(b) The contents of the CSR Policy; and
(c) The reason for not spending the amount of 2% in pursuance of its CSR Policy (in case the company fails to
spend such amount).
6. Defination of CSR
Rule 2 of the Companies (Corporate Social Responsibility Policy) Rules 2014 defines CSR as follows : “Corporate
Social Responsibility (CSR) means and includes but is not limited to :
(i) Projects or programs relating to activities specified in Schedule VII to the Act; or
(ii) Projects or programs relating to activities undertaken by the Board of Directors of the company (Board)
in pursuance of recommendation of the CSR Committee of the Board as per declared CSR Policy of the
Company subject to the condition that such policy will cover subjects enumerated in Schedule VII of the Act.

7. Activities not amounting to CSR
As per Rule 4 & 6 of the Companies (CSR Policy) Rules, 2014 following shall not amount to CSR activities for
the Purpose of Section 135;
(a) The CSR projects or programs or activities under taken outside India.
(b) The CSR projects or programs or activities that benefit only the employees of the company and their families.
(c) Contribution of any amount, directly or indirectly to any political party under Section 182 of the Companies
Act, 2013.
(d) Any activity under taken in pursuance of normal course of a business of a company.
8. Manner of implementing CSR Policy
Rule 4 of the Company (CSR Policy) Rules 2014 makes the following provisions with respect to manner of
implementation of CSR policy :
(a) The CSR activities shall be undertaken by the company, as per its stated CSR policy.
(b) The company may under take CSR activities through a registered trust or a registered society or a company
established under section 8 of the Act by the company, either singly or along with its holding or subsidiary or
associate company, or along with any other company or holding or subsidiary or associate company of such
other company, or otherwise.
(c) If such trust, society or company is not established by the company either singly or along with its holding
or subsidiary or associate company or along with any other company or holding or subsidiary or associate
company of such other company it shall have an established track record of 3 years in undertaking similar
programs or projects.
(d) The company shall specify the project or programs to be under taken through the entities, the modalities of
utilisation of funds on such projects and programs and the monitoring and reporting mechanism.
(e) A company may also collaborate with other companies for under taking project programs or CSR activities
in such a manner that the CSR Committees of respective companies are in a position to report separately
on such projects or programs.
(f) Companies may build CSR capacities of their own personnel as well as those of their implementing
agencies through institutions with established track records of at least 3 FYs but such expenditure including
expenditure on administrative overheads, shall not exceed 5% of total CSR expenditure of the company in
1 FY.
9. CSR Reporting
Rule 8 of the Companies (CSR policy) Rules 2014, makes the following provisions with respect to CSR reporting.
(a) The Boards Report pertaining to any FY commencing on or after the 1st day of April, 2014 shall include an
annual report on CSR.
(b) In case of a foreign company the balance sheet filled U/s 381 of the Companies Act, 2013 shall contain
Annexure regarding report on CSR.

10. Display of CSR policy on the website
The Board shall place the contents of CSR policy on the company’s website, if any, in such manner as may be
prescribed.
As per Rule 9 of the Companies ( CSR Policy) Rules, 2014 and Rule 6 of the Companies (Accounts) Rules,
2014, the CSR Policy and its contents shall be displayed on the company’s website, if any, as per the particulars
specified in the Annexure to the Companies (CSR Policy) Rules, 2014.
11. CSR Activities to be in accordance with Schedule VII
The Board shall ensure that activities included by a company in its CSR Policy fall within the purview of the
activities included in Schedule VII.
Schedule VII contains such activities which may be undertaken by the companies in pursuance of their CSR
Policy. The activities specified under Schedule VII are as under :
(i) Eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and
sanitation and making available safe drinking water.
(ii) Promoting education, including special education and employment enhancing vocation skills especially
among children, women, elderly, and the differently abled and livelihood enhancement projects.
(iii) Promoting gender equality, empowering women, setting up homes and hostels for women and orphans;
setting up old age homes, day care centres and such other facilities for senior citizens and measures of
reducing inequalities faced by socially and economically backward groups.
(iv) Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare,
agroforestry, conservation of natural resources and maintaining quality of soil, air and water.
(v) Protection of national heritage, art and culture including restoration of buildings and sites of historical
importance and works of art; setting up public libraries; promotion and development of traditional arts and
handicrafts.
(vi) Measures for the benefit of armed forces veterans, war windows and their dependents.
(vii) Training to promote rural sports, nationally recognised sports, Paralympic sports and Olympic sports.
(viii) Contribution to the Prime Minister’s National Relief Fund or any other fund set up by CG for socio-economic
development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes,
minorities and women.
(ix) Contribution for funds provided to technology incubators located within academic institutions which are
approved by CG.
(x) Rural development projects.
(xi) Slum area development.
Explanation : For the purposes of this term, the term “slum area” shall mean any area declared as such by CG
or any SG or any other competent authority under any law for the time being in force.

Circulation of Annual Accounts - Section 136
Copies of audited FS +CFS+

Sent to
Audit Report+other document
Any member Trustee from debenture holder Other Persons
At least 21 days before GM Circulation of Financial statement
Public co.(Net worth>1 crore

Listed companies
and Turnover > 10 crores)
Electronic mode
Despatch of physical copies

(under Section 20)
Circulation of Annual Accounts – Section 136
The company shall send the copies of the following documents before 21 days of AGM to
the members and debenture trustees.(less than 21days if agreed to by all the members)
Financial Statement including consolidated statements.
Auditors’ Report.
Every other document which are annexed to the above documents like Board of Directors’
report etc
A holding company shall place separate auditors report on the website and provide
audited Financial Statement for each of the subsidiary on request by any shareholder.
In case of listed company, the financial statements and documents required to be

attached may be kept at the registered office for inspection during working hrs. for a
period of 21 days before the date of the meeting and send a statement of salient features
of such documents

The above documents need not be sent by post to:
(i) A member, debenture holder who is not entitled and whose address is not available
(ii) To more than one share holder in case of joint holding
(iii) To a member, in case of listed company, and public company having a net worth of Rs.
1 cr. and turnover of Rs. 10 cr. provided it is sent by email in case of demat system is
followed and with consent of shareholders in case there is no demat system.
Circulation of financial statement and other documents in case of a listed company
In the case of a listed company, it shall be sufficient compliance with the provisions of Section 136, if –
(a) The copies of the financial statements and other documents are maid available for inspection at its registered
office during working hours for a period of 21 days before the date of the meeting; and
(b) A statement containing the salient features of such documents in the prescribed form is sent to every
member of the company and to every trustee for the holders of any debentures issued by the company not
less than 21 days before the date of the meeting, unless the shareholders ask for full financial statements.
As per Rule 10 of the companies (Accounts) Rules, 2014, such statement shall be in Form AOC-3.
Display at the website
A listed company shall also place its financial statements and other documents on its website, which is maintained
by or on behalf of the company.
Circulation and placing of separate audited accounts of subsidiaries
Every company having a subsidiary or subsidiaries shall, -

(a) Place separate audited accounts in respect of each of its subsidiary on its website, if any;
(b) Provide a copy of separate audited financial statements in respect of each of its subsidiary, to any shareholder
of the company who asks for it.
Inspection
Every company shall allow every member and debenture trustee to inspect the financial statements and other
documents at its registered office during office hours.

Filing of Accounts with ROC - Section 137
AGM
Held [137(1)] Not held [137(2)]
[Copy of FS + CFS + other documents to be Prescribed documents +

presented] : Prescribed documents Statement of Facts & Reasons for not
holding AGM
Un adopted in File with ROC

Adopted
AGM/Adjourned AGM
Within 30 days of the

Filed with registrar Within 30 days of
Last date before which the
within 30 days of the AGM, Registrar take them as
AGM should have been held
date of AGM Provisional in their records
Further, Adopted in adjourned AGM filed

with Registrar within 30 days of the said
meeting
within 30 days of Annual General Meeting (AGM) in form AOC-4.
If AGM is not held, within 30 days of the day on which the AGM is ought to have
been held.
If the AGM is held but the annual accounts are not prepared on that date, the AGM
shall be adjourned till the accounts are prepared but such adjournment shall not
be beyond the statutory period of holding of AGM.
If the AGM is held but shareholders did not approve the annual accounts, the accounts
shall be filed within 30 days of the AGM specifying the reason of disapproval.

From the accounts of the financial year 2010-11, the following type of companies have to file accounts
in electronic mode using XBRL taxonomy.
XBRL means (i) All companies listed in India and their Indian subsidiaries
Extensible (ii) All companies having paid up capital of `5 cr. or above or turnover of
Business `100 cr. and above
Reporting
(iii) All companies who were required to file in XBRL format in the year 2010-
Language.,
11.
Exemptions : banking co, NBFC and

power sector companies.
Internal Audit – Section 138
Classes of companies requiring Internal Audit

The following class of companies shall be required to appoint an internal auditor or a firm of internal auditors:-
(a) Every listed company;
(b) Every unlisted public company having –
Classes of companies requiring Internal Audit
The following class of companies shall be required to appoint an internal auditor or a firm of internal auditors:-
(a) Every listed company;
(b) Every unlisted public company having –
(i) paid up share capital of fifty crore rupees or more during the preceding financial year; or
(ii) turnover of two hundred crore rupees or more during the preceding financial year; or
(iii) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred
crore rupees or more at any point of time during the preceding financial year; or
(iv) outstanding deposits of twenty five crore rupees or more at any point of time during the preceding
financial year; and
(c) Every private company having –
(i) turnover of two hundred crore rupees or more during the preceding financial year; or
(ii) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred
crore rupees or more at any point of time during the preceding financial year.

Who can be an Internal Auditor
(a) a Chartered Accountant or;

(b) a Cost Accountant or;
(c) such other professional as may be decided by the Board to conduct internal audit of the functions and
activities of the Company.
Q.1 The Board of directors of Bharat Ltd. has a practical problem. The registered office of the company is
situated in a classified backward area of Maharashtra. The Board wants to keep its books of account
at its corporate office in Mumbai which is conveniently located. The Board seeks your advice about the
feasibility of maintaining the accounting records at a place other than the registered office of the company.
Advise.
Ans.
According to section 128(1) of the Companies Act, 2013, every company is required to keep the books of
accounts and other relevant books and papers and financial statement for every financial year which give a true
and fair view of the state of the affairs of the company, including that of its branch office or offices, if any, and
explain the transactions effected both at the registered office and its branches and such books shall be kept
on accrual basis and according to the double entry system of accounting. The proviso to section 128(1) further
provides that all or any of the books of account aforesaid and other relevant papers may be kept at such other
place in India as the Board of Directors may decide and where such a decision is taken, the company shall,
within seven days thereof, file with the Registrar a notice in writing giving the full address of that other place.
Therefore, the Board of Bharat Ltd. is empowered to keep its books of account at its corporate office in Mumbai
by following the above procedure.
Q.2 Mr. White is working as Chief Accountant in White Metal Limited. The Board of Directors of the said
company propose to charge him with the duty of ensuring compliance with the provisions of the Companies
Act, 2013 so that books of account can be properly maintained and Balance Sheet and Profit and Loss
Account can be prepared as per the provisions of law. Draft a"Board Resolution" for the said purpose. Also
point out the consequences in case of default; when such a resolution is passed.
Ans.
Board Resolution for charging Mr. White, Chief Accountant, with the duty of Compliance with the requirements
of Sections 129 & 134 of the Companies Act, 2013.
“Resolved that Mr. White, Chief Accountant of the company be and is hereby charged with the duty of seeing that
the requirements of Sections 129 and 134 of the Companies Act, 2013 are duly and fully complied with.
Resolved further that the said Mr. White is hereby entrusted with the authority to do such Acts or deeds as may
be necessary or expedient for the purpose of discharging his above referred duties.”
Consequences of contravention: Section 128(6) provides that if the managing director, the whole-time director
in charge of finance, the Chief Financial Officer or any other person of a company charged by the Board with

the duty of complying with the provisions of this section, contravenes such provisions, such managing director,
whole-time director in charge of finance, Chief Financial officer or such other person of the company shall be
punishable with imprisonment for a term which may extend to one year or with fine which shall not be less
than fifty thousand rupees but which may extend to five lakh rupees or with both. Hence, Mr. White is liable for
punishment as referred above.
Q.3 Advise: XYZ Ltd. wants to maintain its books of account on cash basis.
Ans.
The Companies Act, 2013 vide section 128(1) now requires every company to prepare and keep at its registered
office books of account and other relevant books and papers and financial statement for every financial year
which give a true and fair view of the state of the affairs of the company, including that of its branch office or
offices, if any, at the registered office and its branches and such books shall be kept on accrual basis and
according to the double entry system of accounting. The second part of the section clearly states that the books
of accounts must be maintained on accrual basis and according to the double entry system of accounting. No
exception has been given by the Act to any class or classes of companies from the above requirement. Hence,
it is clear that XYZ Ltd. cannot maintain its books of accounts on cash basis.
Q.4 Mr. Ramanujam, one of the Directors in Debari Food Processing Limited was not satisfied with the
performance of the company in financial matters. He requested Mr. Anandaraja, a Chartered Accountant, to
inspect the books of accounts of the company on z behalf. Decide, under the provisions of the Companies
Act, 2013 whether the said company can refuse to allow Mr. Anandaraja to inspect the books of accounts?
Ans.
Under section 128(3) of the Companies Act, 2013, the books of account and other books and papers maintained
by the company within India shall be open for inspection at the registered office of the company or at such other
place in India by any director during business hours, and in the case of financial information, if any, maintained
outside the country, copies of such financial information shall be maintained and produced for inspection by any
director subject to such conditions as may be prescribed.
The Companies Act, 2013 makes it quite clear that the inspection can be done by a director. However, in case
the director wishes to get the inspection done by an agent or a representative he must seek the approval of the
Board of Directors without which he will not be allowed to do so.
In Vakharia Vs Supreme General Film Exchange CO. Ltd it was held that a director is entitled to take inspection
of accounts personally or through an agent provided that there is no reasonable objection to the person chosen
and the agent undertakes not to utilize the information obtained by him for any purpose other than the purpose
of his principal.
As the right of inspection is a statutory right given under this section, a director who is prevented or refused from
inspection may enforce his right through court.
As such, Mr. Ramanujam being the director in Debari Food Processing Limited may appoint Mr. Anandaraja to
inspect the books of accounts of the company only with the approval of the Board of Directors.
Hence, the Debari Food Processing Limited cannot refuse to allow Mr. Anandaraja to inspect the books of
accounts if such right of inspection has been approved by the Board of Directors.

Q.5 XYZ Ltd. was registered in the year 2013 under Companies Act. There are allegations that the three
directors who manage the affairs of the company are siphoning the funds of the company. The company
has not declared any dividends on the ground that company is incurring losses. Mr. A, who controls 51%
of the share capital of the company sends a notice to the management that he will inspect the books of
account to verify the allegations. Examine the right of Mr. A to carry out the inspection. State the persons
who have the right to carry out the inspection under the Companies Act, 2013.
Ans.
Right to carry out the inspection of the books of accounts:
Mr. A has no right to carry out an inspection of the books of accounts of the company despite the fact that he
holds 51% of the share capital of the company. According to sections 128 and 206 of the Companies Act, 2013,
the following persons have the right to carry out the inspection of the books of accounts of the company.
(i) Directors of the Company [Section 128(3)]
(ii) Registrar of Companies [Section 206]
(iii) Such officer of Government as may be authorised by the Central Government in this behalf (Section 206).
(iv) Such officers of SFIO (Serious Froud Investigation Office) [Section 212]. Since Mr. A is not a director, he is
not eligible to carry out the inspection.
Note: According to Regulation 89, of Table F, Companies Act, 2013, a member has right to inspect the books of
accounts if he is so authorized by a resolution of the Board of Director or a resolution passed by the company in
general meeting.
Q.6 (i) Define the expression “Accounting Standards” within the meaning of Companies Act, 2013.
(ii) XYZ Limited did not prepare its Balance Sheet as at 31st March, 2015 and the Profit and Loss Account
for the year ended on that date in conformity with some of the mandatory Accounting Standards
issued by the Institute of Chartered Accountants of India. You are required to state with reference to
the provisions of the Companies Act, 2013, the responsibilities of directors and statutory auditor of the
company in this regard
Ans.
(i) As per sub-section (2) of Section 2 of the Companies Act, 2013, the expression “accounting standards”
means the standards of accounting or any addendum thereto for companies or class of companies referred
to in section 133. As per Section 133, the standards of accounting recommended by the Institute of
Chartered Accounts of India constituted under the Chartered Accountants Act, 1949 as may be prescribed
by the Central Government in consultation with and after examination of the recommendations made by
the National Financial Reporting Authority established under section 132 of the said Act. Rule 7 of the
Companies (Accounts) Rules, 2014, further states that the standards of accounting specified under the
Companies Act, 1956 shall be deemed to be the accounting standards until the according standards are
prescribed by the Central Government under section 133.
(ii) Sub-section (1) of the section 129 of this act states that financial statement of the company shall comply
with the accounting standards notified under section 133. As per sub – section (5), where the Financial

Statements of the company do not comply with the accounting standards, such companies shall disclose in
its financial statements, the following, namely:
(a) The deviation from the accounting standards;
(b) The reasons for such deviation; and
(c) The financial effect, if any, arising due to such deviation.
Apart from the above consequence on non compliance, section 129(7) further provides that if a company
contravenes the provisions of section 129 (which requires compliance with accounting standards), the managing
director, whole- time director in charge of finance, the Chief Financial Officer or any other person charged by the
Board with the duty of complying with the requirements of this section and in the absence of any of the officers
mentioned above, all the directors shall be punishable with imprisonment for a term which may extend to one
year or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or
with both.
Moreover, the Board of directors is also required under section 134 of the Companies Act, 2013 to include
a Directors Responsibility Statement indicating therein that in the preparation of the financial statements the
applicable accounting standards had been followed along with proper explanation relating to material departures,
if any. If such person (as above referred) fails to take all reasonable steps to secure compliance by the company,
as respects any accounts laid before the company in general meeting, with the provisions of this section and
with the other requirements of this Act as to the matters to be stated in the accounts, he shall, in respect of
each offence, be punishable with imprisonment for a term which may extend to 1 year, or with fine not less than
`50,000 but which may extend to `5,00,000 or with both.
Responsibilities of auditors:
As per section 143(3) (e) of the Companies Act, 2013, the statutory auditor’s responsibility is to state in his report,
whether in his opinion, the profit and loss account and balance sheet comply with the accounting standards
referred to in section 143 of the Companies Act, 2013.
Q.7 Gujarat Textiles Limited is having a foreign subsidiary company. The said Indian holding company failed
to furnish particulars of its foreign subsidiary company in its Balance Sheet. Decide the liability of Gujarat
Textiles Limited under the Companies Act, 2013.
Ans.
Under section 129(3) of the Companies Act, 2013, where a company has one or more subsidiaries, it shall, in
addition to financial statements provided under sub-section (2), prepare a consolidated financial statement of the
company and of all the subsidiaries in the same form and manner as that of its own which shall also be laid before
the annual general meeting of the company along with the laying of its financial statement under sub-section (2).
Provided that the company shall also attach along with its financial statement, a separate statement containing
the salient features of the financial statement of its subsidiary or subsidiaries in such form as may be prescribed.
For reference, sub section 2 of section 129 provides that at every annual general meeting of a company, the
Board of Directors of the company shall lay before such meeting financial statements for the financial year. The
above provisions do not make any distinction between a domestic subsidiary company and a foreign subsidiary.
Therefore, Gujarat Textiles Ltd. has contravened the provisions of Section 129 of the Companies Act, 2013 by not
furnishing the consolidated financial statements on the one hand and not attaching with its financial statements

a separate statement of the foreign subsidiary giving the salient features thereof. Section 129(7) lays down the
punishment for violation of section 129 and provides that if a company contravenes the provisions of this section,
the managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other
person charged by the Board with the duty of complying with the requirements of this section and in the absence
of any of the officers mentioned above, all the directors shall be punishable with imprisonment for a term which
may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to
five lakh rupees, or with both. The management of Gujarat Textiles Ltd. will accordingly be punishable as above.
Q.8 State giving reasons whether the following are true or false under the provisions of the Companies Act,
2013? The Board of Directors of ABC Ltd. wants to circulate unaudited accounts before the Annual General
Meeting of the shareholders of the Company.
Q.9 The Board of Directors of Vishwakarma Electronics Limited consists of Mr. Ghanshyam, Mr. Hyder
(Directors) and Mr. Indersen (Managing Director). The company has also employed a full time Secretary.
The Profit and Loss Account and Balance Sheet of the company were signed by Mr. Ghanshyam and Mr.
Hyder. Examine whether the authentication of financial statements of the company was in accordance with
the provisions of the Companies Act, 2013?
Ans.
Under section 134(1) of the Companies Act, 2013 the financial statement, including consolidated financial
statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board by
at least:
(a) The chairperson of the company where he is authorised by the Board; or
(b) Two directors out of which one shall be managing director and
(c) the other the Chief Executive Officer, if he is a director in the company,
(d) the Chief Financial Officer and the company secretary of the company, wherever they are appointed.
In the instant case, the Balance Sheet and Profit and Loss Account have been signed by Mr. Ghanshyam and Mr.
Hyder, the directors. In view of Section 134(1) of the Companies Act, 2013, Mr. Indersen, the Managing Director
should be one of the two signing directors. Since the company has also employed a full time Secretary, he should
also sign the Balance Sheet and Profit and Loss Account.
Q.10 The Companies Act, 2013 has prescribed an additional duty on the Board of Directors to include in the
Board’s Report a 'Directors' Responsibility Statement’. Explain briefly the details to be furnished in the said
statement.
Ans.
Section 134(3)(c) of the Companies Act, 2013 provides that there shall be attached to statements laid before a
company in general meeting, a report by its Board of Directors, which shall include a number of statements as
prescribed in the sub section including Directors’ Responsibility Statement.
Further section 134(5) states that the Directors Responsibility Statement shall state that:

(i) In the preparation of the annual accounts, the applicable accounting standards had been followed along
with proper explanation relating to material departures;
(ii) The directors had selected such accounting policies and applied them consistently and made judgments
and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the
company at the end of the financial year and of the profit or loss of the company for that period;
(iii) The directors had taken proper and sufficient care for the maintenance of adequate accounting standards
in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing
and detecting fraud and other irregularities;
(iv) That the directors had prepared the annual accounts on a going concern basis; and
(v) He directors, in the case of a listed company, had laid down internal financial controls to be followed by the
company and that such internal financial controls are adequate and were operating effectively.
(vi) The directors had devised proper systems to ensure compliance with the provisions of all applicable laws
and that such systems were adequate and operating effectively.
Q.11 The Annual General Meeting of Robertson Ltd., for laying the Annual Accounts thereat for the year ended
31st March, 2014 was not held, as the accounts were not ready. In this context:
(i) Advise the company regarding compliance of the provisions of section 137 of the Companies Act,
2013 for filing of copies of financial statements with the Registrar of Companies.
(ii) Will it make any difference in case the Annual Accounts were duly laid before the Annual General
Meeting held on 27th September, 2014 but the same were not adopted by the shareholders?
Q.12 The Board of directors of Bharat Ltd. has a practical problem. The registered office of the company is
situated in a classified backward area of Maharashtra. The Board wants to keep its books of account
at its corporate office in Mumbai which is conveniently located. The Board seeks your advice about the
feasibility of maintaining the accounting records at a place other than the registered office of the company.
Advise.
Q.13 The Board of Directors of Vishwakarma Electronics Limited consists of Mr. Ghanshyam, Mr. Hyder
(Directors) and Mr. Indersen (Managing Director). The company has also employed a full time Secretary.
The Profit and Loss Account and Balance Sheet of the company were signed by Mr. Ghanshyam and Mr.
Hyder. Examine whether the authentication of financial statements of the company was in accordance with
the provisions of the Companies Act, 2013?
Q.14 Mr. Bhagvath, recently acquired 76% of the equity shares of M/s Renowned Company Ltd., in the hope
of earning good dividend income. Unfortunately the existing Board of Directors have been avoiding
declaration of dividend due to alleged inadequacy of profits. Unconvinced, Mr. Bhagvath seeks permission
of the Company to allow him to examine the Books of Accounts, which is summarily rejected by the
Company. Examine and advise the provisions relating to inspection of Books of Accounts and remedy
available.

Q.15 ABC Limited has on its Board, four Directors viz. W, X, Y and Z. In addition, the company has Mr. D as
the Managing Director. The company also has a full time Company Secretary, Mr. Wise, on its rolls. The
financial statements of the company for the year ended 31st March, 2015 were authenticated by two of the
directors, Mr. X and Y under their signatures.
Referring to the provisions of the Companies Act, 2013:
(i) Examine the validity of the authentication of the Balance Sheet and Statement of Profit & Loss and
the Board’s Report.
(ii) What would be your answer in case the company is a One Person Company (OPC) and has only one
Director, who has authenticated the Balance Sheet and Statement of Profit & Loss and the Board’s
Report ?
Q.16 DJA Company Limited, incorporated under the provisions of the Companies Act, 2013, has two subsidiaries
– AJD Limited and AMR Limited. All the three companies have prepared their financial statements for the
year ended 31st March, 2015. Examining the provisions of the Companies Act, 2013, answer the following
:
(i) In what manner the subsidiaries – AJD Limited and AMR Limited shall prepare their Balance Sheet
and Profit & Loss Account ?
(ii) What would be your answer in case the DJA Limited – the holding company, is not required to prepare
consolidated financial statements under the Indian Accounting Standards ?
(iii) What shall be your answer in case one of the subsidiary company’s financial statements do not
comply with the Accounting Standards ?
(iv) To what extent is the Central Government empowered to exempt a company from preparing the
financial statements in compliance with the Indian Accounting Standards ?

Chapter - 3 APPOINTMENT OF AUDITORS
Section - 139 - 148
Refer Audit mat handout.

Notes

Chapter - 4 THE INDIAN CONTRACT
ACT, 1872
Unit - 1
Section 124 Contract of Indemnity
Section 125 Rights of Indemnity
Section 126 Contract of guarantee, surety, principal debtor and creditor
Section 127 Consideration for guarantee
Section 128 Nature of surety’s liability
Section 129 Continuing guarantee
Section 130 Revocation of continuing guarantee
Section 131 Revocation of continuing guarantee by surety’s death
Section 133 By variance in terms of contract
Section 134 By release or discharge of principal debtor
Section 135 Discharge of surety when creditor compounds with, gives time to, or agrees not to sue,
principal debtor
Section 136 Surety not discharged when agreement made with third person to give time to principal debtor
Section 137 Creditor’s forbearance to sue does not discharge surety
Section 139 Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy
Section 140 Rights of subrogation
Section 141 Surety’s right to benefit of creditor’s securities
Section 142 Guarantee obtained by misrepresentation invalid
Section 143 Guarantee obtained by concealment invalid
Section 144 Guarantee on contract that creditor shall not act on it until co- surety joins
Section 145 Implied promise to indemnify surety
Section 146 Co-sureties liable to contribute equally
Section 147 Liability of co-sureties bound in different sums
Contracts of Indemnity and Guarantee

(Section 124-147)
Contract of Indemnity Nature of Surety s Discharge of Surety

(Section 124-125) Liability (Section 133 - 139)
(Section 128)
Contract of Guarantee Continuing Guarantee Right of Surety

(Section 126-127) (Section 129-132) (Section 140 - 147)

Contract of Indemnity
“Contract of Indemnity” defined (Section 124) : A contract by which one party promises to save the other
from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a
“contract of indemnity.” There are two parties in this form of contract. The party who promises to indemnify/ save
the other party from loss is known as ‘indemnifier’, where as the party who is promised to be saved against the
loss is known as ‘indemnified’ or indemnity holder.
Example 1 : A may contract to indemnify B against the consequences of any proceedings which C may take
against B in respect of a sum of ` 5000/- advanced by C to B. In consequence, when B who is called upon to pay
the sum of money to C fails to do so, C would be able to recover the amount from A as provided in Section 124.
Example 2 : X, a shareholder of a company lost his share certificate. He applied for the duplicate. The company
agreed to issue the same on the term that X will compensate the company against the loss where any holder
produces the original certificate. Here, there is contract of indemnity between X and the company.
Explanation
To indemnify means to compensate or make good the loss. Thus, under a contract of indemnity the “existence
of loss” is essential. Unless the promisee has suffered a loss, he cannot hold the promisor liable on the contract
of indemnity.
However, the above definition of indemnity restricts the scope of contracts of indemnity in as much as it covers
only the loss caused :
(i) By the conduct of the promisor himself, or
(ii) By the conduct of any other person.
Thus, loss occasioned by the conduct of the promise, or accident, or an act of God is not covered.
A contract of indemnity like any other contract may be express or implied.
A contract of indemnity is like any other contract and must fulfill all the essentials of a valid contract like
consideration, free consent, competency of contract, lawful object etc.
Example : A asks B to beat C promising to indemnify him against the consequences. The promise of A cannot
be enforced. Suppose, B beats C and is fined Rs. 1000, B cannot claim this amount from A because the object
of the agreement is unlawful.
A contract of Fire Insurance or Marine Insurance is always a contract of indemnity. But there is no contract of
indemnity in case of contract of Life Insurance.
Rights of Indemnity—holder when sued (Section 125) : The promisee in a contract of indemnity, acting
within the scope of his authority, is entitled to recover from the promisor/indemnifier—
(1) All damages which he may be compelled to pay in any suit in respect of any matter to which the promise to
indemnify applies;
(2) All costs which he may be compelled to pay in any such suit if, in bringing or defending it.
(3) All sums which he may have paid under the terms of any compromise of any such suit.

