Paper 5 (New) - Business Laws & Ethics

PAPER – 5
BUSINESS LAWS &

ETHICS
CMA INTERMEDIATE
1FIN BY INDIGOLEARN
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Index Page #
Chapter 1: The Indian Contract Act, 1872
Unit 1: Nature of Contracts 1
Unit 2: Consideration 23
Unit 3: Other Essential Elements of a Contract 32
Unit 4: Performance of a Contract 59
Unit 5: Breach of Contract And Its Remedies 64
Unit 6: Contingent and Quasi Contracts 73
Unit 7: Contract of Indemnity And Guarantee 83
Unit 8: Bailment And Pledge 93
Unit 9: Agency 107
Chapter 2: The Sale of Goods Act, 1930
Unit 1: Formation of the Contract of Sale 122
Unit 2: Conditions & Warranties 136
Unit 3: Transfer Of Ownership And Delivery Of Goods 150
Unit 4: Unpaid Seller 168
Chapter 3: The Partnership Act, 1932
Unit 1: General Nature of Partnership 183
Unit 2: Relations of Partners 196
Unit 3: Registration And Dissolution Of A Firm 214
Chapter 4: The Limited Liability Partnership Act, 2008 226
Chapter 5: The Companies Act, 2013 253
Chapter 6: The Negotiable Instruments Act, 1881 502

CH-1: UNIT 1 – NATURE OF CONTRACTS
Learning Outcomes –
• Agreement vs. Contract
• Essential elements of a contract.
• Types of contracts.
• Offer and acceptance
• Rules of communication of offer and acceptance
• Modes of revocation of offer
1. Introduction
The Law of Contract is the most important branch of mercantile law. It has an impact on trade,
commerce and industry.
25th April, 1872 1st Sept, 1872
Date of Assent Date of Effect
Preamble of the Act:

It is an Act to define and amend certain parts of the law relating to contract.
• The Indian Contract Act, 1872 codifies the legal principles that govern ‘contracts’. The basically
identifies the ingredients of a legally enforceable valid contract in addition to dealing with special
type of contractual relationships.
2. Important terms
2.1 Contract
Definition as per Section 2(h):

It defines contract as – “An agreement enforceable by law.”
1FIN BY INDIGOLEARN 1
• Enforceability by law means giving rise to legal obligation. Domestic and Social obligations are
Contract = Agreement + Enforceability by law
out of scope of the Contract Act, as they are not legally enforceable.
2.2 Agreement
2.3 Promise
3. Types of Agreement
Definition as per Section 2(e):

It defines Agreement as “every promise and every set of promises, forming the
consideration for each other.”
Definition as per Section 2(b):

Promise means “when a person to whom proposal is made signifies his assent on that
proposal, the proposal becomes accepted. Accepted proposal becomes a promise.”
Agreement = Promise (Accepted proposal) + Consideration
Promise = Offer/Proposal + Acceptance
Types
Domestic/
Social Political
Family
4. Difference between Agreement and Contract
Basis of Difference Agreement Contract

Enforceability by law May not be legally Legal enforceability
enforceable
Definitions Section 2(e) Every promise Section 2(h) An agreement
or set of promises forming enforceable by law
consideration for each (Agreement + Legal
other Enforceability)
(Offer + Acceptance)
Scope It is wider term including It is used in narrow sense
both legal and social due to its legal
agreement enforceability
Nature All agreements are not All contracts are
contracts agreement
All Contracts are Agreements, but all Agreements are not Contracts
• Contract = Agreement + Enforceability by law. Thus, for a Contract, there should first be an
Agreement.
• Agreements that do not give rise to contractual obligations are not Contracts.
A invites B for his son's wedding. B accepts the invitation. This is a mere agreement, not a
Contract, there being no intention to create legal obligation.
• Agreements to do an unlawful, immoral or illegal act, like smuggling or murdering a person,

cannot be enforceable by law. Such agreements cannot be considered as a Contract.
• Also, certain Agreements are specifically declared Void or Unenforceable. Example: Agreements
to bet i.e., wagering Agreements, Agreements in restraint of trade, agreements to do an
impossible act, etc.
Hence, all Agreements are not Contracts, but all contracts are in fact Agreements.
5. Essentials of a Valid Contract
• The essential are given in Section 10 but this section is not complete and exhaustive. Therefore,
there are some general essentials apart from the essential given in Section 10.
Definition as per Section 10:

All agreements are contracts if they are made by the free consent of the parties competent to
contract, for a lawful consideration and with a lawful object and are not expressly declared to
be void.
Essentials of Valid Contract
General Essential Essentials as per Sec 10
Two Parties Agreement
Intention to create legal

Free Consent
relationship
Possibiltiy of performance Competency of parties
Cetrainty of meaning Lawful consideration
Formality in certain cases Legal object
Not expressely declared as void
• These essential elements must be present in a contract, if these elements are not present in a
contract, then the contract is not valid.
• Both general essentials and elements given in Section 10 shall be present in a contract for it to
be a valid contract.
5.1 General Essential Elements
5.1.1 Two Parties
• A person cannot enter into a contract with himself, a contract involves at least two parties.
• A contract can be made by either natural persons or other persons having legal existence.
5.1.2 The identities of the parties shall be ascertainable.
Case Law: State of Gujarat Vs. Ramanlal S & Co

Facts: When on dissolution of a partnership, the assets of the firm were divided among
the partners, the sales tax officer wanted to tax this transaction.
Judgement: It was held that it was not a sale. The partners being joint owner of those
assets cannot be both buyer and seller.
5.1.3 Parties must be intended to create legal relationship
• There must be an intention on the part of the parties to create legal relationship between them.
• Social or domestic type of agreements are not enforceable in court of law and hence they do not
result into contracts.
5.1.4 Certainty
of
meaning
Case Law: Balfour Vs. Balfour
• The Facts: A husband agreed to pay to his wife certain amount as maintenance every month
while he was abroad. Husband failed to pay the promised amount. Wife sued him for the
recovery of the amount.
Judgement: Wife could not recover the amount as it was a social agreement, and the
parties did not intend to create any legal relations.
agreement must be certain, definite and not vague.
5.1.5 Possibility of performance
• The terms of agreement should be capable of performance. An agreement to do an act

impossible in itself cannot be enforced.
5.1.6 Formalities in certain cases
• A contract may be written or spoken. In case of certain contracts some other formalities have to
be complied with to make an agreement legally enforceable.
•State of Gujarat
Two Parties in a
Vs. Ramanlal S
contract
&Co.
Parties must
intend to •Balfour Vs.
cretate legal Balfour
relationship
Certainity of •Specific and

meaning definite terms
Possibility of •Possible to
performance perform
•Written contract
Other •Registered with
Formalities concerned
authority
5.2 Essential elements under section 10
5.2.1 Agreement
• An Agreement is the first essential element of a valid contract. It is a result of offer and
acceptance. A Contract will not come into existence if there’s no agreement.
5.2.2 Free Consent
• Consent means agreeing upon the same thing in the same sense. The consent shall be free (i.e.)
the parties must willingly enter into the contract.
• Consent is said to be free when it is not caused by Coercion, Undue Influence, Fraud,
Misrepresentation or mistake.
5.2.3 Capacity of parties
• Capacity to contract means the legal ability of a person to enter into a valid contract. A person is
competent to contract if he satisfies all the given conditions:
▪ He attained the age of majority
▪ He is a person of sound mind
▪ Is not disqualified by law
Disqualified by law
Insolvent Convicted Criminal Alien friend
5.2.4 Lawful Consideration
• A valuable consideration may consist either some right, interest,

Latin Maxim for
profit, benefit accruing to one party or some forbearance,
consideration
detriment, loss or responsibility given, suffered or undertaken by “Quid pro quo”
the other.
5.2.5 Lawful object
• The object and consideration must be lawful (i.e) it should not be prohibited by law or opposed
to public policy.
5.2.6 Not expressly declared to be void
• The agreement entered into must not be which the law declares to be either illegal or void. A void
agreement is one without any legal effects.
• For a contract to be valid contract it must not be expressly declared as void by law
• It should not be
▪ Immoral
▪ Opposed to public policy
▪ Injurious
▪ Forbidden by law
6. Types of Contract
• Contracts are divided into three types based on the following

▪ Validity or enforceability
▪ Formation
▪ Performance
6.1 Validity or Enforceability
Types of Contract
Valid Void Voidable Illegal Unenforceable
6.1.1 Valid Contract
The Valid Contract is an agreement that is legally binding and enforceable. It must qualify all the
essentials of a contract.
6.1.2 Void Contract
Definition:
The section 2(j) of the Act defines a void contract as “A contract which ceases to be
enforceable by law becomes void when it ceases to be enforceable”.
• A void contract is a contract not enforceable by law

• Contract that is valid at the inception but due to happening of an
event the contract becomes void at later date A contract made with
• A contract that is void since its inception is Void ab initio minor is
void ab initio
Example: Arijit Sigh and Event organizer enter into a contract, where
Arijit Singh will give a live performance at a Concert organized by the Event organizer and will
receive ₹ 10,00,000 as consideration. Just a day before the concert, Arijit Singh meets with an
accident and got his leg fractured. In this situation the contract has now become void since it is
no longer enforceable.
6.1.3 Voidable Contract
• An agreement which is enforceable by law at the option of one or more of the parties thereto,
but not at the option of the other or others, is a voidable contract.
• A voidable contract is a Valid Contract.
• In a voidable contract, at least one of the parties has to be bound to the terms of the contract.
• The other party is not bound and may choose to repudiate or accept the terms of the contract.
Options available to
agrreieved
Cancel the Continue if

contract beneficial
• Consent in a contract is obtained by-

▪ Fraud
▪ Undue- influence
▪ Misrepresentation
Example: Punit points a gun at Hiten’s forehead and makes him enter a contract of sale of his
house to Punit for Rs. 10,00,000 only. In this situation, Hiten’s consent is not free as he is forced
to enter into the contract due to the threat to his life. The contract is voidable at Hiten’s option.
Difference between Void and Voidable Contract
Void Contract Voidable Contract

Sec-2(g): Agreement which is not Sec-2(i): Agreement in which one of the
enforceable by law two parties have the option to enforce or
rescind it.
Subsequent happening of uncertain Consent is not free
events or change in circumstances
No rights to the parties Aggrieved party has certain rights
Contract cannot be performed at all Contract is valid until the aggrieved party
does not revoke it
6.1.4 Illegal Contract
• An agreement that leads to one or all the parties breaking a law or

Illegal contracts are void
not conforming to the norms of the society is deemed to be illegal ab initio since the
by the court. A contract opposed to public policy is also illegal. beginning
Example: Rohit enters into a contract with Rohan and directs him
to kill Sanjay for ₹ 1 Lakh. Although this contract has all the essential
elements of a valid contract, it is still illegal.
Difference between Void and Voidable Contract
Void Contract Illegal Contract

Not forbidden by law Forbidden by law
Contracts are not illegal Contracts are always void
Parties are not liable for punishment Parties are liable for punishment
Collateral agreements are enforceable Collateral agreements are also illegal
by law
6.1.5 Unenforceable Contract
• Unenforceable contracts are rendered unenforceable by law due to some technical defect.
Example: Raj borrowed ₹ 1 Lakh from Rohan and promised to pay the same back within one
year. Rohan filed a case against Raj after six years and court denied the case as the same was
barred by limitation. Hence, it became an Unenforceable Contract
6.2 Formation
Types of Contract
Express Implied Quasi

E-Contract
Contract Contract Contract
6.2.1 Express Contract
• The terms of the Express Contract are clearly stated either orally or in writing.
• So, the main aspect of the Express Contract is that the terms of the contract are expressed clearly.
Contract form
Oral Written
Example: A person proposes to his friend an offer to sell his i-Phone 12 Pro for ₹ 4,500. His friend
agrees to buy the phone and gives confirmation over a call. This was an Express Contract.
6.2.2 Implied Contract
• A contract in which the terms of the agreement are not expressed in written or oral form is an
implied contract.
• These contracts come into existence by implication.
• This implication is by action or conduct of parties or course of dealing.
Example: A person boarded a bus that travelled from Kashmir to Kanyakumari. The conductor
arrived at his seat and asked to pay fare for the journey. This became an Implied Contract since
the person had boarded the bus with an intention to travel.
• Tacit Contracts: They are a sub-type of implied contracts; these contracts are inferred by the
conduct of the parties without any words spoken or written. It is not a separate type of contract;
it falls within the scope of implied contracts.
Example: A person enters the ATM and inserts the card in order to withdraw money. This is a
tacit (silent) Contract by the action of the parties.
6.2.3 Quasi Contract
• They are not contracts in the sense that no agreements are made between any of the parties.
• It comes into existence by a court order or under law.
• It is thus enforced by the law which also creates it.
• Most of the times the quasi-contract is created to stop any of the parties from taking unfair
advantage of the other.
Example: Finder of lost goods to return the goods to the original owner. This is a Quasi Contract
which is imposed by the law
6.2.4 E-Contract
• When a contract is formed by the use of electronic devices and means, it is called an electronic
contract or an e-contract.
• The electronic means and devices may include emails, tests, telephones, digital signatures etc.
They are also known as the Cyber contracts, the EDI contracts or the Electronic Data Interchange
contracts.
6.3 Performance
Contract on basis of
performance
Executed Executory
Contract Contract
Unilateral Bilateral
6.3.1 Executed Contract
• When the parties to the contract perform their obligations under a contract, the contract is
executed in nature.
Example: Mr. A goes to a general store, buys some goods, and pays to the shopkeeper for the
goods. This is an Executed Contract where both the parties have performed their respective
obligations.
6.3.2 Executory Contract
• In Executory contracts, the consideration is reciprocal promise or obligation.

• Such consideration is to be performed in future only and therefore these contracts are described
as executory contracts.
Example: Mr. A goes to a general store, buys some goods on credit. Mr. A promises to pay to the
shopkeeper for the goods after a week. This is an Executory Contract where one party has
performed his obligation and other party has not yet performed his obligation.
• Executory Contracts are further divided into two types:
Unilateral Contract Bilateral Contract

It is a one-sided contract, in which one It is a contract where the obligation or
party has performed his duty or promise is outstanding on the part of
obligation and the other party’s both the parties.
obligation is outstanding.
7. Proposal / Offer
7.1 Definition
Definition as per Section 2(a):

As per this section of the Act, “when one person signifies to another his willingness to do or to
abstain from doing anything with a view to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal.”
Makes an offer
Offeror/Promisor Offeree
Accepts an
offer
Offeree Promisee/Acceptor
7.2 Types of Offer
General
Counter
Standing
Cross
Specific
7.2.1 General Offer
• A General Offer is an offer that is made to the public at large. The genesis of a General Offer came
about from the Landmark case of Carlill v. Carbolic Smoke Ball Co.
Case Law: Carlill v. Carbolic Smoke Ball Co.

Facts: A company by the name Carbolic Smoke Ball offered through an Advertisement to pay 100
Pounds to anyone who would contract increasing epidemic Influenza, colds or any disease caused
by cold after taking its Medicine according to the prescribed instructions.
It was also added that 1000 Pounds have been deposited in Alliance bank showing our sincerity
in the matter. One customer Mrs. Carlill used the medicine and still contracted Influenza and
hence sued the company for the reward. The Defendants gave the argument that the offer was
not made with an intention to enter into a legally binding agreement, rather was only to Puff the
sales of the company.
Judgement: Setting aside the arguments of the Defendant, the bench stated that in cases of such
offers i.e., general offers, there is no need for communication of acceptance, anyone who
performs the conditions of the contract is said to have communicated his/her acceptance, and
moreover, the money deposited by the Defendant in Alliance Bank clearly shows that they
intended to create a legally binding relationship.
7.2.2 Specific/Special Offer
• A Specific offer is an offer that is made to a specific or ascertained person, this type of offer can
only be accepted by the person to whom it is made.
Case Law: Boulton v. Jones,
Facts: wherein the Plaintiff had taken the business of one Brocklehurst, the defendant used to
have business with Brocklehurst and not knowing about the change in ownership of business,
sent him an order for certain goods. The Defendant came to know about the change only after
receiving an invoice, at which point he had already consumed the goods. The Defendant refused
to pay the price, as he had a set off against the original owner, for which the plaintiff sued him.
Judgement: The Judges gave a unanimous judgement holding the defendant not liable.
7.2.3 Cross Offer
• When two parties make an identical offer to each other, in ignorance to each other’s offer, they
are said to make cross offers. Cross offers are not valid offers
Example: If A makes a proposal to B to sell his car for ₹ 2,00,000 and B, without knowing the
proposal of A, makes an offer to purchase the same car at ₹ 2,00,000 from A, it is not an
acceptance, as B was not aware of proposal made by A. It is only cross proposal (cross offer).
7.2.4 Counter Offer
• When the offeree offers a qualified acceptance of the offer subject to modifications and
variations in terms of the original offer, he is said to have made a counter offer.
• The original offer lapses as a result of a counter offer.
Example: ‘A’ offers to sell his plot to ‘B’ for ₹ 10 lakhs. ’B’ agrees to buy it for ₹ 8 lakhs. It amounts
to counteroffer. It will result in the termination of the offer of ’A’. If later on ‘B’ agrees to buy the
plot for ₹ 10 lakhs, ’A’ may refuse.
7.2.5 Standing Offer
• An Offer which remains open for acceptance over a period of time is called a standing offer.
Tenders that are invited for supply of goods is a kind of Standing Offer.
7.3 Essential of a valid offer
Capable of creating legal relations
Certain, definite and not vague
Communicated to the offeree
Must be made with a view to obtaining the assent of the other party
May be conditional
Should not contain a term the non-compliance of which would

amount to acceptance
May be specific or general
May be express or implied
Different from a mere statement of intention, a mere communication

of information, a prospectus or advertisement or a statement of price
7.4 Invitation to Offer
• An invitation to offer is only a circulation of an offer, it is an attempt to induce offers and precedes
a definite offer.
• An offer becomes an agreement when accepted.
• On the other hand, an invitation to offer becomes an offer when the public responds to it.
• The main objective of an invitation to offer is to negotiate the terms on which the contract can be
made.
Examples:
1) A magazine displaying offer

2) Prospectus of a college given while admission
3) Display of goods for sale in shop windows.
4) An invitation by a company to the public to subscribe for its shares.
• Although Invitation to Offer is not a type of offer per se, it is imperative to distinguish both to
even construe what an actual offer is.
• An invitation to offer is an offer to negotiate, an offer to receive offers.
• An offer is a final expression of willingness to get into a contract upon those following terms.
7.4.1 Possible outcomes of an Invitation to Offer
Outcomes
Accept Reject
Offer Vs. Invitation to Offer
Offer Invitation to Offer

Definition Sec 2(a) Expression of No willingness but information
willingness to do something or to induce for offers
not with an intention to obtain
assent of other party
Intention Binding on the offeror No binding factor only inducing
Leads to negotiation and may
Acceptance Results in contract
lead to offer
Precedence Offer cannot precede invitation Invitation precedes the offer
to offer
Case Law: Harvey vs. Facie

Facts: The plaintiffs through a telegram asked the defendants two questions namely,
(i) Will you sell us Bumper Hall Pen? and
(ii) Telegraph lowest cash price.
The defendants replied through telegram that the “lowest price for Bumper Hall Pen is £ 900”.
The plaintiffs sent another telegram stating, “we agree to buy Bumper Hall Pen at £ 900”.
However, the defendants refused to sell the property at the price. The plaintiffs sued the
defendants contending that they had made an offer to sell the property at £ 900 and therefore
they are bound by the offer.
Judgement: While plaintiffs had asked two questions, the defendant replied only to the second
question by quoting the price but reserved their answer with regard to their willingness to sell.
The mere statement of the lowest price at which the vendor would sell contained no implied
contract to sell to the person who had enquired about the price.
8. Acceptance
8.1 Definition
Definition as per Section 2(b):

As per this section the term acceptance is defined as “When the person to whom the proposal
is made signifies his assent thereto, proposal is said to be accepted. The proposal, when
accepted, becomes a promise”.
Offeror – Person who makes the proposal / offer
Offeree – Person to whom the proposal / offer is made
Right of Offeree – Only offeree has the right to accept the proposal
Acceptance – when Offeree gives assent / consent to the offer
Acceptor – Offeree becomes acceptor when assent is given
8.2 Rules regarding a Valid Acceptance
8.2.1 Acceptance can be given only by the person to whom offer is made:
• In the case of a specific proposal or offer, it can only be accepted by the person it was made to.
• No third person without the knowledge of the offeree can accept the offer.
• When the proposal is a general offer, then anyone with knowledge of the offer can accept it.
Example: Arjun went to his friend’s house, Chandu and made an offer to sell his I-Phone 12 Pro
for ₹ 50,000. This was accepted by another person Sonu in Chandu’s house, but Arjun refused
the contract as it was made to a specific person and had to be accepted by Offeree only.
According to Sir William Anson – Acceptance is to offer what a lighted match is to a train of
gun powder.
8.2.2 Must be absolute and unqualified
• Acceptance must be unconditional and absolute.