Contract of Guarantee
“Contract of guarantee”, “surety”, “principal debtor” and “creditor” [Section 126]

Contract of guarantee : A contract of guarantee is a contract to perform the promise made or discharge the
liability, of a third person in case of his default.
Three parties are involved in a contract of guarantee
Surety - Person who gives the guarantee,
Principal debtor - Person in respect of whose default the guarantee is given,
Creditor- Person to whom the guarantee is given
Example 1 : When A requests B to lend `10,000 to C and guarantees that C will repay the amount within the
agreed time and that on C falling to do so, he will himself pay to B, there is a contract of guarantee.
Here, B is the creditor, C the principal debtor and A the surety.
Example 2 : Where ‘A’ obtains housing loan from LIC Housing and if ‘B’ promises to pay LIC Housing in the event
of ‘A’ failing to repay, it is a contract of guarantee.
Example 3 : X and Y go into a car showroom where X says to the dealer to supply latest model of Wagon R
to Y. In case of Y’s failure to pay, X will be paying for it. This is a contract of guarantee because X promises to
discharge the liability of Y in case of his defaults.
Explanation
Guarantee is a promise to pay a debt owed by a third person in case the latter does not pay.
Any guarantee given may be oral or written.
From the above definition, it is clear that in a contract of guarantee there are, in effect three contracts
(i) A principal contract between the principal debtor and the creditor
(ii) A secondary contract between the creditor ad the surety.
(iii) A implied contract between the surety and the principal debtor whereby principal debtor is under an obligation
to indemnify the surety; if the surety is made to pay or perform.
The right of surety is not affected by the fact that the creditor has refused to sue the principal debtor or that he
has not demanded the sum due from him.
Consideration for guarantee [Section 127] : What constitutes consideration in a case of guarantee is an
important issue and is laid down in Section 127 of the Act. As per Section 127 of the Act, “anything done, or any
promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving
the guarantee.”
Example 1 : B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee
the payment of the price of the goods. C promises to guarantee the payment in consideration of A’s promise to
deliver the goods. This is a sufficient consideration for C’s promise.

Example 2 : A sell and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for a year,
and promises that if he does so, C will pay for them in default of payment by B. A agrees to forbear as requested.
This is a sufficient consideration for C’s promise.
Any promise made Anything done, or For the benefit of principal debtor
Consideration for
guarantee
Example 3 : A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in
default of B. The agreement is void.
Essentials of a valid Guarantee
1. Existence of a principal debt.
2. Benefit to principal debtor is sufficient consideration, but past consideration is no consideration for a contract
of guarantee.
3. Consent of surety should not be obtained by misrepresentation or concealment of a material fact.
4. Can be oral or written.
5. Surety can proceeded against without proceeding against the principal debtor first.
6. If the co-surety does not join, the contract of guarantee is not valid.
Distinction between a Contract of Indemnity and a Contract of Guarantee
Point of distinction Contract of Indemnity Contract of Guarantee

Number of parties/ There are only two parties namely the There are three parties creditor, principal
Parties to the indemnifier [promisor] and the indemnified debtor and surety.
contract [promisee]
Nature of liability The liability of the indemnifier is primary The liability of the surety is secondary as
and independent the primary liability is that of the principal
debtor.
Time of liability The liability of the indemnifier arises only Liability is already in existence but
on the happening of a contingency. specifically crystallizes when principal
debtor fails.
Time to Act The indemnifier need not necessarily act Surety must act by extending guarantee
at the request of indemnified at the request of debtor
Right to sue third Indemnifier cannot sue a third party for Surety can proceed against principal
party loss in his own name as there is no privity debtor in his own right because he gets
of contract. Such a right would arise only all the right of a creditor after discharging
if there is an assignment in his favour. the debts.
Purpose Reimbursement of loss For the security of the creditor

Competency All parties must be competent to contract In the case of a contract of guarantee,
to contract where a minor is a principal debtor, the
contract is still valid.
Number of Contracts Only one original and independent contract There are 3 contracts made between–
between indemnifier and indemnified. • Creditor and principal debtor
• Creditor and Surety
• Surety and Principal debtor
Nature of surety’s liability [Section 128]
The liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided by the
contract.
Explanation :
(i) The term “co-extensive with that of principal debtor” means that the surety is liable for what the principal
debtor is liable.
(ii) The liability of a surety arises only on default by the principal debtor. But as soon as the principal debtor
defaults, the liability of the surety begins and runs co-extensive with the liability of the principal debtor, in the
sense that the surety will be liable for all those sums for which the principal debtor is liable.
(iii) Where a debtor cannot be held liable on account of any defect in the document, the liability of the surety also
ceases.
(iv) Surety’s liability continues even if the principal debtor has not been sued or is omitted from being sued. In
other words, a creditor may choose to proceed against a surety first, unless there is an agreement to the
contrary.
Example : A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured by C. A
is liable not only for the amount of the bill but also for any interest and charges which may have become due on it.
Nature of Surety’s liability can be summed up as (a) Liability of surety is of secondary nature as he is liable only
on default of principal debtor. (b) his liability arises immediately on the default by the principal debtor (c) The
Creditor has a right to sue the surety directly without first proceeding against principal debtor.
Continuing Guarantee
Continuing guarantee (Section 129): A guarantee which extends to a series of transactions is called a “continuing
guarantee”. The essence of continuing guarantee is that it applies not to a specific number of transactions but
to any number of transactions and makes the surety liable for the unpaid balance at the end of the guarantee.
Example 1 : A, in consideration that B will employ C in collecting the rents of B’s zamindari, promises B to
be responsible, to the amount of `5,000 rupees, for due collection and payment by C of those rents. This is a
continuing guarantee.
Example 2 : A guarantees payment to B, a tea-dealer, to the amount of $ 100, for any tea he may from time to
time supply to C. B supplies C with tea to above the value of $ 100, and C pays B for it. Afterwards B supplies
C with tea to the value of $ 200. C fails to pay. The guarantee given by A was a continuing guarantee, and he is
accordingly liable to B to the extent of $100.
Example 3 : A guarantees payment to B of the price of five sacks of flour to be delivered by B to C and to be

paid for in a month. B delivers five sacks to C. C pays for them. Afterwards B delivers four sacks to C, which C
does not pay for. The guarantee given by A was not a continuing guarantee, and accordingly he is not liable for
the price of the four sacks.
In the continuing guarantee, the liability of surety continues till the performance or the discharge of all the
transactions entered into or the guarantee is withdrawn.
Liability of two persons, primarily liable, not affected by arrangement between them that one shall be
surety on other’s default.
Where two persons contract with a third person to undertake a certain liability, and also contract with each other
that one of them shall be liable only on the default of the other, the third person not being a party to such contract,
the liability of each of such two persons to the third person under the first contract is not affected by the existence
of the second contract, although such third person may have been aware of its existence. (Section 132)
Example : A and B make a joint and several promissory note to C. A makes it, in fact, as surety for B, and C
knows this at the time when the note is made. The fact that A, to the knowledge of C, made the note as surety
for B, is no answer to a suit by C against A upon the note.
Discharge of a surety
A surety is discharged from liability on a guarantee under the following circumstances :

(i) By revocation of the contract of guarantee
(ii) By the conduct of the creditor, or
(iii) By the invalidation of the contract of guarantee.
By revocation
Modes of discharge
By conduct of the creditor
On validation of Contract of Guarantee
By revocation of the Contract of Guarantee

(a) Revocation of continuing guarantee (Section 130) : The continuing guarantee may at any time be
revoked by the surety as to future transactions by notice to the creditors.
Example 1 : A, in consideration of B’s discounting, at A’s request, bills of exchange for C, guarantees to B,
for twelve months, the due payment of all such bills to the extent of 50,000 rupees. B discounts bills for C to
the extent of 20,000 rupees. Afterwards, at the end of three months, A revokes the guarantee. This revocation
discharges A from all liability to B for any subsequent discount. But A is liable to B for the 20,000 rupees, on
default of C.
Example 2 : A guarantees to B, to the extent of 100,000 rupees, that C shall pay all the bills that B shall draw
upon him. B draws upon C. C accepts the bill. A gives notice of revocation. C dishonours the bill at maturity. A is
liable upon his guarantee.

(b) Revocation of continuing guarantee by surety’s death (Section 131) : The death of the surety operates,
in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards
future transactions.
The estate of deceased surety is, however, liable for those transactions which had already taken place during
the lifetime of the deceased. Surety’s estate will not be liable for the transactions taking place after the death of
surety even if the creditor had no knowledge of surety’s death.
By conduct of the creditor
(a) By variance in terms of contract (Section 133) : Where there is any variance in the terms of contract
between the principal debtor and creditor without surety’s consent, it would discharge the surety in respect
of all transactions taking place subsequent to such variance.
Example 1 : A becomes surety to C for B’s conduct as a manager in C’s bank. Afterwards, B and C contract,
without A’s consent, that B’s salary shall be raised, and that he shall become liable for one-fourth of the losses
on overdrafts. B allows a customer to overdraw, and the bank loses a sum of money. A is discharged from his
suretyship by the variance made without his consent, and is not liable to make good this loss.
Example 2 : A guarantees C against the misconduct of B in an office to which B is appointed by C, and of
which the duties are defined by an Act of the Legislature. By a subsequent Act, the nature of the office is
materially altered. Afterwards, B misconducts himself. A is discharged by the change from future liability under
his guarantee, though the misconduct of B is in respect of a duty not affected by the later Act.
Example 3 : C agrees to appoint B as his clerk to sell goods at a yearly salary, upon A’s becoming surety to C for
B’s duly accounting for moneys received by him as such clerk. Afterwards, without A’s knowledge or consent, C
and B agree that B should be paid by a commission on the goods sold by him and not by a fixed salary. A is not
liable for subsequent misconduct of B.
Example 4 : A gives to C a continuing guarantee to the extent of 3,00,000 rupees for any oil supplied by C to B
on credit. Afterwards B becomes embarrassed, and, without the knowledge of A, B and C contract that C shall
continue to supply B with oil for ready money, and that the payments shall be applied to the then existing debts
between B and C. A is not liable on his guarantee for any goods supplied after this new arrangement.
Example 5 : C contracts to lend B 5,00,000 rupees on the 1st March. A guarantees repayment. C pays the
5,00,000 rupees to B on the 1st January. A is discharged from his liability, as the contract has been varied, in as
much as C might sue B for the money before the 1st March.
(b) By release or discharge of principal debtor (Section 134) : The surety is discharged by any contract
between the creditor and the principal debtor; by which the principal debtor is released, or by any act or
omission of the creditor, the legal consequence of which is the discharge of the principal debtor.
Example : A contracts with B for a fixed price to build a house for B within a stipulated time, B supplying the
necessary timber. C guarantees A’s performance of the contract. B omits to supply the timber. C is discharged
from his suretyship.
(c) Discharge of surety when creditor compounds with, gives time to, or agrees not to sue, principal
debtor [Sector 135] : A contract between the creditor and the principal debtor, by which the creditor makes
a composition with, or promises to give time to, or not to sue, the principal debtor, discharges the surety,
unless the surety assents to such contract.
(d) Surety not discharged when agreement made with third person to give time to principal debtor
[Section 136] : Where a contract to give time to the principal debtor is made by the creditor with a third

person, and not with the principal debtor, the surety is not discharged.
Example : C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by B, contracts
with M to give time to B. A is not discharged.
(e) Creditor’s forbearance to sue does not discharge surety [Section 137] : Mere forbearance on the part
of the creditor to sue the principal debtor or to enforce any other remedy against him does not in the absence
of any provision in the guarantee to the contrary, discharge the surety.
Example : B owes to C a debt guaranteed by A. The debt becomes payable. C does not sue B for a year after
the debt has become payable. A is not discharged from his suretyship.
(f) Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy [Section 139]
: If the creditor does any act which is inconsistent with the rights of the surety, or omits to do any act which
his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal
debtor is thereby impaired, the surety is discharged.
Example 1 : B contracts to build a ship for C for a given sum, to be paid by instalments as the work reaches
certain stages. A becomes surety to C for B’s due performance of the contract. C, without the knowledge of A,
prepays to B the last two instalments. A is discharged by this prepayment.
Example 2 : A puts M as apprentice to B, and gives a guarantee to B for M’s fidelity. B promises on his part
that he will, at least once a month, see that M make up the cash. B omits to see this done as promised, and M
embezzles. A is not liable to B on his guarantee.
By the invalidation of the contract of guarantee
(a) Guarantee obtained by misrepresentation invalid [Section 142] : Any guarantee which has been
obtained by means of misrepresentation made by the creditor, or with his knowledge and assent, concerning
a material part of the transaction, is invalid.
(b) Guarantee obtained by concealment invalid [Section 143] : Any guarantee which the creditor has
obtained by means of keeping silence as to material circumstances is invalid.
Example 1 : A engages B as a clerk to collect money for him, B fails to account for some of his receipts, and
A in consequence calls upon him to furnish security for his duly accounting. C gives his guarantee for B’s duly
accounting. A does not acquaint C with B’s previous conduct. B afterwards makes default. The guarantee is
invalid.
Example 2 : A guarantees to C payment for iron to be supplied by him to B for the amount of ` 2,00,000 tons. B
and C have privately agreed that B should pay five rupees per ton beyond the market price, such excess to be
applied in liquidation of an old debt. This agreement is concealed from A. A is not liable as a surety.
(c) Guarantee on contract that creditor shall not act on it until co- surety joins (Section 144) : Where
a person gives a guarantee upon a contract that the creditor shall not act upon it until another person has
joined in it as co-surety, the guarantee is not valid if that other person does not join.
Rights of a Surety
Rights of a surety may be classified as under :

(a) Rights against the creditor,
(b) Rights against the principal debtor,
(c) Rights against co-sureties.

Rights of Surety
Against the Against the Against the

principal Debtor Creditor co-sureties
Right of Subrogation Right of Indemnity Right to security Right to contribution
Right against the principal debtor

(a) Rights of subrogation [Section 140] : Where, a guaranteed debt has become due, or default of the
principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of
all that he is liable for, is invested with all the rights which the creditor had against the principal debtor.
This right is known as right of subrogation. It means that on payment of the guaranteed debt, or performance
of the guaranteed duty, the surety steps into the shoes of the creditor.
(b) Implied promise to indemnify surety [Section 145] : In every contract of guarantee there is an implied
promise by the principal debtor to indemnify the surety. The surety is entitled to recover from the principal
debtor whatever sum he has rightfully paid under the guarantee, but no sums which he has paid wrongfully.
Example 1 : B is indebted to C, and A is surety for the debt. C demands payment from A, and on his refusal
sues him for the amount. A defends the suit, having reasonable grounds for doing so, but is compelled to pay the
amount of the debt with costs. He can recover from B the amount paid by him for costs, as well as the principal
debt.
Example 2 : C lends B a sum of money, and A, at the request of B, accepts a bill of exchange drawn by B upon
A to secure the amount. C, the holder of the bill, demands payment of it from A, and, on A’s refusal to pay, sues
him upon the bill. A, not having reasonable grounds for so doing, defends the suit, and has to pay the amount of
the bill and costs. He can recover from B the amount of the bill, but not the sum paid for costs, as there was no
real ground for defending the action.
Example 3 : A guarantees to C, to the extent of 2,00,000 rupees, payment for rice to be supplied by C to B. C
supplies to B rice to a less amount than 2,00,000 rupees, but obtains from A payment of the sum of 2,00,000
rupees in respect of the rice supplied. A cannot recover from B more than the price of the rice actually supplied.
Right against the Creditor
Surety’s right to benefit of creditor’s securities [Section 141] : A surety is entitled to the benefit of every
security which the creditor has against the principal debtor at the time when the contract of suretyship is entered
into, whether the surety knows of the existence of such security or not; and, if the creditor loses, or, without the
consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.
Example 1 : C advances to B, his tenant, 2,00,000 rupees on the guarantee of A. C has also a further security for
the 2,00,000 rupees by a mortgage of B’s furniture. C cancels the mortgage. B becomes insolvent, and C sues
A on his guarantee. A is discharged from liability to the amount of the value of the furniture.
Example 2 : C, a creditor, whose advance to B is secured by a decree, receives also a guarantee for that

advance from A. C afterwards takes B’s goods in execution under the decree, and then, without the knowledge
of A, withdraws the execution. A is discharged.
Example 3 : A, as surety for B, makes a bond jointly with B to C, to secure a loan from C to B. Afterwards, C
obtains from B a further security for the same debt. Subsequently, C gives the up the further security, A is not
discharged.
Rights against co-sureties
(a) Co-sureties liable to contribute equally (Section 146) : Equality of burden is the basis of Co-suretyship.
This is contained in section 146 which states that “when two or more persons are co-sureties for the same
debt, or duty, either jointly, or severally and whether under the same or different contracts and whether
with or without the knowledge of each other, the co-sureties in the absence of any contract to the contrary,
are liable, as between themselves, to pay each an equal share of the whole debt, or of that part of it which
remains unpaid by the principal debtor”.
Example 1 : A, B and C are sureties to D for the sum of 3,00,000 rupees lent to E. E makes default in payment.
A, B and C are liable, as between themselves, to pay 1,00,000 rupees each.
Example 2 : A, B and C are sureties to D for the sum of 1,00,000 rupees lent to E, and there is a contract
between A, B and C that A is to be responsible to the extent of one-quarter, B to the extent of one-quarter, and C
to the extent of one- half. E makes default in payment. As between the sureties, A is liable to pay 25,000 rupees,
B 25,000 rupees, and C 50,000 rupees.
(b) Liability of co-sureties bound in different sums (Section 147) : The principal of equal contribution is,
however, subject to the maximum limit fixed by a surety to his liability. Co-sureties who are bound in different
sums are liable to pay equally as far as the limits of their respective obligations permit.
Example 1 : A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely,
A in the penalty of 1,00,000 rupees, B in that of 2,00,000 rupees, C in that of 4,00,000 rupees, conditioned for
D’s duly accounting to E. D makes default to the extent of 3,00,000 rupees. A, B and C are each liable to pay
1,00,000 rupees.
Example 2 : A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A
in the penalty of 1,00,000 rupees, B in that of 2,00,000 rupees, C in that of 4,00,000 rupees, conditioned for D’s
duly accounting to E. D makes default to the extent of 4,00,000 rupees; A is liable to pay 1,00,000 rupees, and
B and C 1,50,000 rupees each.
Example 3 : A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely,
A in the penalty of 1,00,000 rupees, B in that of 2,00,000 rupees, C in that of 4,00,000 rupees, conditioned for
D’s duly accounting to E. D makes default to the extent of 7,00,000 rupees. A, B and C have to pay each the full
penalty of his bond.
Q.1 M advances to `5,000 on the guarantee of P. The loan carries interest at ten percent per annum.
Subsequently, N becomes financially embarrassed. On N’s request, M reduces the interest to six per cent
per annum and does not sue N for one year after the loan becomes due. N becomes insolvent. Can M sue
P?
Ans.
M cannot sue P, because a surety is discharged from liability when, without his consent, the creditor makes any

change in the terms of his contract with the principal debtor, no matter whether the variation is beneficial to the
surety or does not materially affect the position of the surety (Section 133, Indian Contract Act, 1872).
Q.2 What are the rights of the indemnity-holder when sued?
Q.3 Define contract of indemnity and contract of guarantee and state the conditions whenguarantee is
considered invalid ?
Ans.
Section 124 of the Indian Contract Act,1872 says that “A contract by which one party promises to save the
other from loss caused to him by the conduct of the promisor himself, or the conduct of any person”, is called a
“contract of indemnity”.
Section 126 of the Indian ContractAct says that “A contract to perform the promise made or discharge liability
incurred by a third person in case of his default.” is called as “contract of guarantee”.
The conditions under which the guarantee is invalid or void are stated in section 142,143 and 144 of the Indian
Contract Act are :
(i) Guarantee obtained by means of misrepresentation.
(ii) creditor obtained any guarantee by means of keeping silence as to material circumstances.
(iii) When contract of guarantee is entered into on the condition that the creditor shall not act upon it until
another person has joined in it as co-surety and that other party fails to join as such.
Q.4 Mr. X, is employed as a cashier on a monthly salary of `2,000 by ABC bank for a period of three years. Y
gave surety for X’s good conduct. After nine months, the financial position of the bank deteriorates. Then
X agrees to accept a lower salary of `1,500/- per month from Bank. Two months later, it was found that X
has misappropriated cash since the time of his appointment. What is the liability of Y ?
Ans.
If the creditor makes any variance (i.e. change in terms) without the consent of the surety, then surety is discharged
as to the transactions subsequent to the change. In the instant case Y is liable as a surety for the loss suffered
by the bank due to misappropriation of cash by X during the first nine months but not for misappropriations
committed after the reduction in salary. [Section 133, Indian Contract Act, 1872].
Q.5 A contracts with B for a fixed price to construct a house for B within a stipulated time. B would supply the
necessary material to be used in the construction. C guarantees A’s performance of the contract. B does
not supply the material as per the agreement. Is C discharged from his liability.
Ans.
According to Section 134 of the Indian Contract Act, 1872, the surety is discharged by any contract between
the creditor and the principal debtor, by which the principal debtor is released or by any act or omission for the
creditor, the legal consequence of which is the discharge of the principal debtor. In the given case the B omits to
supply the timber. Hence C is discharged from his liability.

Unit - 2
Section 150 Bailor’s duty to disclose faults in goods bailed
Section 151 Care to be taken by bailee
Section 152 Bailee when not liable for loss, etc., of thing bailed
Section 153 Termination of bailment by bailee’s act inconsistent with conditions
Section 154 Liability of bailee making unauthorised use of goods bailed
Section 155 Effect of mixture, with bailor’s consent, of his goods with bailee’s
Section 156 Effect of mixture, without bailor’s consent, when the goods can be separated
Section 157 Effect of mixture, without bailor’s consent, when the goods cannot be separated
Section 158 Repayment by bailor of necessary expenses
Section 160 Return of goods bailed on expiration of time or accomplishment of purpose
Section 161 Bailee’s responsibility when goods are not duly returned
Section 163 Bailor entitled to increase or profit from goods balled
Section 164 Bailor’s responsibility to bailee
Section 165 Bailment by several joint owners
Section 167 Right of third person claiming goods bailed
Section 168 Right of finder of lost goods; may sue for specific reward offered
Section 169 When finder of thing commonly on sale may sell it
Section 170 Bailee’s particular lien
Section 172 Pledge, pawnor and pawnee
Section 173 Right of retainer
Section 174 Right to retention of subsequent debts
Section 175 Pawnee’s right as to extraordinary expenses Incurred
Section 176 Pawnee’s right where pawnor makes default
Section 177 Right to redeem
Section 178A Pledge by person in possession under voidable contract
Section 179 Pledge where pawnor has only a limited interest
Section 178 Pledge by mercantile agents
Section 179 Pledge where pawnor has only a limited interest
Section 180 Suit by bailor & bailee against wrong doers
Section 181 Apportionment of relief or compensation obtained by such suits

Bailment and Pledge
(Section 148-181)
Bailment Pledge Distinction between

(Section 148-171) (Section 172-181) bailment and pledge
Duties & Duties & Finder of General lien Pawnee Pawor Pledge by
Rights of Rights of Goods and particular Rights Rights Mercantile
Bailor Bailee lien Agent
As per Section 148 of the Act, bailment is the delivery of goods by one person to another for some purpose,
upon a contract, that the goods shall, when the purpose is accomplished, be returned or otherwise disposed of
according to the directions of the person delivering them. The person delivering the goods is called the “bailor”.
The person to whom they are delivered is called the “bailee”.
Example : Where ‘X’ delivers his car for repair to ‘Y’, ‘X’ is the bailor and ‘Y’ is the bailee.
Explanation :
The essential characteristics of bailment are—
(a) Bailment is based upon a contract. Sometimes it could be implied by law as it happens in the case of finder
of lost goods.
(b) It involves the delivery of goods from one person to another for some purposes.
(c) Delivery involves change of possession from one person to another, and not change of ownership. In
bailment, bailor continues to be the owner of goods as there is no change of ownership.
(d) Bailment is only for moveable goods and never for immovable goods or money.
(e) In bailment, possession of goods changes. Change of possession can happen by physical delivery or by
any action which has the effect of placing the goods in the possession of bailee.
(f) Bailee is obliged to return the goods physically to the bailor. The bailee cannot deliver some other goods,
even not those of higher value.
Deposit of money in a bank is not bailment since the money returned by the bank would not be identical currency
notes.
Similarly depositing ornaments in a bank locker is not bailment, because ornaments are kept in a locker whose
key are still with the owner and not with the bank. The ornaments are in possession of the owner though kept in
a locker at the bank.
Different forms of Bailment : Following are the popular forms of bailment
(1) Delivery of goods by one person to another to be held for the bailor’s use.
(2) Goods given to a friend for his own use without any charge.

(3) Hiring of goods.
(4) Delivering goods to a creditor to serve as security for a loan.
(5) Delivering goods for repair with or without remuneration.
(6) Delivering goods for carriage.
Duties of Bailor : The duties of bailor are spelt out in a number of Sections. These are categorized under the
following headings :
Ø Disclose known facts

Ø Bear necessary expenses
Duties of Bailor
Ø Indemnify bailee
Ø Bound to accept the goods
These are enumerated hereunder :

(i) Bailor’s duty to disclose faults in goods bailed [Section 150] : The bailor is bound to disclose to the
bailee faults in the goods bailed, of which the bailor is aware, and which materially interfere with the use of
them, or expose the bailee to extraordinary risks; and if he does not make such disclosure, he is responsible
for damage arising to the bailee directly from such faults.
If the goods are bailed for hire, the bailor is responsible for such damage, whether he was or was not aware of
the existence of such faults in the goods bailed.
Example 1 : A lends a horse, which he knows to be vicious, to B. He does not disclose the fact that the horse is
vicious. The horse runs away. B is thrown and injured. A is responsible to B for damage sustained.
Example 2 : A hires a carriage of B. The carriage is unsafe, though B is not aware of it, and A is injured. B is
responsible to A for the injury.
(ii) Repayment by bailor of necessary expenses [Section 158] : Where, by the conditions of the bailment,
the goods are to be kept or to be carried, or to have work done upon them by the bailee for the bailor, and
the bailee is to receive no remuneration, the bailor shall repay to the bailee the necessary expenses incurred
by him for the purpose of the bailment.
(iii) Bailor’s responsibility to bailee [Section 164] : The bailor is responsible to the bailee for any loss which
the bailee may sustain by reason that the bailor was not entitled to make the bailment, or to receive back the
goods or to give directions, respecting them.
(iv) where the bailment is gratuitous, the bailor must reimburse the bailee for any expenditure incurred in keeping
the goods.
(v) the bailor should reimburse any expense which the bailee may incur by way of loss in the process of
returning the goods or complying with other directions for returning the goods.
(vi) the bailor must compensate the bailee for the loss or damage suffered by the bailee that is in excess of the
benefit received, where he had lent the goods gratuitously and decides to terminate the bailment before the
expiry of the period of bailment.

(vii) The bailor is bound to accept the goods after the purpose is accomplished. If bailor fails, he is responsible
for any loss or damage to the goods and has to reimburse for expenses incurred by the bailee for keeping
the goods safely.
Rights of Bailor : Broadly rights of bailor can be categorized as under :
Right to enforce the duties of the bailee and claim for damages
Right to terminate the contract
Right to demand the goods back
Right to claim the increase/ profits
The following are the rights of bailor :

(i) Liability of bailee making unauthorised use of goods bailed [Section 154]: If the bailee makes any
use of the goods bailed, which is not according to the conditions of the bailment, he is liable to make
compensation to the bailor for any damage arising to the goods from or during such use of them.
Example 1 : A lends a horse to B for his own riding only. B allows C, a member of his family, to ride the horse. C
rides with care, but the horse accidentally falls and is injured. B is liable to make compensation to A for the injury
done to the horse.
Example 2 : A hires a horse in Calcutta from B expressly to march to Benares. A rides with due care, but
marches to Cuttack instead. The horse accidentally falls and is injured. A is liable to make compensation to B for
the injury to the horse.
(ii) Effect of mixture, with bailor’s consent, of his goods with bailee’s [Section 155] : If the bailee, with the
consent of the bailor, mixes the goods of the bailor with his own goods, the bailor and the bailee shall have
an interest, in proportion to their respective shares, in the mixture thus produced.
(iii) Effect of mixture, without bailor’s consent, when the goods can be separated [Section 156] : If the
bailee, without the consent of the bailor, mixes the goods of the bailor with his own goods, and the goods
can be separated or divided, the property in the goods remains in the parties respectively; but the bailee is
bound to bear the expenses of separation or division, and any damage arising from the mixture.
Example : A bails 100 bales of cotton marked with a particular mark to B. B, without A’s consent, mixes the 100
bales with other bales of his own, bearing a different mark; A is entitled to have his 100 bales returned, and B is
bound to bear all the expenses incurred in the separation of the bales, and any other incidental damage.
(iv) Effect of mixture, without bailor’s consent, when the goods cannot be separated [Section 157] : If the
bailee, without the consent of the bailor, mixes the goods of the bailor with his own goods, in such a manner
that it is impossible to separate the goods bailed from the other goods and deliver them back, the bailor is
entitled to be compensated by the bailee for the loss of the goods.
Example : A bails a barrel of Cape flour worth `45 to B. B, without A’s consent, mixes the flour with country flour
of his own, worth only ` 25 a barrel. B must compensate A for the loss of his flour.

(v) Termination of bailment by bailee’s act inconsistent with conditions [Section 153] : A contract of
bailment is voidable at the option of the bailor, if the bailee does any act with regard to the goods bailed,
inconsistent with the conditions of the bailment.
Example : A lets to B, for hire, a horse for his own riding. B drives the horse in his carriage. This is, at the option
of A, a termination of the bailment.
Termination of bailment may take place in the following circumstances :
Act done inconsistent with the condition of bailment
Period of bailment expires
Demand for return of goods
Death of bailee
(vi) Bailor entitled to increase or profit from goods balled [Section 163] : In the absence of any contract to
the contrary, the bailee is bound to deliver to the bailor, or according to his directions, any increase or profit
which may have accrued from the goods bailed.
Example : A leaves a cow in the custody of B to be taken care of. The cow has a calf, B is bound to deliver the
calf as well as the cow to A.
(vii) Gratuitous bailment : Bailor in the case of gratuitous bailment has a right to demand the goods back even
before the expiry of the period of bailment. If in the process, loss is caused to the bailee, bailor is bound to
compensate.
Care to be taken by Bailee
Care to be taken by bailee [Section 151] : In all cases of bailment, the bailee is bound to take as much care
of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own
goods of the same bulk, quality and value as the goods bailed.
Example : If X bails his ornaments to ‘Y’ and ‘Y’ keeps these ornaments in his own locker at his house along with
his own ornaments and if all the ornaments are lost/ stolen in a riot ‘Y’ will not be responsible for the loss to ‘X’.
If on the other hand ‘X’ specifically instructs ‘Y’ to keep them in a bank, but ‘Y’ keeps them at his residence, then
‘Y’ would be responsible for the loss [caused on account of riot].
Bailee when not liable for loss, etc., of thing bailed [Section 152] : The bailee, in the absence of any special
contract, is not responsible for the loss, destruction or deterioration of the thing bailed, if he has taken the amount
of care of it described in section 151.

Duties and rights of a Bailee
In addition to the two important duties of having to take care of the goods bailed and being responsible for loss
or injury or damage to goods, bailee has other following duties under the Act.
Take care of goods bailed
No unauthorized use of goods
No mixing of bailor's goods with his own
Return the goods
To return any extra profit accruing from goods bailed
(i) No unauthorized use of goods : Bailee has no right to make unauthorized use of goods bailed.
(ii) No right to mix the goods bailed : Bailee has no right to mix the goods bailed with his own goods without
the consent of the bailor.
(iii) Return of goods bailed on expiration of time or accomplishment of purpose [Section 160] : It is the
duty of bailee to return, or deliver according to the bailor’s directions, the goods bailed without demand, as
soon as the time for which they were bailed, has expired, or the purpo.se for which they were bailed has
been accomplished.
(iv) Bailee’s responsibility when goods are not duly returned [Section 161] : If, by the default of the bailee,
the goods are not returned, delivered or tendered at the proper time, he is responsible to the bailor for any
loss, destruction or deterioration of the goods from that time.
(v) Bailment by several joint owners [Section 165] : If several joint owners of goods bail them, the bailee
may deliver them back to, or according to the directions of, one joint owner without the consent of all, in the
absence of any agreement to the contrary.
(vi) Bailee has a duty to return any extra profit accruing from goods bailed. Where A bails his cow to ‘B’ and if
the cow gives birth to a calf, ‘B’ must return both the cow and the calf to ‘A’
Rights of bailee : The bailee has the following rights [These rights are also the duties of the bailor]—
Compensation for loss arising from non-disclosure of defects
Claim of indemnification for loss/damage due to defective title
Return the goods
Bailee's right to lien

Action against third parties
No responsibility for delivery of goods
(i) to claim compensation for any loss arising from non-dislosure of known defects in the goods.
(ii) to claim indemnification for any loss or damage as a result of defective title.
(iii) to deliver back the goods to joint bailors according to the agreement or directions.
(iv) If the bailor has no title to the goods, and the bailee, in good faith, delivers them back to, or according to
the directions of, the bailor, the bailee is not responsible to the owner in respect of such delivery. (Section
166)
(v) to exercise his ‘right of lien’. This right of lien is a right to retain the goods and is exercisable where charges
due in respect of goods retained have not been paid. The right of lien is a particular lien for the reason that
the bailee can retain only these goods for which the bailee has to receive his fees/remuneration.
(vi) to take action against third parties if that party wrongfully denies the bailee of his right to use the goods
Suit by bailor & bailee against wrong doers [Section 180] : If a third person wrongfully deprives the bailee of
the use or possession of the goods bailed, or does them any injury, the bailee is entitled to use such remedies
as the owner might have used in the like case if no bailment had been made; and either the bailor or the bailee
may bring a suit against a third person for such deprivation or injury.
Apportionment of relief or compensation obtained by such suits [Section 181] : Whatever is obtained by
way of relief or compensation in any such suit shall, as between the bailor and the bailee, be dealt with according
to their respective interests.
Right of third person claiming goods bailed [Section 167]
If a person, other than the bailor, claims goods bailed, he may apply to the Court to stop the delivery of the goods
to the bailor, and to decide the title to the goods.
Finder of lost goods
Right of finder of lost goods; may sue for specific reward offered [Section 168] : The finder of goods has
no right to sue the owner for compensation for trouble and expense voluntarily incurred by him to preserve
the goods and to find out the owner; but he may retain the goods against the owner until he receives such
compensation; and, where the owner has offered a specific reward for the return of goods lost, the finder may
sue for such reward, and may retain the goods until he receives it.
Explanation : The ‘finder of lost goods’ can ask for reimbursement for expenditure incurred for preserving the
goods but also for searching the true owner. If the real owner refuses to pay compensation, the ‘finder’ cannot
sue but retain the goods so found. Further where the real owner has announced any reward, the finder is entitled
to receive the reward. The right to collect the reward is a primary and a superior right even more than the right to
seek reimbursement of expenditure.
When finder of thing commonly on sale may sell it [Section 169] : When a thing which is commonly the

subject of sale if lost, if the owner cannot with reasonable diligence be found, or if he refuses, upon demand, to
pay the lawful charges of the finder, the finder may sell it—
(1) when the thing is in danger of perishing or of losing the greater part of its value, or
(2) when the lawful charges of the finder in respect of the thing found amount to two-thirds of its value.
Explanation : The finder though has no right to sell the goods found in the normal course, he may sell the goods
if the real owner cannot be found with reasonable efforts or if the owner refuses to pay the lawful charges subject
to the following conditions:
(a) when the article is in danger of perishing and losing the greater part of the value or
(b) when the lawful charges of the finder amounts to two-third or more of the value of the article found.
General lien and Particular lien
Bailee’s particular lien [Section 170] : Where the bailee has, in accordance with the purpose of the bailment,
rendered any service involving the exercise of labour or skill in respect of the goods bailed, he has, in the
absence of a contract to the contrary, a right to retain such goods until he receives due remuneration for the
services he has rendered in respect of them.
Example 1 : A delivers a rough diamond to B, a jeweller, to be cut and polished, which is accordingly done. B is
entitled to retain the stone till he is paid for the services he has rendered.
Example 2 : A gives cloth to B, a tailor, to make into a coat. B promises A to deliver the coat as soon as it is
finished, and to give a three months’ credit for the price. B is not entitled to retain the coat until he is paid.
Analysis : In accordance with the purpose of bailment if the bailee by his skill or labour improves the goods
bailed, he is entitled for remuneration for such services. Towards such remuneration, the bailee can retain the
goods bailed if the bailor refuses to pay the remuneration. Such a right to retain the goods bailed is the right of
particular lien. He however does not have the right to sue.
Where the bailee delivers the goods without receiving his remuneration, he has a right to sue the bailor. In such
a case the particular lien may be waived. The particular lien is also lost if the bailee does not complete the work
within the time agreed.
General lien of bankers, factors, wharfingers, attorneys and policy brokers [Section 171] : Bankers, factors,
wharfingers, attorneys of a High Court and policy brokers may, in the absence of a contract to the contrary, retain,
as a security for a general balance of account any goods bailed to them; but no other persons have a right to
retain, as a security for such balance, goods bailed to them, unless there is an express contract to the effect.
Explanation : Bankers, factors, wharfingers, policy brokers and attorneys of law have a general lien in respect
of goods which come into their possession during the course of their profession.
For instance a banker enjoys the right of a general lien on cash, cheques, bills of exchange and securities
deposited with him for any amounts due to him. For instance ‘A’ borrows `500/- from the bank without security
and subsequently again borrows another `1000/- but with security of say certain jewellery. In this illustration,
even where ‘A’ has returned `1000/- being the second loan, the banker can retain the jewellery given as security
to the second loan towards the first loan which is yet to be repaid.
Under the right of general lien the goods cannot be sold but can only be retained for dues. The right of lien can
be waived through a contract.

Differences between General and Particular Lien
Basis General lien Particular lien

1. Right It is a right to detain/retain any goods of the bailor It is a right exercisable only on such goods
for general balance of account outstanding in respect of which charges are due.
2. Automatic A general lien is not automatic but is recognized It is automatic
through on agreement. It is exercised by the
bailee only by name
3. Labour or It can be exercised against goods even without It comes into play only when some labour or
Skill involvement of labour or skill. skill is involved
4. Example Bankers, factors, wharfingers, policy brokers Bailee, finder of goods, pledgee, unpaid
etc. are entitled to general lien seller, agent, partner etc are entitled to
particular lien
Pledge
“Pledge”, “pawnor” and “pawnee” defined [Section 172] : The bailment of goods as security for payment of
a debt or performance of a promise is called “pledge”. The bailor is in this case called the “pawnor”. The bailee
is called the “pawnee”.
Explanation : Pledge is a variety or specie of bailment. It is bailment of goods as security for payment of debt
or performance of a promise. The person who pledges[or bails] is known as pledgor or also as pawnor, the
bailee is known as pledgee or also as pawnee. In pledge, there is no change in ownership of the property. Under
exceptional circumstances, the pledgee has a right to sell the property pledged. Section 172 to 182 of the Indian
Contract Act,1872 deal specifically with the bailment of pledge.
Example : A lends money to B against the security of jewellery deposited by B with him i.e. A. This bailment of
jewellery is a pledge as security for lending the money. B is a pawnor and the A is a pawnee.
There must be bailment for security for payment of

debt/ performance of a promise
Elements of Pledge
Goods must be the subject matter of the contract

of pledge.
The goods pledged must be in existence
There must be a delivery of goods from pawnor to

pawnee
Pawnee’s rights : Rights of Pawnee can be classified as under the following headings :
(a) Right of retainer [Section 173] : The pawnee may retain the goods pledged, not only for payment of the
debt or the performance of the promise, but for the interest, of the debt, and all necessary expenses incurred
by him in respect of the possession or for the preservation of the goods pledged.

Example : Where ‘M’ pledges stock of goods for certain loan from a bank, the bank has a right to retain the stock
not only for adjustment of the loan but also for payment of interest.
(b) Right to retention of subsequent debts [Section 174] : Pawnee has a right to retain the goods pledged
towards subsequent advances as well, however subject to such right being specifically contemplated in the
contract.
(c) Pawnee’s right as to extraordinary expenses Incurred [Section 175] : The pawnee is entitled to receive
from the pawnor extraordinary expenses incurred by him for the preservation of the goods pledged.
(d) Pawnee’s right where pawnor makes default [Section 176] : If the pawnor makes default in payment of
the debt, or performance, at the stipulated time of the promise, in respect of which the goods were pledged,
the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as
a collateral security; or he may sell the thing pledged on giving the pawn or reasonable notice of the sale.
If the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor is
still liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the pawnee
shall pay over the surplus to the pawnor.
(e) Pledge by person in possession under voidable contract [Section 178A] : When the pawnor has
obtained possession of the goods pledged by him under a contract voidable under section 19 or section
19A, but the contract has not been rescinded at the time of the pledge, the pawnee acquires a good title to
the goods, provided he acts in good faith and without notice of the pawnor’s defect of title.
Rights of a pawnor
Ø Right to redeem
Rights of pawnor
Ø limited interest
(a) Right to redeem [Section 177] : If a time is stipulated for the payment of the debt, or performance of the
promise, for which the pledge is made, and the pawnor makes default in payment of the debt or performance
of the promise at the stipulated time, he may redeem the goods pledged at any subsequent time before the
actual sale of them; but he must, in that case, pay, in addition, any expenses which have arisen from his
default.
(b) Pledge where pawnor has only a limited interest [Section 179] : Where a person pledges goods in
which he has only a limited interest, the pledge is valid to the extent of that interest.
Pledge by mercantile agents [Section 178]
Where a mercantile agent is, with the consent of the owner, in possession of goods or the documents of title
to goods, any pledge made by him, when acting in the ordinary course of business of a mercantile agent, shall
be as valid as if he were expressly authorised by the owner of the goods to make the same; provided that the
pawnee acts in good faith and has not at the time of the pledge notice that the Pawnor has no authority to pledge.
Explanation : In this section, the expressions ‘mercantile agent and documents of title’ shall have the meanings
assigned to them in the Sale of Goods Act, 1930.
Analysis : Though generally only a owner of goods can pledge, the Act recognizes the right of certain mercantile
agents to pledge provided it is done with the consent of the owner of the goods. Such a pledge done in the
ordinary course of business is valid. Pledge in this case can be effected through pledge of documents like a bill
of lading or a railway receipt etc.

Distinction between Pledge and Bailment
Basis Pledge Bailment

(a) As to purpose Pledge is a kind of bailment. Under pledge In regular bailment, goods are bailed
goods are bailed as a security for a loan or for purposes other than the two referred
a performance of a promise. above. The bailee takes them for repairs,
safe custody etc.
(b) As to right of sale The pledgee enjoys the right to sell only In bailment, the bailee, generally, cannot
on default by the pledgor to repay the debt sell the goods. He can either retain or sue
or perform his promise, that too only after for non-payment of dues.
giving due notice.
(c) As to right of Pledgee has a right to use goods. A bailee can, if the terms so provide, use
using goods the goods.
(d) Consideration In pledge there is always a consideration In bailment there may or may not be
consideration.
(e) Discharge of Pledge is discharged on the payment of Bailment is discharged when the purpose
contract debt or performance of promise is accomplished or after a specified time.
(f) Return of goods Pledgee is not bound to return the goods In case of gratuitous bailment, the bailee is
on demand delivered as security on demand by bailor bound to return the goods on demand by
unless and until the debt is repaid or the bailor.
promise is performed.
Q.1 Examine whether the following constitute a contract of ‘Bailment’ under the provisions of the Indian Contract
Act, 1872 :
(i) V parks his car at a parking lot, locks it, and keeps the keys with himself.
(ii) Seizure of goods by customs authorities.
Ans.
(i) No. Mere custody of goods does not mean possession. For a bailment to exist the bailor must give possession
of the bailed property and the bailee must accept it, Section 148, of the Indian Contract Act, 1872 is not
applicable.
(ii) Yes, the possession of the goods is transferred to the custom authorities. Therefore bailment exists and
section 148 is applicable.
Q.2 A hires a carriage of B and agrees to pay `500 as hire charges. The carriage is unsafe, though B is
unaware of it. A is injured and claims compensation for injuries suffered by him. B refuses to pay. Discuss
the liability of B.
Ans.
Problem asked in the question is based on the provisions of the Indian Contract Act, 1872 as contained in
Section 150. The section provides that if the goods are bailed for hire, the bailor is responsible for such damage,
whether he was or was not aware of the existence of such faults in the goods bailed. Accordingly, applying the
above provisions in the given case B is responsible to compensate A for the injuries sustained even if he was not
aware of the defect in the carriage.

Q.3 A bails his jewelry with B on the condition to safeguard in bank’s safe locker. However, B kept in safe locker
at his residents, where he usually keeps his own jewelry. After a month all jewelry was lost in a religious
riot. A filed a suit against B for recovery. Referring to provisions of the Indian Contract Act, 1872, state
whether A will succeed.
Ans.
Referring to the Section 152 of the Indian Contract Act, 1872, B is liable to compensate A for his negligence to
keep jewelry at his resident. Here, A and B agreed to keep the jewelry at the Bank’s safe locker and not at the
latter’s residence.
Q.4 R gives his umbrella to M during raining season to be used for two days during Examinations. M keeps the
umbrella for a week. While going to R’s house to return the umbrella, M accidently slips and the umbrella
is badly damaged. Who bear the loss and why?
Ans.
M shall have to bear the loss since he failed to return the umbrella within the stipulated time and Section 161
clearly says that where a bailee fails to return the goods within the agreed time, he shall be responsible to
the bailor for any loss, destruction or deterioration of the goods from that time notwithstanding the exercise of
reasonable care on his part.
Q.5 State the essential elements of a contract of bailment. Distinguish between the ‘contract of bailment’ and
‘contract of pledge’.

Unit - 3
Section 182 Principal
Section 184 Contract Act
Section 186 The authority may be express or implied
Section 187 Express and implied authority
Section 188 Agent’s authority in normal circumstances
Section 189 Agent’s authority in an emergency
Section 190 When agent cannot delegate
Section 191 Sub-agent
Section 192 Representation of principal by sub-agent properly appointed
Section 193 Agent’s responsibility for sub-agent appointed without authority
Section 194 Relation between principal and person duly appointed by agent to act in business of agency
Section 196 Rights of person as to acts done for him without his authority, Effect of ratification
Section 197 Ratification may be expressed or Implied
Section 198 Knowledge requisite for valid ratification
Section 199 Effect of ratifying unauthorized act forming part of a transaction
Section 200 Ratification of unauthorized act cannot injure third person
Section 202 Termination of agency, where agent has an interest in subject-matter
Section 203 When principal may revoke agent’s authority
Section 204 Revocation where authority has been partly exercised
Section 205 Compensation for revocation by principal, or renunciation by agent
Section 206 Notice of revocation or renunciation
Section 207 Revocation and renunciation may be expressed or implied
Section 208 When termination of agent’s authority takes effect as to agent, and as to third persons
Section 209 Agent’s duty on termination of agency by principal’s death or insanity
Section 210 Termination of sub-agent’s authority
Section 227 Principal not bound, when agent exceeds authority
Section 228 Principal not bound when excess of agent’s authority is not separable
Section 229 Consequences of notice given to agent
Section 230 Agent cannot personally enforce, nor be bound by, contracts on behalf of principal
Section 231 Rights of parties to a contract made by agent not disclosed
Section 232 Performance of contract with agent supposed to be principal
Section 233 Right of person dealing with agent personally liable
Section 234 Consequence of inducing agent or principal to act on belief that principal or agent will be held
exclusively liable
Section 235 Liability of pretended agent
Section 236 Person falsely contracting agent not entitled to performance
Section 237 Liability of principal inducing belief that agent’s unauthorized acts were authorized
Section 238 Effect,on agreement, of misrepresentation or fraud by agent

Agency
(Section 182-238)
Revocation Duties, Obligations Effect of agency on

Meaning Sub agents Ratification
of Authority and Rights of Agent contract with third persons
Appointment Authority
Definition
The Indian Contract Act,1872 does not define the word ‘Agency’. However the word ‘Agent’ is defined as “a
person employed to do any act for another or to represent another in dealings with third persons”. The person for
whom the act is done or who is so represented is called “Principal”. [Section 182]
Test of Agency
(a) Whether the person has the capacity to bind the principal and make him answerable to the third party.
(b) Whether he can establish Privity of Contract between the principal and third parties.
The Rule of Agency is based on the maxim “Quit facit per alium, facit per se” i.e., he who acts through an agent
is himself acting.
Appointment and Authority of agents
Who may employ agent : According to Section 183, “any person who is of the age of majority according to
the law to which he is subject, and who is of sound mind, may employ an agent.” Thus a minor or a person of
unsound mind cannot appoint an agent.
Person qualified to Ø Major

appoint agent must be Ø Sound mind
Who may be an agent : Section 184 provides that “as between the principal and third persons any person may
become an agent, but no person who is not of the age of majority and of sound mind can become an agent, so
as to be responsible to his principal according to the provisions in that behalf herein contained.
Section 184 of the Contract Act provides that any person may become an agent. In other words, even a minor
can become an agent and the principal can be bound by his acts.
Since, agent is a mere connecting link between the principal and the third party, it is immaterial whether or not the
agent is legally competent to contract. Thus, there is no bar to the appointment of a minor as an agent. However,
in considering the contract of agency itself (i.e. the relation between principal and agent), the contractual capacity
of the agent becomes important.

Thus, if the agent happens to be a person incapable of contracting, then the principal cannot hold the agent
liable, in case of his misconduct or where the agent has been negligent in performance of his duties.
Example :
P appoints Q, a minor, to sell his car for not less than `2,50,000. Q sells it for `2,00,000. P will be held bound by
the transaction and further shall have no right against Q for claiming the compensation for having not obeyed the
instructions, since Q is a minor and a contract with a minor is ‘void-ab-initio’.
Consideration not necessary : According to Section 185, no consideration is necessary to create an agency.
The acceptance of the office of an agent is regarded as a sufficient consideration for the appointment.
Creation of Agency
Agent's authority may be created

by-
Express agreement Implied agreement Ratification

[Section 196-187] [Section 187] [Section 196-200]
Words Spoken Written In ordinary Express Implied

Inferred from things spoken
course
circumstances or written
of dealing
The authority may be express or implied : According to Section 186, the authority of an agent may be express
or implied.
Definitions of express and implied authority [Section 187]
Express Authority : An authority is said to be express when it is given by words, spoken or written.
Example : A is residing in Delhi and he has a house in Kolkata. A appoints B by a deed called the power of
attorney, as a caretaker of his house. Agency is created by express agreement.
Implied Authority : An authority is said to be implied when it is to be inferred from the circumstances of the case;
and things spoken or written, or the ordinary course of dealing, may be accounted circumstances of the case.
Example 1 : If a person realises rent and gives it to the landlord, he impliedly acts for the landlord as an agent.
Extent of agent’s authority
The extent of an agent’s authority, whether expressed or implied is determined by :

(a) The nature of the act or the business he is appointed to do
(b) Things which are incidental to the business or are usually done in the course of such business,
(c) The usage of trade or business.

Whatever be the nature or extent of the agent is authority, it will always include the authority to do :
(1) Every lawful thing necessary for the purpose of carrying it out,
(2) Every lawful thing justified by various customs of trades,
(3) In an emergency, all such acts for the purpose of protecting the principal from loss as will be done by a
person of ordinary prudence in his own case under similar circumstances.
The agent’s authority is governed by two principles, namely (a) in normal circumstances and (b) in emergency.
(a) Agent’s authority in normal circumstances [Section 188] : An agent having an authority to do an act has
authority to do every lawful thing which is necessary in order to do such act.
An agent having an authority to carry on a business has authority to do every lawful thing necessary for the
purpose, or usually done in the course, of conducting such business.
Example 1 : A is employed by B, residing in London, to recover at Mumbai a debt due to B. A may adopt any
legal process necessary for the purpose of recovering the debt, and may give a valid discharge for the same.
Example 2 : A constitutes B as his agent to carry on his business of a shipbuilder. B may purchase timber and
other materials, and hire workmen, for the purposes of carrying on the business.
(b) Agent’s authority in an emergency [Section 189] : An agent has authority, in an emergency, to do all such
acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence,
in his own case, under similar circumstances.
To constitute a valid agency in an emergency, following conditions must be satisfied.
(i) Agent should not be a in a position or have any opportunity to communicate with his principal within the time
available.
(ii) There should have been actual and definite commercial necessity for the agent to act promptly.
(iii) the agent should have acted bonafide and for the benefit of the principal.
(iv) the agent should have adopted the most reasonable and practicable course under the circumstances, and
(v) the agent must have been in possession of the goods belonging to his principal and which are the subject
of contract.
Example 1 : An agent for sale may have goods repaired if it be necessary.
Example 2 : A consigns provisions to B at Kolkata, with directions to send them immediately to C at Cuttack. B
may sell the provisions at Kolkata, if they will not bear the journey to Cuttack without spoiling.
Sub-Agents
When agent cannot delegate [Section 190] : An agent cannot lawfully employ another to perform acts which
he has expressly or impliedly undertaken to perform personally, unless by the ordinary custom of trade a sub-
agent may, or from the nature of the agency, a sub-agent must, be employed.
“Sub-agent” defined [Section 191] : A “Sub-agent” is a person employed by, and acting under the control of,
the original agent in the business of the agency.
Explanation : Sub agency refers to case where an agent appoints another agent. The appointment of sub agent

is not lawful, because the agent is a delegatee and a delegatee cannot further delegate. This is based on the
Latin principle “delegatus non potest delegare”.
A contract of agency is of a fiduciary character. It is based on the confidence reposed
by the principal in the agent and that is why a delegatee cannot further delegate.
Exception where an agent can appoint Sub-agent :
(1) The appointment of a sub agent would be valid if the terms of appointment originally contemplated it.
(2) Sometimes customs of the trade may provide for appointment of sub agents. In both these cases the sub
agent would be treated as the agent of the principal.
(3) Where in the course of the agent’s employment, unforeseen emergency arise which make it necessary for
him to delegate authority.
Representation of principal by sub-agent properly appointed [Section 192] : Where a sub-agent is properly
appointed,
(1) The principal is, so far as regards third persons, represented by the sub-agent, and is bound by and
responsible for his acts as if he were an agent originally appointed by the principal.
(2) Agents responsibility for sub agents : The agent is responsible to the principal for the acts of the sub-
agent.
(3) Sub-agents responsibility : The sub-agent is responsible for his acts to the agent, but not to the principal,
except in case of fraud or wilful wrong.
Agent’s responsibility for sub-agent appointed without authority [Section 193] : Where an agent, without
having authority to do so, has appointed a person to act as a sub-agent,
(1) The agent stands towards such person in the relation of a principal to an agent, and is responsible for his
acts both to the principal and to third persons;
(2) The principal is not represented by or responsible for the acts of the sub agent, the sub agent is not
responsible to the principal at all. He is answerable only to the agent.
Explanation :
(a) Where the sub-agent is properly appointed : Where a sub agent is properly appointed, the principal is
bound by his acts and is therefore responsible to third parties as if he were an agent originally appointed by
the principal.
Example : A, a carrier, agreed to carry 60 bags of cotton waste from Morvi to Bhavnagar by a truck. A asked B,
another carrier, to carry the goods. The goods were damaged in transit. Held, A was liable even though it was
proved that B was the carrier.
(b) In the case of appointment without authority : In case where the appointment of sub agent takes place
without authority, the principal is not bound by the acts of sub agent and sub agent is not bound to the
principal. It is the agent who is the principal of sub agent. Where the sub-agent purportedly acts in the name
of first principal, that first principal may ratify the act of sub agent. However if the sub agent acts in his own
name or in the name of the agent who has without authority delegated to the sub agent the business which
is in fact of the principal, the principal cannot ratify such acts of sub agent.

Substituted Agent
Substituted Agent is a person appointed by the agent to act for the principal, in the business of agency, with the
knowledge and consent of the principal.
Substituted agents are not sub agents. They are agents of the principal. Where the principal appoints an agent
and if that agent identifies another person to carry out the acts ordered by principal, then the second person is
not to be treated as a sub agent but only as an agent of the original principal.
Relation between principal and person duly appointed by agent to act in business of agency [Section
194] : Where an agent, holding an express or implied authority to name another person to act for the principal in
the business of the agency, has named another person accordingly, such person is not a sub-agent, but an agent
of the principal for such part of the business of the agency as is entrusted to him.
Example 1 :
A directs B, his solicitor, to sell his estate by auction, and to employ an auctioneer for the purpose. B names C,
an auctioneer, to conduct the sale.C is not a sub-agent, but is A’s agent for the conduct of the sale.
Example 2 :
A authorizes B, a merchant in Kolkata, to recover the moneys due to A from C & Co. B instructs D, a solicitor, to
take legal proceedings against C &Co. for the recovery of the money. D is not a sub-agent, but is a solicitor for A.
Agent’s duty in naming such person [Section 195] : In selecting such agent for his principal, an agent is bound
to exercise the same amount of discretion as a man of ordinary prudence would exercise in his own case; and,
if he does this, he is not responsible to the principal for the acts or negligence of the agent so selected.
Explanation :
While selecting a “substituted agent” the agent is bound to exercise same amount of diligence as a man of
ordinary prudence and if he does so he will not be responsible for acts or negligence of the substituted agent.
Example 1 :
A instructs B, a merchant, to buy a ship for him. B employs a ship surveyor of good reputation to choose a ship
for A. The surveyor makes the choice negligently and the ship turns out to be unseaworthy and is lost. B is not,
but the surveyor is, responsible to A.
Example 2 :
A consigns goods to B, a merchant, for sale B, in due course, employs an auctioneer in good credit to sell the
goods of A, and allows the auctioneer to receive the proceeds of the sale. The auctioneer afterwards becomes
insolvent without having accounted for the proceeds. B is not responsible to A for the proceeds.