• There cannot be conditional acceptance, that would amount to a counteroffer which nullifies the
original offer.
Example: Samar makes an offer to Andi to buy a diamond studded watch for ₹ 1 Lakh. Andi
accepts the offer but with a condition that he shall pay ₹ 85,000 only. This became qualified
acceptance and hence, not valid.
Case Law: Neale vs. Merret

Facts: M offered to sell his land to N for £280. N replied purporting to accept the offer but enclosed a cheque
for £ 80 only. He promised to pay the balance of £ 200 by monthly instalments of £ 50 each.
Judgement: It was held that N could not enforce his acceptance because it was not an unqualified one.
Union of India vs. Bahulal
A offers to sell his house to B for Rs. 1,00,000/-. B replied that, “I can pay Rs. 80,000 for it.” The offer of A is
rejected by B as the acceptance is not unqualified. B however changes his mind and is prepared to pay Rs.
1,00,000. This is also treated as counteroffer and it is up to A whether to accept it or not.
8.2.3 Must be communicated
• For a proposal to become a contract, the acceptance of such a proposal must be communicated
to the promisor.
• One of the case law here was of Lalman Shukla Vs. Gauri Dutt
Case Law : Brogden vs. Metropolitan Railway Co.

Facts: B a supplier, sent a draft agreement relating to the supply of coal to the manager of railway
Co. viz, Metropolitian railway for his acceptance. The manager wrote the word “Approved” on
the same and put the draft agreement in the drawer of the table intending to send it to the
company’s solicitors for a formal contract to be drawn up. By an oversight the draft agreement
remained in drawer.
Judgement: There was no contract as the manager had not communicated his acceptance to the
supplier, B.
Case law – Heyworth Vs. Knight

It was concluded that, mere change in the language of communication without any change in
substance will not make the acceptance invalid
Case law – Bhagwandas Vs. Girdhari Lal

Courts held that, offer made by an intended offeree without the knowledge of the offer will not
be deemed to be an acceptance of the offer
8.2.4 Must be in prescribed mode
• Acceptance of the offer must be in the prescribed manner that is demanded by the offeror. If no
such manner is prescribed, it must be in a reasonable manner that would be employed in the
normal course of business.
Example: Raghu offered Rohan to purchase his car for ₹ 5,00,000. He asked Rohan to convey his
acceptance over a phone call. Rohan sent a WhatsApp message and this mode was not accepted
by Raghu as the prescribed mode was Phone call.
8.2.5 Time
Exception – The offeror not objecting any other mode of acceptance
• Acceptance must be given within the specified time limit, if any, and if no time is stipulated,
acceptance must be given within the reasonable time and before the offer lapses.
Example: Ajay offers to sell 100 apples for ₹ 2,000 to Vijay. Vijay does not reply to Ajay within a
reasonable time and the apples get rot. Hence, communication of acceptance within a reasonable
time is required.
• If there is a time fixed for communication of acceptance, then it must be done within the fixed
time
• In case there is no time fixed for communication of acceptance, it must be done within reasonable
time
• What is reasonable time is nowhere defined in the law and thus would depend on facts and
circumstances of the particular case.
8.2.6 Mere silence is not acceptance
• The acceptance of an offer cannot be implied from the silence of the offeree or his failure to
answer, unless the offeree has in any previous conduct indicated that his silence is the evidence
of acceptance.
Example: Mr. A offers to sell Mr. B MacBook Pro for ₹ 70,000. Mr. B remains silent and does not
respond to the offer. This is a case of mere silence that does not amount to acceptance.
8.2.7 Implied acceptance or Acceptance by Conduct
Case Law: Felthouse vs. Bindley

Facts: F (Uncle) offered to buy his nephew’s horse for £30 saying “If I hear no more about it, I shall
consider the horse mine at £30.” The nephew did not reply to F at all. He told his auctioneer, B to
keep the particular horse out of sale of his farm stock as he intended to reserve it for his uncle. By
mistake the auctioneer sold the horse. F sued him for conversion of his property.
Judgement: F could not succeed as his nephew had not communicated the acceptance to him.
• Section 8 of Indian Contract Act 1872 provides that acceptance by conduct or actions of the
promisee is acceptable. So, if a person performs certain actions that communicate that he has
accepted the offer, such implied acceptance is permissible.
Example: A boy offers his sibling ₹ 1,000 for polishing his shoe for the next month. Sibling accepts
the money given. This is an implied acceptance that the sibling will polish his shoes for the next
month.
Definition as per Section 8:

The performance of the conditions of a proposal, or the acceptance of any consideration for a
reciprocal promise which may be offered with a proposal, is an acceptance of the proposal.
Acceptance
Implied Acceptance Acceptance by conduct
Performs conditions
Accepts the consideration
imposed
Rules Case Laws
Acceptance must be communicated only by Boulton Vs. Jones

the person to whom the offer is made
Acceptance must be absolute and Neale Vs. Merret
unqualified Union of India Vs. Bahulal
Acceptance must be communicated Brogden Vs. Metropolitan Railway Co.
Acceptance must be in prescribed mode -
Time & reasonable time -
Mere silence does not amount to acceptance Felthouse Vs. Bindley
Acceptance can be implied/by conduct -
9. Communication of Offer and Acceptance
• One important common requirement for both offer and acceptance is their effective
communication. Effective and proper communication prevents avoidable revocation and
misunderstanding between parties.
• When the contracting parties are face-to-face, there is no problem of communication because
there is instantaneous communication of offer and acceptance. In such a case the question of
revocation does not arise since the offer and its acceptance are made instantly.
• The difficulty arises when the contracting parties utilize services such as post or email etc, in such
cases it becomes very important to ascertain what is the exact time of communication of offer
and acceptance.
9.1 Communication of Offer
In terms of Section 4 of the Act, the communication of offer is complete when it comes to the
knowledge of the person to whom it is made.
Example: A writes to B offering to fix his roof for five thousand rupees. He posts the letter on 2nd
July. The letter reaches B on 4th July. So, the communication is said to complete on 4th July. In
case B reads the letter on 5th July, then the date of communication of offer will be 5th July as that
is the date when the offeree comes to know about the offer.
9.2 Communication of Acceptance
• Acceptance can be done in two ways, namely
Communication of Acceptance
By Act By conduct
9.2.1 Communication of Acceptance by Act
• This would include communication via words, whether oral or written. So, this will include
communication via telephone calls, letters, e-mails, telegraphs, etc.
9.2.2 Communication of Acceptance by Conduct
• The offeree can also convey his acceptance of the offer through some action of his, or by his
conduct.
So, say when a person boards a bus, he is accepting to pay the bus fare via his conduct.
In terms of Section 4 of the Act, communication of acceptance is complete:

a) As against the proposer, when it is put in the course of transmission to him so as to be out
of the power of the acceptor to withdraw the same;
b) As against the acceptor, when it comes to the knowledge of the proposer
Example: A accepts the offer of B via a letter. He posts the letter of

acceptance on 10th July and the letter reaches B on 14th. For B (the
proposer) the communication of the acceptance is completed on Case Laws:
1. Mukul Datta Vs. Indian Airlines
10th July itself. Whereas from A’s point of view communication will be
2. Lilly White Vs. R. Mannuswamy
complete on 14th July, when B learns of the acceptance.
9.3 Communication of Special Conditions
• Sometimes there are situations where there are contracts with special conditions.
• These special conditions are conveyed tacitly and the acceptance of these conditions are also
conveyed by the offeree again tacitly or without him even realizing it.
10. Revocation of Offer and Acceptance
• In term of Section 4, communication of revocation (of the proposal or its acceptance) is complete.
▪ as against the person who makes it (Person making revocation) when it is put into a course
of transmission to the person to whom it is made so as to be out of the power of the person
who makes it, and
▪ as against the person to whom it is made, when it comes to his knowledge.
• As per Section 5 of the Act, offer can be revoked at any time before communication of
acceptance is completed as against the offeror.
• As per Section 5 of the Act, acceptance can be revoked at any time before the communication
of acceptance is complete against the acceptor.
Example: Anil send a letter of offer to Sunil on 10th August, the letter reaches Sunil of 14th August
and he reads it on the same day. Sunil posts his letter of acceptance on 17th August. In this case, the
communication of acceptance from Anil’s point is completed on 17th August, therefore, Anil can
revoke his offer at any time before 17th August.
In the above situation, if the letter of acceptance reaches Anil on 20th August, if Sunil wants to
revoke his acceptance, he can do so before 20th August (i.e) before the communication of acceptance
is complete from Sunil’s point of view.
11. Modes of Revocation of Offer
Notice of Revocation
Lapse of Time
Non-fulfilment of conditions
attached to offer
Death or insanity of the Offeror
Counter Offer
Subsequent illegality
Not given in prescribed mode
12. Overview
Contract
[Section 2(h)]
Essentials Communicatio
Elements Types of
of valid n of Offer and Revocation
of contract contracts
contract acceptance
Agreement Enforceability Based on validity

[Section 2(e)] by law
Valid
Promise Void
Consideration
[Section 2(b)]
Voidable
Offer Illegal
Acceptance
[Section 2(a)]
Unenforceable
Rules to a valid
Invitation Based on
Types acceptance
to offer Formation
Can be given Express
General only by the
person to Implied
Specific whom offer is
made Quasi
Cross Absolute and
E-contract
unqualified
Counter Based on
Communicated Performance
Standing In the Executed
prescribed
mode Executory
Within
specified time
limit
Mere silence is
not acceptance
Implied
acceptance
CH-1: UNIT 2 – CONSIDERATION
• Importance of consideration.
• Consideration from a third party.
• Contracts valid without consideration.
• Doctrine of privity to a contract
1. Introduction
Consideration is an essential element of a valid contract. Without a consideration no single promise

will be enforceable. It is a term used in the sense of quid pro quo, i.e., ’something in return’.
2. What is Consideration?
Definition as per Section 2(d):

When at the desire of the promisor, the promisee or any other person has done or abstained
from doing, or does or abstains from doing or promises to do or abstain from doing something,
such an act or abstinence or promise is called consideration for the promise.
Consideration is the price agreed to be paid by the promisee for the obligation of the promisor.
• Consideration is an act i.e., doing something.
Example : A college promises students, who will score above 95% for the job in MNC.
Consideration need not to be monetary. Here the promise for recruitment of candidate will be
considered as consideration for the act of students scoring above 95%.
• Consideration can be abstinence i.e., abstain from doing something.
Example : Abhishek promises Bharti not to file a suit against him if she (Bharti) would pay him
(Abhishek) ₹ 1,00,000. Here abstinence on the part of Abhishek would constitute consideration
against Bharti’s payment of ₹ 1,00,000 in favour of Abhishek.
• Consideration must be at the desire of the promisor.
• Consideration may move from promisee or any other person.
• Consideration may be past, present, or future.
Consideration = Promise / Performance that parties exchange with each other.
Case Law: Misa v. Currie

A valuable consideration in the sense of law may consist either in some right, interest, profit or
benefit accruing to one party (i.e. promisor) or forbearance, detriment, loss or responsibility
given, suffered or undertaken by the other (i.e. the promisee).
3. Legal rules regarding Consideration
3.1 Consideration must move at the desire of the promisor
Consideration must be offered by the promisee or the third An act done at the desire of a
party at the desire or request of the promisor. third party is not a
consideration.
Case Law: Durga Prasad v. Baldeo

Facts: D (defendant) promised to pay to P (plaintiff) a certain commission on articles which
would be sold through their agency in a market. Market was constructed by P at the desire of
the C (Collector), and not at the desire of the D.
Judgement: D was not bound to pay as there was no consideration and hence void.
3.2 Consideration may move from promisee or any other person
In India, consideration may proceed from the promisee or any other person who is not a party to
the contract. The words “…promisee or any other person…” in the definition u/s 2(d) makes this
proposition clear.
Thus, there can be a stranger to a consideration

but not stranger to a contract.
Case Law: Chinnayya vs. Ramayya (1882)
Facts: An old lady made a gift of her property to her daughter with a direction to
pay a certain sum of money to the maternal uncle by way of annuity. On the same
day, the daughter executed a writing in favour of the brother agreeing to pay
annuity. The daughter did not, however, pay the annuity and the uncle sued to
recover it.
Judgement: There was sufficient consideration for the uncle to recover the money
from the daughter.
3.3 Executed and Executory consideration
• A consideration which consists in the performance of an act is said to be executed.
• When a consideration consists in a promise, it is said to be executory.
• The promise by one party may be the consideration for an act by some other party, and
vice versa.
Example : A pays ₹5,000 to B and B promises to deliver to him a certain quantity of wheat
within a month. Here, the promise by B to deliver the wheat within a month is the
consideration for A to pay ₹5,000. Thus, the consideration paid by A is executed, whereas the
consideration promised by B is executory.
3.4 Consideration may be past, present, or future
The words “…has done or abstained from doing…” [as contained in Section 2(d)] are a recognition
of the doctrine of past consideration.
Example : ‘A’ performed some services to ‘B’ at his desire. After a week, ‘B’ promises to
compensate ‘A’ for the work done by him. This is a past consideration and A can sue B for
recovering the promised money.
A past consideration may be the motive but cannot be the real consideration of a
subsequent promise.
Example : A cash sale of goods is an example of present consideration. The consideration is

immediately made against delivery of goods.
Example : A agrees to supply wheat bags to B and B agrees to pay for them on a future date. This
consideration is the future consideration.
3.5 Consideration need not be adequate
The value of the consideration need not be equal to the value of the promise, act, or
abstinence for which it is given. However, consideration must be something which the law
considers as having some value.
Example : X promises to sell a house worth ₹6 lacs for ₹1 lacs only, the adequacy of the price in
itself shall not render the transaction void, unless the party pleads that transaction takes place
under coercion, undue influence, or fraud.
3.6 Performance of what one is legally bound to perform is not consideration
• The performance of an act by a person who is legally bound to perform the same cannot be
consideration for a contract.
• Such a contract is void for want of consideration.
• But where a person promises to do more that he is legally bound to do, such a promise
provided it is not opposed to public policy, is a good consideration.
Example : A promise to pay money to a witness is void, for it is without consideration.
A promise to pay a policeman to provide security is void as a policeman is legally bound to

provide security.
3.7 Consideration must be real and not illusory
Consideration must be something to which the law attaches some value. If it is legally or
physically impossible it is not considered valid consideration.
Example : A man promises to discover treasure by magic, bringing the dead person to live again.
This transaction can be said to be void as it is illusory.
3.8 Consideration must not be unlawful, immoral, or opposed to public policy
Only presence of consideration is not sufficient it must

be lawful. Anything which is immoral or opposed to
public policy cannot be valued as valid consideration.
What consideration is lawful, and
Example : ABC Ltd. promises to give job to Mr. X in a what not is covered in detail in
Government bank against payment of ₹50,000 is void as Unit 3.
the promise is opposed to public policy.
4. Suit by a third party to a contract
4.1 Doctrine of Privity of Contract
Under the Indian Contract Act, 1872, the consideration for an

agreement may proceed from a third party. However, such third
Only a person who is party to
party cannot sue on the contract. a contract can sue on it.
This rule, that stranger to a contract cannot sue is known as a
“doctrine of privity of contract”.
Doctrine of Privity of Contract = Stranger to a contract cannot sue.
However, there are certain exceptions to the Doctrine of Privity of contract.
4.2 Exceptions to the Doctrine of Privity of contract
4.2.3 In case of Trust
In case of a trust, the contract is between the settler and the trustee. However, a beneficiary can
enforce his right under the trust, though he is not a party to the contract.
4.2.4 In case of a Family settlement
• In the case of a family settlement, the members of family who originally had not been
parties to the settlement may enforce the agreement.
• However, the terms of settlement must have been reduced into writing.
Example : Two brothers X and Y agreed to pay an allowance of ₹20,000 to mother on partition
of joint properties. But later they denied to abide by it. It was held that their mother although
stranger to contract can require their sons for such allowance in the court of law.
4.2.5 In case of certain Marriage Contracts/Arrangements
In the case of certain marriage contracts/arrangements, a provision may be made for the
benefit of a person. Such a person may file the suit though he is not a party to the agreement.
Example : Mr. X’s wife deserted him for ill-treating her. Mr. X promised his wife’s father Mr. Puri
that he will treat her properly or else pay her monthly allowance. But she was again ill-treated by
her husband. It was held that she has all right to sue Mr. X against the contract made between
Mr. X and Mr. Puri even though she was stranger to contract.
4.2.6 In case of Assignment of a Contract
• In the case of assignment of a contract, when the benefit under a contract has been assigned,
the assignee can enforce the contract
• However, such assignment should not involve any personal skill.
4.2.7 Acknowledgement or Estoppel
Where the promisor by his conduct acknowledges himself as an agent of the third party, it
would result into a binding obligation towards third party.
Example : L gives to M ₹20,000 to be given to N, and M informs N that he is holding the money
for him. Afterwards M refuses to pay the money to N. In that case, N will be entitled to recover
the same from M.
4.2.8 In case of Covenant running with the Land
In the case of covenant running with the land, the person who purchases land with notice that
the owner of land is bound by certain duties affecting land, the covenant affecting the land
may be enforced by the successor of the seller.
Example : One owner of the land having two land adjacent to each other. One was agricultural
land. He sold the other land containing a condition that it can never be used for Industrial
purpose so as to protect the other agricultural land from pollution. Such condition is attached
with the land so who so ever is the successor of land has to abide by it. Such are called restrictive
covenants and all successors are bound to it.
4.2.9 Contracts entered into through an Agent
The principal can enforce the contracts entered by his agent where the agent has acted within
the scope of his authority and in the name of the principal.
Assignment
In case of certain of contract
marriage Acknowledgement
contracts or or estoppel
arragements
In case of a Covenant
family running with
settlement a land
Exceptions
Contracts
In case of to the Doctrine through
trust of Privity of
agent
Contract
5. Validity of an agreement without consideration
The general rule is that an agreement made without consideration is void (Section 25). However,
the Indian Contract Act contains certain exceptions to this rule.
In the following cases, the agreement though made without consideration, will be valid and enforceable
–
i) Natural Love and Affection - A written and registered agreement based on natural love and
affection between the parties standing in near relation (e.g., husband and wife) to each other is
enforceable even without consideration [Section 25(1)].
•Made out of natural love and affection between the

Conditions to be parties.
satisfied u/s •Parties must stand in near relationship to each other.
25(1) •It must be in writing
•It must be registered under the law
Example : A husband by a registered deed, promises to bring a diamond necklace for his wife. This
agreement is valid, though it is without consideration and can be enforced.
ii) Compensation for past voluntary services – A promise to compensate, wholly or in part, a person
who has already voluntarily done something for the promisor, is enforceable [Section 25(2)].
However, following conditions need to be satisfied
a. The services should have been rendered voluntarily.
b. The services must have been rendered for the promisor.
c. The promisor must be in existence at the time when services were rendered.
d. The promisor must have intended to compensate the promisee.
Example : Peter finds Sameer’s wallet on the road and returns it to him. Sameer is happy to find his
lost wallet and promises to pay Peter ₹ 2,000. In this case, too, the no consideration no contract rule
does not apply. This contract is a valid contract.
iii) Promise to pay time barred debt – Where a promise in writing, signed by the person making it or
by his authorised agent, is made to pay a debt barred by limitation, it is valid without consideration
[Section 25(3)].
Example : Pratik owes ₹1,00,000 to Hari. He had borrowed the money 5 years ago. However, he
never paid a single rupee back. He signs a written promise to pay ₹50,000 to Hari as a final settlement
of the loan. In this case, ‘the no consideration no contract’ rule does not apply either. This is a valid
contract.
iv) Agency – No consideration is necessary to create an agency [Section 185].
v) Completed gift – In case of completed gifts, the rule no consideration no contract does not apply
[Explanation (1) to Section 25]
vi) Bailment – Bailment means the delivery of goods from one person to another for some purpose
[Section 148]. Such delivery is made upon a contract that after accomplishment of the purpose, the
goods will either be returned or disposed of, according to the directions of the person delivering
them. No consideration is required to affect a contract of bailment.
Example : Mr. Y deposits his goods in the godown of Mr. A for free. Mr. A hand over the keys of his
godown to Mr. Y. Mr. Y gets possession of godown but not the ownership. As soon as Mr. Y lifts his
goods from godown he is liable to hand over the keys back to Mr. A..
vii) Charity – If a promisee undertakes the liability on the promise of the person to contribute to
charity, there the contract shall be valid.
Case Law: Kedarnath v. Gorie Mohammad

Facts: In this case, the defendant had agreed to subscribe ₹100 towards the construction of
town hall at Howrah. The Secretary, on the faith of the promise, called for plans and entrusted
the work to contractors and undertook liability to pay them. The Defendant refused to pay the
promised amount.
Judgement: Though the promise was for a charitable purpose and there was no benefit to the
defendant, yet he is liable for the promise made by him.
6. Summary
Consideration
[Section 2(d)]
Legal rules Doctrine of Agreement