Difference between a Sub-agent and a Substituted agent
Sub-agent Substituted
A sub-agent does his work under the control of agent Substituted agent works under the instructions of the
principal.
The agent not only appoints a sub-agent but also The agent does not delegate any part of his task to a
delegates to him a part of his own duties. substituted agent.
There is no privity of contract between the principal Privity of contract is established between a principal and
and the sub-agent. a substituted agent.
The sub-agent is responsible to the agent alone and A substituted agent is responsible to the principal and
is not generally responsible to the principal. not to the original agent who appointed him.
The agent is responsible to the principal for the acts He is not liable for those of the substituted agent,
of the sub-agent. provided he has taken due care in selecting him.
in the case of a sub-agent the agent remains In the case of a substituted agent, the agent’s duty ends
answerable for the acts of the sub-agent as long as once he has named him,
sub-agency continues.
Ratification
Rights of person as to acts done for him without his authority, Effect of ratification [Section 196] : Where
acts are done by one person on behalf of another, but without his knowledge or authority, he may elect to ratify or
to disown such acts. If he ratifies them, the same effects will follow as if they had been performed by his authority.
Essentials of a valid Ratification
1. Ratification may be expressed or Implied [Section 197] : Ratification may be expressed or may be
implied in the conduct of the person on whose behalf the acts are done.
Example 1 :
A, without authority, buys goods for B. Afterwards B sells them to C on his own account; B’s conduct implies a
ratification of the purchase made for him by A.
Example 2 :
A, without B’s authority, lends B’s money to C. Afterwards B accepts interests on the money from C. B’s conduct
implies a ratification of the loan.
2. Knowledge requisite for valid ratification [Section 198] : No valid ratification can be made by a person
whose knowledge of the facts of the case is materially defective.
Example : A has an authority from P to buy certain goods at the market rate. He buys at a higher rate but P
accepts the purchase. Afterwards P comes to know that the goods purchased by A for P belonged to A himself.
The ratification is not binding on P.
If however the alleged principal is prepared to take the risk of what the purported agent has done, he can choose
to ratify without full knowledge of facts.
3. Effect of ratifying unauthorized act forming part of a transaction [Section 199] : A person ratifying any
unauthorized act done on his behalf ratifies the whole of the transaction of which such act formed a part.

There can be ratification of an act in entirely or its rejection in entirely. The principal cannot ratify a part of the
transaction which is beneficial to him and reject the rest.
4. Ratification of unauthorized act cannot injure third person [Section 200] : An act done by one person
on behalf of another, without such other person’s authority, which, if done with authority, would have the
effect of subjecting a third person to damages, or of terminating any right or interest of a third person,
cannot, by ratification, be made to have such effect. In other words, when the interest of third parties is
affected, the principle of ratification does not apply. Ratification cannot relate back to the date of contract if
third party has in the intervening time acquired rights.
Example 1 :
A, not being authorized thereto by B, demands on behalf of B, the delivery of a chattel, the property of B, from
C, who is in possession of it. This demand cannot be ratified by B, so as to make C liable for damages for his
refusal to deliver.
Example 2 :
A holds a lease from B, terminable on three months’ notice. C, an unauthorized person, gives notice of termination
to A. The notice cannot be ratified by B, so as to be binding on A.
5. Ratification within reasonable time : Ratification must be made within a reasonable period of time.
6. Communication of Ratification : Ratification must be communicated to the other party.
7. Act to be ratified must be vailid : Act to be ratified should not be void or illegal, for e.g. payment of dividend
out of capital is void and cannot be ratified.
Revocation of Authority
by the principal revoking his authority; or
by the agent renouncing the business of the agency; or
by the business of the agency being completed; or
by either the principal or agent dying or becoming of unsound mind; or
by either the principal or agent dying or becoming of unsound mind
Termination of agency, where agent has an interest in subject-matter [Section 202]

Where the agent has himself an interest in the property which forms the subjectmatter of the agency, the agency
cannot, in the absence of an express contract, be terminated to the prejudice of such interest.
Example 1 : A gives authority to B to sell A’s land, and to pay himself, out of the proceeds, the debts due to him
from A. A cannot revoke this authority, nor can it be terminated by his insanity or death.
Example 2 : A consigns 1,000 bales of cotton to B, who has made advances to him on such cotton, and desires

B to sell the cotton, and to repay himself, out of the price the amount of his own advances. A cannot revoke this
authority, nor is it terminated by his insanity or death.
When principal may revoke agent’s authority [Section 203]
The principal may, save as is otherwise provided by the last preceding section, revoke the authority given to his
agent at any time before the authority has been exercised so as to bind the principal.
Revocation where authority has been partly exercised [Section 204]
The principal cannot revoke the authority given to his agent after the authority has been partly exercised so far
as regards such acts and obligations as arise for acts already done in the agency.
Example 1 : A authorizes B to buy 1,000 bales of cotton on account of A, and to pay for it out of A’s money
remaining in B’s hands. B buys 1,000 bales of cotton in his own name, so as to make himself personally liable
for the price. A cannot revoke B’s authority so far as regards payment for the cotton.
Example 2 : A authorizes B to buy 1,000 bales of cotton on account of A, and to pay for it out of A’s money
remaining in B’s hands. B buys 1,000 bales of cotton in A’s name, and so as not to render himself personally
liable for the price. A can revoke B’s authority to pay for the cotton.
Compensation for revocation by principal, or renunciation by agent [Section 205]
Where there is an express or implied contract that the agency should be continued for any period of time, the
principal must make compensation to the agent, or the agent to the principal, as the case may be, for any
previous revocation or renunciation of the agency without sufficient cause.
Notice of revocation or renunciation [Section 206]
Reasonable notice must be given of such revocation or renunciation; otherwise the damage thereby resulting to
the principal or the agent, as the case may be, must be made good to the one by the other.
Revocation and renunciation may be expressed or implied [Section 207] Revocation and renunciation may
be expressed or may be implied in theconduct of the principal or agent respectively.
Example : A empowers B to let A’s house. Afterwards A lets it himself. This is an implied revocation of B’s
authority.
When termination of agent’s authority takes effect as to agent, and as to third persons [Section 208] :
The termination of the authority of an agent doesnot, so far as regards the agent, take effect before it becomes
known to him, or, so far as regards third persons, before it becomes known to them.
Example 1 : A directs B to sell goods for him, and agrees to give B five per cent commission on the price fetched
by the goods. A afterwards, by letter, revokes B’s authority. B, after the letter is sent, but before he receives it sells
the goods for `1,00,000. The sale is binding on A, and B is entitled to `5,000 as his commission.
Example 2 : A, at Chennai, by letter directs B to sell for him some cotton lying in a warehouse in Mumbai, and
afterwards, by letter, revokes his authority to sell, and directs B to send the cotton to Chennai. B, after receiving
the second letter, enters into a contract with C, who knows of the first letter, but not of the second, for the sale to
him of the cotton. C pays B the money, with which B absconds. C’s payment is good as against A.
Example 3 : A directs B, his agent, to pay certain money to C. A dies, and D takes out probate to his will. B, after
A’s death, but before hearing of it, pays the money to C. The payment is good as against D, the executor.
Agent’s duty on termination of agency by principal’s death or insanity [Section 209] : When an agency
is terminated by the principal dying or becoming of unsound mind, the agent is bound to take, on behalf of the
representatives of his late principal, all reasonable steps for the protection and preservation of the interests

entrusted to him.
Termination of sub-agent’s authority [Section 210]
The termination of the authority of an agent causes the termination (subject to the rules herein contained regarding
the termination of an agent’s authority) of the authority of all sub-agents appointed by him.
Duties and Obligations of an Agent
Conduct the business according to principal's directions
Conduct the business with the skill and diligence
Render proper accounts (Anand Prasad vs Dwarkanath)
Communicate with principal in cases of difficulty
Repudiation of the transaction by principal
Not to deal on his own account
Agent's duty to pay sums received for principal
Example 1 : A, an agent engaged in carrying on for B a business, in which it is the custom to invest from time to
time, at interest, the moneys which may be in hand, omits to make such investment. A must make good to B the
interest usually obtained by such investment.
Example 2 : B, a broker, in whose business it is not the custom to sell on credit, sells goods of A on credit to C,
whose credit at the time was very high. C, before payment, becomes insolvent. B must make good the loss to A.
Example 3 : A, a merchant in Kolkata, has an agent, B, in London, to whom a sum of money is paid on A’s
account, with orders to remit. B retains the money for a considerable time. A, in consequence of not receiving
the money, becomes insolvent. B is liable for the money and interest from the day on which it ought to have been
paid, according to the usual rate, and for any further direct loss- as, e.g. by variation of rate of exchange-but not
further.
Example 4 : A, an agent for the sale of goods, having authority to sell on credit, sells to B on credit, without
making the proper and usual enquiries as to the solvency of B. B, at the time of such sale is insolvent. A must
make compensation to his principal in respect of any loss thereby sustained.
Example 5 : A, an insurance-broker, employed by B to effect an insurance on a ship, omits to see that the usual
clauses are inserted in the policy. The ship is afterwards lost. In consequence of the omission of the clauses
nothing can be recovered from the underwriters. A is bound to make good the loss to B.
Example 6 : A, a merchant in England, directs B, his agent at Mumbai, who accepts the agency, to send him
100 bales of cotton by a certain ship. B, having it in his power to send the cotton, omits to do so. The ship arrives
safely in England. Soon after her arrival the price of cotton rises. B is bound to make good to A the profit which he

might have made by the 100 bales of cotton at the time the ship arrived, but not any profit he might have made
by the subsequent rise.
Example 7 : A directs B to sell A’s estate. B buys the estate for himself in the name of C. A, on discovering that
B has bought the estate for himself, may repudiate the sale if he can show that B has dishonestly concealed any
material fact, or that the sale has been disadvantageous to him.
Example 8 : A directs B to sell A’s estate. B, on looking over the estate before selling it, finds a mine on the estate
which is unknown to A. B informs A that he wishes to buy the estate for himself, but conceals the discovery of
the mine. A allow B to buy, in ignorance of the existence of the mine. A, on discovering that B know of the mine
at the time he bought the estate, may either repudiate or adopt the sale at his option.
Example 9 : A directs B, his agent, to buy a certain house for him. B tells A it cannot be bought, and buys the
house for himself. A may, on discovering that B has bought the house, compel him to sell it to A at the price he
gave for it.
Rights of an Agent
Right of retain out

of sums received on
principal's account
Right to
Right of remuneration
indemnification
against acts done in
good faith Rights of
an Agent
Agent's lien on
principal's property
Right of
indemnification for
lawful acts
Non-liability of employer of agent to do a criminal act
According to section 224, where one person employs another to do an act which is criminal, the employer is not
liable to the agent, either upon an express or an implied promise, to indemnify him against the consequences of
that act.
Example 1 : A employs B to beat C, and agrees to indemnify him against all consequences of the act. B
thereupon beats C, and has to pay damages to C for so doing. A is not liable to indemnify B for those damages.

Example 2 : B, the proprietor of a newspaper, publishes, at A’s request, a libel upon C in the paper, and A
agrees to indemnify B against the consequences of the publication, and all costs and damages of any action in
respect thereof. B is sued by C and has to pay damages, and also incurs expenses. A is not liable to B upon the
indemnity.
Compensation to agent for injury caused by principal’s neglect
Section 225 provides that the principal must make compensation to his agent in respect of injury caused to such
agent by the principal’s neglect or want of skill.
Example : A employs B as a bricklayer in building a house, and puts up the scaffolding himself. The scaffolding
is unskilfully put up, and B is in consequence hurt. A must make compensation to E.
Agent’s liability to third parties
An agent does all acts on behalf of the principal but incurs no personal liability. The liability remains that of the
principal unless there is a contract to the contrary. This is because there is no priviity of contract and passing of
consideration between the agent and third party. An agent also cannot personally enforce contracts entered into
by him on behalf of the principal.
(i) Principal’s liability for the Acts of the Agent : Principal liable for the acts of agents which are within the
scope of his authority. Contracts entered into through an agent, and obligations arising from acts done by an
agent, may be enforced in the same manner, and will have the same legal consequences, as if the contracts
had been entered into and the acts done by the principal in person.
Example 1 : A buys goods from B, knowing that he is an agent for their sale, but not knowing who is the principal.
B’s principal is the person entitled to claim from A the price of the goods, and A cannot, in a suit by the principal,
set off against that claim a debt due to himself from B.
Example 2 : A, being B’s agent with authority to receive money on his behalf, receives from C, a sum of money
due to B. C is discharged of his• obligation to pay the sum in question to B.
(ii) Principal not bound, when agent exceeds authority [Section 227] : When an agent does more than he
is authorised to do, and when the part of what he does, which is within his authority, can be separated from
the part which is beyond his authority, so much only of what he does as is within his authority is binding as
between him and his principal.
Example : A, being owner of a ship and cargo, authorizes B to procure an insurance for `4,00,000 on the ship.
B procures a policy for `4,00,000 on the ship, and another for the like sum on the cargo. A is bound to pay the
premium for the policy on the ship, but not the premium for the policy on the cargo.
(iii) Principal not bound when excess of agent’s authority is not separable [Section 228] : Where an
agent does more than he is authorised to do, and what he does beyond the scope of his authority cannot be
separated from what is within it, the principal is not bound to recognise the transaction.
Example : A authorizes B to buy 500 sheep for him. B buys 500 sheep and 200 lambs for one sum of `6,00,000.
A may repudiate the whole transaction.
(iv) Consequences of notice given to agent [Section 229] : Any notice given to or information obtained by
the agent, provided it be given or obtained in the course of the business transacted by him for the principal,
shall, as between the principal and third parties, have the same legal consequence as if it had been given
to or obtained by the principal.

Example 1 : A is employed by B to buy from C certain goods of which C is the apparent owner, and buys them
accordingly. In the course of the treaty for the sale, A learns that the goods really belonged to D, but B is ignorant
of that fact. B is not entitled to set off a debt owing to him from C against the price of the goods.
Example 2 : A is employed by B to buy from C goods of which C is the apparent owner. A was, before he was
so employed, a servant of C, and then learnt that the goods really belonged to D, but B is ignorant of that fact.
In spite of the knowledge of his agent, B may set off against the price of the goods a debt owing to him from C.
(v) Agent cannot personally enforce, nor be bound by, contracts on behalf of principal [Section 230] : In
the absence of any contract to that effect, an agent cannot personally enforce contracts entered into by him
on behalf of his principal, nor is he personally bound by them.
Presumption of contract to the contrary : Such a contract shall be presumed to exist in the following cases :
(1) Where the contract is made by an agent for the sale or purchase of goods for a merchant resident abroad/
foreign principal;
(2) Where the agent does not disclose the name of his principal or undisclosed principal; and
(3) Where the principal, though disclosed, cannot be sued.
(vi) Rights of parties to a contract made by agent not disclosed [Section 231] : If an agent makes a
contract with a person who neither knows, nor has reason to suspect, that he is an agent, his principal may
require the performance of the contract; but the other contracting party has, as against the principal, the
same right as he would have had as against the agent if the agent had been the principal.
If the principal discloses himself before the contract is completed, the other contracting party may refuse
to fulfil the contract, if he can show that, if he had known who was the principal in the contract, or if he had
known that the agent was not a principal, he would not have entered into the contract.
(vii) Performance of contract with agent supposed to be principal [Section 232] : Where one man makes a
contract with another, neither knowing nor having reasonable ground to suspect that the other is an agent,
the principal, if he requires the performance of the contract, can only obtain such performance subject to the
rights and obligations subsisting between the agent and the other party to the contract.
Example : A, who owes 50,000 rupees to B, sells 1,00,000 rupees worth of rice to B. A is acting as agent for C
in the transaction, but B has no knowledge nor reasonable ground of suspicion that such is the case. C cannot
compel B to take the rice without allowing him to set off A’s debt.
(viii) Right of person dealing with agent personally liable [Section 233] : In cases where the agent is
personally liable, a person dealing with him may hold either him or his principal, or both of them, liable.
Example : A enters into a contract with B to sell him 100 bales of cotton, and afterwards discovers that B was
acting as agent for C. A may sue either B or C, or both, for the price of the cotton.
(ix) Consequence of inducing agent or principal to act on belief that principal or agent will be held
exclusively liable [Section 234] : When a person who has made a contract with an agent induces the
agent to act upon the belief that the principal only will be held liable, or induces the principal to act upon
the belief that the agent only will be held liable, he cannot afterwards hold liable the agent or principal
respectively.
(x) Liability of pretended agent [Section 235] : A pretended agent is a person who represents himself to be
an agent of another, when infact he has no authority from him, whatsoever if the principal ratifies his acts as
agent, he has no liability. But if the principal refuses to ratify his acts, he becomes personally liable to third
party for any loss or damage caused to him. It is to be noted that where agent is personally liable, the third
party can sue the principal or the agent or both the principal and the agent, as the liability of the principal

and agent is joint and several.
(xi) Person falsely contracting agent not entitled to performance [Section 236] : A person with whom a
contract has been entered into in the character of agent, is not entitled to require the performance of it if he
was in reality acting, not as agent, but on his own account.
(xii) Liability of principal inducing belief that agent’s unauthorized acts were authorized [Section 237]
: When an agent has, without authority, done acts or incurred obligations to third persons on behalf of his
principal, the principal is bound by such acts or obligations, if he has by his words or conduct induced such
third persons to believe that such acts and obligations were within the scope of the agent’s authority.
Example 1 : A consigns goods to B for sale, and gives him instructions not to sell under a fixed price. C, being
ignorant of B’s instructions, enters into a contract with B to buy the goods at a price lower than the reserved price.
A is bound by the contract.
Example 2 : A entrusts B with negotiable instruments endorsed in blank. B sells them to C in violation of private
orders from A. The sale is good.
(xiii) Effect,on agreement, of misrepresentation or fraud by agent [Section 238] : Misrepresentations
made, or frauds committed, by agents acting in the course of their business for their principals, have the
same effect on agreements made by such agents as if such misrepresentations or frauds had been made,
or committed, by the principals; but misrepresentations made, or frauds committed, by agents, in matters
which do not fall within their authority, do not affect their principals.
Example 1 : A, being B’s agent for the sale of goods, induces C to buy them by a misrepresentation, which he
was not authorized by B to make. The contract is voidable, as between B and C, at the option of C.
Example 2 : A, the captain of B’s ship, signs bills of lading without having received on board the goods mentioned
therein. The bills of lading are void as between B and the pretended consignor.
Q.1 A appoints M, a minor, as his agent to sell his watch for cash at a price not less than `700. M sells it to D
for `350. Is the sale valid? Explain the legal position of M and D, referring to the provisions of the Indian
Contract Act, 1872.
Ans.
According to the provisions of Section 184 of the Indian Contract Act, 1872, as between the principal and a
third person, any person, even a minor may become an agent. But no person who is not of the age of majority
and of sound mind can become an agent, so as to be responsible to his principal. Thus, if a person who is not
competent to contract is appointed as an agent, the principal is liable to the third party for the acts of the agent.
Thus, in the given case, D gets a good title to the watch . M is not liable to A for his negligence in the performance
of his duties.
Q.2 State with reason whether the following statement is correct or incorrect Ratification of agency is valid
even if knowledge of the principal is materially defective.
Ans.
Incorrect : Section 198 of the Indian Contract Act, 1872 provides that for a valid ratification, the person who
ratifies the already performed act must be without defect and have clear knowledge of the facts of the case. If the
principal’s knowledge is materially defective, the ratification is not valid and hence no agency.

Q.3 Ramesh instructed Suresh, a transporter, to send a consignment of apples to Mumbai. After covering half
the distance, Suresh found that the apples will perish before reaching Mumbai. He sold the same at half
the market price. Ramesh sued Suresh. Will he succeed?
Ans.
An agent has the authority in an emergency to do all such acts as a man of ordinary prudence would do for
protecting his principal from losses which the principal would have done under similar circumstances.
A typical case is where the ‘agent’ handling perishable goods like ‘apples’ can decide the time, date and place of
sale, not necessarily as per instructions of the principal, with the intention of protecting the principal from losses.
Here the agent acts in an emergency and acts as a man of ordinary prudence. In the given case Suresh had
acted in an emergency situation and Ramesh will not succeed against him.
Q.4 Mr. Ahuja of Delhi engaged Mr. Singh as his agent to buy a house in West Extension area. Mr. Singh
bought a house for `20 lakhs in the name of a nominee and then purchased it himself for `24 lakhs. He
then sold the same house to Mr. Ahuja for `26 lakhs. Mr. Ahuja later comes to know the mischief of Mr.
Singh and tries to recover the excess amount paid to Mr. Singh. Is he entitled to recover any amount from
Mr. Singh? If so, how much? Explain.
Ans.
The problem in this case, is based on the provisions of the Indian Contract Act, 1872 as contained in Section
215 read with Section 216. The two sections provide that where an agent without the knowledge of the principal,
deals in the business of agency on his own account, the principal may :
(1) repudiate the transaction, if the case shows, either that the agent has dishonestly concealed any material
fact from him, or that the dealings of the agent have been disadvantageous to him.
(2) claim from the agent any benefit, which may have resulted to him from the transaction.
Therefore, based on the above provisions, Mr. Ahuja is entitled to recover `6 lakhs from Mr. Singh being the
amount of profit earned by Mr. Singh out of the transaction.
Q.5 Comment on the following :

‘Principal is not always bound by the acts of a sub-agent ’.
Ans.
The statement is correct. Normally, a sub-agent is not appointed, since it is a delegation of power by an agent
given to him by his principal. The governing principle is, a delegate cannot delegate’. (Latin version of this
principle is, “delegates non potest delegare”). However, there are certain circumstances where an agent can
appoint sub-agent.
In case of proper appointment of a sub-agent, by virtue of Section 192 of the Indian Contract Act, 1872 the
principal is bound by and is held responsible for the acts of the sub-agent. Their relationship is treated to be as
if the sub-agent is appointed by the principal himself.
However, if a sub-agent is not properly appointed, the principal shall not be bound by the acts of the sub-agent.
Under the circumstances the agent appointing the sub- agent shall be bound by these acts and he (the agent)
shall be bound to the principal for the acts of the sub-agent.

Chapter - 5 THE NEGOTIABLE INSTRUMENTS
ACT, 1881
Section 4 Promissory Note
Section 5 Bill of Exchange
Section 6 Cheque
Section 8 Holder
Section 9 Holder in due course
Section 10 Payment in due course
Section 11 & 12 Inland instrument and Foreign instrument
Section 15 Indorsement
Section 16 Indorsement in blank and in full - endorsee
Section 17 Ambiguous instruments
Section 18 Where amount is stated differently in figures and words
Section 19 Instruments payable on demand
Section 20 Inchoate stamped instruments
Section 21 At sight, On presentment, After sight
Section 22 Days of grace
Section 23 Calculation of maturity
Section 25 When day of maturity is a holiday
Section 28 Liability of agent signing
Section 29 Liability of legal representative signing
Section 30 Liability of drawer
Section 31 Liability of drawee of cheque
Section 32 Liability of maker of note and acceptor of bill
Section 35 Liability of endorser
Section 36 Liability of prior parties to holder in due course
Section 38 Prior party a principal in respect of each subsequent party
Section 40 Discharge of endorser’s liability
Section 41 Acceptor bound, although endorsement forged
Section 42 Acceptance of bill drawn in fictitious name
Section 43 Negotiable instrument made, etc. without consideration
Section 44 Partial absence or failure of money-consideration
Section 45A Holder’s right to duplicate of lost bill
Section 46 Delivery
Section 47 Negotiation by delivery
Section 47 Negotiation by endorsement
Section 61 Presentment for acceptance
Section 64 Presentment for acceptance
Section 77 Liability of banker for negligently dealing with bill presented for payment

Section 78 To whom payment should be made
Section 82 Modes of discharge from liability on Instruments
Section 83 Discharge by allowing drawee more than forty-eight hours to accept
Section 84 When cheque not duly presented and drawer damaged thereby
Section 87 Effect of material alteration
Section 89 Payment of instrument on which alteration is not apparent
Section 91 Dishonour by non-acceptance
Section 92 Dishonour by non-payment
Section 93 By and to whom notice should be given
Section 98 When, notice of dishonour is unnecessary
Section 118 Presumptions as to negotiable instruments
Section 138 Dishonour of cheque for insufficiency, etc., of funds in the accounts
Section 141 Offences by companies
Section 142 Cognizance of offences
Section 143 Power of Court to try cases summarily
Meaning of Negotiable Instruments
Section 13 says, “A “negotiable instrument” means a promissory note, bill of exchange or cheque payable
either to order or to bearer”.
Promissory Note
(Section - 4)
An instrument Not a Must contain Signed
in writing To Pay a certain

Bank Note, Currency Unconditional sum of money
or Note undertaking
To, order of the a To the

certain person, or bearer of the
instrument
Examples :
A signs instruments in the following terms :
(a) “I promise to Pay B or order `500”.
(b) “I acknowledge myself to be indebted to B in `1,000, to be paid on demand, for value received.”

Section - 5
Bill of exchange
An instrument Must contain Signed by maker
in writing Unconditional Directing a

undertaking certain person
To pay a certain To the order of the a To the bearer of

sum of money certain person, or the instrument
Cheque [Section 6]
Cheque
Bill of exchange
Drawn on
Specified banker
Payable on demand
(a) Cheque in the electronic form”- means a cheque drawn in electronic form by using any computer resource,
and signed in a secure system with a digital signature (with/without biometric signature) and asymmetric
crypto system or electronic signature, as the case may be;
(b) “a truncated cheque” means a cheque which is truncated during the course of a clearing cycle, either by
the clearing house or by the bank whether paying or receiving payment, immediately on generation of an
electronic image for transmission, substituting the further physical movement of the cheque in writing.

Specimens of Promissory notes, bill of exchange and cheque
Specimen of Promissory notes
`
10,000 Lucknow
April 10, 2017
Three months after date, I promise to pay Shri Ramesh (Payee) or to his order the sum of Rupees
Ten Thousand, for value received.
Stamp
Sd/-
Ram
To,
Shri
Ramesh,
B-20, Green
Park,
Mumbai
(Maker)
Specimen of Promissory notes
Mr. A (Drawer)
48, MP Nagar, Bhopal (M.P.)
April 10, 2015
` 10,000/-
Four months after date, pay to Mr. B (Payee) a sum of Rupees Ten Thousand, for value received.
To,
Mr. C (Drawee)
576, Arera Colony, Bhopal (M.P.)
Signature
Mr. A

Specimen of Cheque
Date :....................
Pay ...................................................................................................................................................
a sum of Rupees......................................................................................... Rs.
A/C No. 12345678910
ABC Bank
622, Vijay Nagar, Indore (M. P.)
Signature
01212 1125864 000053 38
“drawee in case of need”— When in the bill or in any indorsement thereon the name of any person is given in
addition to the drawee to be resorted to in case of need such person is called a “drawee in case of need”.
Bill
upon assent of drawee by signing
by delivery
or by giving notice of such signing
to holder
or to some other person
shall be called "acceptor"
“acceptor” — After the drawee of a bill has signed his assent upon the bill, or, if there are more parts thereof
than one, upon one of such parts, and delivered the same, or given notice of such signing to the holder or to
some person on his behalf, he is called the “acceptor”.
“acceptor for honour” — When a bill of exchange has been noted or protested for non-acceptance or for better
security, and any person accepts it supra protest for honour of the drawer or of any one of the indorsers, such
person is called an “acceptor for honour”.

“Payee” — The person named in the instrument, to whom or to whose order the money is by the instrument
directed to be paid, is called the “payee”.
“Holder” [Section 8] — The “holder” of a promissory note, bill of exchange or cheque means—
Ø any person
Ø entitled in his own name to the possession thereof, and
Ø to receive or recover the amount due thereon from the parties thereto.
Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or
destruction.
“Holder in due course” [Section 9] — ”Holder in due course” means—
Ø any person
Ø who for consideration
Ø became the possessor of a promissory note, bill of exchange or cheque (if payable to bearer), or the payee
or endorsee thereof, (if payable to order),
Ø before the amount mentioned in it became payable, and
Ø without having sufficient cause to believe that any defect existed in the title of the person from whom he
derived his title.
Example 1 : A draws a cheque for `5,000 and hands it over to B by way of gift. B is a holder but not a holder in
due course as he does not get the cheque for value and consideration. His title is good and bonafide. As a holder
he is entitled to receive `5000 from the bank on whom the cheque is drawn.
Example 2 : On a Bill of Exchange for `1 lakh, X’s acceptance to the Bill is forged. ‘A’ takes the Bill from his
customer for value and in good faith before the Bill becomes payable. State with reasons whether ‘A’ can be
considered as a ‘Holder in due course’ and whether he (A) can receive the amount of the Bill from ‘X’.
“Payment in due course” [Section 10] — ”Payment in due course” means payment in accordance with the
apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under
circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment
of the amount therein mentioned.
“Inland instrument” and “Foreign instrument” [Sections 11 & 12] — A promissory note, bill of exchange
or cheque drawn or made in India and made payable in, or drawn upon any person resident in India shall be
deemed to be an inland instrument.
“Foreign instrument”
Any such instrument not so drawn, made or made payable shall be deemed to be foreign instrument.

Inland instrument-w hen
B.o.E/ P/N, Cheque
Made payable in/drawn

Drawn /made in
upon person resident in
India
India
when such instrument is not
Made payable in
Drawn in India Made in India
India
Foreign instrument
Indorsement [Section 15]

When the maker or holder of a negotiable instrument signs the same (otherwise than as such maker)—
Ø for the purpose of negotiation
Ø on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a
stamped paper intended to be completed as a negotiable instrument,
Ø he (maker/holder) is said to indorse the same, and is called the “indorser”.
Example : X, who is the holder of a negotiable instrument writes on the back thereof : “pay to Y or order” and
signs the instrument. In such a case, X is deemed to have endorsed the instrument to Y. If X delivers the
instrument to Y, X ceases to be the holder and Y becomes the holder.
Indorsement “in blank” and “in full”-”endorsee” [Section 16]
(1) If the indorser signs his name only, the endorsement is said to be “in blank”, and if he adds a direction to pay
the amount mentioned in the instrument to, or to the order of, a specified person, the endorsement is said
to be “in full”, and the person so specified is called the “indorsee” of the instrument.
(2) The provisions of this Act relating to a payee shall apply with the necessary modifications to an indorsee.
Example 1 : Blank (or general) : No indorsee is specified in an indorsement in blank, it contains only the bare
signature of the indorser. A bill so indorsed becomes payable to bearer.
Specimen
Motilal Poddar

Example 2 : Special (or in full) : In such an indorsement, in addition to the signature of the indorser the person
to whom or to whose order the instrument is payable is specified.
Specimen
Pay to B, Batliwala or order.
S. Shroff
Ambiguous instruments [Section 17]
Where an instrument may be construed either as a promissory note or bill of exchange (example, a bill drawn by
a person on himself in favour of a third person or where the drawee is a fictitious person), the holder may at his
election treat it as either and the instrument shall be thenceforward treated accordingly.
Where amount is stated differently in figures and words [Section 18]
If the amount undertaken or ordered to be paid is stated differently in figures and in words, the amount stated in
words shall be the amount undertaken or ordered to be paid.
Instruments payable on demand [Section 19]
A promissory note or bill of exchange, in which no time for payment is specified, and a cheque, are payable on
demand.
Inchoate stamped instruments [Section 20]
Where one person signs and delivers to another a paper stamped in accordance with the law relating to negotiable
instruments then in force in India, and either wholly blank or having written thereon an incomplete negotiable
instrument, he thereby gives prima facie authority to the holder thereof to make or complete, as the case may
be, upon it a negotiable instrument, for any amount specified therein and not exceeding the amount covered by
the stamp. The person so signing shall be liable upon such instrument, in the capacity in which he signed the
same, to any holder in due course for such amount; provided that no person other than a holder in due course
shall recover from the person delivering the instrument anything in excess of the amount intended by him to be
paid thereunder.
Example : a person signed a blank acceptance and kept it in his drawer and some person stole it and filled it up
for `20,000 and negotiated it to an innocent person for value, it was held that the signer to the blank acceptance
was not liable to the holder in due course because he never delivered the instrument intending it to be used as
a negotiable instrument. Further, as a condition of liability, the signer as a maker, drawer, endorser or acceptor
must deliver the instrument to another. In the absence of delivery, the signer is not liable. Furthermore, the paper
so signed and delivered must be stamped in accordance with the law prevalent at the time of signing and on
delivering otherwise the signer is not estopped from showing that the instrument was filled without his authority.
“At sight”, “On presentment”, “After sight” [Section 21]
In a promissory note or bill of exchange the expressions “at sight” and “on presentment” means on demand.
The expression “after sight” means, in a promissory note, after presentment for sight, and, in a bill of exchange
after acceptance, or noting for non-acceptance, or protest for non-acceptance.
“Maturity”
Where bill or note is payable at fixed period after sight, the question of maturity becomes important. The maturity
of a note or bill is the date on which it falls due.

Days of grace : A note or bill, which is not expressed to be payable on demand, at sight or on presentment; is
at maturity on the third day after the day on which it is expressed to be payable. Three days are allowed as days
of grace (Section 22).
Calculation of maturity [Section 23] :
In calculating the date at which a promissory note or bill of exchange, made payable at stated number of months
after date or after sight, or after a certain event, is at maturity, the period stated shall be held to terminate on the
day of the month, which corresponds with the day on which the instrument is dated, or presented for acceptance
or sight, or noted for non-acceptance, or protested for non-acceptance, or the event happens or, where the
instrument is a bill of exchange made payable at stated number of months after sight and has been accepted
for honor, with the day on which it was so accepted. If the month in which the period would terminate has no
corresponding day, the period shall be held to terminate on the last day of such month.
Sl. No. Time at which instrument is Maturity period
payable
1. When a note or bill is made payable, a stated when the period stated terminates on the day of the
number of months after date month which corresponds with the day on which the
instrument is dated
2. When it is made payable after a stated The period terminates on the day of the month which
number of months after sight corresponds with the day on which it is presented for
acceptance or sight or noted for non-acceptance or
protested for non-acceptance.
3. When it is payable a stated number of months The period terminates on the day of the month which
after a certain event corresponds with the day on which it is presented for
acceptance or sight or noted for non-acceptance or
protested for non-acceptance.
4. When the instrument is a bill of exchange Maturity will be with the day on which it was so
made payable at stated number of months accepted.
after sight and has been accepted for
honor.
Examples :
(a) A negotiable instrument dated 29th January, 2017, is made payable at one month after date. The instrument
is at maturity on the third day after the 28th February, 2017.
(b) A negotiable instrument, dated 30th August, 2016, is made payable three months after date. The instrument
is at maturity on the 3rd December, 2016.
(c) A promissory note or bill of exchange, dated 31st August, 2016, is made payable three months after date.
The instrument is at maturity on the 3rd December, 2016.
When day of maturity is a holiday [Section 25]
When the day on which a promissory note or bill of exchange is at maturity is a public holiday, the instrument
shall be deemed to be due on the next preceding business day.
Explanation : The expression “Public Holiday” includes Sundays and any other day declared by the Central
Government, by notification in the Official Gazette, to be a public holiday.

Parties to notes, Bills and Cheques
(1) Capacity of the parties
Parties to the
Instruments
Every person Ever person

who is capable of through duly authorised
contracting agent
(2) Liability of the parties
Liability of agent signing [Section 28]

An agent who signs his name to a promissory note, bill of exchange or cheque without indicating thereon that
he signs as agent, or that he does not intend thereby to incur personal responsibility, is liable personally on the
instrument, except to those who induced him to sign upon the belief that the principal only would be held liable.
An agent can be sued by the holder in an action for falsely representing that he had authority.
Liability of legal representative signing [Section 29]
A legal representative of a deceased person who signs his name to a promissory note, bill of exchange or cheque
is liable personally thereon unless he expressly limits his liability to the extent of the assets received by him as
such.
Liability of drawer [Section 30]
The drawer of a bill of exchange or cheque is bound in case of dishonour by the drawee or acceptor thereof,
to compensate the holder, provided due notice of dishonor has been given to, or received by, the drawer as
hereinafter provided.
Liability of drawee of cheque [Section 31]
The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment
of such cheque must pay the cheque when duly required so to do, and, in default of such payment, must
compensate the drawer for any loss or damage caused by such default.
Liability of maker of note and acceptor of bill [Section 32]
In the absence of a contract to the contrary, the maker of a promissory note and the acceptor before maturity of
a bill of exchange are bound to pay the amount thereof at maturity according to the apparent tenor of the note or
acceptance respectively, and the acceptor of a bill of exchange at or after maturity is bound to pay the amount
thereof to the holder on demand.
In default of such payment as aforesaid, such maker or acceptor is bound to compensate any party to the note
or bill for any loss or damage sustained by him and caused by such default.

Liability of endorser [Section 35]
In the absence of a contract to the contrary, whoever endorses and delivers a negotiable instrument before
maturity, without, in such endorsement, expressly excluding or making conditional his own liability, is bound
thereby to every subsequent holder, in case of dishonour by the drawee, acceptor or maker, to compensate such
holder for any loss or damage caused to him by such dishonour, provided due notice of dishonour has been
given to, or received by, such endorser as hereinafter provided.
Every endorser after dishonour is liable as upon an instrument payable on demand.
Liability of prior parties to holder in due course [Section 36]
Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly
satisfied.
Prior party a principal in respect of each subsequent party [Section 38]
As between the parties so liable as sureties, each prior party is, in the absence of a contract to the contrary, also
liable thereon as a principal debtor in respect of each subsequent party.
Example :
A draws a bill payable to his own order on B, who accepts. A afterwards endorses the bill to C, C to D and D to
E. As between E and B, B is the principal debtor, and A, C and D are his sureties. As between E and A, A is the
principal debtor, and C and D are his sureties. As between E and C, C is the principal debtor and D is his surety.
(3) Other related concepts to the parties on the negotiation of the Instruments
Discharge of endorser’s liability [Section 40]
Where the holder of a negotiable instrument—

Ø without the consent of the endorser,
Ø destroys or impairs the endorser’s remedy against a prior party,
Example :
A is the holder of a bill of exchange made payable to the order of B, which contains the following endorsements
in blank-
First endorsement, “B”.
Second endorsement, “Peter Williams”.
Third endorsement, “Wright & Co.”.
Fourth endorsement “John Rozario”.
This bill A puts in suit against John Rozario and strikes out, without John Rozario’s consent, the endorsements
by Peter Williams and Wright & Co. A is not entitled to recover anything from John Rozario.

Acceptor bound, although endorsement forged [Section 41]
An acceptor of a bill of exchange already endorsed is not relieved from liability by reason that such endorsement
is forged, if he knows or had reason to believe the endorsement to be forged when he accepted the bill.
Acceptance of bill drawn in fictitious name [Section 42]
An acceptor of a bill of exchange—

Ø drawn in a fictitious name, and
Ø payable to the drawer’s order
is not (by reason that such name is fictitious) relieved from liability to any holder in due course claiming under an
endorsement by the same hand as the drawer’s signature, and purporting to be made by the drawer.
Example : X draws a bill on Y but signs it in the fictitious name of Z. The bill is payable to the order of Z. The bill
is duly accepted by Y. M obtains the bill from X thus becoming its holder in due course. Can Y avoid payment of
the bill? Decide in the light of the provisions of the Negotiable Instruments Act, 1881.
Answer : Bill drawn in fictitious name : The problem is based on the provision of Section 42 of the Negotiable
Instruments Act, 1881. In case a bill of exchange is drawn payable to the drawer’s order in a fictitious name and
is endorsed by the same hand as the drawer’s signature, it is not permissible for the acceptor to allege as against
the holder in due course that such name is fictitious. Accordingly, in the instant case, Y cannot avoid payment
by raising the plea that the drawer (Z) is fictitious. The only condition is that the signature of Z as drawer and as
endorser must be in the same handwriting.
Negotiable instrument made, etc. without consideration [Section 43]
A negotiable instrument—
Ø made, drawn, accepted, endorsed, or transferred without consideration, or
Ø for a consideration which fails,
creates no obligation of payment between the parties to the transaction.
But if any such party has transferred the instrument with or without endorsement to a holder for a consideration,
such holder, and every subsequent holder deriving title from him, may recover the amount due on such instrument
from the transferor for consideration or any prior party thereto.
Partial absence or failure of money-consideration [Section 44]
When the consideration for which a person signed a promissory note, bill of exchange or cheque consisted of
money—
Ø which was originally absent in part, or
Ø has subsequently failed in part,
the sum which a holder standing in immediate relation with such signer is entitled to receive from him is
proportionally reduced.

Explanation : The drawer of a bill of exchange stands in immediate relation with the acceptor. The maker of a
promissory note, bill of exchange or cheque stands in immediate relation with the payee, and the endorser with
his endorsee. Other signers may by agreement stand in immediate relation with a holder.
Sl. Instruments with/without consideration Liabilities of the parties
no.
1. Instrument made without consideration Creates no obligation of payment between the
parties to the transaction
2. Instrument made with consideration consisted A holder standing in immediate relation with
of money, absent in part such signer is entitled to receive from signerthe
proportionally reduced sum.
3. On partial failure of consideration not consisting A holder standing in immediate relation with such
of money signer is entitled to receive from him the proportionally
reduced sum.
Holder’s right to duplicate of lost bill [Section 45A]
Where a bill of exchange has been lost before it is overdue,

Ø The person who was the holder of it may apply
Ø To the drawer to give him another bill of the same tenor,
Ø Giving security to the drawer, if required,
Ø To indemnify him against all persons whatever in case the bill alleged to have been lost shall be found
again.
Modes of Negotiation
Mode of negotiation
in case where p/n, BoE or in case where p/n, BoE or

cheque payable to bearer cheque payable to order
by delivery indorsement delivery

Delivery [Section 46]
The making, acceptance or endorsement of a promissory note, bill of exchange or cheque is completed by
delivery, actual or constructive.
Delivery when effective between the parties
Negotiation of instruments between the How delivery is to be made
parties
As between parties standing in immediate relation Delivery to be effectual must be made by the party making,
accepting or endorsing the instrument, or by a person
authorized by him in that behalf.
As between such parties and any holder of the It may be shown that the instrument was delivered
instrument other than a holder in due course conditionally or for a special purpose only, and not for the
purpose of transferring absolutely the property therein.
Modes of negotiation of instrument ?
(i) A promissory note, bill of exchange or cheque payable to bearer is negotiable by the delivery thereof.
(ii) A promissory note, bill of exchange or cheque payable to order is negotiable by the holder by endorsement
and delivery thereof.
Negotiation by delivery [Section 47]
Subject to the provisions of section 58, a promissory note, bill of exchange or cheque payable to bearer is
negotiable by delivery thereof.
Exception : A promissory note, bill of exchange or cheque delivered on condition that it is not to take effect
except in a certain event is not negotiable (except in the hands of a holder for value without notice of the
condition) unless such event happens.
Negotiation by endorsement [Section 48]
Subject to the provisions of section 58, a promissory note, bill of exchange or cheque payable to order, is
negotiable by the holder by endorsement and delivery thereof.
Presentment
Presentment for acceptance [Section 61]
BoE payable after sight must be presented
in case where time & place is specified in case where no time & place is specified
presented to drawee within reasonable time

presented at particular place in business hrs ona business day

Presentment for acceptance [Section 64]
P/N, BoE& Cheques

• must be presented to the maker, acceptor or drawee
by or on behalf of holder
In default of presentment
• other parties thereto are not liable to such holder
Exception : Where a promissory note is payable on demand and is not payable at a specified place, no
presentment is necessary in order to charge the maker thereof.
When presentment unnecessary
No presentment for payment is necessary, and the instrument is dishonoured at the due date for presentment,
in any of the following cases:
(a) If the maker, drawee or acceptor intentionally prevents the presentment of the instrument, or
Ø If the instrument being payable at his place of business, he closes such place on a business day during
the usual business hours, or
Ø If the instrument being payable at some other specified place, neither he nor any person authorized to
pay it attends at such place during the usual business hours, or
Ø If the instrument not being payable at any specified place, he cannot after due search be found;
(b) as against any party sought to be charged therewith, if he has engaged to pay not with standing non-
presentment;
(c) as against any party if, after maturity, with knowledge that the instrument has not been presented—
Ø he makes a part payment on account of the amount due on the instrument, or
Ø promises to pay the amount due therein whole or in part, or
Ø otherwise waives his right to take advantage of any default in presentment for payment;
(d) as against the drawer, if the drawer could not suffer damage from the want of such presentment.
Liability of banker for negligently dealing with bill presented for payment [Section 77]
When a bill of exchange, accepted payable at a specified bank, has been duly presented there for payment and
dishonored, if the banker so negligently or improperly keeps, deals with or delivers back such bill as to cause
loss to the holder, he must compensate the holder for such loss.

Payment and interest
To whom payment should be made [Section 78]
Subject to the provisions of section 82, clause (c), payment of the amount due on a promissory note, bill of
exchange or cheque must, in order to discharge the maker or acceptor, be made to the holder of the instrument.
Section 82(c) of the Act provides that the maker, acceptor, or endorser respectively of a negotiable instrument is
discharged from liability thereon by payment to all parties thereto, if the instrument is payable to bearer, or has
been endorsed in blank, and such maker, acceptor or endorser makes payment in due course of the amount due
thereon.
Interest when rate specified Interest when no rate specified

Where interest rate is expressly made When no rate of interest is specified in the instrument—
payable on P/N, BoE— Interest shall be Interest on the amount due thereon shall be calculated at
calculated at the rate specified on the amount of the rate of 18% per annum, from the date at which the same
the principal money due thereon, from the date of ought to have been paid by the party charged, until tender
the instrument, until tender or realization of such or realization of the amount due thereon, or until such date
amount, or until such date after the institution of a after the institution of a suit to recover such amount as the
suit to recover such amount as the court directs. court directs.
Explanation : When the party charged is the indorser of
an instrument dishonoured by non-payment- he is liable to
pay interest only from the time that he receives notice of the
dishonour.
Discharge from liability on notes, bills and cheques
Modes of discharge from liability on Instruments [Section 82]
Ø Cancellation
Discharge of parties
from liability by Ø Release
Ø Payment
(a) By cancellation — to a holder thereof who cancels such acceptor’s or endorser’s name with intent to
discharge him, and to all parties claiming under such holder,
(b) By release — to a holder thereof who otherwise discharges such maker, acceptor or endorser, and to all
parties deriving title under such holder after notice of such discharge;
(c) By payment — to all parties thereto, if the instrument is payable to bearer, or has been endorsed in blank,
and such maker, acceptor or endorser makes payment in due course of the amount due thereon.

Discharge by allowing drawee more than forty-eight hours to accept [Section 83]
If the holder of a bill of exchange allows the drawee more than forty eight hours, exclusive of public holidays,
to consider whether he will accept the same, all previous parties not consenting to such allowance are thereby
discharged from liability to such holder.
When cheque not duly presented and drawer damaged thereby [Section 84]
(1) Cheque not presented for payment within reasonable time : Where a cheque is not presented for
payment within a reasonable time of its issue, and the drawer or person on whose account it is drawn had
the right, at the time when presentment ought to have been made, as between himself and the banker, to
have the cheque paid and suffers actual damage through the delay, he is discharged to the extent of such
damage, that is to say, to the extent to which such drawer or person is a creditor of the banker to a large
amount than he would have been if such cheque had been paid.
(2) Determination of reasonable time : In determining what a reasonable time is, regard shall be had to the
nature of the instrument, the usage of trade and of bankers, and the facts of the particular case.
(3) Remedy to a holder : The holder of the cheques as to which such drawer or person is so discharged shall
be a creditor, in lieu of such drawer or person, of such banker to the extent of such discharge and entitled to
recover the amount from him.
Examples :
(1) A draws a cheque for `1,000, and, when the cheque ought to be presented, has funds at the bank to meet it.
The bank fails before the cheque is presented. The drawer is discharged, but the holder can prove against
the bank for the amount of the cheque.
(2) A draws a cheque at Umballa on a bank in Calcutta. The bank fails before the cheque could be presented in
ordinary course. A is not discharged, for he has not suffered actual damage through any delay in presenting
the cheque.
Example : A cheque is drawn payable to “B or order”. It is stolen and the thief forges B’s endorsement and
endorses it to C. The banker pays the cheque in due course. Can B recover the money from the banker ?
Answer : According to Section 85, the drawee banker is discharged when he pays a cheque payable to order
when it is purported to be endorsed by or on behalf of the payee. Even though the endorsement of Mr. B is
forged, the banker is protected and he is discharged. The true owner, B, cannot recover the money from the
drawee bank.
Effect of material alteration [Section 87]
Any material alteration of a negotiable instrument renders the same void as against anyone who is a party
thereto at the time of making such alteration and does not consent thereto, unless it was made in order to carry
out the common intention of the original parties.
Alteration by indorsee :
And any such alteration, if made by an indorsee, discharges his endorser from all liability to him in respect of the
consideration thereof.
The provisions of this section are subject to those of sections 20, 49, 86 and 125.

Example 1 : A promissory note was made without mentioning any time for payment. The holder added the words
“on demand” on the face of the instrument. As per the above provision of the Negotiable Instruments Act, 1881
this is not a material alteration as a promissory note where no date of payment is specified will be treated as
payable on demand. Hence adding the words “on demand” does not alter the business effect of the instrument.
Example 2 : State whether the following alterations are material alterations under the Negotiable Instruments
Act, 1881?
(i) The holder of the bill inserts the word “or order” in the bill,
(ii) The holder of the bearer cheque converts it into account payee cheque,
Answer : The following materials alterations have been authorised by the Act and do not require any authentication:
(a) Filling blanks of inchoate instruments [Section 20]
(b) Conversion of a blank endorsement into an endorsement in full [Section 49]
Payment of instrument on which alteration is not apparent [Section 89]
Ø Where a promissory note, bill of exchange or cheque has been materially altered but does not appear to
have been so altered, or
Ø Where a cheque is presented for payment which does not at the time of presentation appear to be crossed
or to have had a crossing which has been obliterated,
Payment thereof by a person or banker liable to pay, and paying the same according to the apparent tenor
thereof at the time of payment and otherwise in due course, shall discharge such a person or banker from all
liability thereon, and such payment shall not be questioned by reason of the instrument having been altered, or
the cheque crossed.
Notice of Dishonour
Dishonour by non-acceptance of BoE

drawee makes defaults presentment is Bill not accepted drawee is acceptance is
in acceptance excused and incompetant qualified
Dishonour by non-payment of P/N, BoE/ Cheque

maker/ acceptor /drawee makes default in payment
Dishonour by non-acceptance [Section 91]
A bill of exchange is said to be dishonoured by non-acceptance when the drawees, or one of several drawees not
being partners, makes default in acceptance upon being duly required to accept the bill, or where presentment
is excused and the bill is not accepted.
Where the drawee is incompetent to contract, or the acceptance is qualified the bill may be treated as dishonoured.

Dishonour by non-payment [Section 92]
A promissory note, bill of exchange or cheque is said to be dishonoured by non- payment when the maker of the
note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the
same.
By and to whom notice should be given [Section 93]
P/N, BoE, Cheque
Dishonoured by
non-acceptance non- payment
Holder/some party thereto liabile thereon
give notice of dishonour
to parties whom holder seeks liable
severally jointly
When a promissory note, bill of exchange or cheque is dishonoured by non-acceptance or non-payment, the
holder thereof, or some party thereto who remains liable thereon, must give notice that the instrument has been
so dishonoured to all other parties whom the holder seeks to make severally liable thereon, and to some one of
several parties whom he seeks to make jointly liable thereon.
Nothing in this section renders it necessary to give notice to the maker of the dishonoured promissory note, or
the drawee or acceptor of the dishonoured bill of exchange or cheque.
When, notice of dishonour is unnecessary [Section 98]
No notice of dishonour is necessary,-

(a) when it is dispensed with by the party entitled thereto;
(b) in order to charge the drawer, when he has countermanded payment;
(c) when the party charged could not suffer damages for want of notice;
(d) when the party entitled to notice cannot after due search be found; or the party bound to give notice is, for
any other reason, unable without any fault of his own to give it;
(e) to charge the drawers, when the acceptor is also a drawer;
(f) in the case of a promissory note which is not negotiable;
(g) when the party entitled to notice, knowing the facts, promises unconditionally to pay the amount due on the
instrument.

Noting and Protest
Noting Protest
P/N, BoE, Cheque has been dishonoured by non- P/N or BoE has been dishonoured by non-acceptance
acceptance or non-payment— the holder may cause or non-payment— the holder may, cause such
such dishonour to be noted by a notary public upon- dishonour to be
Ø the instrument, or Ø noted, and
Ø upon a paper attached thereto, or Ø certified
Ø partly upon each by a notary public
Special rules of Evidence
Presumptions as to negotiable instruments [Section 118]
Presumptions made in Presumptions dawn

relation of
Until the contrary is proved, the following presumption shall be made :
of consideration every negotiable instrument was made or drawn for consideration
as to date every negotiable instrument bearing a date was made or drawn on
such date
as to time of acceptance every accepted bill of exchange was accepted within a reasonable
time after its date and before its maturity
as to time of transfer every transfer of a negotiable instrument was made before its maturity;
as to order of endorsements endorsements appearing upon a negotiable instrument were made in
the order in which they appear thereon
as to stamps lost promissory note, bill of exchange or cheque was duly stamped
that holder is a holder in due course the holder of a negotiable instrument is a holder in due course
Penalties in case of dishounour of certain cheques for insufficiency of funds in the accounts
Dishonour of cheque for insufficiency, etc., of funds in the accounts [Section 138]
Where any cheque drawn by a person on an account maintained by him with a banker—
Ø for payment of any amount of money
Ø to another person from out of that account
Ø for the discharge, in whole or in part, of any debt or other liability,
Ø is returned by the bank unpaid,
Ø either because of the—
o amount of money standing to the credit of that account is insufficient to honour the cheque, or

o that it exceeds the amount arranged to be paid from that account by an agreement made with that
bank,
Such person shall be deemed to have committed an offence and shall, be punished with imprisonment for a term
which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both :
Provided that this section shall not apply, unless—
(a) Cheque presented within validity period :
(b) Demand for the payment through the notice : The payee or the holder in due course of the cheque, as the
case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing,
to the drawer of the cheque, within 30 days of the receipt of information by him from the bank regarding the
return of the cheque as unpaid, and
(c) Failure of drawer to make payment : the drawer of such cheque fails to make the payment of the said
amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within
fifteen days of the receipt of the said notice.
Offences by companies [Section 141]
(1) If the person committing an offence under section 138 is a company,every person who, at the time the
offence was committed—
Ø was in charge of, and
Ø as responsible to the company for the conduct of the business of the company, as well as the company, shall
be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.
Example : A promoter who has borrowed a loan on behalf of company, who is neither a director nor a person-in-
charge, sent a cheque from the companies account to discharge its legal liability. Subsequently, the cheque was
dishonoured and the compliant was lodged against him. Is he liable for an offence under section 138 ?
Answer : According to Section 138 of the Negotiable Instruments Act, 1881 where any cheque drawn by a person
on an account maintained by him with a banker for payment of any amount of money to another person from/out
of that account for discharging any debt or liability, and if it is dishonoured by banker on sufficient grounds, such
person shall be deemed to have committed an offence and shall be liable. However, in this case, the promoter is
neither a director nor a person-in-charge of the company and is not connected with the day-to-day affairs of the
company and had neither opened nor is operating the bank account of the company. Further, the cheque, which
was dishonoured, was also not drawn on an account maintained by him but was drawn on an account maintained
by the company. Therefore, he has not committed an offence under section 138.
Cognizance of offences [Section 142]
Place of Jurisdiction of court for the trail of offence : The offence under section 138, which deals with the
dishonour of cheque, shall be inquired into and tried only by a court within whose local jurisdiction,—
(a) if the cheque is delivered for collection through an account, the branch of the bank where the payee or
holder in due course, as the case may be, maintains the account, is situated; or
(b) if the cheque is presented for payment by the payee or holder in due course, otherwise through an
account, the branch of the drawee bank where the drawer maintains the account, is situated.

Explanation — For the purposes of clause (a), where a cheque is delivered for collection at any branch of the
bank of the payee or holder in due course, then, the cheque shall be deemed to have been delivered to the
branch of the bank in which the payee or holder in due course, as the case may be, maintains the account.”
Power of Court to try cases summarily [Section 143]
(1) Trial of Offence : Notwithstanding anything contained in the Code of Criminal Procedure, 1973, all offences
under this Chapter shall be tried by a Judicial Magistrate of the first class or by a Metropolitan Magistrate
and the provisions of sections 262 to 265 (both inclusive) of the said Code shall, as far as may be, apply to
such trials.
In case of summary trial : Provided that in the case of any conviction in a summary trial under this section, it
shall be lawful for the Magistrate to pass a sentence of imprisonment for a term not exceeding one year and an
amount of fine exceeding five thousand rupees.
In case where no summary trial can be made : Provided further that when at the commencement of, or in
the course of, a summary trial under this section, it appears to the Magistrate that the nature of the case is such
that a sentence of imprisonment for a term exceeding one year may have to be passed or that it is, for any other
reason, undesirable to try the case summarily, the Magistrate shall after hearing the parties, record an order to
that effect and thereafter recall any witness who may have been examined and proceed to hear or rehear the
case in the manner provided by the said Code.
Q.1 A' Promises to Pay B' a sum of `10,000 and other sums due. Is it a valid Promissory note?
Ans.
As per Sec. 4, then features, the above is not a valid Promissory Note as amount payable is not certain. Hence
in lights of above discussion.............
Q.2 A' Promises to Pay B' a sum of `10,000 if C' Dies.
Ans.
Yes, valid Promissory Note, because it is an unconditional undertaking & unconditional means an event which is
bound to happen sooner or later.
Q.3 What would be your answer if the Promise was to pay when C' dies leaving enough sum of money.
Ans.
Not a valid Promissory Note because leaving enough sum of money may or may not happen...............