Meaning regarding Privity of without
consideration contract consideration
Consideratio Desire of Natural
n may be an Exceptions love and
promisor
act affection
Durga
Consideratio Prasad v. Trust Past
n may be Baldeo voluntary
abstinence services
May move from Family
Desire of the promisee or any settlement Time
promisor is other person
barred
required Marriage debt
Chinnayya v.
May move Ramayya contracts
from Agency
promisee or Executed or Assignment
any other executory
person Completed
Acknowledgemen
Consideratio Past gift
t or estoppel
n may be consideration
past present Covenant
Need not be running with the
or future Bailment
adequate land
Performance Through an
of what one is agent Charity
legally bound
to perform
Real and not

illusory
Must not be
unlawful, immoral
or opposed to
public policy
CH-1: UNIT 3 – OTHER ESSENTIAL ELEMENTS OF A CONTRACT
• Who is competent to contract.
• Law related to contracting with a minor.
• Concept of ‘consensus ad idem’
• Elements vitiating free consent.
• Circumstances when object and consideration become unlawful.
• Agreements opposed to public policy.
1. Introduction
Conditions to be satisfied by an agreement

in order to be a contract
Section 10 of the Indian

Contract Act, 1872
Parties must be Made for a lawful Not expressly

Free consent
competent to conideration and with a declared as void
of parties
contract lawful object by law
2. Capacity to Contract
Capacity to contract means the competence of the parties to make a contract.
Section 11 of the Indian Contract Act, 1872 states who is competent to contract –
“Every person is competent to contract who is of the age of majority according to the law to which
he is subject, and who is of sound mind and is not disqualified from contracting by any law to
which he is subject”
2.1 Age of Majority
The age of majority in India is governed by The Indian Majority Act, 1875. Every person domiciled in
India shall attain the age of majority on the completion of 18 years of age and not before. The
following are the laws relating to minor’s agreement/position of minor –
2.1.1 A contract made with or by a minor is void ab-initio
Any agreement with or by a minor is void from the very beginning.
Case Law: Mohori Bibi vs. Dharmo Das Ghose (1903)

Facts: A, a minor had borrowed some money from B (a money lender) by
mortgaging his house. He became a major a few months later. The moneylender
moved to take possession of the minor’s house when he defaulted payment.
Judgement: A mortgage by a minor was void and B was not entitled to repayment
of money.
2.1.2 No ratification after attaining majority
A minor cannot ratify the agreement on attaining majority as the original agreement is void ab
initio and a void agreement can never be ratified.
Example : X, a minor makes a promissory note in the name of Y. He cannot ratify it on attaining
majority. Also, if he makes a new promissory note in place of old one, here the new promissory
note which he executed after attaining majority is also void being without consideration.
2.1.3 Minor can be a beneficiary or can take benefit out of a contract
Though a minor is not competent to contract, he can be a beneficiary to the contract i.e., entitled
to the benefits of the contract.
2.1.4 A minor can always plead minority
• A minor can always plead minority, even

where he has entered into any contract by
Rule of Estoppel cannot be
falsely representing that he was major. applied against a minor.
Example : A, a minor has falsely induced himself as
major and contracted with Mr. X for loan of ₹20,000.
When Mr. X asked for the repayment A denied to pay. He pleaded that he was a minor so
cannot enter into any contract. It was held that A cannot be held liable for repayment of
amount. However, if he has not spent the same, he may be asked to repay it, but the minor
shall not be liable for any amount which he has already spent even though he received the
same by fraud.
2.1.5 Liability for necessaries
• A person who supplies the necessities of life to a minor or to

any other person whom such minor is legally bound to Necessaries mean those
things that are essentially
support is entitled to get reimbursement.
needed by a minor. They
• However, there is no personal liability of the minor, but do not include luxuries or
only his property is liable. costly or unnecessary
articles.
• To render minor’s estate liable for necessaries two conditions
must be satisfied :
▪ The contract must be for goods which are necessary for life, and
▪ The minor must not have already a sufficient supply of these necessaries.
Example : Shruti being a minor purchased a laptop for her online classes of ₹70,000 on credit
from a shop. But her assets could pay only ₹20,000. The shop keeper could not hold Shruti
personally liable and could recover only amount recoverable through her assets i.e., up to ₹
20,000.
2.1.6 Enforceability of a contract by guardian
• Where the guardian makes a contract for the minor, which is within his competence and
which is for the benefit of the minor, there will be valid contract which the minor can
enforce.
• However, all contracts made by guardian on behalf of a minor are not valid.
Example : The guardian of a minor has no power to bind the minor by a contact for the
purchase of immovable Property. But a contract entered into by a certified guardian
(appointed by the Court) of a minor, with the sanction of the court for the sale of the minor’s
property, may be enforced by either party to the contract.
2.1.7 No specific performance
No court can allow specific performance of a contract with minors because it is void altogether.
2.1.8 No insolvency
• A minor cannot be declared insolvent as a minor cannot incur any liability personally.
• He can never be held personally liable. Dues are payable from the personal properties of
minor
2.1.9 Partnership
A minor cannot become a partner in a partnership firm, but he can be admitted to the benefits
of partnership with the consent of all the partners [Section 30 of the Indian Partnership Act].
2.1.10 Minor can be an agent
A minor can draw, deliver, and
• A minor can act as an agent and bind the principal
endorse negotiable instruments
• But he will not be liable to his principal for his without himself being liable.
acts.
Example : A minor can have an account in the bank.

He can draw a cheque for his purchases. But he shall not be liable for cheque bounces nor
can he be sued under court of law for any fraud done from his account.
2.1.11 Minor cannot bind parent or guardian
A minor is not capable of binding his parent or guardian, even for necessaries. They will be held
liable only when the minor acts as their agent.
Example : Richa, a minor entered into contract of buying a scooty from the dealer and mentioned
that her parents will be liable for the payment of scooty. The dealer sent a letter to her parents
for money. The parents will not be liable for such payment as the contract was entered by a minor
in their absence and out of their knowledge.
2.1.12 Joint contract by minor and adult
In case a joint Contract is made by minor and an adult, the adult will be liable on the contract
and not the minor.
Case Law: Sain Das vs. Ram Chand

There was a joint purchase by two purchasers, one of them was a minor.
It was held that the vendor could enforce the contract against the major purchaser and not the
minor.
2.1.13 Surety for a minor
When an adult gives a guarantee on behalf of a minor, then the adult is liable to the third party
as if there is direct contract between the surety and the third party.
Example : Mr. X guaranteed for the purchase of a mobile phone by Krish, a minor. In case of
failure for payment by Krish, Mr. X will be liable to make the payment.
2.1.14 Minor as Shareholder
• A minor cannot become a shareholder as he is

incompetent to contract. A minor may, acting though his
lawful guardian become a
• If by mistake he becomes a member, the company can shareholder by transfer or
rescind the transaction and remove his name from transmission of fully paid shares
register. to him.
2.1.15 Liability for torts
A minor is liable for tort unless the tort in reality is a breach

A tort is a civil wrong.
of contract.
Example : A minor was held liable for his failure to return

certain instruments which he had hired and then passed on to a friend.
Law relating to Minor's Agreement

• Void-ab-initio
• No ratification after becoming major
• Can be a beneficiary
• Can always plead minority
• Minor's property is liable for necessaries of life supplied to him
• Contracts by a guardian enforceable under certain circumstances
• No specific performance
• No insolvency
• Cannot be partner in a partnership firm. But can be beneficiary
• Can be an agent
• Cannot bind parent or guardian
• Joint contract - adult will be liable
• Surety for minor - will be liable
• Cannot be a shareholder
• Minor is liable for torts
2.2 Person of sound mind
Section 12 of the Indian Contract Act, 1872 states who is a person of sound mind
–
“A person is said to be of sound mind for the purposes of making a contract if, at the
time when he makes it is capable of understanding it and of forming a rational
judgement as to its effect upon his interests.”
A contract by a person who is not of sound mind is void.
Person who is usually of unsound
He may make a contract
mind, but occasionally of sound
when he is of sound mind
mind
Person who is usually of sound

He may not contract when
mind, but occasionally of
he is of unsound mind
unsound mind
2.3 Contract by disqualified persons
• Besides minors and persons of unsound mind, there are also other persons who are disqualified
from contracting, partially or wholly. The contracts by such person are void.
• Incompetency to contract may arise from political status, corporate status, legal status, etc.
The following persons fall in this category:
▪ Foreign Sovereigns and Ambassadors,
▪ Alien enemy, Corporations,
▪ Convicts,
▪ Insolvent etc.
3. Free Consent
3.1 Consent
Definition of Consent [Section 13]
“Two or more persons are said to consent when they agree upon the same thing
in the same sense.”
• When parties to a contract make some fundamental error

as to the nature of the transaction, or as to the person dealt with Latin Maxim for
or as to the subject-matter of the agreement, it cannot be said ‘of same mind’
that they have agreed upon the same thing in the same “ad idem”
sense.
Example : If two persons enter into an apparent contract concerning a particular person or ship,
and it turns out that each of them, misled by similarity of name, had a different person or ship in
his mind, no contract would exist between them as they were not ad idem, i.e., of the same mind.
• Consent may be free or not free.
• Free consent is necessary for the validity of a contract.
3.2 Free Consent
Definition of Free Consent [Section 14]
“Consent is said to be free when it is not caused by Coercion, Undue Influence,

Fraud, Misrepresentation, or Mistake”.
Contract is Voidable
4. Elements Vitiating Free Consent
4.1 Coercion [Section 15]
Definition of Coercion [Section 15]
“Coercion’ is the committing, or threatening to commit, any act forbidden by the Indian Penal
Code or the unlawful detaining, or threatening to detain any property, to the prejudice of any
person whatever, with the intention of causing any person to enter into an agreement.”
4.1.1 The essential ingredients of Coercion
✓ Committing or threatening to commit any act

forbidden by the Indian Penal Code; or
Coercion may proceed from
✓ The unlawful detaining or threatening to detain any a third party. It may also be
property to the prejudice of any person whatever, directed at a third party.
✓ The intention of causing any person to enter into an

agreement.
✓ It is immaterial whether the India Penal Code is or is not in force at the place where the
coercion is employed.
4.1.2 The effect of Coercion u/s 19
If any benefit is A person to

Contract The burden of
received in whom money
induced by proof in case of
course of this has been paid
coercion is coercion is on
type of contract or anything
voidable at the the aggrieved
it should be delivered under
option of the party i.e., the
restored by the coercion must
party whose person
person on
repay or
consent was so cancelling this whom coercion
return it.
obtained. contract has been used.
(Section 72)
Example : Where husband obtained a release deed from his wife and son under a threat of
committing suicide, the transaction was set aside on the ground of coercion, suicide being
forbidden by the Indian Penal Code. The threat of suicide amounts to coercion within Section 15.
4.2 Undue Influence [Section 16]
Definition of Undue Influence [Section 16]
“A contract is said to be induced by ‘undue influence’ where the relations subsisting

between the parties are such that one of the parties is in a position to dominate
the will of the other and he uses that position to obtain an unfair advantage
over the other”.
4.2.1 The essential ingredients of Undue Influence u/s 16
i) Relation between the parties – A person can dominate other when there is near relation
between them.
ii) Position to dominate the will – The relation between the two parties is such that one is in
a position to dominate the other. A person is deemed to dominate the will of other in these
situations:
a) In case he holds real and apparent authority over the other.
b) In case the relationship between them is a fiduciary relationship, i.e., a relation of

trust and confidence
c) When a person’s mental capacity is temporarily or permanently affected.
d) Where one of the parties to a contract is in a position to dominate the will of the other
and the contract is apparently unconscionable i.e., unfair. [Unconscionable
bargains are witnessed mostly in money-lending transactions and in gifts.]
Examples :
• Real and apparent authority : A father, by reason of his authority over the son can
dominate the will of the son.
• Fiduciary relationship : By reason of fiduciary relationship, a solicitor can dominate the
will of his client and a trustee can dominate the will of the beneficiary.
• Mental distress : A doctor is deemed to be in a position to dominate the will of his patient
enfeebled by protracted illness.
Case Law: Kirpa Ram vs. Sami-Ud-din Ad. Khan (1903)

Facts: A youth of 18 years of age, spend thrift and a drunkard, borrowed ₹ 90,000 on a bond bearing compound
interest at 2% per mensem (p.m.).
Judgement: The transaction is unconscionable as the rate of interest charged being so exorbitant
iii) The object must be to take undue advantage - The person in a position to influence the
will of the other in getting consent, must have the object to take advantage of the other.
Example : A teacher asks her daughter to get married to one of his brilliant students. Both
the girl and boy were smart, settled, and intelligent. Here the teacher had a relation which
can have influence on both of them. But, as no undue advantage of such influence was taken
such contract of marriage is said to be made by free consent.
iv) Burden of proof - The dominant party will have to prove that they have not used their
dominant position to take unfair advantage of the other and induce them to enter a contract.
4.2.2 Power to set aside contract induced by undue influence [Section 19A]
• When consent to an agreement is caused by undue influence, the agreement is a contract

voidable at the option of the party whose consent was so caused.
• Such contract may be set aside either absolutely, or, if the party who was entitled to avoid
it has received any benefit thereunder, upon such terms and conditions as to the Court
may seem just.
Example : A, a money lender advances ₹ 1,00,000 to B, an agriculturist, and by undue influence

induces B to execute a bond for ₹ 2,00,000 with interest at 6 percent per month. The court may
set aside the bond, ordering B to repay ₹ 1,00,000 with such interest as may seem just.
Case Study
Facts: A student was induced by his teacher to sell his brand-new car to the latter at less than the purchase price to
secure more marks in the examination. Accordingly, the car was sold. The student’s father persuaded him to sue his
teacher.
Judgement: The student can sue his teacher on the ground of undue influence under the provisions of Indian Contract
Act, 1872.
4.2.3 Difference between Coercion and Undue Influence
Basis of Difference Coercion Undue Influence

Nature of action It involves physical force or threat. It involves mental pressure.
Involvement of criminal It involves committing or No such illegal act is committed, or

action threatening to commit an act threat is given.
forbidden by the Indian Penal
Code.
Relationship between Relationship between parties is Some sort of relationship between
parties not necessary the parties is necessary
Exercised by whom Coercion can move from a Undue Influence cannot be

stranger and can be used upon a exercised by a stranger.
stranger
Enforceability The contract is voidable at the The contract is either voidable or
option of the aggrieved party. the court may set it aside or
enforce in a modified form.
Position of benefits Any benefit already received must The court has discretion to direct
received be returned once the contract is the aggrieved party to return the
rescinded. benefit in whole or in part.
4.3 Fraud [Section 17]
Definition of Fraud [Section 17]
‘Fraud’ means and includes any of the following acts committed by a party to a contract, or with his connivance,
or by his agent, with an intent to deceive another party thereto or his agent, or to induce him to enter into the
contract:
• the suggestion, as a fact, of that which is not true, by one who does not believe it to be true,
• the active concealment of a fact by one having knowledge or belief of the fact,
• a promise made without any intention of performing it,
• any other act fitted to deceive,
• any such act or omission as the law specially declares to be fraudulent.
4.3.1 Essential elements of the fraud
• A false representation or assertion must be made. However, silence, or an active

concealment may also amount to fraud.
• Representation must be related to a fact.
• Representation must be made before the conclusion of the contract with an intention to
deceive
• The representation or statement should be made with a knowledge of its falsity or without
belief in its truth or recklessly not caring whether it is true or false.
• The other party must have been induced to act upon the representation or assertion.
• The other party must have relied upon the representation and must have been deceived.
• The other party acting on the representation must have consequently suffered a loss.
4.3.2 Whether silence amounts to fraud
• Mere silence as to facts likely to affect the willingness of a

person to enter into a contract is not fraud. ‘Caveat Emptor’ i.e.,
let the purchaser
• A party to the contract is under no obligation to disclose the beware is rule applicable
whole truth to the other party. to contracts.
Example : A and B being traders, enter into a contract. A has private

information of a change in prices which would affect B’s willingness
to proceed with the contract. A is not bound to inform B.
• Exceptions to this are when –
i) Duty of the person to speak – Where the circumstances of the case are such that it is
the duty of the person observing silence to speak. For example, in contracts of uberrimae
fidei i.e., contracts of utmost good faith.
Following contracts come under this category –
Contracts of Share
Fiduciary Contracts of Contracts of
Family Allotment
Relationship Insurance Marriage
Settlement Contracts
▪ Fiduciary Relationship - The person in whom confidence is reposed is under a duty to act
with utmost good faith and make full disclosure of all material facts concerning the
agreement, known to him.
Case Law: Regier V. Campbell Staurt

Facts: A broker was asked to buy shares for client. He sold his own shares without disclosing this
fact.
Judgement: The client was entitled to avoid the contract or affirm it with a right to claim secret
profit made by broker on the transaction since the relationship between the broker and the
client was relationship of utmost good faith.
▪ Contracts of Insurance - In contracts of marine, fire and life insurance, there is an implied
condition that full disclosure of material facts shall be made. Otherwise, the insurer is entitled
to avoid the contract.
▪ Contracts of marriage - Every material fact must be disclosed by the parties to a contract of
marriage (Hazi Ahmed v. Abdul Gassi)
▪ Contracts of family settlement - Full disclosure of material facts within the knowledge of
the parties is required.
▪ Share Allotment contracts - Persons issuing ‘Prospectus’ at the time of public issue of
shares/debentures by a joint stock company have to disclose all material facts within their
knowledge.
ii) Where the silence itself is equivalent to speech – Mere silence as to facts likely to
affect the willingness of a person to enter into a contract is fraud where his silence is, in
itself, equivalent to speech.
Examples :
• A sell, by auction, to B, a horse which A knows to be unsound. A says nothing to B about

the unsoundness of the horse. This is not fraud by A.
• B is A’s daughter and has just come of age. Here, the relation between the parties would
make it A’s duty to tell B if the horse is unsound.
• When B says to A – “If you do not deny it, I shall assume that the horse is sound”. A says
nothing. Here A’s silence is equivalent to speech.
4.3.3 Effect of Fraud upon validity of a contract
The following remedies are available to the party defrauded –
• Rescind the contract within reasonable time
• Sue for damages
• Insist on performance of contract on the condition that he is put in the position in

which he would have been if false representation had not been made.
4.4 Misrepresentation [Section 18]
Definition of Misrepresentation [Section 18]
Misrepresentation means and includes –
i) the positive assertion, in a manner not warranted by the information of the person making it,
of that which is not true, though he believes it to be true,
ii) any breach of duty which, without an intent to deceive, gains an advantage to the person
committing it, or anyone claiming under him; by misleading another to his prejudice or to the
prejudice of anyone claiming under him,
iii) causing, however, innocently, a party to an agreement to make a mistake as to the substance
of the thing which is the subject of the agreement.
4.4.1 Essentials of misrepresentation
• Maker of the statement of fact, which is false, believes it to be true, even though such fact
is not justified by the information he possesses.
Example : A makes a positive statement to B that C will be made the director of a company.
A makes the statement on information derived, not directly from C but from M. B applies for
shares on the faith of the statement which turns out to be false. The statement amounts to
misrepresentation, because the information received second-hand did not warrant A to make
the positive statement to B.
• Breach of duty by a person without the intention to deceive and such breach brings an
advantage to him.
If there is intention to deceive, it becomes fraud.
Examples :
▪ ‘A’ believed the engine of his motorcycle to be in an excellent condition. ‘A’ without getting
it checked in a workshop, told to ‘B’ that the motorcycle was in excellent condition. On this
statement, ‘B’ bought the motorcycle, whose engine proved to be defective. Here, ‘A’s
statement is misrepresentation as the statement turns out to be false.
▪ A buy an article thinking that it is worth ₹1000 when in fact it is worth only ₹500. There
has been no misrepresentation on the part of the seller. The contract is valid.
• A party causes, even though done innocently, the other party to the agreement to make a
mistake as to the subject matter.
4.4.2 Difference between Fraud and Misrepresentation.
Basis of difference Fraud Misrepresentation

Intention There’s an intention to deceive the No such intention to deceive the
other party in case of fraud. other party in case of
misrepresentation.
Knowledge of truth The person suggesting believes The person suggesting believes the
that the statement is untrue. statement is true, though it is not
true.
Recission of the contract The aggrieved party can repudiate The aggrieved party can repudiate
and claim of damage the contract and claim damages. the contract but cannot claim
damages.
Means to discover the The party using the fraudulent act Party can always plead that the
truth cannot secure or protect himself by injured party had the means to
saying that the injured party had discover the truth.
means to discover the truth.
4.5 Legal effects of agreements without free consent [Section 19]
• When consent to an agreement is caused by coercion, fraud or misrepresentation, the

agreement is a contract voidable at the option of the party whose consent was so caused.
Example : A, intending to deceive B, falsely represents that 500 maunds of indigo are made
annually at A’s factory, and thereby induces B to buy the factory. The contract is voidable at the
option of B as consent is caused by fraud.
• Exception-
a) If such consent was caused by misrepresentation or by silence amounting to fraud the

contract is not voidable if the party whose consent was so caused had the means
of discovering the truth with ordinary diligence.
Example : A by a misrepresentation leads B to believe erroneously that 750 tons of sugar

is produced per annum at the factory of A. B examines the accounts of the factory, which
should have disclosed, if ordinary diligence had been exercised by B, that only 500 tons
had been produced. Thereafter B purchases the factory. In the circumstance, B cannot
repudiate the contract on the ground of A’s misrepresentation.
b) A fraud or misrepresentation which did not cause the consent to a contract of
the party on whom such fraud was practiced, or to whom such misrepresentation was
made, does not render a contract voidable.
Example : When a seller of specific goods deliberately conceals a fault in order that the
buyer may not discover it even if he inspects the goods, but the buyer does not in fact,
make any inspection, the buyer cannot avoid the contract, as he is not in fact deceived by
the conduct of the seller.
A party to contract, whose consent was so caused by fraud or misrepresentation may, if he thinks
fit, insist that the contract shall be performed, and that he shall be put in the position in which
he would have been if the representation made had been true.
4.6 Mistake
• Mistake may be defined as innocent or erroneous belief which leads the party to
misunderstand the others.
• Mistake may be either Bilateral or Unilateral.
• Bilateral mistake – Both the parties to a contract are under a mistake.
• Unilateral mistake – Only one party to the contract is under a mistake.
Mistake
Mistake of Law Mistake of facts
Mistake of Bilateral Unilateral