Q.4 Bharat, draw a cheque on his ICICI Bank to pay Mr. Mohit Agarwal. The cheque was stolen from MA by
the thief. Thief got it encashed from ICICI Bank by signing in the name of MA because MA name appears
on cheque. ICICI bank deducted the amount paid to thief from Bharat's account. Can ICICI bank be held
liable for the amount paid to thief? MA had account at HDFC & SBH.
Ans.
A' Neglns according to Justice Willis J is an instrument in which the property is acquired by any person who takes
it bonafide (in Good faith) for value notwithstanding any defect of title in the person from whom he took it. As per
sec 13(1) negotiable Ins also includes a cheque.
In the given case the cheque has been transferred to ICICI bank from the thief who was not the owner but it is
to be noted that —
(a) ICICI Bank has acted in good faith, i.e., had taken the cheque without knowing that the amount was not
being paid to MA. Had ICICI know it is giving to thief then it means not acted in Good faith. Further the thief
signed in the name of MA & ICICI did not have resources to tally the sign of MA.
(b) ICICI bank has given a consideration of 210,000. ICICI Bank has acted in good faith and for value, the
ownership of the cheque gets transferred to it and thus he can claim the amount of cheque form Bharat's
account!
Thus in the lights of above discussion ICICI Bank cannot be held liable for anything. Q.5)
Q.5 What would be your answer if Bharat's signature was forged in the above case?
Ans.
This time ICICI Bank will be liable because it had the resources to tally the sign of Bharat and find out that it was
forged (i.e. it indicates bank not acted in good faith). (i.e., he cannot be a true holder in due course).
Q.6 M drew a cheque amounting to `2/- lakh payable to N and subsequently delivered to him. After receipt
of cheque N indorsed the same to C but kept it in his safe lockr. After sometime, N died and P found the
cheque in N's safe locker. Does this amount to Indorsement under the Negotiable Instruments Act, 1881?
Ans.
No, P does not become the holder of the cheque as the negotiation was not completed by delivery of the cheque
to him. (Section 48, the Negotiable Instruments Act, 1881)
Q.7 M owes money to N. Therefore, he makes a promissory note for the amount in favour of N, for safety of
transmission he cuts the note in half and posts one half to N. He then changes his mind and calls upon N
to return the half of the note which he had sent. N requires M to send the other half of the promissory note.
Decide how a rights of the parties are to be adjusted.
Ans.
The question arising in this problem is whether the making of promissory note is complete when one half of the
note was delivered to N. Under Section 46 of the N.I. Act, 1881, the making of a P/N is completed by delivery,
actual or constructive. Delivery refers to the whole of the instrument and not merely a part of it. Delivery of half

instrument cannot be treated as constructive delivery of the whole. So the claim of N to have the other half the
P/N sent to him is not maintainable. M is justified in demanding the return of the first half sent by him. He can
change his mind and refuse to send the other half of the P/N.
Q.8 P draws a bill on Q for 10,000. Q accepts the bill. On maturity the 'bill was dishonored by non- payment.
P files a suit against Q for payment of `10,000. Q proved that the bill was accepted for value of 7,000 and
as an accommodation to the plaintiff for the balance amount i.e. 3,000. Referring to the provisions of the
Negotiable Instruments Act, 1881 decide whether P would succeed in recovering the whole amount of the
bill?
Ans.
As per Section 44 of the Negotiable Instruments Act, 1881, when the consideration for which a person signed
a promissory note, bill of exchange or cheque consisted of money, and was originally absent in part or has
subsequently failed in part, the sum which a holder standing in immediate relation with such signer is entitled to
receive from him is proportionally reduced.
[Explanation- The drawer of a bill of exchange stands in immediate relation with the acceptor. The maker of a
promissory note, bill of exchange or cheque stands in immediate relation with the payee, and the endorser with
his endorsee. Other signers may be agreement stand in immediate relation with a holder].
On the basis of above provision, P would succeed to recover `7,000 only from Q and not the whole amount of
the bill because it was accepted for value as to `7,000 only and an accommodation to P for 3,000.
Q.9 J accepted a bill of exchange and gave it to K for the purpose of getting it discounted and handing over
the proceeds to J. K having failed to discount it returned the bill to J. J tore the bill in two pieces with the
intention of cancelling it and threw the pieces in the street. K picked up the pieces and pasted the two
pieces together, in such manner that the bill seemed to have been folded for safe custody, rather than
cancelled. K put it into circulation and it ultimately reached L, who took it in good faith and for value. Is J
liable to pay the bill under the provisions of the Negotiable Instruments Act, 1881 ?
Ans.
The problem is based upon the privileges of a 'holder in due course', Section 120 of the Negotiable Instruments
Act, 1881 provides that No drawer of a bill shall in a suit thereon by a holder in due course be permitted to deny
the validity of the instrument as originally drawn .... A holder in due course gets a good title of the bill.
Therefore in the given problem J is liable to pay for the bill. L is a holder in due course, who got the bill in good
faith and for value. (Ingham v Primrose)
Q.10 B obtains A's acceptance to a bill of exchange by fraud. B endorses it to C who is a holder in due course.
C endorses the bill to D who knows of the fraud. Referring tp the provisions of the Negotiable Instruments
Act, 1882, decide whether D can recover the money from A in the given case.
Ans.
Section 53 of the Negotiable Instruments Act, 1881 provides that a holder of negotiable instrument who derives

title from a holder in due course has the right thereon of that holder in due course. Such holder of the bill who is
not himself a party to any fraud or illegality affecting it, has all the rights of that holder in due course as regards to
the acceptor and all parties to the bill prior to that holder. In this case, it is clear that though D was aware of the
fraud, he was himself not a party to it. He obtained the instrument from C who was a holder in due course. So D
gets a good title and can recover from A.
Q.11 X draws a bill on Y for `10,000 payable to his order. Y accepts the bill but subsequently dishonours
it by non-payment, X sues Y on the bill. Y proves that it was accepted for value as of 28,000 and as
accommodation to X for `2,000. How much can X recover from Y ? Decide with reference to the provisions
of the Negotiable Instruments Act, 1881.
Ans.
According to the provisions of Section 44 of the Negotiable Instruments Act, 1881, when there is a partial absence
or failure of money consideration for which a person signed a bill of exchange, the same rules as applicable for
total absence or failure of consideration will apply. Thus, the parties standing in immediate relation to each other
cannot recover more than the actual consideration. Accordingly, X can recover only 8000.
Q.12 A cheque payable to bearer is crossed generally and marked "not negotiable" the cheque is lost and
comes into the possession of B who takes it in good faith and givesvalue for it. B deposits the cheque into
his bank and his banker present is and obtains thepayment for his customer from the bank upon which
it is drawn. The true owner of thecheque claims refund of the amount of the cheque from B. Discuss the
liability of thebanker collecting the cheque and the banker paying the cheque and B is the true owner ofthe
cheque reffering to the provision of NI ACT, 1881.
Ans.
B is liable to the true owner since his title is not better than the title or the immediate transferor, who had either
stolen or found the cheque, and was therefore, notentitled to receive the amount of cheque the paying banker is
not liable provided it made the payment is good faith and without negligence. The collecting banker is not liable
since it has collected the payment of cheque acting as agent provided is has collected the payment of cheque is
good faith and without negligence. (sec 131).
Q.13 A draws a cheque for 50000. When the cheque ought to be presented to the drawee bank, the drawer has
sufficient funds to make payment of the cheque. The bankfails before the cheque is presented. The payee
demands payment from the drawer. Whatis the liability of the drawer ?
Ans.
The drawer is discharged since the drawer has sufficient balance when the cheque ought to be presented for
payments the holder has defaulted in presenting the cheque for payment within a reasonable time; the drawer
has suffered actual damages due to the failure of the bank after issue of cheque put before presentation of
cheque.

Q.14 A, a major and B, a minor, executed a promissory note in favour of C. Examine with reference to the
provisions of NI Act, the validity of the promissory note and whether it is binding on A and B.
Ans.
The promissory note is not valid since a negotiable instrument does not become 'invalid only because of the
reason that any party to the nego inst (i.e. the maker. payee, endorser or endorsee) is a minor. B is not liable
since a minor is not liable on negotiable instrument. A is liable since all the parties, except the minor are liable on
a nego inst draw, accepted, endorsed or negotiated by a minor.
Q.15 Ascertain the date of maturity of a bill payable 120 days after date. The bill of exchange was drawn on 1st
June, 2005.
Ans.
Date of maturity 1st October, 2005 (being the proceeding day) since 2nd is a public holiday.
Q.16 B obtains A's acceptance to a bill of exchange by fraud. B endorses it is C who is ina holder in due course.
C endorses the bill to D who knows of the fraud. Referring to the provisions of the NI ACT, 1881, decide
whether D can recover the money from A in the given case.
Ans.
D has the same rights as the of C since a person who derives title to a NI from a HDC has the same rights as
the HDC, since D has derived title to the bill from a HDC. D can recover the payment from A since da has same
rights is that of C; since D has acquired the ni from C, and the title of C is defective: since it is immaterial that D
has knowledge of the fraud (provided D was not a party to the fraud).
J, a shareholder of a company purchased for his personal use certain goods from a mall on credit. He sent a
cheque drawn on the coss account to the mail towards full payment of the bills. The cheque was dishonoured by
the co's bank. the shareholder of the co. was neither a Director nor a person in charge of the co-state.
Q.17 Whether J has committed an offence under sec 138 of the act decide whether J can be held liable for the
payment, for the goods purchased from the mall.
Ans.
Since the co is held liable for his dishonour of a cheque issued to discharge the debt or liability of any other person
co has committed an offence u/s138. co as will as very officer in charge is liable u/s 138. J has not committed any
offence since he is not a director or officer in charge of the co. J is liable for the payment of goods purchased.
Q.18 Referring to the provisions of NI act, 1881, examine the validity of the follows :
(a) A bill of exchange originally drawn by M for a sum of `10000 but accepted by only for `7000.
(b) A cheque marked not negotiable is not transferrable.
Ans.
The acceptance is valid and the accept it is liable for `7000 but is amount to qualified acceptance (since the
acceptance is given for a part of the sum mentioned in the bill). But, no other party shall be liable on the bill,

unless it has given its consent to the qualified acceptance. However, the holder is entitled to object to qualified
acceptance and treat the bill as dishonoured by non acceptance and is such case all the prior parties shall be
liable towards the holder.
(b) A cheque marked not negotiable is transferable but no transferee shall have a title better that that of the
transferor, even though he acquired the cheque is good faith and without negligence.
Q.19 A owes a certain sum of money to B. A. does not know the exact amount and hence he makes out a bank
cheque is favour of B, signs and delivers it is B with a request to fillup the amount due payable by him B.
fill up fraudulently the amount larger than theamount due payable by a and endorses the cheque to C in full
payment of dues of B. Cheque of A is dishonoured. Referring to the provisions of the NI Act 1881, discuss
therights of B and C.
Ans.
B is entitled to recover only such amount as was intended to be paid by A since a holder to whom an inchoate
instrument is delivered is entitled to receive only such amount as was intended to be paid by the person delivering
on an inchoate instrument. Cis entitled to recover the whole amount of cheque since a holder in due course is
entitled to receive whole of the amount of negotiable instrument.
Q.20 State whether the following alterations are material alterations under the NI Act, 1881?
(i) The holder of the bill inserts the word "or order" in the bill.
(ii) The holder of the bearer cheque converts into account payee cheque. iii) A bill payable to X is converted
into a bill payment to X and Y.
Ans.
(i) It is not a material alteration, since even after the insertion of the words 'or order' the negotiable instrument
continues to be an order instrument.
(ii) It is a material alteration since it restricts the right of the holder to obtain the payment of the cheque in cash
to negotiable is.
(iii) It is a material alteration since the right to receive the payment has been altered(before the alteration, the
right to receive was X, but after the alteration, the right is the X and Y jointly).
Q.21 A draw a bill of exchange payable to himself on X, who accepts the bill without consideration just to
accommodate 'A'. 'A' transfers the bill to 'P' for good consideration.
State the rights of 'A' and 'P'. Would your answer differ if 'A' transferred the bill to 'P' after maturity?
Ans.
A is not entitled to sue X since there is no consideration between A and X since there is no obligation to pay, if
there us no consideration between the parties to the transaction. P is entitled to the A and X since P is a holder for
consideration since a holder for consideration can sue the transferor for consideration and very party prior to him.
Even if a had transferred the bill after maturity the answer would have remained the same. Since the right to
sue the transferor for consideration and every party prior to him, is available to 'holder for consideration', even
thought he is not a 'holder is due course'. (i.e. even if the holder for consideration obtains the bill after maturity.

Q.22 Discuss with reasons, whether the following can be said as a 'holder' under the NI Act, 1881.
(i) X who obtains the cheque drawn by way of gift.
(ii) A, the payee of cheque, who is prohibited by a court order from receiving the amount of the cheque.
(iii) M, who finds a cheque payable to bearer on the road and retains it.
(iv) B, the agent of C, is entrusted with an instrument without endorsement by C, who is the payee.
(v) B, who steels a blank cheque of A and forges A' signature.
Ans.
(i) X is a holder since he is entitled in his own name of the possession of the cheque and to receive the amount
of the cheque.
(ii) A is not a holder since he is not entitled to recover the amount of the cheque asper court's order.
(iii) M is not a holder since the cheque was not negotiated to him; since mere' possession' does not make a
person holder; it is the entitlement to possession which makes a person holder; since M is not entitled to the
possession and is not entitled to receive or recover the amount of the cheque. Moreover a finder of a lost
negotiable instrument has no right to receive the amount of the negotiable instrument.
(iv) B is nit a holder since he is entitled to the possession of the negotiable instrument, but not is his own name,
since he is entitled to receive the amount of the negotiable instrument, but not is his own name.
(v) B is not a holder since he is in wrongful possession of the negotiable instrument the is not entitled to recover
the amount of the negotiable instrument; since a cheque containing forged signature of the drawer is a
nullity, and does not confer and title to any person.
Q.23 X draws a bill on Y but signs it in the fictitious name of Z. The bill is a payable to order of Z. The bill is duly
accepted by Y. M. obtains the bill from X thus becoming its holder in due course, Can Y avoid payment of
the bill? Decide in the lights or provisions of the Nl Act, 1881.
Ans.
Y is liable to M for the payment of the bill since where a bill is signed by the drawer in fictitious name, the acceptor
cannot allege against a holder in due course that the drawer is fictitious; since it can be provide that the signature
of the person signing in the capacity of the endorser are the same handwriting.
Q.24 A makes a gift of `10,000 to W through a cheque issued in favour of W. Later Vinforms W nit to present
the cheque for payment and informs the bank also to stop payment. Whether it constitutes offence ?
Ans.
V is not liable for an offence u/s 138 since the drawer of a cheque is liable u/s 138 only if a cheque is issued to
discharge a legally enforceable debt or other liability. (Sec 138) Presumption of consideration is not applicable
since it can be proved that the cheque was given as a gift.

Q.25 Referring to the provisions of the NI Act, 1881 examine whether acceptance of a bill of exchange is the full
situations shall be treated as qualified acceptance where the acceptor :
i) undertakes to pay only `2,000 for a bill draw for `5000; ii) declares the payment to be independent of
any other event; iii) write;" accepted, payable at ABC bank.
Ans.
(i) The acceptance is qualified since the acceptance is given for a part of the sum mentioned in the bill.
(ii) The acceptance is not qualified since the acceptance is given without any condition or qualification.
(iii) The acceptance is not qualified since an acceptance to pay at a particular place amounts to general
acceptance (but if is expressly stated that the bill shall be paid at the specified place only and not elsewhere
amount to qualified acceptance).
Q.26 Mr wise obtains fraudulently from R a crossed cheque 'Not Negotiable'. He transfers the cheque to "V",
who gets the cheque encashed from ANS BANK LTD. which is not the drawee bank. R on coming to
know about the fraudulent act of Mr. Wise sues ANS BANK LTD. for the recovery of money. Examine with
reference to the relevant provisions of the NI ACT, 1881 whether R will succeed in his claim? Would your
answer be still the same in case Mr. 'Wise does not transfer the cheque and gets the cheque encashed
from AN BANK himself?
Ans.
The collecting banker is not liable towards R since it has collected the payment of the cheque, acting as an agent
provided it has collected the payment of the cheque in good faith and without negligence (Sec 131). Even if Mr.
Wise collects the cheque himself collecting banker is not liable for the same reasons cited above. (Sec 128)
Q.27 A issues an open 'bearer' cheque for `10,000 is favour of B who strikes out the word 'bearer' and puts
crossing across the cheque. The cheque is thereafter negotiated to C and D. When it is finally presented
by D's banker it is returned with remarks' payment counter manded 'by drawer. In response to this legal
notice from D A pleads that the cheque was altered after it had been issued from therefore he is not bound
to pay the cheque. Referring to the provisions of the Nl ACT 1881, decide whether a' argument is valid or
not?
Ans.
Effect of striking off the word barenit amount to a material alteration. However such material alteration is authorised
by the act. Therefor the cheque is not discharged remains valid.
Effect of crossing the cheque : It amounts to a materials alteration. However such material alteration is authorised
by the act. Therefore, the cheque is not discharged it remains valid.
A's argument is not valid since the reason for dishonour of cheque is not material alteration, but payment
countermanded by drawer. Therefore A is liable for the payment of the cheque, and he shall also be liable for
dishonour of cheque in accordance with the provisions of Sec 138.

Q.28 N is the holder of a bill of exchange made payable to the order of 'P'. The of exchange contains the foil,
endorsements in bank : first endorsement - P; Second endorsement -'Q'.
Third endorsement -'R' Fourth endorsement-'S' N strikes out, without S's consent, the endorsement by Q
and R. Decide with reasons whether N is entitled to recover any thing from S under the provisions of the
NI Act. 1881.
Ans.
Effects of striking off the name of an endorse where the holder cancels the name of any party liable on the
negotiable instrument, such a party and all parties subsequent to him are discharged S. is discharged since
the holder N has struck off the name of Q and R, and S is the party subsequent to Q and R. N. is not entitled to
recover anything from S since S has been discharged due to cancellation of endorsement of Q and R.
Q.29 State briefly the rules laid down under the Negotiable Instruments Act for determining the date of maturity
of a bill of exchange. Ascertain the date of maturity of a bill payable hundred days after sight and which is
presented for sight on 4th May, 2000.
Ans.
Calculation of maturity of a Bill of Exchange: The maturity of a bill, not payable on demand, at sight, or on
presentment, is at maturity on the third day after the day on which it is expressed to be payable (Section 22, para
2 of Negotiable Instruments Act, 1881). Three days are allowed as days of grace. No days of grace are allowed
in the case of bill payable on demand, at sight, or presentment.
When a bill is made payable at stated number of months after date, the period stated terminates on the day of the
month which corresponds with the day on which the instrument is dated. When it is made payable after a stated
number of months after sight the period terminates on the day of the month which corresponds with the day
on which it is presented for acceptance or sight or noted for non-acceptance or protested for non¬acceptance.
When it is payable a stated number of months after a certain event, the period terminates on the day of the month
which corresponds with the day on which the event happens (Section 23).
When a bill is made payable a stated number of months after sight and has been accepted for honour, the period
terminates with the day of the month which corresponds with the day on which it was so accepted.
If the month in which the period would terminate has no corresponding day, the period terminates on the last day
of such month (Section 23).
In calculating the date a bill made payable a certain number of days after date or after sight or after a certain
event is at maturity, the day of the date, or the day of presentment for acceptance or sight or the day of protest
for non-accordance, or the day on which the event happens shall be excluded (Section 24).
Three days of grace are allowed to these instruments after the day on which they are expressed to be payable
(Section 22).
When the last day of grace falls on a day which is public holiday, the instrument is due and payable on the next
preceding business day (Section 25).
Answer to Problem: In this case the day of presentment for sight is to be excluded i.e. 4th May, 2000. The period
of 100 days ends on 12th August, 2000 (May 27 days + June 30 days + July 31 days + August 12 days). Three
days of grace are to be added. It falls due on 15th August, 2000 which happens to be a public holiday. As such
it will fall due on 14th August, 2000 i.e. the next preceding business day.

Q.30 In what way does the Negotiable Instruments Act, 1881 regulate the determination of the `Date of maturity'
of a Bill of Exchange. Ascertain the 'Date of maturity' of a bill payable 120 days after the date. The Bill of
exchange was drawn on 1st June, 2005.
Ans.
Calculation of maturity of a Bill of Exchange: The maturity of a bill, not payable on demand, at sight or on
presentment, is at maturity on the third day after the day on which it is expressed to be payable (Section 22, pare
2 of Negotiable Instruments Act, 1881). Three days are allowed as days of grace. No days of grace are allowed
in the case of a bill payable on demand, at sight, or presentment.
When a bill is made payable as stated number of months after date, the period stated terminates on the day of the
month, which corresponds with the day on which the instrument is dated. When it is made payable after a stated
number of months after sight the period terminates on the day of the month which corresponds with the day on
which it is presented for acceptance or sight or noted for non-acceptance on protested for Non-acceptance when
it is payable a stated number of months after a certain event, the period terminates on the day of the month which
corresponds with the day on which the event happens. (Section 23).
When a bill is made payable a stated number of months after sight and has been accepted for honour, the period
terminates on the day of the month which corresponds with the day on which it was so accepted.
If the month in which the period would terminate has no corresponding day, the period terminates on the last day
of such month (Section 23).
In calculating the date a bill made payable a certain number of days after date or after sight or after a certain
event is at maturity, the day of the date, or the day of protest for non- acceptance, or the day on which the event
happens, shall be excluded (Section 24).
Three days of grace are allowed to these instruments after the day on which they are expressed to be payable.
(Section 22).
When the last day of grace falls on a day, which is public holiday, the instrument is due and payable on the next
preceding business day (Section 25).
Answer to Problem: In this case the day of presentment for sight is to be excluded i.e. 1st June, 2005. The period
of 120 days ends on 29th September, 2005 (June 29 days + July 31 days + August 31 Days + September 29
days = 120 days). Three days of grace are to be added. It falls due on 2nd October, 2005, which happens to be
a public holiday. As such it will fall due on 151 October, 2005 i.e., the next preceding Business Day.
Q.31 Bharat executed a promissory note in favour of Bhushan for 5 crores. The said amount was payable three
days after sight. Bhushan, on maturity, presented the promissory note on 1st January, 2008 to Bharat.
Bharat made the payments on 4th January, 2008. Bhushan wants to recover interest for one day from
Bharat. Advise Bharat, in the light of provisions of the Negotiable Instruments Act, 1881, whether he is
liable to pay the interest for one day?
Ans.
Claim of Interest: Section 24 of the Negotiable Instruments Act, 1881 states that where a bill or note is payable
after date or after sight or after happening of a specified event, the time of payment is determined by excluding
the day from which the time begins to run.

Therefore, in the given case, Bharat will succeed in objecting to Bhushan's claim. Bharat paid rightly "three days
after sight". Since the bill was presented on 1st January, Bharat was required to pay only on the 4th and not on
3rd January, as contended by Bharat.
Q.32 A draws a bill on B. B accepts the bill without any consideration. The bill is transferred to C without
consideration. C transferred it to D for value. Decide-.
(i) Whether D can sue the prior parties of the bill, and
(ii) Whether the prior parties other than D have any right of action inter se?
Give your answer in reference to the Provisions of Negotiable Instruments Act, 1881.
Ans.
Problem on Negotiable Instrument made without consideration: Section 43 of the Negotiable Instruments Act,
1881 provides that a negotiable instrument made, drawn, accepted, indorsed or transferred without consideration,
or for a consideration which fails, creates no obligation of payment between the parties to the transaction. But
if any such party has transferred the instrument with or without endorsement to a holder for consideration, such
holder, and every subsequent holder deriving title from him, may recover the amount due on such instrument
from the transferor for consideration or any prior party thereto.
(i) In the problem, as asked in the question, A has drawn a bill on B and B accepted the bill without consideration
and transferred it to C without consideration. Later on in the next transfer by C to D is for value. According
to provisions of the aforesaid section 43, the bill ultimately has been transferred to D with consideration.
Therefore, D can sue any of the parties i.e. A, B or C, as D arrived a good title on it being taken with
consideration.
(ii) As regards to the second part of the problem, the prior parties before D i.e., A, B, and C have no right of
action inter se because first part of Section 43 has clearly lays down that a negotiable instrument, made,
drawn; accepted, indorsed or transferred without consideration, or for a consideration which fails, creates
no obligation of payment between the parties to the transaction prior to the parties who receive it on
consideration.
Q.33 What do you understand by "Material alteration" under the Negotiable Instruments Act, 1881? State
whether the following alterations are material alterations under the Negotiable Instruments Act, 1881?
(i) The holder of the bill inserts the word "or order" in the bill,
(ii) The holder of the bearer cheque converts it into account payee cheque,
(iii) A bill payable to ' is converted into a bill payable to X and Y
Ans.
As per the Negotiable Instruments Act, 1881, an alteration can be called a material alteration if it alters or
attempts to alters the character of the instrument and affects or is likely to affect the contract which the instrument
contains or is evidence of. Thus, it totally alters the business effect of the instrument. It makes the instrument
speak a language other than that was intended.
The following materials alterations have been authorised by the Act and do not require any authentication:
(a) filling blanks of inchoate instruments [Section 20]
(b) Conversion of a blank endorsement into an endorsement in full [Section 49]

(c) Crossing of cheque [Section 125]
The important materials and non-materials altermnation are :
Materials alternation Non-material alternation

1. Alternation of date of instrument (e.g. if a bill dated 1st 1. Conversion of instrument payable to bearer.
mat, 1998) is changed to a bill dated 1st June, 1998.
2. Alternation of time of payment (e.g. if a bill payable three 2. Conversion of instrument payable to bearer
months after date is changed to bill payable four months into order.
payable after date).
3. Alternation of place of payment (e.g., if a bill payable at 3. Elimination of the words 'or order' from an
Delhi is changed to bill payable at Mumbai). endorsement.
4. Alternation of amount payable (e.g. if bill fòr1,000 is 4. Addition of the words 'or demand' to a note in
changed to a bill for `2000) which no time or payment is expressed.
5. Conversion of blank endorsement into special
endorsement.
6. Addition of a new party to an instrument.
7. Alternation of one of the clauses of the instrument
containing a penal action
As per the above sections the changes of serial numbers (i) is non-material and changes of serial numbers (ii)
(iii) are material changes in the given problem.
Amendments to the Negotiable Instruments Act, 1881

The Ministry of Law and Justice has made amendments to the Negotiable Instruments Act, 1881 through the
Negotiable Instruments (Amendment) Act, 2018. This Amendment Act received the assent of the President and
published in the Official Gazette on 2nd August, 2018.
In the Negotiable Instruments Act, 1881 (hereinafter referred to as the principal Act), after section 143, the
following section shall be inserted, namely:—
‘‘143A. Power to direct interim compensation.
(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973, the Court trying an offence under
section 138 may order the drawer of the cheque to pay interim compensation to the complainant—
(a) in a summary trial or a summons case, where he pleads not guilty to the accusation made in the complaint; and
(b) in any other case, upon framing of charge.
(2) The interim compensation under sub-section (1) shall not exceed twenty per cent. of the amount of the cheque.
(3) The interim compensation shall be paid within sixty days from the date of the order under sub-section (1), or
within such further period not exceeding thirty days as may be directed by the Court on sufficient cause being
shown by the drawer of the cheque.
(4) If the drawer of the cheque is acquitted, the Court shall direct the complainant to repay to the drawer the amount
of interim compensation, with interest at the bank rate as published by the

Reserve Bank of India, prevalent at the beginning of the relevant financial year, within sixty days from the date of
the order, or within such further period not exceeding thirty days as may be directed by the Court on sufficient cause
being shown by the complainant.
(5) The interim compensation payable under this section may be recovered as if it were a fine under section 421 of
the Code of Criminal Procedure, 1973.
(6) The amount of fine imposed under section 138 or the amount of compensation awarded under section 357 of
the Code of Criminal Procedure, 1973, shall be reduced by the amount paid or recovered as interim compensation
under this section.’’.
(2) In the principal Act, after section 147, the following section shall be inserted, namely:—
‘‘148. Power of Appellate Court to order payment pending appeal against conviction.
(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973, in an appeal by the drawer
against conviction under section 138, the Appellate Court may order the appellant to deposit such sum which shall
be a minimum of twenty per cent. of the fine or compensation awarded by the trial Court:
Provided that the amount payable under this sub-section shall be in addition to any interim compensation paid by
the appellant under section 143A.
(2) The amount referred to in subsection (1) shall be deposited within sixty days from the date of the order, or within
such further
period not exceeding thirty days as may be directed by the Court on sufficient cause being shown by the
appellant.
(3) The Appellate Court may direct the release of the amount deposited by the appellant to the complainant at any
time during the pendency of the appeal:
Provided that if the appellant is acquitted, the Court shall direct the complainant to repay to the appellant the
amount so released, with interest at the bank rate as published by the Reserve Bank of India, prevalent at the
beginning of the relevant financial year, within sixty days from the date of the order, or within such further period not
exceeding thirty days as may be directed by the Court on sufficient cause being shown by the complainant.’’.

Chapter - 6 THE GENERAL CLAUSES
ACT, 1897
Section 1 Preliminary
Section 3 - 4A General Definitions
Section 5 - 13 General Rules of Construction
Section 14 - 19 Power & Functionaries
Section 20 - 24 Provisions as to orders, rules etc. made under enactments
Section 25 - 30 Miscellaneous
Preliminary [Section 1]
The general clauses act, 1897
General Definitions [Sections 3 to 4A]
Provisions as to orders, rules etc. made under enactments

[Sections 20 to 24]
General Rules of Construction [Sections 5 to 13]
Miscellaneous [Sections 25 to 30]
Power & Functionaries [Sections 14 to 19]
Introduction
This is an Act intends to provide general definitions which shall be applicable to all Central Acts and Regulations
where there is no definition in those Acts or regulations that emerge with the provisions of the Central Acts or
regulations, unless there is anything repugnant in the subject or context.
The General Clauses Act has been enacted to shorten language used in parliamentary legislation and to avoid
the repetition of the same words in the same course of the same piece of legislation.
Example : Wherever the law provides that court will have the power to appoint, suspend or remove a receiver,
the legislature simply enacted that wherever convenient the court may appoint receiver and it was implied within
that language that it may also remove or suspend him. (Rayarappan V. Madhavi Amma, A.I.R. 1950 F.C. 140)
The General Clauses Act, 1897 was enacted on 11th March, 1897 to consolidate and extend the General Clauses
Act, 1868 and 1887.