Indian Law
Mistake as to Mistake as to Identity of
Mistake of subject possibility of person
Foreign matter performance
Law
Character of
Quality Legal written
document
Existence Physical
Identity
Title
Price
Quantity
4.6.1 Mistake of Law
• This mistake may relate to the mistake of the Indian laws, or it can be a mistake of foreign
laws.
• Mistake of Indian Law – If the mistake is regarding Indian laws, it does not render a
contract void as Ignoratia Juris Non Excuta i.e., ignorance of the law is not a good enough
excuse.
• However, if the mistake of law is caused through the inducement of another, the contract
may be avoided.
• Mistake of Foreign Law – Mistake of foreign law is excusable and is treated like a mistake
of fact. Contract may be avoided on such mistake.
4.6.2 Mistake of fact
• Bilateral Mistake –
o Where the contracting parties misunderstood each other and are at cross
purposes, there is a bilateral or mutual mistake.
o Where both the parties to an agreement are under a mistake as to a matter of fact
essential to the agreement, the agreement is void.
• Unilateral Mistake –
o Where only one party is under mistake, there is unilateral mistake.
o Unilateral mistake is not allowed as a defence to avoid a Contract. So, if only one party
has made a mistake of fact the contract remains a valid contract.
Example : A offers to sell his Ambassador Car to B, who believes that A has only Fiat Car, agrees
to buy the car. Here, the two parties are thinking about different subject matter so that there is
no real consent, and the agreement is void.
5. Legality of Object and Consideration
Section 23 of the Indian Contract Act, 1872 describes which considerations are lawful and
those which are not –
The consideration or object of an agreement is lawful, unless –
1. It is forbidden by law; or
2. Is of such a nature that, if permitted, it would defeat the provisions of any law; or
3. Is fraudulent; or
4. Involves injury to the person or property of another; or
5. The court regards it as immoral; or
6. Opposed to public policy.
Every agreement of which the object or consideration is unlawful is void.
Examples :
• ‘A’ promises to B to abandon a prosecution which he had instituted against B for robbery and B
promises in lieu thereof to restore the value of the property robbed. The agreement is void as its
object, namely, the stifling of prosecution, is unlawful.
• ‘A’ promises to obtain for B an employment in the public service and B promises, in return, to pay
₹1,00,000 to A. The agreement is void. The consideration, being opposed to public policy, is
unlawful.
5.1 Consideration or object is forbidden by law
• When the object of a contract or the consideration of a contract is prohibited by law, then they
are not lawful consideration or object anymore. They then become unlawful in nature. And
so, such a contract cannot be valid anymore.
• Unlawful consideration of object includes acts that are specifically punishable by the law.
This also includes those that the appropriate authorities prohibit via rules and regulations.
But if the rules made by such authorities are not in tandem with the law, then these will not
apply.
Example : A licence to cut grass is given to X by the Forest Department under the Forest Act. One
of the terms of licence is that the licencee should not assign his interest under the licence without
the permission of the Forest Officer, and a fine is prescribed for a breach of this condition. But the
observance of the conditions of the licence is not obligatory under the Forest Act. If X in breach of
the condition, agrees to assign his interest under the licence to B, that agreement will be valid.
Here, the assignment is not prohibited by law, the condition against assignment has been imposed
only for administrative purpose or solely for the protection of revenue.
5.2 Consideration or object defeats the provision of law
This means that the contract is trying to defeat the intention of the law. If the courts find that
the real intention of the parties to the agreement is to defeat the provisions of the law, it will put
aside the said contract.
Example : A and B enter into an agreement, where A is the debtor, that B will not plead limitation.
This, however, is done to defeat the intention of the Limitation Act, and so the courts can rule the
contract as void due to unlawful object.
5.3 Consideration or object is fraudulent
Agreements which are entered into to promote fraud are void.
Example : A decides to sell goods to B and smuggle them outside the country. This is a fraudulent
transaction hence, it is void. Now B cannot recover the money under the law if A does not deliver
on his promise.
5.4 Consideration or object defeats any rule for the time being in force in India
If the consideration or the object is against any rules in effect in the country for the time being,
then they will not be lawful consideration or objects. And so, the contract thus formed will not
be valid.
5.5 Consideration or object involves injury to the person or property of another
In legal terms, an injury means a criminal and harmful wrong done to another person. So, if the
object or the consideration of the contract does harm to another person or property, this will
amount to unlawful consideration.
Example : An agreement to publish a book that is a violation of another person’s copyright would
be void. This is because the consideration here is unlawful and injures another person’s property,
i.e. his copyright.
5.6 Consideration or object is immoral
If the object or the consideration are regarded by the court as immoral, then such contract is not
valid.
5.7 Consideration or object is opposed to public policy
For the betterment of the community, there are certain restriction on contracts in the name
of public policy. But we do not use public policy in a wide sense in this matter. If that was the case
it would curtail individual freedom of people to enter into contracts. So, for the purpose of lawful
consideration and object public policy is used in a limited scope.
Some of the agreements which are held to be opposed to public policy are as follows-
5.7.1 Trading with enemy
Entering into an agreement with a person from a country with whom India is at war is void, as
the object is opposed to public policy.
Example : India entered in war like situation with China. Mr. A from India entered into contract
with China for import of toys. Such contract is void as China is alien enemy of India. The contract
if made before such war like situation may be suspended or dissolved.
5.7.2 Stifling Prosecution
• This is a pervasion of the natural course of law, and such contracts are void.
• The principle is that one should not make a trade of felony (i.e., a serious crime). The
compromise of any public offence is generally illegal.
• However, in case of a statutory list of compoundable offences, an agreement to drop

proceeding relating to such offences with or without the permission of the Court, as the case
may be, in consideration the accused promising to do something for the complainant, is not
opposed to public policy.
• In case of an uncompoundable offence, it is void.
5.7.3 Maintenance and Champerty
• Maintenance is an agreement in which a person promises to maintain suit in which he has

no interest.
• Champerty is an agreement in which a person agrees to assist another in litigation in-

exchange of a promise to hand over a portion of the proceeds of the action.
• The agreement for supplying funds by way of Maintenance or Champerty is valid unless
a) It is unreasonable so as to be unjust to other party or
b) It is made by a malicious motive.
Examples : ‘A’ offer B ₹ 2000, if he sues C for a case which they could have settled mutually under
provisions of law, just to annoy C. Such agreement is maintenance agreement.
▪ A agrees to pay expenses to B if he sues C and B agrees to pay half of the amount received
from result of such suit. This is an agreement of champerty.
5.7.4 Trafficking relating to Public Offices and titles
An agreement to trafficking in public office is opposed to public policy, as it interferes with the
appointment of a person best qualified for the service of the public. Public policy requires
that there should be no money consideration for the appointment to an office in which the public
is interested.
Example : Harish paid ₹15,000 to the officer to give his son the job in the Forest department of
India. On failure by officer he couldn’t recover the amount as such contract amounts to trafficking
in public office which is opposed to public policy.
5.7.5 Agreements tending to create monopolies
Agreements having for their object the establishment of monopolies are opposed to public
policy and therefore void.
Example : XYZ and ABC were only the manufactures of oxygen cylinders in West Bengal. They
both entered into contract of supplying the same at very high rates and enjoy the monopoly rates
during the COVID-19 period in the country. Such contract is opposed to public policy as they
intended to create monopolies.
5.7.6 Marriage brokerage agreements
• An agreement to negotiate marriage for reward, which is known as a marriage brokerage

contract.
• Such an agreement is void, as it is opposed to public policy.
Marriage bureau only provides information and doesn’t negotiate marriage for reward;
therefore, it is not covered under this point.
5.7.7 Interference with the course of justice
An agreement whose object is to induce any judicial officer of the State to act partially or
corruptly is void, as it is opposed to public policy. Also, an agreement which contemplates the
use of under-hand means to influence legislation is void.
5.7.8 Interest against obligation
Agreements which tend to create interest against obligation are void.
Examples :
• An agreement by an agent to receive without his principal’s consent compensation from

another for the performance of his agency is invalid.
• A, who is the manager of a firm, agrees to pass a contract to X if X pays to A ₹200,000 privately;
the agreement is void.
5.7.9 Consideration Unlawful in Part
• By virtue of Section 24, if
o any part of a single consideration for one or more objects, or
o any one or any part of any one of several considerations for a single object, is
unlawful, the agreement is void.
There is no promise for a lawful consideration if there is anything illegal in a consideration

which must be taken as a whole.
• The general rule is that –
▪ where the legal part of a contract can be severed from the illegal part, the bad part
may be rejected, and the good one can be retained.
▪ But, where the illegal part cannot be severed, the contract is altogether void.
Agreements
tending to create
monopolies
Trafficking relating Marriage
to Public Offices brokerage
and titles agreements
Maintenance Interference
and with the course
Champerty of justice
Interest
Stifling
against
prosecution
obligation
Agreements
Trading with opposed to Consideration
enemy public Unlawful in Part
policy
6. Void Agreements
Made by incompetent parties [Sec. 11]
Agreements made under Bilateral mistake of fact [Sec. 20]

Agreements the consideration or object of which is unlawful
[Sec. 23]
Expressly declared void
Agreement the consideration or object of which is unlawful in parts

[ Sec. 24]
agreements
Agreements made without consideration [Sec. 25]
Agreement in restraint of marriage [Sec. 26]
Agreements in restraint of trade [Sec. 27]
Agreement in restraint of legal proceedings [Sec. 28]
Agreement the meaning of which is uncertain [Sec. 29]
Wagering agreement [Sec. 30]
Agreements to do impossible Acts [Sec. 56]
6.1 Agreement in restraint of marriage [Section 26]
Every agreement in restraint of marriage of any person other than a minor, is void. So, if a
person, being a major, agrees for good consideration not to marry, the promise is not binding and
considered as void agreement.
6.2 Agreement in restraint of trade [Section 27]
• An agreement by which any person is restrained from carrying on a trade or practising a

legal profession or exercising a business of any kind is an expressly void agreement. Such
an agreement violates the constitutional rights of a person.
An agreement of service by which an employee binds himself, during the term of his
agreement, not to compete with his employer is not in restraint of trade.
• However, there are a few exceptions to this rule.
▪ Sale of goodwill – Where a person sells the goodwill of a business and agrees with the
buyer to refrain from carrying on a similar business, within specified local limits, so
long as the buyer or his successor in interest carries on a like business therein, such
an agreement is valid.
▪ In case of outgoing partner – Under Section 36 of the Indian Partnership Act, 1932 if
an outgoing partner makes an agreement with the continuing partners that he will not
carry on any business similar to that of the firm within a specified period or within
specified local limits, such an agreement, thought in restraint of trade, will be valid, if
the restrictions imposed are reasonable.
▪ Agreement between partners – Under Section 11 of the Indian Partnership Act, 1932
an agreement between partners not to carry on competing business during the
continuance of partnership is valid.
Exceptions to the rule that Agreement

in Restraint of Trade is Void
Statutory Judicial
provisions Interpretations
Indian LLP
Sale of
Partnership Act,
goodwill
Act, 1932 2008
Sole or
Trade Service Exclusive
combinations agreements dealing
agreements
and
franchise
6.3 Agreement in restraint of legal proceedings [Section 28]
• An agreement in restraint of legal proceeding means an agreement
a) by which any party thereto is restricted absolutely from enforcing his rights under
a contract through a Court or
b) which abridges the usual period for starting legal proceedings.
• A contract of this nature is void.
• However, there are certain exceptions –
a) A contract by which the parties agree that any dispute between them in respect of
any subject shall be referred to arbitration and that only the amount awarded in such
arbitration shall be recoverable is a valid contract.
b) A contract by which the parties agree to refer to arbitration any question between
them which has already arisen, or which may arise in future, is valid; but such a
contract must be in writing.
6.4 Agreement - the meaning of which is uncertain [Section 29]
• An agreement, the meaning of which is not certain, is void.
• But, where the meaning thereof is capable of being made certain, the agreement is valid.
Example : A agrees to sell B “a hundred tons of oil”. There is nothing whatever to show what kind
of oil was intended. The agreement is void for uncertainty. But the agreement would be valid if A
was dealer only in coconut oil; because in such a case its meaning would be capable of being made
certain.
6.5 Wagering agreement [Section 30]
• Wagering agreement is an agreement involving payment of a sum of money upon the

determination of an uncertain event.
• An agreement by way of a wager is void.
• But if one of the parties has control over the event, agreement is not a wager.
Example : A agrees to pay ₹ 50,000 to B if it rains, and B promises to pay a like amount to A, if it
does not rain, the agreement will be by way of wager.
Promise to
pay money
or money's
worth Conditional
No interest
on an event
in the event
happening
except for
or not
stake
Essentials happening
of a
Common wager
intention to
bet at the Uncertainity
time of of event
making the
agreement Two parties
- each must
stand to win
or lose
6.5.1 Transactions similar to Wager (Gambling)
Lottery transactions
• A game of chance.
• Where prime motive is gambling - it is wager.
• Even a lottery authorised by GOI is wagering - only effect of such sanction
is thatperson running the lottery is not punished under IPC
Crossword puzzles and Competitions
• Crossword puzzles in which prizes depend upon the correspondence of
the competitor’s solution with a previously prepared solution kept with
the editor of a newspaper is a lottery and therefore, a wagering
transaction.
• State of Bombay vs. R.M.D. Chamarbangwala
Speculative Transactions
• An agreement or a share market transaction where the parties intend to
settle the difference between the contract price and the market price of
certain goods or shares on a specified day, is a gambling and hence void.
Horse Race Transaction
• A horse race competition where prize payable to the bet winner is less
than Rs. 500, is a wager.
Case Law: State of Bombay vs. R.M.D. Chamarbangwala AIR (1957)
Facts: A crossword puzzle was given in magazine. A solved his crossword puzzle and his
solution corresponded with previously prepared solution kept with the editor.
Judgement: This was a game of chance and therefore a lottery (wagering transaction).
6.5.2 Transactions resembling with wagering transaction but are not void
a) Chit fund: Chit fund does not come within the scope of wager u/s 30. In case of a chit fund,
a certain number of persons decide to contribute a fixed sum for a specified period and at
the end of a month, the amount so contributed is paid to the lucky winner of the lucky draw.
b) Commercial transactions or share market transactions: In these transactions in which

delivery of goods or shares is intended to be given or taken, do not amount to wagers.
c) Games of skill and Athletic Competition: Crossword puzzles, picture competitions and
athletic competitions where prizes are awarded on the basis of skill and intelligence are
the games of skill and hence such competition are valid.
According to the Prize Competition Act, 1955 prize competition in games of skill are not
wagers provided the prize money does not exceed ₹1,000.
d) Contract of insurance: A contract of insurance is a type of contingent contract and is valid
under law and these contracts are different from wagering agreements.
6.5.3 Distinction between Contract of Insurance and Wagering Agreement
Basis Contracts of Insurance Wagering Agreement
Meaning It is a contract to indemnify the loss.

It is a promise to pay money or
money’s worth on the happening or
non- happening of an uncertain
event.
Consideration Essence of insurance contract is the There is no consideration between
mutual consideration (premium and the two parties. There is just
compensation amount). gambling for money.
Insurable Interest Insured party has insurable interest There is no property in case of
in the life or property sought to be wagering agreement. There is betting
insured. on other’s life and properties.
Contract of Indemnity Except life insurance, the contract of Loser has to pay the fixed amount on
insurance indemnifies the insured the happening of uncertain event.
person against loss.
Enforceability It is valid and enforceable It is void and unenforceable

agreement.
Premium Calculation of premium is based on No such logical calculations are
scientific and actuarial calculation of required.
risks.
Public Welfare They are beneficial to the society. They have been regarded as against
the public welfare.
6.6 Agreements to do Impossible Acts [Section 56]
An agreement to do an act impossible in itself is void. Section 56

covers various circumstances under which agreement may be void,
Such agreements are
since it is impossible to carry it out.
covered in detail in Unit 4
– Performance of Contract.
7. Overview
Essential Elements of a valid

contract
Lawful
Capacity to Not expressly
Free Consent consideration
contract declared void
& Object
Agreements
Major Not caused by where
consideration or
object is unlawful
Sound mind
Coercion
Forbidden by law
Not
disqualified Undue
Influence Defeats the
provision of law
Fraud
Fraudulent
Mis-
representatio
Defeats any rule
n
Injury to the
Mistake person or
property of
another
Immoral
Opposed to public
policy
CH-1: UNIT 4 – PERFORMANCE OF CONTRACT
• Carrying out obligations under a contract.
• Various modes of performance.
• Refusal of performance.
• Joint Promisor Liabilities and
• Joint Promisee Rights
• Appropriation of payments.
• Contracts which need not be performed.
4.1 Joint Promisors
• When two or more persons have made a joint promise, then unless a contrary intention appears
by the contract, all such persons must jointly fulfil the promise.
• If any of them dies, his legal representatives must, jointly with the surviving promisors,
fulfil the promise.
• If all of them die, the legal representatives of all of them must fulfil the promise jointly.
Example : ‘A’, ‘B’ and ‘C’ jointly promised to pay ₹6,00,000 to ‘D’. Here ‘A’, ‘B’ and ‘C’ must jointly
perform the promise. If ‘A’ dies before performance, then his legal representatives must jointly with
‘B’ and ‘C’ perform the promise, and so on. And if all the three (i.e. ‘A’, ‘B’ and ‘C’) die before
performance, then the legal representatives of all must jointly perform the promise.
8. Distinction between Succession and Assignment
Succession Assignment
In case of succession both the In case of assignment, the

burden and benefits attaching benefit of the contract can
to the contract are succeeded only be assigned but not the
by process of law. liabilities.
However, the successor's Benefit is coupled with a

liability is limited to the extend liability OR when a personal
to the property inherited by consideration is involved, then
him. benefit cannot be assigned.
9. Discharge of a Contract
Modes of Discharge of a Contract
• By Performance
• By Mutual Agreement
• By Impossibility of Performance
• By Lapse of Time
• By Operation of Law
• By Breach of Contract
• By waiver or remission of performance by promisee
• By neglect of promisee to afford the promisor reasonable
facilities for performance
• By merger of rights
11.1 Discharge by performance
When the parties to the contract fulfil their obligations arising under the contract within
the time and in the manner prescribed. Discharge by performance may be
• Actual performance; or
• Attempted performance.
Example : Actual performance – A contracts to sell his car to B on the agreed price. the contract
comes to an end by performance as soon as the car is delivered to B and B pays the agreed price
for it.
Example : Attempted performance – A contracted to supply certain quantity of timber to B. B

made the supply of timber at appointed time and place, but A refused to accept the delivery. This
is called as attempted performance.
11.2 Discharge by mutual agreement
If the parties to a contract agree to substitute a new contract for it, or to rescind or remit or
alter it, the original contract need not be performed [Section 62].
11.3 Discharge by impossibility of performance
• The impossibility may exist from the very start. In that case, it would be impossibility ab
initio.
• Alternatively, impossibility may supervene. Supervening impossibility may take place owing
to:
o An unforeseen change in law, or
o The destruction of the subject-matter essential to that performance, or
o The non-existence or non-occurrence of particular state of things, which was

naturally contemplated for performing the contract, as a result of some personal
incapacity like dangerous malady, or
o The declaration of a war.
11.4 Discharge by lapse of time
A contract should be performed within a specified period as prescribed by the Limitation Act,
1963. If it is not performed and if no action is taken by the promisee within the specified
period of limitation, he is deprived of remedy at law.
Example : If a creditor does not file a suit against the buyer for recovery of the price within three
years, the debt becomes time-barred and hence irrecoverable.
11.5 Discharge by operation of law
A contract may be discharged by operation of law which includes by death of the promisor, by
insolvency etc.
11.6 Discharge by breach of contract
• If a party to a contract fails to perform his obligation according to the time and place
specified, then he is said to have committed a breach of contract.
• Breach can be of two types – actual breach or anticipatory breach. In both cases, the
breach discharges the contract.
When a person repudiates a contract before the stipulated time for its performance has
arrived, he is deemed to have committed anticipatory breach.
Example : A contracted with B to supply 100 kgs of rice on 1st June. But A failed to deliver the
same on said date. This is actual breach of contract. If time is not essential essence of contract B
can give him another date for supply of goods and he will not be liable to claim for any damages
if prior notice for the same is not given to A while giving another date.
11.7 Promisee may waive or remit performance of promise
Every promisee may dispense with or remit, wholly or in part, the performance of the
promise made to him, or may extend the time for such performance or may accept instead
of it any satisfaction which he thinks fit [Section 63].
11.8 Effects of neglect of promisee to afford promisor reasonable facilities for performance
If any promisee neglects or refuses to afford the promisor reasonable facilities for the
performance of his promise, the promisor is excused by such neglect or refusal as to any
non-performance caused thereby [Section 67].
11.9 Merger of rights
In some situations, it is possible that inferior and superior right coincides in the same person.
In such cases, both the rights combine leading to a discharge of the contract governing the
inferior rights.
Example : A took a land on lease from B. Subsequently, A purchases that very land. Now, A
becomes the owner of the land and the ownership rights being superior to rights of a lessee, the
earlier contract of lease stands terminated.
10. Overview
Refusal to accept
offer of
Obligations of performance [Sec.
parties to 38]
contracts
[Sec. 37] Refusal to perform
wholly [Sec. 39]
Promisor, Agent,
Legal Rep.
[Sec. 40]
By whom a
contract may be Liability of Joint
Third person promisor and
performed
[Sec. 41] promisee
[Sec. 42, 43 &
Time and place Joint promisors 44]
for performance [Sec. 42]
Performance [Sec. 46 to 50]
Rights of joint
of a Contract promisees
Reciprocal
Agreement to do [Sec. 45]
promises [Sec.
impossible acts
51 to 55, 57 &
[Sec. 56]
58]
Appropriation of
payments [Sec.
59, 60 & 61] Novation,
Recission,
Alteration
Contracts which
[Sec. 62]
need not be
performed
Waiver by
promisee [Sec. 63]
Discharge of a
Contract
CH-1: UNIT 5 – BREACH OF CONTRACT AND ITS REMEDIES
● Concept of Breach of Contract
● Various modes of Breach of Contract
● Remedies for Breach of Contract
● Measurement of Damages
1. Introduction
Breach means failure of a party to perform his or her obligation under a contract.
Breach of Contract
Actual Anticipatory
2. Anticipatory Breach of Contract
● An anticipatory breach of contract is a breach of contract occurring before the time fixed for
performance has arrived.
● Anticipatory breach of a contract may take either of the following two ways:
a) Expressly by words spoken or written, and
b) Impliedly by the conduct of one of the parties.
Examples :
1) Where A contracts with B on 15th July 2020 to supply 10 bales of cotton for a specified sum on
14th August 2020 and on 30th July informs B, that he will not be able to supply the said cotton on
14th August 2020, there is an express rejection of the contract.
2) Where A agrees to sell his white horse to B for ₹ 50,000/- on 10th of August 2020, but he sells this
horse to C on 1st of August 2020, the anticipatory breach has occurred by the conduct of the
promisor.
2.1 Effect of anticipatory breach
As per Section 39 of the Indian Contract Act, 1872 –
“When a party to a contract has refused to perform or disable himself from performing, his
promise in its entirety, the promisee may put an end to the contract, unless he has signified, but
words or conduct, his acquiescence in its continuance.”
● The promisee is excused from performance or further performance of the contract.
● He further has the following options:
i) He can rescind the contract and sue the other party for damages immediately without
waiting till the due date of performance.
ii) He may decide not to rescind the contract and treat it as still operative and wait till the
time of performance and then hold the other party responsible.
3. Actual Breach of Contract
● While an anticipatory breach is before the time of performance, an actual breach of contract is on
the scheduled time of performance of the contract.
● Actual breach of contract may be committed –
o At the time when the performance of the contract is due, or
o During the performance of the contract.
Example : A agrees to deliver 100 bags of sugar to B on 1 Feb 2020. On the said day, he failed to supply
100 bags of sugar to B. This is actual breach of contract. The breach has been committed by A at time
when performance becomes due.
3.1 Remedies Available for Breach of Contract
Suit for specific

Suit for Damages Recission of Contract
performance
Suit upon Quantum

Suit for Injunction
Meruit
4. Suit for Damages
4.1 Compensation for loss or damage caused by breach of contract
As per Section 73 of the Indian Contract Act, 1872 –
“When a contract has been broken, the party who suffers by such a breach is
entitled to receive, from the party who has broken the contract, compensation for
any loss or damage caused to him thereby, which naturally arose in the usual course
of things from such breach, or which the parties knew, when they made the contract,
to be likely to result from the breach of it”.
● On the breach of the contract, the party who suffers from such a breach is entitled to
receive, from the party who has broken the contract, compensation for any loss or damage
caused to him by breach.
● Compensation can be claimed for :
o any loss or damage which naturally arises No compensation is payable

in the usual course of events, or for any remote or indirect
loss.
o any loss or damage which the party knew
when they entered into the contract, as
likely to result from the breach.
● Special damages, if any, can be claimed only if the suffering party has given notice about it
earlier. Also, the party suffering a loss is expected to take reasonable steps to minimize it.
● While estimating the loss incurred, all the means which existed to remedy the inconvenience
caused by the non-performance of the contract should be considered.
Example : Yash agrees to sell and deliver 50 kilograms of rice to Rohan for ₹ 5,000. The amount
is to be paid on delivery. However, he fails to perform the promise. Rohan buys 50 kilograms of
rice from a neighbourhood trader for ₹ 7,500. Rohan can claim compensation from Yash. The
compensation amount is the additional amount that Rohan had to pay to procure the
same quantity of rice of similar quality from the market. In this case, it is ₹2,500.
4.2 Compensation for failure to discharge obligation resembling those created by contract
When an obligation resembling those created by contract has been incurred and has not been
discharged, any person injured by the failure to discharge it is entitled to receive the same
compensation from the party in default, as if such person had contracted to discharge it and
had broken his contract.
4.3 Kind of Damages
Damages
Damages for
General/Or Vindictive or Pre-fixed
Special Nominal deterioration
dinary Exemplary damages
caused by delay
4.3.1 Ordinary damages
The damages which arise naturally in the usual course of things from breach of contract.
Case Law: Hadley vs. Baxendale

Facts: The crankshaft of P’s flour mill had broken. He gives it to D, a common carrier who promised
to deliver it to the foundry in 2 days where the new shaft was to be made. The mill stopped working,
D delayed the delivery of the crankshaft, so the mill remained idle for another 5 days. P received the
repaired crankshaft 7 days later than he would have otherwise received. Consequently, P sued D for
damages not only for the delay in the delivering the broken part but also for loss of profits suffered
by the mill for not having been worked.
Judgement: The court held that P was entitled only to ordinary damages and D was not liable for the
loss of profits because the only information given by P to D was that the article to be carried was the
broken shaft of a mill and it was not made known to them that the delay would result in loss of profits.
4.3.2 Special damages
Where a party to a contract receives a notice of special circumstances affecting the

contract, he will be liable not only for damages arising naturally and directly from the breach but
also for special damages.
Example : ‘A’ delivered a machine to ‘B’, a common carrier, to be conveyed to ‘A’s mill without
delay. ‘A’ also informed ‘B’ that his mill was stopped for want of the machine. ‘B’ unreasonably
delayed the delivery of the machine, and in consequence ‘A’ lost a profitable contract with the
Government.
● In this case, ‘A’ is entitled to receive from ‘B’, by way of compensation, the average amount
of profit, which would have been made by running the mill during the period of delay.
● But, he cannot recover the loss sustained due to the loss of the Government contract, as
‘A’s contract with the Government was not brought to the notice of ‘B’.
4.3.3 Vindictive or Exemplary damages
These damages may be awarded only in two cases –
i) for breach of promise to marry, and
ii) for wrongful dishonour by a banker of his customer’s cheque (Gibbons v West Minister
Bank).
4.3.4 Nominal damages
● Nominal damages are awarded where the plaintiff has proved that there has been a breach
of contract, but he has not in fact suffered any real damage.
● The amount may be a rupee or even 10 paise.
4.3.5 Damages for deterioration caused by delay
In the case of deterioration caused to goods by delay, damages can be recovered from carrier
even without notice.
The word ‘deterioration’ not only implies physical damages to the goods, but it may also mean
loss of special opportunity for sale.
4.3.6 Pre-fixed damages
Section 74 of the Act provides that if a sum is named in a contract as the amount to be paid
in case of a breach, the aggrieved party is entitled to receive from the party at fault a reasonable
compensation not exceeding the amount so named.
Example : If the penalty provided by the contract is ₹ 1,00,000 and the actual loss because of
breach is ₹ 70,000, only ₹ 70,000 shall be available as damages, i.e., the amount of actual loss and
not the amount stipulated. But if the loss is, say, ₹ 1,50,000, then only, ₹ 1,00,000 shall be
recoverable.
5. Penalty and Liquidated Damages
● English Law makes distinction between liquidated damages and penalty, whereas Indian Law does
not make any distinction between the two.
● If the sum fixed in the contract represents a genuine pre-estimate by the parties of the loss, which
would be caused by a future breach of the contract it is liquidated damages.
● Where the sum fixed in the contract is unreasonable and is used to force the other party to
perform the contract, it is penalty.
● Section 74 of the Contract Act lays down if the parties have fixed what the damages will be, the
courts will never allow more. Thus, a person complaining of breach of contract is entitled to get
reasonable compensation and is not entitled to realise anything by way of penalty.
▪ Exception: If a party enters into a contract with the State or Central government for the
performance of an act in the interest of the general public, then a breach of such a
contract makes the party liable to pay the entire amount mentioned in the contract.
Examples :
● A borrows ₹ 10,000 from B and gives him a bond for ₹ 20,000 payable by five yearly instalments
of ₹ 4,000 with a stipulation that in default of payment, the whole shall become due. This is a
stipulation by way of penalty.
● A undertakes to repay B, a loan of ₹ 10,000 by five equal monthly instalments with a stipulation
that in default of payment of any instalment, the whole shall become due. This stipulation is not
by way of penalty and the contract may be enforced according to its terms.
5.1 Distinction between liquidated damages and penalty
▪ If the sum payable is far in excess of the probable damage on breach of the contract, then it is a
penalty.
▪ If a contract mentions an amount payable at a certain date and an additional amount if a default
happens, then the additional sum is a penalty.
▪ Even if the contract specifies a sum as ‘penalty’ or ‘damages’, the Court needs to discern this from
the facts of the case
▪ In penalty, the payment intended to threaten (i.e., as a terrorem to) the offending party, whereas
Liquidated damages is a genuine pre-estimate of the damage.
▪ The Indian Courts focus on awarding a reasonable compensation not exceeding the amount fixed
in the contract and does not distinguish between the two.
5.2 Other remedies available for the breach of contract, besides claiming damages
Rescission of Quantum Suit for specific Suit for

contract Meruit performance injunction
5.2.1 Rescission of contract
When a contract is broken by one party, the other party may treat the contract as rescinded.
In such a case he is free from all his obligations under the contract and is entitled to
compensation for any damages that he might have suffered.
Example : A promises B to deliver 50 bags of cement on a certain day. B agrees to pay the amount
on receipt of the goods. A failed to deliver the cement on the appointed day. B is discharged from
his liability to pay the price.
5.2.2 Quantum Meruit
● It covers a case where the party injured by the breach ‘Quantum Meruit’ means as
had at time of breach done part but not all of the work much as is earned/as much as
which he is bound to do under the contract and seeks the party doing the service has
to be compensated for the value of the work done. deserved.
● For the application of this doctrine, two conditions

must be fulfilled:
i) It is only available if the original contract has been discharged.
ii) The claim must be brought by a party not in default.
Damages are compensatory in nature while quantum merit is restitutory (i.e., seeking to restore
the person to the position which he was in earlier).
● The claim for quantum meruit arises in the following cases –
▪ Agreement discovered to be void or when contract becomes void.

▪ Something done without intention of doing so gratuitously.
▪ Express or implied contract to render services but no agreement as to remuneration.
▪ Party refuses or abandons to perform contract.
▪ Divisible contract and party not in default has enjoyed benefit of part performance.
▪ When an indivisible contract for a lump sum is completely performed but badly the
person who has performed the contract can claim the lump sum, but the other party can
make a deduction for bad work.
Example : A agrees to deliver 100 bales of cottons to B at a price of ₹1,000 per bale. The cotton
bales were to be delivered in two instalments of 50 each. A delivered the first instalment but
failed to supply the second. B must pay for 50 bags.
5.2.3 Suit for specific performance
Where damages are not an adequate remedy in the case of breach of contract, the court may
in its discretion on a suit for specific performance direct party in breach, to carry out his promise
according to the terms of the contract.
5.2.4 Suit for injunction
Where a party to a contract is negating the terms of a

An injunction is basically like a
contract, the court may by issuing an ‘injunction orders’,
decree for specific performance
restrain him from doing what he promised not to do.
but for a negative contract. An
Example : N, a film star, agreed to act exclusively for a injunction is a court order
restraining a person from doing a
particular producer, for one year. During the year she
particular act.
contracted to act for some other producer. Held, she could be
restrained by an injunction.
5.2.5 Party rightfully rescinding contract, entitled to

compensation
A person who rightfully rescinds a contract is entitled to compensation for any damage which he
has sustained through non-fulfilment of the contract [Section 75].
Example : A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for two
nights in every week during the next two months, and B engages to pay her ₹ 100 for each night’s
performance. On the sixth night, A wilfully absents herself from the theatre, and B, in consequence,
rescinds the contract. B is entitled to claim compensation for the damage which he has sustained
through the non-fulfilment of the contract.
6 Overview
Expressly
Anticipatory
Breach
Impliedly
At the time when

performance is due
Actual Breach
During the
performance
Ordinary
damages
Breach of
Contract
Special
damages
Vindictive
Suit for Damages
damages
Recission of Nominal
contract damages
Liquidated
damages
Remedies for Suit for Specific Prefixed
Breach of Contract performance damages
Penalty
Suit for Injunction
Suit for Quantum

Meruit
CH-1: UNIT 6 – CONTINGENT AND QUASI CONTRACTS
• Basic characteristics of Contingent contract and Quasi Contract.
• Enforcement of Contingent Contracts.
• Contingent Contract vs. Wagering Contract.
• Cases deemed as Quasi Contracts.
1. Contingent Contracts
A contract may be absolute or a contingent. An Absolute contract is one where the promisor
undertakes to perform the contract in any event without any condition.
Section 31 of the Indian Contract Act, 1872 defines Contingent Contract as –
“A contract to do or not to do something, if some event, collateral to such contract, does or

does not happen”.
• In simple words, contingent contracts, are the ones where the promisor perform his obligation only
when certain conditions are met.
• The contracts of insurance, indemnity, and guarantee are some examples of contingent
contracts.
Collateral event – An event which is neither a performance directly promised as part of the
contract, nor the whole of the consideration for a promise [Pollock and Mulla].
Example : A contracts to pay B ₹100,000 if B’s house is burnt. This is a contingent contract.
▪ Here the burning of the B’s house is neither a performance promised as part of the contract nor
it is the consideration obtained from B. Thus, the burning of the house is the collateral event.
▪ The liability of A arises only on the happening of the collateral event.
• Essentials of a contingent contract –
i) The performance of a contingent contract would depend upon the happening or non-
happening of some event or condition.
ii) An event collateral to the contract - The event is not part of the contract. The event should
be neither performance promised nor a consideration for a promise.
Examples :
▪ A agrees to deliver 100 bags of wheat and B agrees to pay the price only afterwards. This
is a conditional contract and not contingent because the event on which B’s obligation is
made to depend is part of the promise itself and not a collateral event.
▪ A promises to pay B ₹ 1,00,000 if he marries C. It is not a contingent contract.
▪ A agreed to construct a swimming pool for B for ₹ 200,000. And B agreed to make the
payment only on the completion of the swimming pool. It is not a contingent contract as
the event (i.e. construction of the swimming pool) is directly connected with the contract.
iii) The contingent event should not be a mere ‘will’ of the promisor - The event should be
contingent in addition to being the will of the promisor.
Example : If A promises to pay B ₹100,000 if it rains on 1st April and A leave Delhi for Mumbai on
a particular day, it is a contingent contract, because going to Mumbai is an event no doubt within
A’s will, but raining is not merely his will.
iv) The event must be uncertain - If the performance of the contract is dependent on an event,
which is although a future event, but certain and sure to happen, then it will not be considered
as a contingent contract.
Example : A agreed to sell his agricultural land to B after obtaining the necessary permission
from the collector. As a matter of course, the permission was generally granted on the fulfilment
of certain formalities. It was held that the contract was not a contingent contract as the grant of
permission by the collector was almost a certainty.
Dependent on Contingent event is

The event must be
another event or Collateral event not a mere will of
uncertain
condition the promisor
2. Rules relating to Enforcement
2.1 Enforcement of contracts contingent on an event happening [Section 32]
• Where a contingent contract is made to do or not to do anything if an uncertain future event

happens, it cannot be enforced by law unless and until that event has happened.
• If the event becomes impossible, such contracts become void.
Example : A contracts to pay B a sum of money when B marries C. C dies without being married to
B. The Contract becomes void.
2.2 Enforcement of contracts contingent on an event not happening [Section 33]
Where a contingent contract is made to do or not do anything if an uncertain future event does not
happen, it can be enforced only when the happening of that event becomes impossible and
not before.
Example : Where Rohit agrees to pay Mohan, ₹10,000 if a particular ship ‘Titanic’ does not return,
the contract becomes enforceable only if the ship sinks so that it cannot return.
Section 32 and 33 explains about enforceability of contracts contingent on happening or non-

happening of event, where no fixed time is mentioned.
2.3 A contract which is contingent upon the conduct of a living person [Section 34]
If a contract is contingent upon as to how a person will act at an unspecified time, the event
shall be considered to have become impossible when such person does anything which renders
it impossible that he should so act within any definite time or otherwise than under further
contingencies.
Example : ‘A’ agrees to pay ‘B’ a sum of money if ‘B’ marries ‘C’. ‘C’ marries ‘D’. This act of ‘C’ has
rendered the event of ‘B’ marrying ‘C’ as impossible; it is though possible if there is divorce between
‘C’ and ‘D’.
Case Law: Frost V. Knight

Facts: The defendant promised to marry the plaintiff on the death of his father.
While the father was still alive, he married another woman.
Judgement: It had become impossible that he should marry the plaintiff and she
was entitled to sue him for the breach of the contract.
2.4 Contingent on happening of specified event within the fixed time [Section 35]
Contingent contracts to do or not to do anything, if a specified uncertain event happens within a

fixed time, becomes void if,
• At the expiration of time fixed, such event has not happened, or
• If, before the time fixed, such event becomes impossible.
Example : Rohit promises to pay Mohan ₹10,000, if a certain ship ‘Titanic’ returns within a year. The
contract may be enforced if the ship returns within the year, and becomes void if the ship is burnt
within the year.
2.5 Contingent on specified event not happening within fixed time [Section 35]
Contingent contracts to do or not to do anything, if a specified uncertain event does not happen
within a fixed time, may be enforced by law when
• The time fixed has expired, and such event has not happened or
• Before the time fixed has expired if it becomes certain that such event will not happen.
Example : Rohit promises to pay Mohan ₹10,000, if a certain ship ‘Titanic’ does not return within a
year. The contract may be enforced if the ship does not return within the year, or is burnt within the
year.
2.6 Contingent on an impossible event [Section 36]
Contingent agreements to do or not to do anything, if an impossible event happens are void,

whether the impossibility of the event is known or not to the parties to the agreement at the time
when it is made.
Example : ‘A’ agrees to pay ‘B’ ₹1,00,000/- if sun rises in the west next morning. This is an impossible
event and hence void.
Section Contingency When Valid and When Void and not

Enforceable enforceable
Sec 32 Happening of an event Event happens Event becomes
impossible
Sec 33 Non-Happening of an 1. Event becomes Event Happens
event impossible or
2. Does not happen
Sec 35 Happening of an event Event happens within 1. Time Lapses or
within specified time specified time 2. Event becomes
Impossible
Sec 35 Non-Happening of an 1. Time Lapses or Event happens within
event within specified 2. Event becomes specified time
time Impossible
Sec 36 Impossible Event Never Always
3. Contingent Contract Vs. Wagering Contract
Basis of difference Contingent contract Wagering contract

Meaning Contract to do or not to do A wagering agreement is a
something with reference to a promise to give money or
money’s worth with reference
collateral event happening or to an uncertain event
not happening. happening or not happening.
Reciprocal May not contain reciprocal Consists of reciprocal
promises promises. promises.
Uncertain event Uncertain event is collateral. Uncertain event is the core
factor.
Nature of contract Contingent contract may not A wagering agreement is
be wagering in nature. essentially contingent in
nature.
Interest of Contracting parties have Contracting parties have no
contracting parties interest in the subject matter interest in the subject matter.
in contingent contract.
Doctrine of Contingent contract is not A wagering contract is a
mutuality of lose based on doctrine of game, losing and gaining
and gain mutuality of lose and gain. alone matters.
Effect of contract Valid Void
4. Quasi Contracts
• Even in the absence of a contract, certain social relationships give rise to certain specific
obligations to be performed by certain persons. These are known as quasi contracts as they
create same obligations as in the case of regular contract.
• Such cases are not contract in the strict sense, but the Court recognises them as relations
resembling those of contracts and enforces them as if they were contracts. Hence the term Quasi-
contracts (i.e. resembling a contract).
• Quasi contracts are based on principles of equity,

justice, and good conscience.
A quasi or constructive contract
Example : A pays some money to B by mistake. It is rest upon the maxims, “No man
really due to C. B must refund the money to A. must grow rich out of another
person’s loss”.
✓ Salient features of quasi contracts
It is usually a right to money and is generally (not always)

to a liquated sum of money
The right is not an outcome of an agreement but is

imposed by law.
The right is not available against everyone in the world but

only against a specific person(s). Hence it resembles a
contractual right.
4.1 Cases Deemed as Quasi – Contracts
Under the provisions of the Indian Contract Act, the relationship of quasi contract is deemed to have
come to existence in five different circumstances. In none of these cases there comes into existence
any contract between the parties in the real sense. Due to peculiar circumstances in which they are
placed, the law imposes in each of these cases the contractual liability.
Obligation of a
person enjoying
benefit of a non-
gratutious right
Payment by an [Sec. 72] Responsibility of
interested finder of good
person [Sec. 69] [Sec. 71]
Claims for Cases Money paid by

necessaries deemed as mistake or
supplied Quasi under coercion
[Sec. 68] Contracts [Sec. 72]
4.1.1. Claim for necessaries supplied to persons incapable of contracting [Section 68]
If a person, incapable of entering into a contract, or anyone whom he is legally bound to support,
is supplied by another person with necessaries suited to his condition in life, the person who
has furnished such supplies is entitled to be reimbursed from the property of such
incapable person.
Example : A supplies B, a lunatic, or a minor, with necessaries suitable to his condition in life. A
is entitled to be reimbursed from B’s property. To establish his claim, the supplier must prove
that –
✓ The goods were supplied to the person who was minor or a lunatic and
✓ Also, that they were suitable to his actual requirements at the time of the sale and delivery.
4.1.2 Payment by an interested person [Section 69]
A person who is interested in the payment of money which another is bound by law to pay,
and who therefore pays it, is entitled to be reimbursed by the other.
Example : B holds land in Bengal, on a lease granted by A, the zamindar. The revenue payable by
A to the Government being in arrear, his land is advertised for sale by the Government. Under
the revenue law, the consequence of the sale will be the annulment of B’s lease.
B, to prevent the sale and the consequent annulment of his own lease, pays to the government
the sum due from A. A is bound to make good to B, the amount so paid.
4.1.3 Obligation of person enjoying benefits of non-gratuitous act

[Section 70]
• Where a person lawfully does anything for another person, or delivers anything to him
not intending to do so gratuitously and such other person enjoys the benefit thereof,
the latter is bound to pay compensation to the former in respect of, or to restore, the thing
so done or delivered.
• For a suit to succeed in this case, the plaintiff must prove:
▪ That he had done the act or had delivered the thing lawfully,
▪ That he did not do so gratuitously, and
▪ That the other person enjoyed the benefit.
Example : A, a tradesman, leaves goods at B’s house by mistake. B treats the goods as his own. He
is bound to pay A for them.
Case Law: Shyam Lal vs. State of U.P.
Facts: ‘K’ a government servant was compulsorily retired by the government. He filed a writ
petition and obtained an injunction against the order. He was reinstated and was paid salary
but was given no work and in the meantime government went on appeal.
Judgement: Appeal was decided in favour of government and ‘K’ was directed to return the
salary paid to him during period of reinstatement.
4.1.4 Responsibility of finder of goods [Section 71]
A person who finds goods belonging to another and takes them into his custody is subject to
same responsibility as if he were a bailee. Thus, a finder of lost goods has:
i) to take proper care of the property as man of ordinary prudence would take,
ii) no right to appropriate the goods, and
iii) to restore the goods if the owner is found.
Example : ‘P’ a customer in ‘D’s shop puts down a brooch worn on her coat and forgets to pick it
up and one of ‘D’s assistants finds it and puts it in a drawer over the weekend. On Monday, it was
discovered to be missing. ‘D’ was held to be liable in the absence of ordinary care which a prudent
man would have taken.
Case Law: Hollins vs. Howler L. R. & H. L.