Object, Purpose and Importance of the general clauses act
The objects of the Act are several, namely:

(1) To shorten the language of Central Acts;
(2) To provide, as far as possible, for uniformity of expression in Central Acts, by giving definitions of a series of
terms in common use;
Example : The Supreme Court applied the provisions of section 24 of the General Clauses Act to the Mines Act,
1923 (Chief Inspector of Mines V. Karam Chand Thapar.) The General Clauses Act, thus, makes provisions as to
the construction of General Acts and other laws of all-India application. Its importance, therefore, in point of the
number of enactments to which it applies, is obvious.
Much more, however, can be said about the importance of an interpretation Act, which has been called the “Law
of all Laws”.
Application of the general clauses act
The Act not defines any “territorial extent” clause. Its application is primarily with reference to all Central legislation
and also to rules and regulations made under a Central Act. If a Central Act is extended to any territory, the
General Clauses Act would also deemed to be applicable in that territory and would apply in the construction of
that Central Act.
In many countries, Legislatures similar to the General Clauses Act are called Interpretation Acts. The Supreme
Court had observed in the case of Chief Inspector of Mines vs. K. C. Thapar “Whatever the General Clauses Act
says, whether as regards the meanings of words or as regards legal principles, has to be read into every Act to
which it applies.”
It may also be noted that though Act does not,in terms apply to State laws, it is evident that the State General
Clauses Acts should conform to the General Clauses Act of 1897, for, otherwise, divergent rules of construction
and interpretation would apply, and.as a result, great confusion might ensue.
Some basic understandings of legislation
“Preamble” : Every Act has a preamble which expresses the scope, object and purpose of the Act. It is
the main source for understanding the intention of lawmaker behind the Act. Whenever there is ambiguity in
understanding any provision of Act, Preamble is accepted as an aid to construction of the Act.
In short, the Preamble to an Act discloses the primary intention of the legislature but can only be brought in as
an aid to construction if the language of the statute is not clear. However, it cannot override the provisions of the
enactment.
Example :
(1) Preamble of the Negotiable Instruments Act, 1881 states - “An Act to define and amend the law relating to
Promissory Notes, Bills of Exchange and Cheques.”
(2) Preamble of the Companies Act, 2013 states – “An Act to consolidate and amend the law relating to
companies.”

“Definitions”: Every Act contains definition part for the purpose of that particular Act and that definition part
are usually mentioned in the Section 2 of that Act but in some other Acts, it is also mentioned in Section 3 or in
other initial sections. Hence, definitions are defined in the Act itself. However, if there may be words which are not
defined in the definitions of the Act, the meaning of such words may be taken from General Clauses Act, 1897.
Example (1) : The word ‘Company’ used in the Companies Act, is defined in section 2(20) of the respective Act.
Example (2) : The word ‘Affidavit’ used in section 7 during the incorporation of company, in the Companies Act,
2013, shall derive its meaning from the word ‘Affidavit’ as defined in the General Clauses Act, 1897.
“Means” and/or “include” : Some definitions use the word “means”. Such definitions are exhaustive definitions
and exactly define the term.
Example (1) : Definition of ‘Company’ as given in section 2(20) of the Companies Act, 2013. It states, “Company”
means a company incorporated under this Act or under any previous company law.
Example (2) : Section 2(34) of the Companies Act, 2013 defines the term director as “director” means a director
appointed to the Board of a company.
Some definitions use the word “include”. Such definitions do not define the word but are inclusive in nature.
Where the word is defined to ‘include’ such and such, the definition is ‘prima facie’ extensive. The word defined is
not restricted to the meaning assigned to it but has extensive meaning which also includes the meaning assigned
to it in the definition section.
Example (1) : Word ‘debenture’ defined in section 2(30) of the Companies Act, 2013states that “debenture”
includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting
a charge on the assets of the company or not”. This is a definition of inclusive nature.
Example (2) : “Body Corporate” or “Corporation” includes a company incorporated outside India. [Section 2(11)
of the Companies Act, 2013]
The above definition of Body Corporate does not define the term Body Corporate, but just states that companies
incorporated outside India will also cover under the definition of Body Corporate, apart from other entities which
are called as Body Corporate.
We may also find a word being defined as ‘means and includes’ such and such: here again the definition would
be exhaustive.
Example : Share defined under section 2(84) of the Companies Act, 2013, states that “Share” means a share in
the share capital of a company and includes stock;
On the other hand, if the word is defined ‘to apply to and include’, the definition is understood as extensive.
“Shall” and “May” : The word ‘shall’ is used to raise a presumption of something which is mandatory or
imperative while the word ‘may’ is used to connote something which is not mandatory but is only directory or
enabling. Hence, while interpreting any provision of law, the words “shall” and “may” have to be given utmost
importance to understand what is mandatory and what is optional or directory under law.
Example (1) : Section 3 of the Companies Act, 2013 states that “A company may be formed for any lawful
purpose by…………….”
Here the word used “may” shall be read as “shall”. Usage of word ‘may’ here makes it mandatory’ for a company
for the compliance of section 3 for its formation.

Example (2) : Section 21 of the Companies Act, 2013, provides that documents/ proceeding requiring
authentication or the contracts made by or on behalf of the company, may be signed by any Key Managerial
Personnel or an officer of the company duly authorisd by the Board in this behalf.
Usage of the ‘may’ shall be read as ‘may’.
The use of word ‘shall’ with respect to one matter and use of word ‘may’ with respect to another matter in the
same section of a statute, will normally lead to the conclusion that the word ‘shall’ imposes an obligation, whereas
word ‘may ’confers a discretionary power ( Labour Commr., M.P.V. Burhanpur Tapti Mill, AIR, 1964 SC1687).
Preliminary [Section 1]
“Short title” [Section 1(1)] : This Act may be called the General Clauses Act, 1897. Preliminary is the introductory
part of any law which generally contains Short Title, extent, commencement, application etc. The General Clauses
Act contains only short title in the Preliminary part of the Act.
Definitions [Section 3]
1. “Act” [Section 3(2)] : ‘Act’, used with reference to an offence or a civil wrong, shall include a series of acts,
and words which refer to acts done extend also to illegal omissions;
2. “Affidavit” [Section 3(3)] : ‘Affidavit’ shall include affirmation and declaration in the case of persons by
law allowed to affirm or declare instead of swearing. There are two important points derived from the above
definition:
1. Affirmation and declaration,
2. In case of persons allowed affirming or declaring instead of swearing.
The above definition is inclusive in nature. It states that Affidavit shall include affirmation and declarations.
This definition does not define affidavit. However, we can understand this term in general parlance. Affidavit
is a written statement confirmed by oath or affirmation for use as evidence in Court or before any authority.
3. “Central Act” [Section 3(7)] : ‘Central Act’ shall mean an Act of Parliament, and shall include-
(a) An Act of the Dominion Legislature or of the Indian Legislature passed before the commencement of
the Constitution*, and
(b) An Act made before such commencement by the Governor General in Council or the Governor General,
acting in a legislative capacity;
The date of the commencement of the Constitution is 26th January, 1950.
4. “Central Government” [Section 3(8)] : ‘Central Government’ shall-
(a) In relation to anything done before the commencement of the Constitution, mean the Governor General
in Council, as the case may be; and shall include,-
(i) In relation to functions entrusted under sub-section (1) of the section 124 of the Government of
India Act, 1935, to the Government of a Province, the Principal Government acting within the
scope of the authority given to it under that sub-section; and
(ii) In relation to the administration of a Chief Commissioner’s Province, the Chief Commissioner

acting within the scope of the authority given to him under sub-section (3) of section 94 of the said
Act; and
(b) In relation to anything done or to be done after the commencement of the constitution of the Constitution,
mean the President; and shall include ;-
(i) In relation to function entrusted under clause (1) of the article of the Constitution, to the Government
of a state, the State Government acting within the scope of the authority given to it under that
clause;
(ii) In relation to the administration of a Part C State before the commencement of the Constitution
(Seventh Amendment) Act, 1956*, the Chief Commissioner or the Lieutenant Governor or the
Government of a neighbouring State or other authority acting within the scope of the authority
given to him or it under article 239 or article 243 of the Constitution, as the case may be; and
(iii) In relation to the administration of a Union territory, the administrator thereof acting within the
scope of the authority given to him under article 239 of the Constitution;
The date of commencement of the Constitution (Seventh Amendment) Act, 1956 is 01st January, 1956.
5. “Commencement” [Section 3(13)] : ‘Commencement’ used with reference to an Act or Regulation, shall
mean the say on which the Act or Regulation comes into force;
A Law cannot be said to be in force unless it is brought into operation by legislative enactment, or by the
exercise of authority by a delegate empowered to bring it into operation. The theory of a statute being “in
operation in a constitutional sense” though it is not in fact in operation, has no validity. [State of Orissa Vs.
Chandrasekhar Singh Bhoi, Air 1970 SC 398]
6. “Document” [Section 3(18)] : ‘Document’ shall include any matter written, expressed or described upon
any substance by means of letters, figures or marks or by more than one of those means which is intended
to be used or which may be used, for the purpose or recording that matter.
Document [Sec.3(18)]
Shall include
Any matter written, By means of letters,

Which is intended
expressed or or figures or by more For the purpose of
to be used or which
described upon any than one of those recording that matter
may be used
substance means
Thus, the term “Document” include any substance upon which any matter is written or expressed by means of
letters or figures for recording that matter.
For example, book, file, painting, inscription and even computer files are all documents.
7. “Enactment” [Section 2(19)] : ‘Enactment’ shall include a Regulation (as hereinafter defined) and any

Regulation of Bengal, Madras or Bombay Code, and shall also include any provision contained in any Act
or in any such Regulation as aforesaid;
It has been held that an “enactment” would include any Act ( or a provision contained therein) made by the
Union Parliament or the State Legislature. Again, since “enactment” is defined to include also any provision
of an Act, section 6 ( Effect of repeal) would apply to a case where not only the entire Act is repealed, but
also where any provision of an Act is repealed. [State of Punjab Sukh Deo Sarup Gupta A.LR. 1970 SC
1661, 1942, para 3, affirming A.I.R. 1965 Punj. 399 and Godhra Electricity Co. v. Somalal, A.I.R. 1967 Guj.
772, 776, para 6.]
8. “Financial Year” [Section 3(21)]: Financial year shall mean the year commencing on the first day of April.
The term Year has been defined under Section 3(66) as a year reckoned according to the British calendar.
Thus as per General Clauses Act, Year means calendar year which starts from January to December.
Difference between Financial Year and Calendar Year : Financial year starts from first day of April but
Calendar Year starts from first day of January.
Financial Year [Section 3(21)]
Shall mean
The year
Commencing on the first day of April
9. “Good Faith” [Section 3(22)] : A thing shall be deemed to be done in “good faith” where it is in fact done
honestly, whether it is done negligently or not;
The question of good faith under the General Clauses Act is one of fact. It is to determine with reference to
the circumstances of each case. The term “Good faith” has been defined differently in different enactments.
This definition of the good faith does not apply to that enactment which contains a special definition of the
term “good faith” and there the definition given in that particular enactment has to be followed. This definition
may be applied only if there is nothing repugnant in subject or context, and if that is so, the definition is not
applicable.
In Maung Aung Pu Vs. Maung Si Maung, it was pointed out that the expression “good faith” is not defined
in the Indian Contract Act, 1872 and the definition given here in the General Clauses Act, 1897 does not
expressly apply the term on the Indian Contract Act. The definition of good faith as is generally understood in
the civil law and which may taken as a practical guide in understanding the expression in the contract Act is
that nothing is said to be done in good faith which is done without due care and attention as is expected with
a man of ordinary prudence. An honest purchase made carelessly without making proper enquiries cannot
be said to have been made in good faith so as to convey good title.
10. “Government” [Section 3(23)] : ‘Government’ or ‘the Government’ shall include both the Central

Government and State Government.
Hence, wherever, the word ‘Government’ is used, it will include Central Government and State Government
both.
11. “Government Securities” [Section 3(24)] : ‘Government securities’ shall mean securities of the Central
Government or of any State Government, but in any Act or Regulation made before the commencement of
the Constitution shall not include securities of the Government of any Part B state;
12. “Immovable Property” [Section 3(26)] : ‘Immovable Property’ shall include:
(i) Land,
(ii) Benefits to arise out of land, and
(iii) Things attached to the earth, or
(iv) permanently fastened to anything attached to the earth.
It is an inclusive definition. It contains four elements: land, benefits to arise out of land, things attached to
the earth and things permanently fastened to anything attached to the earth. Where, in any enactment, the
definition of immovable property is in the negative and not exhaustive, the definition as given in the General
Clauses Act will apply to the expression given in that enactment.
Example 1 : Trees are immovable property because trees are benefits arise out of the land and attached to the
earth. However, timber is not immovable property as the same are not permanently attached to the earth. In the
same manner, buildings are immovable property.
Example 2 : Right of way to access from one place to another, may come within the definition of Immovable
property whereas to right to drain of water is not immovable property. Any machinery fixed to the soil, standing
crops can be held as immovable property according to the General Clauses Act, 1897.
Immovable Property [Section 3(26)]
Shall include
Land
Benefits to arise out of land
Things attached to the earth
Things permanently fastened to anything

attached to the earth

13. “Imprisonment” [Section 3(27)] : ‘Imprisonment’ shall mean imprisonment of either description as defined
in the Indian Penal Code (45 of 1860);
14. “Indian law” [Section 3(29)] : ‘Indian law’ shall mean any Act, Ordinance, Regulation, rule, order, bye law
orother instrument whichbeforethecommencement of the Constitution, had the force of law in any Province
of India or part thereof or thereafter has the force of law in any Part A or Part C State or part thereof, but does
not include any Act of Parliament of the United Kingdom or any Order in Council, rule or other instrument
made under such Act;
15. “Month” [Section 3(35)] : ‘Month’ shall mean a month reckoned according to the British calendar;
16. “Movable Property” [Section 3(36)] : ‘Movable Property’ shall mean property of every description, except
immovable property.
Thus, any property which is not immovable property is movable property.
17. “Oath” [Section 3(37)] : ‘Oath’ shall include affirmation and declaration in the case of persons by law
allowed to affirm or declare instead of swearing.
18. “Offence”[Section 3(38)] : ‘Offence’ shall mean any act or omission made punishable by any law for the
time being in force.
Any act or omission which is if done, is punishable under any law for the time being in force, is called as
offence.
19. “Official Gazette” [Section 3(39)] : ‘Official Gazette’ or ‘Gazette’ shall mean:
(i) The Gazette of India, or
(ii) The Official Gazette of a state.
20. “Person”[Section 3(42)] : “Person” shall include:
(i) any company, or
(ii) association, or
(iii) body of individuals, whether incorporated or not
21. “Registered” [Section 3(49)] : ‘Registered’ used with reference to a document, shall mean registered in
India under the law for the time being force for the registration of documents.
22. “Rule” [Section 3(51)] : ‘Rule’ shall mean a rule made in exercise of a power conferred by any enactment,
and shall include a Regulation made as a rule under any enactment;
23. “Schedule” [Section 3(52)] : ‘Schedule’ shall mean a schedule to the Act or Regulation in which the word
occurs;
24. “Section” [Section 3(54)] : ‘Section’ shall mean a section of the Act or Regulation in which the word occurs;
25. “Sub-section” [Section 3(61)] : ‘Sub-section’ shall mean a sub-section of the section in which the word
occurs;
26. “Swear” [Section 3(62)] : “Swear”, with its grammatical variations and cognate expressions, shall include
affirming and declaring in the case of persons by law allowed to affirm or declare instead of swearing.
Note : The terms “Affidavit”, “Oath” and “Swear” have the same definitions in the Act.

27. “Writing” [Section 3(65)] : Expressions referring to ‘writing’ shall be construed as including references to
printing, lithography, photography and other modes of representing or reproducing words in a visible forms;
and
28. “Year” [Section 3(66)] : ‘year’ shall mean a year reckoned according to the British calendar.
Application to foregoing definitions to previous enactments [Section 4] - There are certain definitions in
section 3 of the General Clauses Act, 1897 which would also apply to the Acts and Regulations made prior to
1987 i.e., on the previous enactments of 1868 and 1887. This provision is divided into two parts-
(1) Application of terms/expressions to all [Central Acts] made after the third day of January, 1868, and
to all Regulations made on or after the 14th January, 1887-
Here the given relevant definitions in section 3 of the following words and expressions, that is to say,
‘affidavit’, ‘immovable property’, ‘imprisonment’, ‘‘month’, ‘movable property’, ‘oath’, ‘person’, ‘section’, ‘and
‘year’ apply also, unless there is anything repugnant in the subject or context, to all [Central Acts] made after
the third day of January, 1868, and to all Regulations made on or after the 14th January, 1887.
(2) Application of terms/expressions to all Central Acts and Regulations made on or after the fourteenth
day of January, 1887- The relevant given definitions in the section 3 of the following words and expressions,
that is to say, ‘commencement’, ‘financial year’, ‘offence’, ‘registered’, schedule’, ‘sub-section’ and ‘writing’
apply also, unless there is anything repugnant in the subject or context, to all Central Acts and Regulations
made on or after the fourteenth day of January, 1887.
Application of certain definitions to Indian Laws [Section 4A] -
(1) The definitions in section 3 of the expressions ‘Central Act’, ‘Central Government’, ‘‘Gazette’, ‘Government’,
‘Government Securities’, ‘Indian Law’, and ‘‘Official Gazette’, ‘shall apply, unless there is anything repugnant
in the subject or context, to all Indian laws.
(2) In any Indian law, references, by whatever form of words, to revenues of the Central Government or of
any State Government shall, on and from the first day of April, 1950, be construed as references to the
Consolidated Fund of India or the Consolidated Fund of the State, as the case may be.
General rules of Construction: [Section 5 to Section 13]
Operation of enactment” [Section 5] : Where any Central Act has not specifically mentioned a particular date
to come into force, it shall be implemented on the day on which it receives the assent of the Governor General
in case of a Central Acts made before the commencement of the Indian Constitution and/or, of the President in
case of an Act of Parliament.
Example : The Companies Act, 2013 received assent of President of India on 29th August, 2013 and was
notified in Official Gazette on 30th August, 2013 with the enforcement of section 1 of the Act. Accordingly, the
Companies Act, 2013 came into enforcement on the date of its publication in the Official Gazette.
Where, if any specific date of enforcement is prescribed in the Official Gazette, Act shall into enforcement from
such date.
Example : SEBI (Issue of Capital and Disclosure Requirements) (Fifth Amendment) Regulations, 2015 was
issued by SEBI vide Notification dated 14th August, 2015 with effect from 1 January, 2016. Here, this regulation
shall come into enforcement on 1st January, 2016 rather than the date of its notification in the gazette.

In the case of State of Uttar Pradesh v. Mahesh Narain, AIR 2013 SC 1778, Supreme Court held that Effective
date of Rules would be when the Rules are published vide Gazette notification and not from date when the Rules
were under preparation.
“Effect of Repeal” [Section 6] : Where any Central legislation or any regulation made after the commencement
of this Act repeals any Act made or yet to be made, unless another purpose exists, the repeal shall not:
Ø Revive anything not enforced or prevailed during the period at which repeal is effected or;
Ø Affect the prior management of any legislation that is repealed or anything performed or undergone
or;
Ø Affect any claim, privilege, responsibility or debt obtained, ensued or sustained under any legislation so
repealed or;
Ø Affect any punishment, forfeiture or penalty sustained with regard to any offence committed as
opposed to any legislation or
Ø Affect any inquiry, litigation or remedy with regard to such claim, privilege, debt or responsibility or any
inquiry, litigation or remedy may be initiated, continued or insisted.
In State of Uttar Pradesh v. Hirendra Pal Singh, (2011), 5 SCC 305, SC held that whenever an Act is repealed, it
must be considered as if it had never existed. Object of repeal is to obliterate the Act from statutory books, except
for certain purposes as provided under Section 6 of the Act.
In Kolhapur Canesugar Works Ltd. V, Union of India, AIR 2000, SC 811, Supreme Court held that Section 6 only
applies to repeals and not to omissions and applies when the repeal is of a Central Act or Regulation and not of
a Rule.
In Navrangpura Gam Dharmada Milkat Trust v. Rmtuji Ramaji, AIR 1994 Guj 75: ‘Repeal’ of provision is in
distinction from ‘deletion’ of provision. ‘Repeal’ ordinarily brings about complete obliteration of the provision as if
it never existed, thereby affecting all incoherent rights and all causes of action related to the ‘repealed’ provision
while ‘deletion’ ordinarily takes effect from the date of legislature affecting the said deletion, never to effect total
effecting or wiping out of the provision as if it never existed. For the purpose of this section, the above distinction
between the two is essential.
“Repeal of Act making textual amendment in Act or Regulation” [Section 6A] - Where any Central Act or
Regulation made after the commencement of this Act repeals any enactment by which the text of any Central
Act or Regulation was amended by the express omission, insertion or substitution of any matter, then unless
a different intention appears, the repeal shall not affect the continuance of any such amendment made by the
enactment so repealed and in operation at the time of such repeal.
“Revival of repealed enactments” [Section 7] - (1) In any Central Act or Regulation made after the
commencement of this Act, it shall be necessary, for the purpose of reviving, either wholly or partially, any
enactment wholly or partially repealed, expressed to state that purpose.
(2) This section applies also to all Central Acts made after the third day of January, 1968 and to all Regulations
“Construction of references to repealed enactments” [Section 8] - (1) Where this Act or Central Act or
Regulation made after the commencement of this Act, repeals and re-enacts, with or without modification, any
provision of a former enactment, then references in any other enactment or in any instrument to the provision so

repealed shall, unless a different intention appears, be construed as references to the provision so re-enacted.
(2) Where before the fifteenth day of August, 1947, any Act of Parliament of the United Kingdom repealed
and re-enacted, with or without modification, any provision of a former enactment, then reference in any
Central Act or in any Regulation or instrument to the provision so repealed shall, unless a different intention
appears, be construed as references to the provision so re-enacted.
In Gauri Shankar Gaur v. State of U.P., AIR 1994 SC 169, it was held that every Act has its own distinction. If a
later Act merely makes a reference to a former Act or existing law, it is only by reference and all amendments,
repeals new law subsequently made will have effect unless its operation is saved by the relevant provision of
the section of the Act.
“Commencement and termination of time” [Section 9] : In any legislation or regulation, it shall be sufficient,
for the purpose of excluding the first in a series of days or any other period of time to use the word “from” and for
the purpose of including the last in a series of days or any other period of time, to use the word “to”.
Example : If a company declares dividend for its shareholder in its Annual General Meeting held on 30/09/2016.
Under the provisions of the Companies Act, 2013, company is required to pay declared dividend within 30 days
from the date of declaration i.e. from 01/10/2016 to 30/10/2016. In this series of 30 days, 30/09/2016 will be
excluded and last 30th day i.e. 30/10/2016 will be included.
“Computation of time” [Section 10] : Where by any legislation or regulation, any act or proceeding is directed
or allowed to be done or taken in any court or office on a certain day or within a prescribed period then, if the
Court or office is closed on that day or last day of the prescribed period, the act or proceeding shall be considered
as done or taken in due time if it is done or taken on the next day afterwards on which the Court or office is open.
In K. Soosalrathnam v. Div. Engineer, N.H.C. Tirunelveli, it was held by Madras High Court that since the last
date of the prescribed period was subsequent to the date of notification, declared to be a holiday on the basis of
the principles laid down in this section the last date of prescribed period for obtaining the tender schedules was
extended to the next working day.
“Measurement of Distances” [Section 11] : In the measurement of any distance, for the purposes of any
Central Act or Regulation made after the commencement of this Act, that distance shall, unless a different
intention appears, be measured in a straight line on a horizontal plane.
“Duty to be taken pro rata in enactments” [Section 12] : Where, by any enactment now in force or hereafter
to be in force, any duty of customs or excise or in the nature thereof, is leviable on any given quantity, by weight,
measure or value of any goods or merchandise, then a like duty is leviable according to the same rate on any
gender or less quantity.
“Gender and number” [Section 13] : In all legislations and regulations, unless there is anything repugnant in
the subject or context-
(1) Words importing the masculine gender shall be taken to include females, and
(2) Words in singular shall include the plural and vice versa.

Power and Functionaries [Section 14 to Section 19]
“Power conferred to be exercisable from time to time” [Section 14] : (1) Where, by any Central Act or
Regulation made after the commencement of this Act, any power is conferred, then unless a different intention
appears that power may be exercised from time to time as occasion requires.
(2) This section applies to all Central Acts and Regulations made on or after the fourteenth day of January, 1887.
“Power to appoint to include power to appoint ex-officio” [Section 15] : Where by any legislation or
regulation, a power to appoint any person to fill any office or execute any function is conferred, then unless it is
otherwise expressly provided, any such appointment, may be made either by name or by virtue of office.
Ex-officio is a Latin word which means by virtue of one’s position or office. Provision under this section states that
where there is a power to appoint, the appointment may be made by appointing ex-officio as well.
“Power to appoint to include power to suspend or dismiss” [Section 16] : The authority having for the
time being power to make the appointment shall also have power to suspend or dismiss any person appointed
whether by itself or any other authority in exercise of that power.
“Substitution of functionaries” [Section 17] : (1) In any Central Act or Regulation made after the commencement
of this Act, it shall be sufficient, for the purpose of indicating the application of a law to every person or number of
persons for the time being executing the functions of an office, to mention the official title of the officer at present
executing the functions, or that of the officer by whom the functions are commonly executed.
(2) This section applies also to all Central Acts made after the third day of January, 1868 and to all Regulations
“Successors” [Section 18] : (1) In any Central Act or Regulation made after the commencement of this Act, it
shall be sufficient, for the purpose of indicating the relation of a law to the successors of any functionaries or of
corporations having perpetual succession, to express its relation to the functionaries or corporations.
(2) This section shall also applies to all Central Acts made after the third day of January, 1868 and to all
Regulations made on or after the fourteenth day of January, 1887.
“Official Chiefs and subordinates” [Section 19] : A law relative to the chief or superior of an office shall
apply to the deputies or subordinates lawfully performing the duties of that office in the place of their superior, to
prescribe the duty of the superior.
Provision as to orders, rules etc. Made under enactments [Section 20 to Section 24]
“Construction of orders, etc., issued under enactments” [Section 20] : Where by any legislation or regulation,
a power to issue any notification, order, scheme, rule, form, or by-law is conferred, then expression used in the
notification, order, scheme, rule, form or bye-law, shall, unless there is anything repugnant in the subject or
context, have the same respective meaning as in the Act or regulation conferring power.
In Subhash Ram Kumar v. State of Maharashtra, AIR 2003 SC 269, it was held that ‘Notification’ in common
English acceptation mean and imply a formal announcement of a legally relevant fact and “notification publish in
Official Gazette” means notification published by the authority of law. It is a formal declaration and should be in
accordance with the declared policies or statute. Notification cannot be substituted by administrative instructions.
“Power to issue, to include power to add to, amend, vary or rescind notifications, orders, rules or bye-

laws” [Section 21] : Where by any legislations or regulations a power to issue notifications, orders, rules or bye-
laws is conferred, then that power, exercisable in the like manner and subject to the like sanction and conditions
(if any), to add, to amend, vary or rescind any notifications, orders, rules or bye laws so issued.
In Rasid Javed v. State of Uttar Pradesh, AIR 2010 SC 2275, Supreme Court held that under Section 21 of the
Act, an authority which has the power to issue a notification has the undoubted power to rescind or modify the
notification in the like manner.
In Shreesidhbali Steels Ltd. V. State of Uttar Pradesh, AIR 2011 SC 1175, Supreme Court held that power under
section 21 of the Act is not so limited as to be exercised only once power can be exercised from time to time
having regard to exigency of time.
“Making of rules or bye-laws and issuing of orders between passing and commencement of enactment”
[Section 22] : Where, by any Central Act or Regulation which is not to come into force immediately, on the
passing thereof, a power is conferred to make rules or bye-laws, or to issue orders with respect to the application
of the Act or Regulation or with respect to the establishment of any Court or the appointment of any Judge or
officer thereunder, or with respect to the person by whom, or the time when, or the place where, or the manner
in which, or the fees for which, anything is to be done under the Act or Regulation, then that power may be
exercised at any time after passing of the Act or Regulation; but rules, bye-laws or orders so made or issued shall
not take effect till the commencement of the Act or Regulation.
“Provisions applicable to making of rules or bye-laws after previous publications” [Section 23] : Where,
by any Central Act or Regulation, a power to make rules or bye- laws is expressed to be given subject to the
condition of the rules or bye-laws being made after previous publication, then the following provisions shall apply,
namely:-
(1) The authority having power to make the rules or bye-laws shall, before making them, publish a draft of the
proposed rules or bye-laws for the information of persons likely to be affected thereby;
(2) The publication shall be made in such manner as that authority deems to be sufficient, or, if the condition
with respect to previous publication so requires, in such manner as the Government concerned prescribes;
(3) There shall be published with the draft a notice specifying a date on or after which the draft will be taken into
consideration;
(4) The authority having power to make the rules or bye-laws, and, where the rules or bye-laws are to be
made with the sanction, approval or concurrence of another authority, that authority also shall consider any
objection or suggestion which may be received by the authority having power to make the rules or bye-laws
from any person with respect to the draft before the date so specified;
(5) The publication in the Official Gazette of a rule or bye-law purporting to have been made in exercise of a
power to make rules or bye-laws after previous publication shall be conclusive proof that the rule or bye-laws
has been duly made.
“Continuation of orders etc, issued under enactments repealed and re-enacted” [Section 24] : Where
any Central Act or Regulation, is, after, the commencement of this Act, repealed and re-enacted with or without
modification, then unless it is otherwise expressly provided any appointment notification, order, scheme, rule,
form or bye-law, made or issued under the repealed Act, continue in force, and be deemed to have been made
or issued under the notification, order, scheme, rule, form or bye-law, made or issued under the provisions so re-
enacted and when any Central Act or Regulation, which, by a notification under section 5 or 5A of the Scheduled
District Act, 1874, or any like law, has been extended to any local area, has, by a subsequent notification, been
withdrawn from the re-extended to such area or any part thereof, the provisions of such Act or Regulation shall
be deemed to have been repealed and re-enacted in such area or part within the meaning of this section.