Facts: ‘H’ picked up a diamond on the floor of ‘F’s shop and handed over the same
to ‘F’ to keep till the owner was found. In spite of the best efforts, the true owner
could not be traced. After the lapse of some weeks, ‘H’ tendered to ‘F’ the lawful
expenses incurred by him and requested to return the diamond to him. ‘F’ refused
to do so.
Judgement: ‘F’ must return the diamond to ‘H’ as he was entitled to retain the
goods found against everybody except the true owner.
4.1.5 Money paid by mistake or under coercion [Section 72]
A person to whom money has been paid or anything delivered by mistake or under coercion,
must repay or return it.
Judgements made in few Cases
Shivprasad Vs Sirish Chandra - Every kind of payment of money or delivery of goods for every
type of ‘mistake’ is recoverable.
Sales tax officer vs. Kanhaiyalal - A payment of municipal tax made under mistaken belief or
because of mis-understanding of the terms of lease can be recovered from municipal
authorities.
Seth Khanjelek vs National Bank of India - Any money paid by coercion is also recoverable. The
word coercion is not necessarily governed by section 15 of the Act, rather, it is interpreted to
mean and include oppression, extortion, or such other means.
Case Law: Trikamdas vs. Bombay Municipal Corporation
Facts: ‘T’ was traveling without ticket in a tram car and on checking he was asked to pay ₹5/- as
penalty to compound transaction. T filed a suit against the corporation for recovery on the
ground that it was extorted from him.
Judgement: The suit was decreed in T’s favour.
4.2 Difference between quasi contracts and contracts
Basis of distinction Quasi- Contract Contract

Essential for formation of Absent Present
a valid contract
Obligation Imposed by law Created by consent of
the parties
5. Overview
Contingent
Quasi Contracts
Contracts
Rules relating to Difference from

Cases deemed as
Enforcement of Wagering
Quasi Contracts
Contingent Contracts Agreements
Contingent on an Claims for

event happening necessaries supplied
[Sec. 32] [Sec. 68]
Contingent on an Payment by an
event not happening interest person
[Sec. 33] [Sec. 69]
Contingent upon Person enjoying

conduct of a living benefit of a non-
person [Sec. 34] gratutious act
[Sec. 70]
Contingent upon
happening/ not Finder of lost goods
happening of a [Sec. 71]
specified event within
fixed time [Sec. 35]
Money paid by
Contingent on an mistake or under
impossible event coercion [Sec. 72]
[Sec. 36]
CH 1 - UNIT 7: CONTRACT OF INDEMNITY AND GUARANTEE
• Identify special type of contracts i.e., Indemnity contracts and guarantee contracts and also the
nature of obligations and rights of each of the parties to the contracts.
• Explain distinction between these contracts.
INTRODUCTION
Contract of Indemnity and Guarantee are the specific types of contacts provided under Sections 124 to
147 of the Indian Contract Act, 1872. In addition to the specific provisions, the general principles of
contracts are also applicable to such contracts.
CONTRACT OF INDEMNITY
Section 124 and 125 of the Indian Contract Act, 1872 provides provisions relating to contract of
indemnity.
2.1 Definition of “Contract of Indemnity”
The term Contract of Indemnity is defined u/s 124 of the Indian Contract Act, 1872 as “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.”
2.2 Parties in a Contract of Indemnity
• Party who promises to indemnify/ save the

Idemnifier other party from loss.
Idemnified/ Idemnity • Party who is promised to be saved against the

holder loss.
2.3 Basic conditions in a Contract of Indemnity
→ “Existence of loss” is essential – unless the promisee has suffered a loss, he cannot hold
the promisor liable on the contract of indemnity.
→ Such loss is caused by:
• Conduct of the promisor himself, or
• Conduct of any other person
Note: The loss occasioned by an accident not caused by any person, or an act of God/ natural event, is not
covered.
case law:
In case of Gajanan Moreshwar v/s Moreshwar Madan (1942), decision is taken on the basis of
English Law. As per English Law, Indemnity means promise to save another harmless from the
loss. Here it covers every loss whether due to negligence of promisee or by natural calamity or by
accident.
→ Must fulfil all the essentials of a valid of contract which includes –

• Offer and acceptance
• Intention to create legal obligation
A contract of Fire
• Consideration Insurance or Marine
• Competency to contract Insurance is always a
• Free consent contract of Indemnity. But
• Lawful object there is no contract of
• The agreement must not be expressly declared to be indemnity in case of a
void. E.g. an agreement in restraint of trade/ marriage contract of Life Insurance.
etc.
• The terms of the agreement must not be vague or
uncertain
• The agreement must be capable of performance- An agreement to do an impossible
act is void.
• Legal formalities complied
2.4 Modes of Contract of Indemnity
Mode of
Contract of
Indemnity
Express Implied
contract contract
A contract of indemnity is said to A contract of indemnity is said to be

be express when a person implied when it is to be inferred from
expressly promises to compensate the conduct of the parties or from the
the other from loss circumstances of the case
2.5 Rights of Indemnity holder when sued [Section 125]
In a contract of indemnity, the promisee i.e., the indemnity

holder acting within the scope of his authority is entitled to
recover from the promisor, i.e., indemnifier the following The Act is silent about the rights of
rights – the Indemnifier. But they are similar
to the rights of a surety u/s 141 of
a) All damages which he may be compelled to pay in any the Indian Contract Act, 1872.
suit,
b) All costs which he may have been compelled to pay in
bringing/ defending the suit, and
c) All sums which he may have paid under the terms of any compromise of suit.
Note: These rights are not exhaustive. Indemnity holder may claim any other liability (absolute in
nature) that he has incurred.
2.6 When does the liability of the indemnifier commence?
The liability of an indemnifier commences as soon as the liability of the indemnity holder
becomes absolute and certain.
CONTRACT OF GUARANTEE
3.1 Definition of “Contract of Guarantee”
Section 126 of the Indian Contract Act, 1872 provides provisions relating to 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.
3.2 Parties involved in a Contract of Guarantee
Principal debtor
Creditor - Person
Surety - Person - Person in
to whom the
who gives the respect of whose
guarantee is
guarantee default the
given
gurantee is given
Hence, the contract of guarantee is a triplicate agreement between principal debtor, creditor, and
surety. There are, in effect 3 contracts –
1) A principal contract between the principal debtor and creditor.

2) A secondary contract between the creditor and the surety.
3) An implied contract between the surety and the principal debtor whereby principal debtor
is under an obligation to indemnify the surety.
3.3 Essential features of a Guarantee
Principal debt
• It is the essence of the guarantee that there should be someone liable as a principal
debtor and surety undertakes to be liable on his default. If there is principal debt,
there can be no valid guarantee.
Consideration
• A guarantee without consideration is void, but there is no need for direct a direct
consideration between surety and the creditor.
• Consideration received by the principal debtor is sufficient consideration to the
surety for giving the guarantee, but past consideration is no consideration for the
contract of guarantee. [Sec. 127]
Existence of a liabilty
• There must be an existing liability or a promise whose performance is guaranteed.
• Such liability or promise must be enforceable by law and not time barred
No misrepresentation or concealment
• Any guarantee which has been obtained by the means of misrepresentation made
by the creditor, or with his knowledge and assent, concerning a material part of the
transaction, is invalid [Sec. 142]
• Any guarantee which the creditor has obtained by means of keeping silence as to
material circumstances, is invalid [Sec. 143]
Writing not necessary

• Section 126 expressly provides that a guarantee may be either oral or written.
Joining of the other co-sureties

• The contract of guarantee is not valid if a condition is imposed by a surety that some
other person must also join as a co-surety, but such other person does not join as a
co-surety [Sec. 144].
TYPES OF GUARANTEE
Types of
guarantee
Continuing
Specific
guarantee
guarantee
[Sec. 129]
A guarantee which extends to a A guarantee which extends to a

single debt/ specific transaction series of transaction
The surety's laibility comes to an

end when the guarantee is duly A surety's liability continues until
discharged or the promise is duly the revocation of the guarantee
performed
DISTINCTION BETWEEN A CONTRACT OF INDEMNITY AND A CONTRACT OF GUARANTEE
Point of Contract of indemnity Contract of guarantee

distinction
Parties to the Only 2 parties to the contract – There are 3 parties to the
contract indemnifier and indemnified. contract – creditor, principal
debtor, and surety.
Nature and The liability of the indemnifier The liability of the surety is
liability is primary and unconditional. secondary and conditional as
the primary liability is that of
the principal debtor.
Time of liability Liability arises only on the Liability arises only on the non-
happening of a contingency. performance of an existing
promise or non-payment of an
existing debt.
Time to act The indemnifier need not act The surety acts at the request
at the request of indemnity of principal debtor.
holder.
Right to sue third Indemnifier cannot sue a third Surety can proceed against
party party for loss in his own name principal debtor in his own
as there is no privity of right because he gets all the
contract. right of a creditor after
discharging the debts.
Purpose Reimbursement of loss. For the security of the creditor.
Competency to All parties must be competent In case of a contract of
contract to contract. guarantee, where a minor is a
principal debtor, the contract is
still valid.
NATURE AND EXTENT OF SURETY’S LIABILITY
Section 128 of the Indian Contract Act, 1872 provides provisions relating to the liability of the surety.
✓ The liability of the surety is co-extensive with that of the principal debtor unless it is otherwise
provided by the contract. This means that the surety is liable for what the principal debtor is
liable.
✓ The liability of a surety arises only on default by the principal debtor. If there is a condition
precedent for surety’s liability, the surety would be liable only when such condition is fulfilled.
✓ Where a debtor cannot be held liable on account of any defect in the document, the liability
of the surety also ceases.
✓ Surety’s liability continues if the principal debtor has not been sued or omitted from being sued
i.e., the creditor has a right to sue the surety directly without first proceeding against
principal debtor.
LIABILITY OF TWO PERSONS, PRIMARILY LIABLE, NOT EFFECTED 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 (Guarantee), the
creditor cannot sue the guarantor, even if he is aware of such second contract because he is
not party to such contract. The two debtors shall hold the same liability as per primary contract.
Section 132 of the Indian Contract Act, 1872 states the liability of a guarantor in a case where creditor is not a
party to a guarantee.
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
Modes of discharge of
surety
By revocation of On invalidation
By conduct of
the contract of of contract of
the creditor
guarantee guarantee
By variance in terms of contract Guarantee obtained by

By revocation of misrepresentation
continuing guarantee [Sec. 133]
invalid [Sec. 142]
by notice [Sec. 130]
By release or discharge of principal Guarantee obtained by
debtor [Sec. 134] concealment invalid
Revocation of [Sec. 143]
continuing guarantee Discharge of surety when creditor
by surety's death compounds with, gives time to, or
[Sec. 131] Guarantee on contract
aggrees to sue, principal debtor that creditor shall not
[Sec. 135] act on it until co-surety
joins [Sec. 144]
By novation [Sec. 62] Discharge of surety by creditors act
or omission impairing surety's
eventual remedy [Sec. 139]
8.1 By revocation of contract of guarantee
8.1.1 Revocation of continuing guarantee by notice [Sec. 130]

The continuing guarantee may be revoked at any time by the surety as to future transactions
by giving notice to the creditors. After revocation the surety shall be liable for only those
transactions that happened before the notice was given.
Revocation of specific guarantee: only if liability to principal debtor has not accrued.
8.1.2 Revocation of continuing guarantee by surety’s
Example: 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 Rs. 20000. C accepts the bill. A gives notice of revocation. C dishonours the bill at
maturity. A is liable upon his guarantee to pay Rs. 20000.
death [Sec. 131]

In the absence of any contract to the contrary, the death of surety operates as a revocation of a
continuing guarantee as to future transactions taking place after the death of the surety.
However, the surety’s estate remains liable for the past transactions which have already y
taken pace before ethe death of the surety.
8.1.3 Revocation by novation [Sec. 62]
The surety under original contract is discharged if a fresh contract is entered into either
between the same parties or between the other parties, the consideration being the mutual
discharge of the old contract.
8.2 By conduct of the creditor
8.2.1 By variance in terms of contract [Sec. 133]

Where there is any variance in 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.
8.2.2 By release or discharge of principal debtor [Sec. 134]
Note: Variation which is not substantial or material or which is beneficial to the surety will not discharge him
of his liability [M.S Anirudhan v Thomco’s Bank Ltd.]. This exception has however, got limited application in
situations similar to facts of this case.
The surety is discharged if the creditor –
a) Enters into a fresh/new contract with principal debtor, by which the principal debtor is
released, or
b) Does any act or omission, the legal consequence of which is the discharge of the
principal debtor.
8.2.3 Discharge of surety when creditor compounds with, gives time to, or agrees not to sue,
principal debtor [Sec. 135]
• Composition: If the creditor makes a composition with the principal debtor, without
consulting the surety, the latter is discharged.
• Promise to give time: When the creditor allows the principal debtor more time for payment
of debt, the surety is discharged.
• Promise not to sue: If the creditor under an agreement with the principal debtor promises
not to sue him, the surety is discharged.
When aggreement is made by the

creditor with a third person to give
time to principal debtor [Sec. 136]
Cases where the surety is
not discharged
Mere forebearance on the part of
the creditor to sue the principal
debtor or enforce any other duty
against him [Sec. 137]
8.2.4 Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy [Sec. 139]
If the creditor does any act/omits to do an act, which is inconsistent with the rights of the surety,
then the surety is discharged.
In a Supreme Court Case, it was decided that - A bank granted a loan on the security of the
stock in the godown. The loan was also guaranteed by the surety. The goods were lost from the
godown on account of the negligence of the bank officials. The surety was discharged to the
extent of the value of the stock so lost.
8.3 By invalidation of contract of guarantee
• Guarantee obtained by misrepresentation made by the creditor, or with his knowledge or

assent – Invalid [Sec 142]
• Guarantee obtained by concealment – Invalid [Sec 143]
• Guarantee on contract that creditor shall not act on it until so-surety joins – Invalid if that
other person does not join [Sec 144]
RIGHTS OF SURETY
Rights of a surety
Rights against the Rights against the Rights

principal debtor creditor against co-
sureties
Right of Right of Right to Right to set- Right to share
subrogation indemnity security off reduction
Right to
contribution
Section 140 Section 145 Section 141 The surety is The surety has
entitled (in a right to claim
suit filed by proportionate
the creditor reduction in Co-sureties
A surety is against the his liability if liable to
Surety, upon In every
entitled to the surety) to the the principal contribute
payment of all contract of
benefit of benefit of any debtor equally [Sec.
that he is guarantee
every security set-off for becomes 146] - In the
liable for, is there is an
which the counter claim insolvent. absence of any
invested with implied
creditor has which the contract to the
all the rights promise by the contrary, the
principal against the principal
which the co-sureties are
debtor to principal debtor might
creditor has laible to pay
indemnify the debtor at the possess
against the each an equal
surety. The time of making against the
principal share of the
surety is a contract of creditor.
debtor i.e., the whole debt or
surety steps entitled to guarantee.
This is part which
into the shoes recover from remains
of the creditor the principal immaterial
whether the unpaid.
debtor
whatever sum surety is or is
he has not aware of
rightfully paid the existence
under the of such Laibility of co-sureties
guarantee security. bound in different sums
[Sec. 147] - Principal of
equal contribution is,
If the creditor however, subject to the
loses, or, without maximum limit fixed by
the consent of the a surety to his liability.
surety, parts with Co-sureties who are
such security, the bound in different sums
surety is are liable to pay equally
discharged to the but upto the specified
extent of the limit.
value of the
security.
CH 1 - UNIT 8: BAILMENT AND PLEDGE
• Understand the general principles underlying contracts of bailment and pledge.

• Know duties and rights of the parties to the contracts.
WHAT IS BAILMENT?
1.1 Definition of Bailment [Sec. 148]
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.
1.2 Parties to Bailment
Parties to
bailment
Bailor Bailee
The person delivering The person to whom

the goods goods are delivered
1.3 Essential elements of a contract of Bailment
1.3.1 Contract
• Bailment is based upon a contract.
• The contract may be express or implied.
• No consideration is necessary to create a valid contract of bailment.
1.3.2 Delivery of goods

• Bailment is only for moveable goods.
• The delivery of the possession of goods is of the following kinds:
o Actual delivery – physically handing over goods
o Constructive delivery – delivery is made by doing anything that has the effect of
putting goods in the possession of the bailee or of any person authorized to hold
them on his behalf.
1.3.3 Purpose
• The goods are delivered for some purpose.
• The purpose may be express or implied.
1.3.4 Possession
• In bailment, possession of goods changes. Change of possession can happen by physical
delivery or by any action that has the effect of placing the goods in the possession of
bailee.
• The change of possession does not lead to change of ownership.
1.3.5 Return of goods

• Bailee is obliged to return the goods physically to the bailor.
• The goods should be returned in the same form as given or may be altered as per
bailor’s direction.
• The bailee cannot deliver some other goods, even those of higher value.
1.3.6 Types of Bailment
1. On the basis of benefit, bailment can be classified into three types:

a. For the exclusive benefit of bailor:
Example : The delivery of some valuables to a neighbour for safe custody, without charge.
b. For the exclusive benefit of bailee:
Example : The lending of a bicycle to a friend for his use, without charge.
c. For mutual benefit of bailor and bailee:
Example : Giving of a watch for repair.
2. On the basis of reward, bailment can be classified into two types:
a. Gratuitous Bailment:
The word gratuitous means free of charge. So, a gratuitous bailment is one when the
provider of service does it gratuitously i.e. free of charge. Such bailment would be either for
the exclusive benefits of bailor or bailee.
b. Non-Gratuitous Bailment:
Non gratuitous bailment means where both the parties get some benefit i.e. bailment for
the benefit of both bailor & bailee
RIGHTS AND DUTIES OF A BAILOR
2.1 Duties of bailor
• Disclose known facts

• Bear necessary expenses
Duties of • Indemnify bailee
bailor • Bound to accept goods
2.1.1 Disclose known facts [Section 150]
→ In case of gratuitous bailment: 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.
If he does not make such disclosure, he is responsible for damage arising to the bailee directly
for such faults
→ In case of non-gratuitous bailment: If the goods are bailed for hire, the bailor is responsible
for such damage, whether or not he was aware of the existence of such faults in goods bailed.
2.1.2 Bear necessary expenses [Section 158]

→ In case of gratuitous bailment for the exclusive benefit of bailor: The bailor shall repay the
bailee the necessary expenses incurred by him for the purpose of the bailment
→ In case of non-gratuitous bailment: The bailor is liable to pay the extraordinary expenses
incurred by the bailee.
2.1.3 Indemnify bailee

→ Where the bailment was gratuitous and decides to terminate the bailment before the
expiry of the period of bailment: The bailor must compensate the bailee for the loss or damage
suffered by the bailee that is in excess of the benefit received. [Sec 159]
→ Indemnify 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 give directions, respecting
them. [Sec 164]
2.1.4 Bound to accept the goods [Sec. 164]

→ When the bailee returns them after the time of bailment has expired or the purpose of
bailment has been accomplished.
▪ If the bailor refuses- bailee can claim compensation for all necessary expenses incurred for
the safe custody.
2.2 Rights of bailor
A contract of bailment is
voidable at the option of the
Right to terminate
bailor, if the bailor does any act
the bailment [Sec.
with regard to the goods bailed,
153]
inconsistent with the conditions
of bailment
When the goods are lent

gratuitously, the bailor can
Right to demand back demand back the goods at any
the goods [Sec. 159] time even before the expiry of
the time fixed or the
achievement of the object.
Right to file a suit
Rights of a bailor against a wrong doer
[Sec. 180 & 181]
Right to sue the For enforcing all the liabilities

bailee and duties of him.
If any damage is caused to the

goods bailed because of
Right to unauthorized use of goods or
compensation unauthorized mixing of goods,
the bailor has a right to claim
compensation for the same.
RIGHTS AND DUTIES OF A BAILEE
3.1 Duties of a bailee
•Take reasonable care of goods

•No unauthorized use of goods
•No mixing of bailor's goods with his own
•Return the goods
Duties of bailee
•To return any extra profit accruing from goods bailed.
3.1.1 Take reasonable care of goods [Sec. 151 & 152]

→ Bailee shall take as much care of goods bailed to him as a man of ordinary prudence would,
under similar circumstances take care of his own goods of the same bulk, quality, and
value, as the goods bailed.
→ Exception: In the absence of any special contract, the bailee is not responsible for the loss,
destruction or deterioration of the thing bailed, if he has taken reasonable care as required
u/s 151 [Sec. 152]
3.1.2 Not to make inconsistent use of goods [Sec. 153 & 154]
→ If the bailee makes use of any goods bailed, which is not according to the terms & conditions
of the bailment, he is liable to compensate the bailor for any loss or destruction of goods
[Sec. 153]
→ A contract of bailment is voidable at the option of the bailor, if the bailee uses the goods
inconsistently [Sec. 154]
3.1.3 Not to mix the goods [Sec. 155, 156 & 157]
→ If the bailee mixes the goods bailed with his own goods, with the consent of the bailor:
Both the parties shall have an interest in proportion to their respective shares in the mixture
thus produced [Sec. 155].
→ If the bailee mixes the goods bailed with his own goods without the consent of the
bailor,
o Goods can be separated or divided: The property of goods remains in the parties
respectively.
However, the bailee shall bear the expenses of separation or division and any damage
arising from the mixture [Sec. 156].
o It is impossible to separate the goods: The bailor is entitled to be compensated by

the bailee for any loss of the goods [Sec. 157].
3.1.4 Return the goods [Sec. 160 & 161]

→ The bailee shall return or deliver according to the bailor’s directions, the goods bailed
without demand, as soon as
o the time for which they were bailed, has expired, or
o the purpose for which they were bailed has been accomplished [Sec. 160].
→ 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 [Sec. 161].
3.1.5 Return on accretion from the goods [Sec. 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.
3.1.6 Not to set up adverse title

Bailee must hold the goods on behalf of and for the bailor. He cannot deny the title of the
bailor.
3.2 Rights of a bailee
Right to deliver the

goods to any one of
the joint bailors [Sec.
165]
Bailee is entitled to be
indemnified by the bailor
for any loss arising to him
Right to indemnity
by reason that the bailor
[Sec. 166]
was not entitled to make
the bailment or receive
back the goods etc.
If bailment is for hire, bailor

Right to claim
will be liable to compensate
compensation in case
even though he was not
of faulty goods [Sec.
aware of the existence of
150]
such faults
Rights of a bailee Right to claim
necessary expenses
[Sec. 158]
If goods are claimed by a
Right to apply to person other than the
court to decide the bailor, bailee may apply to
title to the goods court to stop its delivery
[Sec. 167] and to decide the title of
the goods
Right of particular
lien for payment of
services [Sec. 170]
Right of general lien

[Sec. 171]
Note: Duties of bailee corresponds with rights of bailor and duties of bailor relates to the rights of bailee.
RIGHTS OF BAILER AND BAILEE AGAINST ANY WRONG DOER
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 [Sec. 180].
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 [Sec. 181].
TERMINATION OF BAILMENT
On expiry
of
stipulated
period
Destruction On
of the fulfillment
subject of the
matter Circumstances purpose
where contract
of bailment is
terminated
By death
in case of
By notice*
gratuitious
bailment
* where bailee acts in manner inconsistent with terms or where it is gratuitous bailment
FINDER OF LOST GOODS
6.1 Right of finder of lost goods to sue for specific reward offered [Sec. 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 Right to collect
goods until he receives it. reward is a primary and
6.2 When finder of thing commonly on sale may sell it [Sec. 169]: a superior right even
more than the right to
→ Owner: seek reimbursement of
o cannot with reasonable diligence be found, or expenditure.
o if he refuses, upon demand, to pay lawful charges of the finder, and
→ when the thing is in danger of perishing or of losing the greater part
of its value, or
lawful charges of the finder in respect of the thing found amount to two-thirds of its value.
GENERAL AND PARTICULAR LIEN
RIGHT OF LIEN: Lien is the right of a person to retain the goods belonging to another until his claim is
satisfied or some debt due to him is repaid.
Types of Lien: a. Particular Lien b. General Lien
General lien Particular lien
Section 171 of the Indian Contract Act, 1872 Section 170 of the Indian Contract Act, 1872
confer on the bailee the right to general lien. confer on the bailee the right to particular
lien.
Examples: Examples:
• X becomes insolvent. Y is appointed as • A delivers a rough diamond to B, a
the official assignee to recover value from jeweller, to be cut and polished, which is
the assets of X. Here Y has general lien on all accordingly done. B is entitled to retain the
the assets of X. stone till he is paid for the services he has
rendered.
• A took a loan of Rs. 5 lacs from bank
against a security worth Rs. 7 lacs. On • A gives cloth to B, a tailor, to make into a
defaulting to repay the loan, the bank sold coat. B promises A to deliver the coat as
the security and recovered only 4 lacs from soon as it is finished, and to give a three
market. The Bank can now recover months’ credit for the price. B is not entitled
remaining 1 lac from general lien on other to retain the coat until he is paid.
assets of A.
General lien relates to the right to keep Particular lien implies a right of the bailee to
possession of goods belonging to another retain specific goods bailed for non-
against general balance of account. payment of amount.
Not automatic but recognised through an It is automatic.

agreement.
It can be exercised against goods even It comes into play in situations involving
without involvement of labour or skill. exercise of labour or skill in respect of
goods bailed.
Only such persons as are specified u/s 171, Bailee, finder of goods, pledgee, unpaid
e.g., Bankers, factors, wharfingers, policy seller, agent, partner etc. are entitled to
brokers etc. are entitled to general lien. particular lien.

PLEDGE
8.1 Definition of Pledge [Sec. 172]
The bailment of goods as security for payment of a debt or performance of a promise is called
pledge.
8.2 Parties to Pledge [Sec. 172]
Parties to pledge
Pawnor Pawnee
The bailor in a pledge The bailee in a pledge
8.3 Essential of contract of Pledge
There shall be a
There shall be
bailment for
The subject Goods pledged the delivery of
security against
matter of for shall be in goods from
payment or
pledge is goods existence pledger to
performance of
pledgee
the promise

RIGHTS AND DUTIES OF PAWNEE
9.1 Rights of Pawnee / Pledgee
Right to retain the pledged goods [Sec. 173]
•Pawnee may retain the goods pledged, not only for payment of debt or performance of
the promise, but for the interest, of the debt, and all necessary expenses incurred by him
in respect of the possession or preservation of the goods pledged
Right to retention of subsequent debts [Sec. 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.
Pawnee's right to extraordinary expenses incurred [Sec. 175]
•Pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him
for the preservation of the goods pledged.
Pawnee's right where pawnor makes default [Sec. 176]
•If pawnor makes default in payment of the debt, or performance, at the stipulated time
of the promise, in respect of the goods pledged, pawnee may bring a suit against the
pawnor, 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.

9.2 Duties of Pawnee
To take
reasonable
care of the
pledged
goods Not to make
To return
unauthorised
accretion to
use of
the goods, if
pledged
any
goods
Duties of
the pawnee
To return goods
Not to do any
when the debt
act which is
has been repaid
inconsistent
or the promise
with the terms
has been
of the pledge
Not to mix performed
his own goods
with goods
pledged
RIGHTS AND DUTIES OF PAWNOR
10.1 Rights of Pawnor
As a bailor of goods pawnor has all the rights of the bailor. Along with that he also has the right
to redemption to the pledged goods which is enumerated u/s 177.
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.

10.2 Duties of Pawnor
To pay the debt or

perform the promise
To compensate the
To pay the deficit, if pawnee for any
the pawnee sells the extraordinary
goods due to default expenses incurred by
by the pawnor him for preserving the
goods
To indemnify the
To disclose all the
pawnee if any loss
faults which may put
occurs to the pawnee
the pawnee under
due to defect in
extraordinary risks
pawnor's title to goods
PLEDGE BY NON-OWNERS
Ordinarily it is the owner of goods, or any other person authorized by him in that behalf, who can
pledge the goods. But in order to facilitate mercantile transactions, the law has recognised certain
exceptions –

Pledge by non-owners
Pledge by
person in Pledge where
Pledge by Pledge by
possession pawnor has Pledge by a
mercantile seller or
under only a limited co-owner in
agent buyer in
voidable interest possession
[Sec. 178] possession
contract [Sec. 179]
[Sec. 178A]
Mercantile agent Pawnor has Person Goods are A seller in whose

is in possession obtained pledges owned by possession the
of the goods or possession many co- goods have been
goods in
under a owners and left after sale or a
documents of which he
voidable left in the buyer who with
title to goods, contract, but has limited
with the consent possession the consent of the
contract has interest - seller, obtains
of the owner of one of
not been pledge is possession of the
them - such
rescinded at valid to the co-owner goods, before sale
the time of extent of may make a can make a valid
Pledge must have pledge that valid pledge pledge
been made by the interest of goods in
mercantile agent his
in the ordinary The pledgee possession The pawnee
course of business must acts good acts in good
faith and should faith and he
have no notice has no
The pledgee must of the pledger's knowledge
acts good faith defective title of the
and should have defect in
no notice of the title of the
pledger's pawnor
defective title
DISTINCTION BETWEEN BAILMENT AND PLEDGE
Basis of
Bailment Pledge
distinction
Meaning Transfer of goods by one person Transfer of goods by one person
to another for some specific to another as security for
purpose. repayment of debt.
Parties involved Bailor and bailee. Pawnor and pawnee.
Purpose For any purpose. As security for payment of a debt

or performance of a promise.

Consideration May be made for consideration or Always made for a consideration.
without consideration.
Right to sell the Bailee has no right to sell the Pawnee has the right to sell the
goods goods even if charges of bailment goods if the pawnor fails to
are not paid to him. Bailee’s rights redeem the goods.
are restricted to suing the bailor
or exercising lien.
Right to use of Bailee can use the goods only for Pawnee cannot use the goods
goods specified purpose and not pledged.
otherwise.

CH-1: UNIT 9 - AGENCY
• Learning Outcomes –
• Understand the relationship between agent and principal and the intention behind adoption of
such course of agency.
• Understand rights and obligations of an agent as well as the circumstances under which the agent
is personally liable for the acts done by him on behalf of the principal and the legal position of
the agent, the principal and the third parties involved.
• Identify with the terms ‘sub-agent’ and ‘substituted agent’ and to distinguish between the two.
INTRODUCTION
A relationship of agency is established when one party (agent) is authorized by another party (principal)
to act on his/ her behalf. Such relationships are initiated when one party desires to extend his/her
activities beyond his/her present limits or capacity. The law of agency is contained in sections 182 to
238 of the Indian Contract Act, 1872.
WHAT IS AGENCY?
Section 182 of the Indian Contract Act, 1872 defines Agent and Principal.
A person employed to do any A person for whom such act

Agent
Principal
act for another or to is done or who is so

represent another in dealing represented.
with the third persons.
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.
If the answer to these questions is in affirmative, then there is a relationship of agency.

Note: The rule of agency is based on the maxim Qui 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 an Who may be an Consideration not necessary

agent [Section 183] agent* [Section 184] [Section 185]
•Person who has •Any person •no consideration is necessary to
attained age of •Minor, Person of create an agency
majority and unsound mind will not •acceptance of the office of an agent
•who is of sound mind be responsible to is sufficient consideration
Principal
* According to Sec. 184, any person may become an agent i.e. a minor or a person of unsound mind may
become an agent and the principal shall be bound by his acts. But in case of his misconduct or negligence, the
principal shall not be able to proceed against him.
CREATION OF AGENCY
Modes of creation of agency
Express An authority is said to be express when it given by words, spoken, or written.

appointment
[Sec. 186 & 187] Example: A is residing in Delhi and he has a house in Kolkata. A authorizes B
under a power of attorney, as caretaker of his house. Agency is created by
express agreement.
Implied Inferred from

appointment •the circumstances of the case,
[Sec. 186 & 187] •things spoken or written,
•or in the ordinary course of dealing.
Example: If a person realises rent and gives it to the landlord, he impliedly

acts for the landlord as an agent.
Agency by When an agent has without authority done acts or incurred obligations to
estoppel third persons on behalf of his principal, the principal is bound by such acts or
[Sec. 237] obligations if he has by his words or conduct induced such third parties to
believe that such acts and obligations were within the scope of the agent’s
authority.

Example: If Mr. P has for several months permitted Mr. A to buy goods from
Mr. S and has paid for the goods bought by Mr. A, he cannot later refuse to
pay Mr. S who has supplied goods on credit to Mr. A on the belief that he was
Mr. P’s agent and was buying goods on his behalf. Mr. P is estopped from
asserting that Mr. A is not his agent.
Agency by Where an agent is authorised to do certain act, and while doing such an act,
necessity an emergency arises, he acquires an extra-ordinary or special authority to
prevent his principal from loss.
Example: Raja has a large farm on which Shyam is the caretaker. When Raja
is in Canada, there is a huge fire on the farm. Shyam becomes an agent of
necessity for Raja so as to save the property from being destroyed by fire.
Raja (the principal) will be liable for any expenses, Shyam (his agent of
necessity) incurred to put out the fire.
Agency by Ratification means approving a previous act or transaction. Where acts are
ratification done by one person on behalf of another, but without his knowledge or
[Sec. 196] authority he may elect to ratify or disown it. Ratification will make the agency
valid. Ratification may be express or implied by the conduct.
Essentials of a valid ratification:

• Ratification may be expressed or implied [Sec. 197].
• No valid ratification may be made by a person whose knowledge of
the facts of the case is materially defective [Sec. 198].
• A person ratifying any unauthorised act done on his behalf ratifies the
whole of the transaction of which such act formed a part [Sec. 199].
• 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 its interest or
rights, cannot, by ratification, be made to have such effect [Sec. 200].
• Ratification must be made within a reasonable period of time.
• Ratification must be communicated to the other party.
• An act to be ratified must be valid.
Example: X who is Y’s agent has on 10th January 2019 purchases goods from
Z on credit without Y’s permission. After the purchase, on 20th January 2019,
Y tells X that he will accept responsibility to pay for the purchases although at
the time of purchase the agent had no authority to buy on credit.

Agency by When law treats one person as an agent of other. For example, a partner is
Operation of Law the agent of the firm for the purposes of the business of the firm.
EXTENT OF AGENT’S AUTHORITY
✓ The authority of an agent means his capacity to bind the principal to third parties. The
agent can bind the principal only if he acts within the scope of his authority.
✓ The agent’s authority is governed by two principles –
o In normal circumstances and
o In emergency.
Scope of agent's
authority
Under normal In emergency

circumstances [Sec. 189]
[Sec. 188]
An agent having an An agent has authority, in an

authority to carry on a emergency, to do all such acts for
business has the the purpose of protecting his
authority to do every principal from loss as would be
lawful thing necessary done by a person of ordinary
for the purpose, or prudence, in his own case, under
usually done in the similar circumstances.
course, of conducting
such business
Conditions for valid agency
during emergency:
Agent Actual and Agent adopted the Agent must have

Agent acts
unable to definite most reasonable and been in
bonafide for
communi commercial practicable course possession of the
benefit of
cate with necessity to act under the goods belonging
principal
principal promptly circumstances, to his principal
and which are
the subject of
contract
SUB-AGENTS
6.1 Definition of sub-agent [Sec. 191]
A sub-agent is a person employed by, and acting under the control of, the original agent in the
business of agency.

6.2 When agent cannot delegate [Sec. 190]
An agent cannot lawfully employ another person 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, sub-agent must be employed.
This is based on the Latin principle “delegatus non potest delegare”.
6.3 Exceptions where an agent can appoint sub-agent
Original
appointment
authorises such
appointment
Circumstances
where sub-
agents can be
appointed
Customs of trade
Unforeseen
may allow sub
emergency arises
agency
6.4 Representation of principal by sub-agent properly appointed [Sec. 192]
• As regards to third persons, principal is bound by the acts of sub-agent.

• Agent is responsible to the principal for the acts of the sub-agent.
• Sub-agent is responsible for his acts to the agent, but not to the principal, except in case of fraud
or willful wrong.
6.5 Agent’s responsibility for sub-agent appointed without

authority [Sec. 193] Where sub-agent
purportedly acts in
Where an agent has appointed a person to act as sub-agent, without having name of the first
authority to do so – principal, that first
principal may
→ Agent is responsible for the acts of sub-agent to both principal
ratify the act of sub-
and third parties.
agent.
→ Principal is not bound by/responsible for the 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. They are not sub-agents. They are agents
of the principal.
7.1 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 substitute agent
for the business entrusted. Principal is bound by his actions.
7.2 Agent’s duty in naming such person [Section 195]:
Example: 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: 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.
In selecting such agent for his principal, an agent is bound to exercise the same amount of discretion
as a man of ordinary prudence. If done so, agent is not responsible to Principal in case of negligence
of the substituted agent.
DIFFERENCE BETWEEN SUB-AGENT AND SUBSTITUTED AGENT
S.no Sub Agent Substituted Agent

1. A sub-agent does his work under the A substituted agent works under the
control and directions of agent. instructions of the principal.
2. The agent not only appoints a sub- The agent does not delegate any part of
agent but also delegates to him a part his task to a substituted agent.
of his own duties.
3. There is no privity of contract Privity of contract is established
between the principal and the sub- between a principal and a substituted
agent. agent
4. The sub-agent is responsible to the A substituted agent is responsible to
agent alone and is not generally the principal and not to the original
responsible to the principal. agent who appointed him.

5. The agent is responsible to the The agent is not responsible to the
principal for the acts of the sub- principal for the acts of the substituted
agent. agent.
6. The sub-agent has no right of action The substituted agent can sue the
against the principal for principal for remuneration due to him.
remuneration due to him.
7. Sub-agents may be improperly Substituted agents can never be
appointed. improperly appointed.
8. The agent remains liable for the acts The agent's duty ends once he has
of the sub-agent as long as the sub- named the substituted agent.
agency continues.
Note: Both a sub-agent and a substituted agent are appointed by the agent.
DUTIES AND RIGHTS OF AN AGENT
9.1 Duties of an agent
Duty to execute mandate
Conduct business in accordance with the directions given by

the principal
Duty of reasonable care and skill
Duty to communicate with the principal
Duty to avoid conflict of interest
Duty not to make secret profit
Duty to remit sums
Duty to maintain accounts
Duty not to delegate
Duty not to use confidential information received in the

course of agency against the principal
9.1.1 Duty to follow instructions or customs [Sec. 211]

Agent must conduct business as per the instructions of the principal. In absence of instruction, he must
follow general customs of business. Otherwise, loss sustained must be compensated back by agent to
principal and if any profit accrues, he must account for it.

Principal's instructions are
Agent should strictly follow
available
Agent should follow customs

Principal's instructions are
which prevails in such
not available
Sec 211 situations
If agent does not follow Loss incurred - agent to

the instructions of compensate loss to principal
principal/customs Profit made - agent to account
prevailing for it
9.1.2 Duty of reasonable care and skill [Sec. 212]

Reasonable skill and care to be used in exercising all his duties. Moreover, he is liable to compensate the
principal for his negligence/misconduct.
Agent
Bound to act diligently

and using skill
Acted with diligence Did not act with

and skill diligence and skill
Indirect and remote

No consequences for Direct consequences
damages suffered by
any future losses suffered by Principal
Principal
Agent to compensate Agent need not

principal compensate
9.1.3 Duty to communicate with principal [Sec. 214]

Agent has the duty to communicate with the principal and seek his instructions in case of any difficulty
in execution of his duties.