In State of Punjab v. Harnek Singh, AIR 2002 SC 1074, It was held that investigation conducted by Inspectors of
Police, under the authorization of notification issued under Prevention of Corruption Act, of 1947 will be proper
and will not be quashed under new notification taking the above power, till the aforesaid notification is specifically
superseded or withdrawn or modified under the new notification.
Miscellaneous [Section 25 to Section 30]
“Recovery of fines” [Section 25] : Section 63 to 70 of the Indian Penal Code and the provisions of the Code of
Criminal Procedure for the time being in force in relation to the issue and the execution of warrants for the levy
of fines shall apply to all fines imposed under any Act, Regulation, rule or bye-laws, unless the Act, Regulation,
rule or bye-law contains an express provision to the contrary.
“Provision as to offence punishable under two or more enactments” [Section 26] : Where an act or
omission constitutes an offence under two or more enactments, then the offender shall be liable to be prosecuted
and punished under either or any of those enactments, but shall not be punished twice for the same offence.
“Meaning of Service by post” [Section 27] : Where any legislation or regulation requires any document to be
served by post, then unless a different intention appears, the service shall be deemed to be effected by:
(i) properly addressing
(ii) pre-paying, and
(iii) posting by registered post.
A letter containing the document to have been effected at the time at which the letter would be delivered in the
ordinary course of post.
In United Commercial Bank v. Bhim Sain Makhija, AIR 1994 Del 181 : A notice when required under the
statutory rules to be sent by ‘registered post acknowledgement due’ is instead sent by ‘registered post’ only, the
protection of presumption regarding serving of notice under ‘registered post’ under this section of the Act neither
tenable not based upon sound exposition of law.
In Jagdish Singhv. Natthu Singh, AIR 1992 SC 1604, it was held that where a notice is sent to the landlord by
registered post and the same is returned by the tenant with an endorsement of refusal, it will be presumed that
the notice has been served.
In Smt. Vandana Gulati v. Gurmeet Singh alias Mangal Singh, AIR 2013 All 69, it was held that where notice sent
by registered post to person concerned at proper address is deemed to be served upon him in due course unless
contrary is proved. Endorsement ‘not claimed/not met’ is sufficient to prove deemed service of notice.
“Citation of enactments” [Section 3(28)] : (1) In any Central Act or Regulation, and in any rule, bye law,
instrument or document, made under, or with reference to any such Act or Regulation, any enactment may be
cited by reference to the title or short title (if any) conferred thereon or by reference to the number and years
thereof, and any provision in an enactment may be cited by reference to the section or sub-section of the
enactment in which the provision is contained.
(2) In this Act and in any Central Act or Regulation made after the commencement of this Act, a description
or citation of a portion of another enactment shall, unless a different intention appears, be construed as
including the word, section or other part mentioned or referred to as forming the beginning and as forming
the end of the portion comprised in the description or citation.
“Saving for previous enactments, rules and bye laws” [Section 29] : The provisions of this Act respecting

the construction of Acts, Regulations, rules or bye-laws made after commencement of this Act shall not affect
the construction of any Act, Regulation, rule or bye-law is continued or amended by an Act, Regulation, rule or
bye-law made after the commencement of this Act.
“Application of Act to Ordinances” [Section 30] : In this Act the expression Central Act, wherever it occurs,
except in Section 5 and the word ‘Act’ in clauses (9), (13), (25), (40), (43), (53) and (54) of section 3 and
in section 25 shall be deemed to include Ordinance made and promulgated by the Governor General under
section 23 of the Indian Councils Act, 1861 or section 72 of the Government of India Act, 1915, or section 42
of the Government of India Act, 1935 and an Ordinance promulgated by the President under article 123 of the
Constitution.
Q.1 What is “Financial Year” under the General Clauses Act, 1897?
Q.2 What is “Immovable Property” under the General Clauses Act, 1897?
Q.3 As per the provisions of the Companies Act, 2013, a whole time Key Managerial Personnel (KMP) shall
not hold office in more than one company except its subsidiary company at the same time. Referring to
the Section 13 of the General Clauses Act, 1897, examine whether a whole time KMP can be appointed in
more than one subsidiary companies?
Q.4 A notice when required under the Statutory rules to be sent by “registered post acknowledgment due” is
instead sent by “registered post” only. Whether the protection of presumption regarding serving of notice
by “registered post” under the General Clauses Act is tenable? Referring to the provisions of the General
Clauses Act, 1897, examine the validity of such notice in this case.
Ans.
As per the provisions of Section 27 of the General Clauses Act, 1897, where any legislation or regulation requires
any document to be served by post, then unless a different intention appears, the service shall be deemed to be
effected by:
(i) Properly addressing,
(ii) Pre-paying, and
(iii) Posting by registered post.
A letter containing the document to have been effected at the time at which the letter would be delivered in the
ordinary course of post.
Therefore, in view of the above provision, since, the statutory rules itself provides about the service of notice that
a notice when required under said statutory rules to be sent by ‘registered post acknowledgement due’, then,
if notice was sent by ‘registered post’ only it will not be the compliance of said rules. However, if such provision
was not provided by such statutory rules, then service of notice if by registered post only shall be deemed to be
effected.
Furthermore, in similar case of In United Commercial Bank v. Bhim Sain Makhija, AIR 1994 Del 181 : A notice
when required under the statutory rules to be sent by ‘registered post acknowledgement due’ is instead sent by
‘registered post’ only, the protection of presumption regarding serving of notice under ‘registered post’ under this
section of the Act neither tenable not based upon sound exposition of law.

Notes

Chapter - 7 INTERPRETATION OF STATUTES,
DEED AND DOCUMENTS
Interpretation of statutes, deeds
and documents
Importance of Rules of
Introduction of Rules of Aids to
interpretation of interpretation of dees
relevant terms Interpretation interpretation
statutes and documents
Primary Rules Secondary Rules
Internal aids External aids
Introduction
A statute has been defined as “the will of the legislature”. Normally, it denotes the act enacted by the legislature.
The purpose of the interpretation is To see what is the intention expressed by the words used.
(i) Primary Rules
(a) The Primary Rule: Literal Construction
According to this rule, the words, phrases and sentences of a statute are ordinarily to be understood in their
natural , ordinary or popular and grammatical meaning unless such a construction leads to an absurdity or the
content or object of the statute suggests a different meaning. The objectives ‘natural’ , ‘ordinary’ and ‘popular’
are used interchangeably.
While discussing rules of literal construction the Supreme Court in State of H.P v. Pawan Kumar (2005) :
- One of the basic principles of interpretation of statutes is to construe them according to plain, literal and
grammatical meaning of the words.
- If that is contrary to, or inconsistent with, any express intention or declared purpose of the Statute, or if it
would involve any absurdity , repugnancy or inconsistency, the grammatical sense must then be modified,
extended, abridged, so far as to avoid such an inconvenience, but no further.
- The onus of showing that the words do not mean what they say lies heavily on the party who alleges it.
- He must advance something which clearly shows that the grammatical construction would be repugnant to
the intention of the Act or lead to some manifest absurdity.

(b) The Mischief Rule or Heydon’s Rule or Beneficial Construction
In Heydon’s Case, in 1584, it was resolved by the Barons of the Exchequer “that for the sure and true interpretation
of all statutes in general (be they penal or beneficial, restrictive or enlarging of the Common Law) four things are
to be discerned and considered : (1) What was the Common Law before the making of the Act; (2) What was the
mischief and defect for which the Common Law did not provide; (3) What remedy the parliament had resolved
and appointed to cure the disease of the Commonwealth; and (4) The true reason of the remedy.
Although judges are unlikely to propound formally in their judgements the four questions in Heydon’s Case,
consideration of the “mischief” or “object” of the enactment is common and will often provide the solution to a
problem of interpretation. Therefore, when the material words are capable of bearing two or more constructions,
the most firmly established rule for construction of such words is the rule laid down in Heydon’s case which has
“now attained the status of a classic.” The rule directs that the courts must adopt that construction which “shall
suppress the mischief and advance the remedy.” But this does not mean that a construction should be adopted
which ignores the plain natural meaning of the words or disregard the context and the collection in which they
occur. ( See Umed Singh v. Raj Singh, A.I.R 1975 S.C 43).
The Supreme Court in Sodra Devi’s case,AIR 1957 S.C. 832 has expressed the view that the rule in Heydon’s
case is applicable only when the words in question are ambiguous and are reasonably capable of more than one
meaning.
(c) Rule of Reasonable Construction i.e Ut Res Magis valeat Quam Pareat
Normally, the words used in a statute have to be construed in their ordinary meaning, but in many cases, judicial
approach finds that the simple device of adopting the ordinary meaning of words, does not meet the end s as a
fair and a reasonable construction.
According to this rule,the words of a statute must be construed at res magis valeat quam pareat, so as to give
a sensible meaning to them. A provision of law cannot be so interpreted as to divorce it entirely from common
sense; every word or expression used in an Act should receive a natural and fair meaning.
(d) Rule of Harmonious Construction
A STATUTE MUST BE READ AS A WHOLE AND ONE PROVISION OF THE Act should be construed with
referenve to other provisions in the same Act so as to make a consistent enactment of the whole statute. Such
a construction has the merit of avoiding any inconsistency or repugnancy either within a section or between a
section and other parts of the statute. It is the duty of the Courts to avoid “a head on clash” between two sections
of the same Act and, “whenever it is possible to do so,to construct provisions which appear to conflict so that they
harmonise ”( Raj Krishna v. Pinod Kanungo, A.I.R 1954 S.C. 202 at 203).
Where in an enactment, there are two provisions which cannot be reconciled with each other, they should be
so interpreted that, if possible, effect may be given to both. This is what is known as the “rule of harmonious
construction”.

(e) Rule of Ejusdem Generis
Ejusdem Generis, literally means “of the same kind or species”. The rule can be stated thus:
1. The statute contains an enumeration by specific words,
2. The members of the enumeration constitute a class,
3. The class is not exhausted by the enumeration,
4. A general term follows the enumeration,
5. There is a distinct genus which comprises more than one species, and
6. There is no clearly manifested intent that the general term be given a broader meaning that the doctrine
requires. ( See Thakura Singh v. Revenue Minister, Air 1965 J & k 102)
(f) Rule of Exceptional Construction :
The rule of exceptional construction stands for the elimination of statutes and words in a statute which defeat the
real objective of the statute or make no sense. It also stands for construction of words ‘and’, ‘or’, ‘may’, ‘shall’ &
‘must’.
This rule has several aspects, viz. :
(a) The Common Sense Rule : Despite the general rule that full effect must be given to every word, if no
sensible meaning can be fixed to a word or phrase, or if it would defeat the real object of the enactment, it
should be eliminated. The words of a statute must be so construed as to give a sensible meaning to them,
if at all possible. They ought to be construed ‘utres magis valeat quam pereat’ meaning thereby that it is
better for a thing to have effect than to be made void.
(b) Conjunctive and Disjunctive Words ‘or’ ‘and’ : The word ‘or’ is normally disjunctive and ‘and’ is normally
conjunctive. However, at times they are read as vice versa to give effect to the manifest intention of the
legislature as disclosed from the context. This would be so where the literal reading of the words produces
an unintelligible or absurd result. In such a case ‘and’ may by read for ‘or’ and ‘or’ for ‘and’ even though the
result of so modifying the words is less favourable to the subject, provided that the intention of the legislature
is otherwise quite clear.
Example : In the Official Secrets Act, 1920, as per section 7 any person who attempts to commit any offence
under the principal Act or this Act , or solicits or incites or endeavours to persuade another person to commit an
offence, or aids or abets and does any act preparatory to the commission of an offence’. Here, the word ánd’ in
bold is to be read as ’or’ . Reading ánd’ as ‘and’ will result in unintelligible and absurd sense and against the clear
intention of the Legislature. [R v. Oakes,(1959)]
(c) ‘May’, ‘must’ and ‘shall’ : Before discussing this aspect, it would be worth while to note the terms ‘mandatory’
and ‘directory’. Practically speaking, the distinction between a provision which is ‘mandatory’ and one
which is ‘directory’ is that when it is mandatory, it must be strictly observed; when it is ‘directory’it would be
sufficient that it is substantially complied with. However, we have to look to the substance and not merely the
form: an enactment in mandatory form might substantially be directory and, conversely, a statute in directory
form may in substance be mandatory. Hence, it is the substance that counts and must take precedence over
mere form. If a provision gives a power coupled with a duty, it is mandatory: whether it is or is not so would

depend on such consideration as:
— The nature of the thing empowered to be done,
— The object for which it is done, and
— The person for whose benefit the power is to be exercised.
(ii) Other rules of Interpretation
(a) Expressio Unis Est Exclusio Alterius
The rule means that express mention of one thing implies the exclusion of another. At the same time, general
words in a statute must receive a general construction, unless there is in the statute some ground for limiting and
restraining their meaning by reasonable construction.
(b) Contemporanea Expositio est Optima et Fortissima in Lege
The maxim means that the best way to give the meaning to a document or proposition of a law is to read it as it
would have read when it was made. Where the words used in a statute have undergone alteration in meaning in
course of time, the words will be construed to bear the same meaning as they had when the statute was passed
on the principle expressed in the maxim. In simple words, old statutes should be interpreted as they would have
been at the date when they were passed and prior usage and interpretation by those who have an interest or
duty in enforcing the Act, and the legal profession of the time, are presumptive evidence of their meaning when
the meaning is doubtful.
(c) Noscitur a Socilis
The ‘Noscitur a Socilis’ i.e. “It is known by its associates”. In other words, meaning of a word should be known
from its accompanying or associating words.
(d) Strict and Liberal Construction
In Wiberforce on Statute law, it is said that what is meant by ‘strict construction’ is that “Acts, are not to be
regarded as including anything which is not within their letter as well as their spirit, which is not clearly intelligibly
described in the very word of the statute, as well as manifestly intended”, while by ‘liberal construction’ is meant
that ‘everything is to be done in advancement of the remedy that can be done consistently with any construction
of the statute. Beneficial construction to suppress the mischief and advance the remedy is generally preferred.
Presumptions
Where the meaning of the statute is clear, there is no need for presumptions. But if the intention of the legislature
is not clear, there are number of presumptions. These are:
(a) That the words in a statute are used precisely and not loosely.
(b) That vested rights i.e., rights which a person possessed at the time the statute was passed, are not taken
away without express words, or necessary implication or without compensation.

(c) That “means rea”, i.e., guilty mind is required for a criminal act. There is a very strong presumption that a
statute creating a criminal offence does not intend to attach liability without a guilty intent.
The general rule applicable to criminal cases is “actus non facit reum nisi mens sit rea”(The act itself does
not constitute guilt unless done with a guilty intent.)
(d) That the state is not affected by a statute unless it is expressly mentioned as being so affected.
(e) That a statute is not intended to be consistent with the principles of International Law. Although the judges
cannot declare a statute void as being repugnant to International Law, yet if two possible alternatives present
themselves, the judges will choose that which is not at variance with it.
(f) That the legislature knows the state of the law.
Internal and external aids in interpretation
(a) Internal Aids in Interpretation
The following may be taken into account while interpreting a statute:
Title
The long title of an Act is a part of the Act and is admissible as an aid to its construction, The long title sets out
in general terms, The purpose of the Act and it often precedes the preamble. It must be distinguished from short
title which implies only an abbreviation for purpose of reference, the object of which is identification and not
description. To give an example, The Civil Procedure Code, 1908 is a long title and CPC 1908 is a short title.
The true nature of the law is determined not by the name given to it by its substance. However, the long title is a
legitimate aid to the construction.
Preamble
The true place of a preamble in a statute was at one time, the subject of conflicting decisions. In Mills v. Wilkins,
(1794) 6. Mad. 62, Lord Hold said: “the preamble of a statute is not part thereof, but contains generally the
motives r inducement thereof.”
Heading and Title of a Chapter
In different parts of an Act, there is generally found a series or class of enactments applicable to some special
object, and such sections are in many instances, preceded by a heading. It is now settled that the headings or
titles to prefixed to sections or group of sections can be referred to in construing an Act of the legislature.
Marginal Notes
In England, the disposition of the Court is to disregard the marginal notes. In our country the Courts have
entertained different views. Although option is not uniform, the weight of authority is in favour of the view that the
marginal note appended to a section cannot be used for construing the section.
It is common to find in statutes “definitions” of certain words and expressions used elsewhere in the body of
the statute. The object of such a definition is to avoid the necessity of frequent repetitions in describing all the
subject-matter to which the word or expression so defined is intended to apply. A definition section may borrow
definitions from an earlier Act and definitions so borrowed need not be found in the definition section but in some
provisions of the earlier Act.

Proviso
When one finds a proviso to a section the natural presumptions is that, but for the proviso, the enacting part of the
section would have included the subject-matter of proviso”. In the words of Lord Macmillan: “The proper function
of a proviso is to except and to deal with a case which would otherwise fall within the general language of the
main enactment, and its effect is confined to the case.”
Distinction between Proviso, exception and saving Clause
Differences
'Exception' is intended to restrain the enacting 'Saving clause' is used to preserve from destruction
clause to particular cases certain rights, remedies or privileges already existing
Illustrations or Explanation
“Illustrations attached to sections are part of the statute and they are useful so far as they help to furnish
same indication of the presumable intention of the legislature. An explanation is at times appended to
a section to explain the meaning of words contained in the section. It becomes a part and parcel of the
enactment.”
Schedules
The schedules form a part of the statute and must be read together with it for all purposes of construction. But
expression in the schedule cannot control or prevail against the express enactment (Allen v. Flicker, 1989, 10
A and F 6.40). In Ramchand Textile v. Sales Tax Officer, A.I.R 1961,All. 24,the Allahabad High Court has held
that, if there is any appearance of inconsistency between the schedule and the enactment, the enactment shall
prevail. If the enacting part and the schedule cannot be made to correspond, the latter must yield to the former.
The statement of objects and reasons as well as the ‘notes on clauses of the Bill relating to any particular
legislation may be relied upon for construing any of its provisions where the clauses have been adopted by the
Parliament without any change in enacting the Bill, but where there have been extensive changes during the
passage of the bill of Parliament, the objects and reasons of the changed provisions may or may not be the same
as the clause so f the original Bill and it will be unsafe to attach undue importance to the statement of objects
and reasons or notes on clauses.
(b) External Aids in Interpretation
Apart from the intrinsic aids, such as preamble and purview of the Act, the Court can consider resources outside
the Act, called the extrinsic aids, in interpreting and finding out the purposes of the Act. Where the words of an Act
are clear and unambiguous, no resource to extrinsic matter, even if it consists of the sources of the codification,
is permissible.
Parliamentary History
The Supreme Court, enunciated the rule of exclusion of parliamentary history in the way it is enunciated by
English courts, but on many occasions, the Court used this aid in resolving questions of construction. The
Court has now veered to the view that legislative history with circumspect limits may be consulted by Courts in
resolving ambiguities.
Reference to Reports of Committees
The report of a Select Committee on whose report an enactment is based, can be looked into “so as to see the

background against which the legislation was enacted, the fact cannot be ignored that Parliament may, and often
does, decide to do something different to cure the mischief.”
Social, Political and Economic Developments and Scientific Invention
Reference to Other Statutes
It has already been stated that a statute must be read as a whole as words are to be understood in their context.
Extension of this rule of context, permits reference to other statutes in pari materia, i .e. statutes dealing with the
same subject matter or forming part of the same system. Viscount Simonds conceived it to be right and duly to
construe every word of a statute in its context and he used the word in its widest sense including other statutes
in pari materia.
The meaning of the phrase ‘pari materia’ has been explained in an American case in the following words: “Statutes
are in pari materia which relate to the same person or thing, or to the same class of persons or things. The word
par must not be confounded with the word simlis
Dictionaries
When a word is defined in the Act itself, it is permissible to refer to dictionaries to find out the general sense in
which that word is understood in common parlance.
Use of Foreign Decisions
Use of foreign decisions of countries following the same system of jurisprudence as ours and rendered on
statutes in pari materia has been permitted by practice in Indian Courts.
Document
Matter
Elements of documents
Record
Substance
Means
(i) Matter —This is the first element. Its usage with the word “any” shows that the definition of document is
comprehensive.
(ii) Record — This second element must be certain mutual or mechanical device employed on the substance.
It must be by writing, expression or description.
(iii) Substance — This is the third element on which a mental or intellectual elements comes to find a permanent
form.
(iv) Means — This represents forth element by which such permanent form is acquired and those can be letters,
any figures, marks, symbols which can be used to communicate between two persons.

Q.1 Explain the rule of ‘beneficial construction’ while interpreting the statutes quoting an example.
Ans.
Where the language used in a statute is capable of more than one interpretation, the most firmly established rule
for construction is the principle laid down in the Heydon’s case. This rule enables, consideration of four matters
in constituting an act :
(1) what was the law before making of the Act,
(2) what was the mischief or defect for which the law did not provide,
(3) what is the remedy that the Act has provided, and
(4) what is the reason for the remedy.
The rule then directs that the courts must adopt that construction which ‘shall suppress the mischief and advance
the remedy’. Therefore even in a case where the usual meaning of the language used falls short of the whole
object of the legislature, a more extended meaning may be attributed to the words, provided they are fairly
susceptible of it. If the object of any enactment is public safety, then its working must be interpreted widely to give
effect to that object. Thus in the case of Workmen’s Compensation Act, 1923 the main object being provision of
compensation to workmen, it was held that the Act ought to be so construed, as far as possible, so as to give
effect to its primary provisions.
However, it has been emphasized by the Supreme Court that the rule in Heydon’s case is applicable only when
the words used are ambiguous and are reasonably capable of more than one meaning [CIT v. Sodra Devi (1957)
32 ITR 615 (SC)].
Q.2 Explain the principles of “Grammatical Interpretation” and “Logical Interpretation” of a Statute. What are
the duties of a court in this regard?
Ans.
Principles of Grammatical Interpretation and Logical Interpretation : In order to ascertain the meaning of
any law/ statute the principles of Grammatical and Logical Interpretation is applied to conclude the real meaning
of the law and the intention of the legislature behind enacting it.
Meaning : Grammatical interpretation concerns itself exclusively with the verbal expression of law. It does not go
beyond the letter of the law, whereas Logical interpretation on the other hand, seeks more satisfactory evidence
of the true intention of the legislature.
Application of the principles in the court : In all ordinary cases, the grammatical interpretation is the sole form
allowable. The court cannot delete or add to modify the letter of the law. However, where the letter of the law is
logically defective on account of ambiguity, inconsistency or incompleteness, the court is under a duty to travel
beyond the letter of law so as to determine the true intentions of the legislature. So that a statute is enforceable
at law, however, unreasonable it may be. The duty of the court is to administer the law as it stands rather it is just
or unreasonable.
However, if there are two possible constructions of a clause, the courts may prefer the logical construction which
emerges from the setting in which the clause appears and the circumstances in which it came to be enacted and
also the words used therein.

Q.3 (i) What is the effect of proviso? Does it qualify the main provisions of an Enactment?
(ii) Does an explanation added to a section widen the ambit of a section?
Ans.
(i) Normally a Proviso is added to a section of an Act to except something or qualify something stated in that
particular section to which it is added. A proviso should not be, ordinarily, interpreted as a general rule. A
proviso to a particular section carves out an exception to the main provision to which it has been enacted as
a Proviso and to no other provision. [Ram Narian Sons Ltd. Vs. Commissioner of Sales Tax AIR (1955) S.C.
765]
(ii) Sometimes an explanation is added to a section of an Act for the purpose of explaining the main provisions
contained in that section. If there is some ambiguity in the provisions of the main section, the explanation
is inserted to harmonise and clear up and ambiguity in the main section. Something may added be to or
something may be excluded from the main provision by insertion of an explanation. But the explanation
should not be construed to widen the ambit of the section.
Q.4 Gaurav Textile Company Limited has entered into a contract with a Company. You are invited to read and
interpret the document of contract. What rules of interpretation of deeds and documents would you apply
while doing so?
Ans.
The rules regarding interpretation of deeds and documents are as follows :
First and the foremost point that has to be borne in mind is that one has to find out what reasonable man, who
has taken care to inform himself of the surrounding circumstances of a deed or a document, and of its scope and
intendments, would understand by the words used in that deed or document.
It is inexpedient to construe the terms of one deed by reference to the terms of another. Further, it is well
established that the same word cannot have two different meanings in the same documents, unless the context
compels the adoption of such a rule.
The Golden Rule is to ascertain the intention of the parties of the instrument after considering all the words in
the documents/deed concerned in their ordinary, natural sense. For this purpose, the relevant portions of the
document have to be considered as a whole. The circumstances in which the particular words have been used
have also to be taken into account. Very often, the status and training of the parties using the words have also to
be taken into account as the same words maybe used by a ordinary person in one sense and by a trained person
or a specialist in quite another sense and a special sense. It has also to be considered that very many words are
used in more than one sense. It may happen that the same word understood in one sense will give effect to all
the clauses in the deed while taken in another sense might render one or more of the clauses ineffective. In such
a case the word should be understood in the former and not in the latter sense.
It may also happen that there is a conflict between two or more clauses of the same documents. An effect must
be made to resolve the conflict by interpreting the clauses so that all the clauses are given effect. If, however, it
is not possible to give effect of all of them, then it is the earlier clause that will override the latter one.

Q.5 How will you interpret the definitions in a statute, if the following words are used in a statute ?
(i) Means, (ii) Includes
Give one illustration for each of the above from statutes you are familiar with.
Ans.
Interpretation of the words “Means” and “Includes” in the definitions- The definition of a word or expression in the
definition section may either be restricting of its ordinary meaning or may be extensive of the same.
When a word is defined to ‘mean’ such and such, the definition is ‘prima facie’ restrictive and exhaustive, we must
restrict the meaning of the word to that given in the definition section.
But where the word is defined to ‘include’ such and such, the definition is ‘prima facie’ extensive, here the
word defined is not restricted to the meaning assigned to it but has extensive meaning which also includes the
meaning assigned to it in the definition section.
Example—
Definition of Director [section 2(34) of the Companies Act, 2013]—Director means a director appointed to
the board of a company. The word “means” suggests exhaustive definition.
Definition of Whole time director [Section 2(94) of the Companies Act, 2013]— Whole time director includes
a director in the whole time employment of the company. The word “includes” suggests extensive definition.
Other directors may be included in the category of the whole time director.

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INDEX

Sl.No Chapter Page No

1. Declaration & Payment of Dividend 7 - 16

4. The Indian Contract Act, 1872

5. The Negotiable Instruments Act, 1881 93 - 126

6. The General Clauses Act, 1897 127 - 142

7. Interpretation of Statutes, Deed and Documents 143 - 152

Fabulous teaching style......with FULL enthusiasm.......I have ever seen.............Vipul Singh

Just......Unmatchable and MOHIT Sir is best and a GURU of many.............Ishith Agarwal

He is the best teacher I have ever seen before.............Abhishek Singh

No one is better than Mohit bhaiya. I salute you bhaiya.............Amit Menon

Thee best teacher in my life i.e. Mohit Bhaiya.............Ankush Pugalia

Nobody can teach Law better than Mohit Sir.............Roshan Agarwal

PAYMENT OF DIVIDEND – SECTION 123

PAYMENT OF DIVIDEND WITHOUT PROVIDING FOR DEPRECIATION

DECLARATION OF DIVIDEND OUT OF COMPANY’S RESERVES

Amount that can be withdrawn from 1/10 of (Paid up share capital +

C Mohit Educomp Pvt. Ltd. Corporate & Other Law 7

PROCEDURE FOR DECLARATION AND PAYMENT OF INTERIM DIVIDEND

1. Verify from company’s Articles of Association

8 Corporate & Other Law C Mohit Educomp Pvt. Ltd.

CLAIMING OF UNCLAIMED/UNPAID DIVIDEND

C Mohit Educomp Pvt. Ltd. Corporate & Other Law 9

Punishment for failure to distribute dividends – Section 127

10 Corporate & Other Law C Mohit Educomp Pvt. Ltd.

Payable in Payable to Nidhi Co.

Declared Dividend Dividend Not Paid/ Claimed

Pay Interest @ 12% Deposit the unpaid/ Unclaimed dividend Transfer to

Prepare Statement (Name, Last known

Website approved by Govt. for this

C Mohit Educomp Pvt. Ltd. Corporate & Other Law 11

Shareholder gave directions regarding payment of dividend,

Those directions cannot be complied with

Dispute regarding right to receive dividend;

12 Corporate & Other Law C Mohit Educomp Pvt. Ltd.

C Mohit Educomp Pvt. Ltd. Corporate & Other Law 13

14 Corporate & Other Law C Mohit Educomp Pvt. Ltd.

C Mohit Educomp Pvt. Ltd. Corporate & Other Law 15

16 Corporate & Other Law C Mohit Educomp Pvt. Ltd.

REQUIREMENT OF KEEPING BOOKS OF ACCOUNT - SECTION 128

Place of Keeping Books of Account

Maintenance of Books of account in electronic form

C Mohit Educomp Pvt. Ltd. Corporate & Other Law 17

Accounts in Electronic Mode

On periodic basis, back up has to be taken inservers physically located in

Company shall intimate to the Registrar, on an annual basis at the time of

18 Corporate & Other Law C Mohit Educomp Pvt. Ltd.

At the registered office of the company

Any other place(s) in India as decided by the Board of Directors

Inspection of Accounts (During Business Hours)

C Mohit Educomp Pvt. Ltd. Corporate & Other Law 19

Books of Account in Respect of Branch Office

Accrual basis and Double-entry system of accounting

Period for which books to be preserved

Persons responsible to maintain books

20 Corporate & Other Law C Mohit Educomp Pvt. Ltd.

Financial Statement – Section 129

Form and Content

Form and contents of financial statement