9.1.4 Duty to avoid conflict of interest
Right of principal when agent
Principal’s right to benefit
deals, on his own account, in
gained by agent dealing on his
business of agency without
account in business of agency
principal's consent
[Section 216]
[Section 215]
If an agent deals on his own account If an agent deal on

without first obtaining the consent of his behalf of the principal
principal and acquainting him with all without his knowledge,
material circumstances, the principal the principal is entitled
may cancel the transaction, if to claim any benefit
resulting from the
i. material fact has been dishonestly
transaction from the
concealed from him or
agent.
ii.Dealings have been disadvantageous to
him.
9.1.5 Duty not to make secret profits

It is the duty of an agent not to make any secret profit in the business of agency. His relationship with
the principal is of fiduciary nature and this requires absolute good faith in the conduct of agency.
Note: Secret profit means any advantage obtained by the agent over and above his agreed
remuneration and which he would not have been able to make without his position as an agent.
9.1.6 Duty to render proper accounts [Sec. 213]

Accounts supported with vouchers must be submitted whenever demanded by principal.
9.1.7 Duty not to delegate [Sec. 190]

Agent shall not delegate any act which he is personally responsible to fulfil unless it’s required in ordinary
custom of trade or from the nature of agency.
9.1.8 Duty to pay sums received to the principal [Sec. 218]

The agent shall pay all the sums received by him on account of the business of agency to the principal,
subject to deduction of sums due to be paid to him.
9.1.9 Duty not to use confidential information received in the course of agency against the principal

9.2 Rights of an agent
Right to retain out of sums received on principal's account [Sec. 217]

all moneys due to himself in expenses properly incurred by
remuneration payable to him
respect of advances made him in conducting such business
Right to remuneration [Sec. 219 & 220]

Remuneration may be as per However an agent who is guilty of misconduct in the business
contract or as per usual customary of the agency is not entitled to any remuneration in respect of
in business. that part of the [Section 220].
Agent’s lien on principal’s property [Section 221]

In the absence of any contract to the contrary, an agent is entitled to retain the goods, papers and
other property, whether movable or immovable, of the principal received by him, until the amount
due to himself for commission, disbursement and services in respect of the same has been paid or
accounted for him.
Right to indemnity
Right of Where one person employs another
Right of indemnification against acts
indemnification for to do an act which is criminal, the
done in good faith upon instructions
lawful acts employer is not liable to the agent
of principal [Section 223]
[Section 222] [Section 224]
Right to compensation for injury caused by principal’s neglect [Section 225]

principal must make compensation to his agent any loss/damage caused to him due to principal’s
neglect or want of skill.
9.2.1 Conditions subject to which agent can exercise the right of lien on principal’s property
a) Agent should be lawfully entitled to receive remuneration/commission from the
principal.
b) Property belongs to the principal.
c) Property have been received by the agent in his capacity as agent and during the course
of his ordinary duties as agent.
d) Agent has only a particular/specific lien.
Note: Agent’s right to lien is lost when possession of property is lost, when agent waives his right
or when agent’s lien is subject to a contrary contract.

PRINCIPAL’S LIABILITY TO THIRD PARTIES
10.1 Principal’s liability for acts of the agent [Section 226]
Principal is liable for, or bound by, the acts of the agent as per authority given in contract. Legal
consequences and obligations born by principal as if he entered into contract himself.
10.2 Principal not bound, when agent exceeds authority [Section 227]
In such situation part of the contract, which is as per authority, shall be binding on the principal.
10.3 Principal is 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 is beyond the scope of his
authority cannot be separated from what is within it, the principal is not bound to recognize the
transaction.
Agent exceeds his

authority
Unauthorized part cannot be

Unauthorized part can be separated
separated from Authorized part
from the Authorized part [Sec. 227]
[Sec. 228]
Part of the contract which isas per

Principal is not bound to recognize
authority shall be binding on the
the transaction
principal
Exception: Principal shall be liable to third parties for inducing belief that agent’s
unauthorized acts were authorized [Section 237].
10.4 Consequences of notice given to agent [Section 229]
Any notice given to or information obtained by agent during course of business, shall have the same
legal consequence as if it had been given to or obtained by the principal.
10.5 Effect on agreement, of misrepresentation or fraud by agent [Sec238]
→ Misrepresentation by agents acting in the course of their business for their principals,
have the same effect as if such misrepresentations or frauds had been made, or committed,
by the principals.
→ Misrepresentations made, or frauds committed, by agents, in matters which do not
fall within their authority, do not affect their principals.

PERSONAL LIABILITY OF AGENT TO THIRD PARTIES
11.1 Agent cannot personally enforce, nor be bound by, contracts on behalf of principal
[Section 230]
Section 230
In the absence of any contrary

contract, agent can neither sue,
nor be sued on contracts made by
him on his principal's behalf
Exceptions - When
agent is personally
bound
Sale or purchase of
Principal is
goods for a merchant Agent does not Pretended agent or
minor/incompeten
resident abroad/ disclose the name agent exceeds
t to contract/non-
foreign principal by of his principal. authority
existent.
agent.
11.2 Rights of parties to a contract made by agent not disclosed

[Section 231]
✓ If an agent makes a contract with a person who does not know/suspect that he is an agent,
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
the principal in the contract was, he would not have entered into the contract.
11.3 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.
11.4 Option of the third person to sue the agent or the principal

a) Right of person dealing with agent personally liable [Section 233]: In cases where the
agent holds himself personally liable, but is acting for the principal, a person dealing with him may
hold either him or his principal, or both of them, liable.
b) 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.
11.5 Liability of pretended agent [Section 235]
A person untruly representing himself to be the authorised agent of another,
→ and thereby including a third person to deal with him as such agent,
→ is liable, if his alleged employer does not ratify his acts,
→ to make compensation to another in respect of any loss or damage which he has
incurred by so dealing.
11.6 Person falsely contracting as 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 acting, not as agent, but on his own account.

REVOCATION OF AUTHORITY
12.1 Termination of agency
Modes of termination of agency

[Sec. 201]
Death or
On expiry of time
Renunciation insanity of
Completion Principal's for which agent
Revocation by agents the
of business insolvency has been
[Sec. 206]* principal or
appointed
agent
Principal may revoke the authority given to his agent

at any time before the authority has been exercised
so as to bind the principal [Section 203]
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. [Section 204].
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 for any previous revocation or renunciation of
the agency without sufficient cause [Section 205]
Reasonable notice must be given of such revocation

or renunciation; otherwise the damage must be
made good to the one by the other [Section 206]
Revocation and renunciation may be expressed or

implied [Section 207]
*An agent may renounce the business of agency in the same manner in which the principal has the right of
revocation
12.2 When agency is revocable [Sec. 202]
Example: 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.

Where the agent has himself an interest in the property which forms the subject matter of the
agency, the agency cannot, in the absence of an express contract, be terminated to the prejudice of
such interest.
12.3 Effects of Termination [Section 208]
The termination of the authority of an agent does not, 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.
12.4 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.
12.5 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.

CH-2: UNIT 1 – FORMATION OF THE CONTRACT OF SALE
● Scope of the Sale of Goods Act, 1930.
● Definition of certain terms.
● Sale and Agreement to Sell.
● Distinguishing Sale from other similar Contracts.
● How a Contract of Sale is made.
● Subject Matter of a Contract of Sale.
● Ascertainment of Price.
1. Introduction
● Sale of Goods Act, 1930 is an Act to define and amend the law relating to the sale of goods.
● It extends to the whole of India. Since 2019, it also applicable to Jammu & Kashmir
● It came into force on 1st July, 1930.
2. Scope of the Act
● The provisions of the Act are applicable to the contracts related to the sale of goods.
The Act is not applicable for the sale of immovable properties like land, shop, or house etc.
Sale of immovable properties comes under Transfer of Property Act, 1882.
Contract of Sale of Goods is a contract whereby the seller transfers or agrees to transfer the property in
goods to the buyer for a price (consideration).
The general provisions of the Indian Contract Act, 1872 apply to a Contract of Sale of Goods in so far as they
are not inconsistent with the express provisions of the Sale of Goods Act.
3. Sale and Agreement to Sell [Section 4]
● Contract of Sale of Goods - A contract of sale of goods is a contract whereby the seller transfers
or agrees to transfer the property in goods to the buyer for a price [Section 4(1)].

● A contract of sale may be absolute or conditional [Section 4(2)].
● Sale Vs. Agreement to sell –
o Where under a contract of sale, the property in the goods is transferred from the seller to
the buyer, the contract is called a sale,
o But where the transfer of the property in the goods is to take place at a future time or
subject to some condition thereafter to be fulfilled, it is called an agreement to sell.
[Section 4(3)]
● An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled
subject to which the property in the goods is to be transferred. [Section 4(4)]
Example : X agrees to sell his car to Y for ₹ 2,00,000 after one month. Y agrees to buy the car and
make the payment after one month. This is an agreement to sell and it will become a sale after one
month when X makes the payment and gets the ownership of the car .
3.1 Elements of a Contract of Sale
The following elements must co-exist so as to constitute a contract of sale of goods under the
Sale of Goods Act, 1930 –
Two parties The seller and the buyer are the two must be parties and
should be different persons.
Subject Matter Goods, covering only moveable property can be the subject
matter of contract. May be existing goods or future goods.
Consideration for the contract of sale should be in money (and

Price not in kind). But it can be partly money and partly in kind. But
money is essential.
Transfer of From seller to buyer must take place. General property is

Property transferred.
Absolute or
Conditional A contract of sale may be absolute or conditional.
All other essential elements of a valid contract must be

Valid contract present. Eg: agreement, free consent, parties are competent,
lawful consideration, etc.

3.2 Distinction between Sale and an Agreement to Sell
Basis of difference Sale Agreement to sell
Transfer of property The property in the goods passes to Property in the goods passes to the
the buyer immediately. buyer on future date or on fulfilment
of some condition.
Nature of contract It is an executed contract. It is an executory contract.
Remedies for breach The seller can sue the buyer for the The aggrieved party can sue for
price of the goods because of the damages only and not for the price
passing of the property therein to unless the price was payable at a
the buyer. stated date.
Subsequent loss or Liability of the buyer. Liability of the seller.

destruction of goods
Burden of risk Risk of loss is that of the buyer since Risk of loss is that of the seller.
risk follows ownership.
Nature of rights Creates Jus in rem i.e. right against a Creates Jus in personam i.e. right
thing. against a person.
Right of resale The seller cannot resell the goods. The seller may sell the goods since
ownership is with the seller.
In case of insolvency of The official assignee will not be able The official assignee will acquire
seller to take over the goods but will control over the goods, but the price
recover the price from the buyer. will not be recoverable.
In case of insolvency of The official assignee will have The official assignee will not have
buyer control over the goods. any control over the goods.
4. Definitions
4.1 Buyer [Section 2(1)]
‘Buyer’ means a person who buys or agrees to buy goods.
4.2 Seller [Section 2(13)]
‘Seller’ means a person who sells or agrees to sell goods.
4.3 Goods [Section 2(7)]

● “Goods” means every kind of movable property
✔ other than actionable claims and money; and
✔ includes stock (bundle of shares) and shares, Fixed Deposit Receipts (FDR)
growing crops, grass, and things attached to or are considered as goods under
forming part of the land, which are agreed to be Section 176 of the Indian
severed before sale or under the contract of sale. Contract Act read with Section
2(7) of the Sale of Goods Act.
✔ Eg: Cars, food, mobiles, clothes, crops, trees that can
be severed from earth, timber, etc
● ‘Actionable claims’ are claims, which can be enforced only by an action or suit [E.g., Debt i.e
debts on which some action can be claimed]. Actionable claims can be transferred but cannot
be sold.
● Money in circulation cannot be goods but currency notes and coins not in circulation and
collected by numismatists shall be considered as goods.
● “Goods” include both tangible goods and intangible goods like goodwill, copyrights, patents,
trademarks etc.
● Stock and shares, gas, steam, water, electricity, and decree of the court are also considered
to be goods.
Classification of Goods
Contingent
Existing Goods Future Goods
Goods
Specific Ascertained Unascertained
4.3.1 Existing Goods
● Existing Goods are such goods which are in existence at the time of the contract of sale,
i.e., those owned or possessed or acquired by the seller at the time of contract of sale
[Section 6].
● The existing goods may be of following kinds:

a) Specific goods [Section 2(14)] –
Goods identified and agreed upon at the time a

contract of sale is made. Any specified and finally
decided goods like a Samsung
Example : ‘A’ had five cars of different models. He Galaxy S7 Edge, Whirlpool
agreed to sell his ‘Santro’ car to ‘B’ and ‘B’ agreed to washing machine of 7 kg etc, are
purchase the same car. In this case, the sale is for specific goods.
specific goods as the car has been identified and
agreed at the time of the contract of sale.
b) Ascertained Goods –
Those goods which are identified in accordance with the agreement after the
contract of sale is made. When from a lot or out of large quantity of unascertained
goods, the number or quantity contracted for is identified, such identified goods are
called ascertained goods.
Example : Raj has 500 apples. Out of these 500 apples, Raj decides to sell 200 apples. To
sell these 200 apples, Raj will need to separate them from the 500 (larger set). Thus, Raj
selects 200 apples from a larger group of unspecified apples. These 200 apples are now
the ascertained goods.
c) Unascertained goods –
Goods which are not specifically identified or ascertained at the time of making of the
contract. They are indicated or defined only by description or sample.
Example : Say, from Raj’s 500 apples, he decides to sell 200 apples but doesn’t specify
which ones he wants to sell. A seller will have the liberty to choose any 200 apples from
the lot. These are thus the unascertained goods.
4.3.2 Future Goods [Section 2 (6)]
Future Goods means goods to be manufactured or produced or acquired by the seller after
making the contract of sale.
A contract for the sale of future goods is always an agreement to sell. It is never actual
sale because a person cannot transfer what is not in existence.
Example : P agrees to sell to Q all the milk that his cow may yield during the coming year. This is
a contract for the sale of future goods.
Example : Amit is a manufacturer of chairs. Shyam ordered Amit to manufacture 200 units of
chairs of specific design and they made an agreement for the same. This is the sale with respect
to future goods.

4.3.3. Contingent Goods [Section 6(2)]
● The acquisition of which by the seller depends upon an uncertain contingency (uncertain
event) are called contingent goods.
● Like the future goods, in the case of contingent goods also, the property does not pass to
the buyer at the time of making the contract.
Example : A agrees to sell to B a Picasso painting provided he is able to purchase it from its
present owner. This is a contract for the sale of contingent goods.
Example : P contracts to sell 50 pieces of particular article provided the ship which is bringing
them reaches the port safely. This is an agreement for the sale of contingent goods.
4.4 Delivery [Section 2(2)]
● Delivery means voluntary transfer of possession from one person to another.
● The transfer of possession is the end result of the whole delivery process. The delivery
could occur even when the goods are transferred to a person other than the buyer but
who is authorized to hold goods on behalf of the buyer.
4.4.1 Forms of Delivery
Actual Delivery Goods are physically delivered to the buyer or to a third person
who is authorised to hold goods on behalf of the buyer.
No change in custody or actual possession of the thing. Takes

Constructive place when a person in possession of the goods belonging to
Delivery the seller acknowledges to the buyer that he holds the goods
on the buyer's behalf.
Symbolic Delivery Delivery of a thing in token of a transfer of something else.
Example : Where a warehouseman holding the goods of A agrees to hold them on behalf of B,
at A’s request, it is Constructive Delivery.
Example : Delivery of goods in the course of transit may be made by handing over documents of
title to goods, like bill of lading or railway receipt or delivery orders or the key to a warehouse
containing the goods is handed over to the buyer . Such handing over of documents of title or
a key etc., are Symbolic deliveries.
4.5 Deliverable state [Section 2(3)]

Goods are said to be in a deliverable state when they are in such a condition that the buyer
would, under the contract, be bound to take delivery of them.
Example : When ‘A’ contracts to sell timber and make bundles thereof, the goods will be in a
deliverable state after A has put the goods in such a condition.
4.6 Document of title to goods [Section 2(4)]
Document of title to goods includes
● bill of lading,
● dock-warrant, A document amounts to a document

of title only where it shows an
● warehouse keeper’s certificate, unconditional undertaking to deliver
the goods to the holder of the
● wharfingers’ certificate, document.
● railway receipt,
● multimodal transport document,
● warrant or order for the delivery of goods and
● any other document used in the ordinary course of business as
o proof of the possession or control of goods or,
o authorizing or purporting to authorize, either by endorsement or by delivery, the

possessor of the document to transfer or receive goods thereby represented.
‘Document Showing Title’ Vs ‘Document of Title’.
There is difference between ‘Document showing title’ and ‘Document of Title’. A document showing
title merely shows that the person named in the document is its owner. It does not allow that
person to transfer the ownership by mere endorsement of the document. For example, a share
certificate is a ‘document’ showing title but not a document of title.
4.7 Mercantile Agent [Section 2(9)]
An agent who in the customary course of business has, as such agent, authority either to sell
goods or to consign goods for the purpose of sale or to buy goods or to raise money on the
security of the goods.
Example : Auctioneers or brokers, etc
4.8 Property [Section 2(11)]
‘Property’ here means ‘ownership’ or general property.

The property in the goods means the general property i.e., all ownership rights of the goods,
and not just a special property.
Example : If A who owns certain goods pledges them to B, A has general property in the goods,
whereas B has special property or interest in the goods to the extent of the amount of advance he
has made.
4.9 Insolvent [Section 2(8)]
A person is said to be insolvent when he ceases to pay his debts in the ordinary course of
business, or cannot pay his debts as they become due, whether he has committed an act of
insolvency or not.
4.10 Price [Section 2(10)]
Price means the money consideration for a sale of goods.
4.11 Quality of goods [Section 2(12)]
Quality of goods includes their state or condition.
5. Sale distinguished from Other Similar Contracts
5.1 Sale and Hire Purchase
● Contract of sale resembles with contracts of hire purchase very closely, and indeed the real
object of a contract of hire purchase is the sale of the goods ultimately.
● Hire purchase agreements are governed by the Hire-purchase Act, 1972.
● Hire-Purchase agreement – means an agreement under which goods are let on hire and
under which the hirer has an option to purchase them in accordance with the terms of the
agreement and includes an agreement under which –
o Possession of goods is delivered by the owner thereof to a person on condition that

such person pays the agreed amount in periodical instalments, and
o The property in the goods is to pass to such person on the payment of the last of
such instalments, and
Basis of difference Sale Hire- Purchase
Time of passing Property in the goods is The property in goods passes

property transferred to the buyer to the hirer upon payment of
immediately at the time of the last instalment.
contract.

Position of the The position of the buyer is The position of the hirer is
party that of the owner of the goods. that of a bailee till he pays the
last instalment.
Termination of Buyer cannot terminate the The hirer may terminate the
contract contract and is bound to pay contract by returning the
the price of the goods. goods to its owner without any
liability to pay the remaining
instalments.
Burden of Risk of The seller takes the risk of The owner takes no such risk,
insolvency of the any loss resulting from the for if the hirer fails to pay an
buyer insolvency of the buyer. instalment, the owner has the
right to take back the goods.
Transfer of title The buyer can pass a good The hirer cannot pass any
title to a bona fide purchaser title even to a bona fide
from him purchaser.
Resale The buyer in sale can resell The hire purchaser cannot
the goods. resell unless he has paid all the
instalments.
o Such person has a right to terminate the agreement at any time before the property
so passes.
5.2 Sale and Bailment
A ‘bailment’ is the delivery of goods for some specific

purpose under a contract on the condition that the
Provisions related to bailment are
same goods are to be returned when the purpose is
regulated by the Indian Contract
accomplished to the bailor or are to be disposed of Act, 1872.
according to the directions of the bailor.
Basis of
Sale Bailment
difference
Transfer of The property in goods is There is only transfer of

property transferred from the seller to the possession of goods from the
buyer. So it is transfer of bailor to the bailee for any of the
general property. reasons like safe custody,
carriage etc. So, it is transfer of
special property.

Return of The return of goods in contract The bailee must return the
goods of sale is not possible. goods to the bailor on the
accomplishment of the purpose
for which the bailment was
made.
Consideration The consideration is the price in The consideration may be

terms of money. gratuitous or non-gratuitous.
5.3 Sale and contract for Work and Labour
A contract of sale of goods is one in which some goods are sold or are to be sold for a price. But
where no goods are sold, and there is only the doing or rendering of some work of labour,
then the contract is only of work and labour and not of sale of goods.
Example : Where gold is supplied to a goldsmith for preparing an ornament or when an artist is
asked to paint a picture.
6. How a Contract of Sale is made [Section 5]
● A contract of sale is made by an offer to buy or sell goods for a price and the acceptance of such
offer [Section 5(1)].
● A contract of sale may be made –
▪ In writing or
▪ By word of mouth, or
▪ Partly in writing and partly by word of mouth or
▪ May be implied from the conduct of the parties.
● A contract of sale can be absolute or conditional.
● Ex: Ram agrees to deliver his old bike valued at Rs.50,000 to Sam in exchange for a new model of
Triumph and agrees to pay the difference in cash, it is a Contract of Sale – as there are two parties,
subject matter is goods, sold for price (part money and part kind), it’s a valid contract and goods are
agreed to be delivered.

● Modes of Delivery & Payment in Contract of Sale –
Situation II Situation III

Situation I
Immediate payment Immediate delivery
Immediate delivery
of price and delivery and immediate
of goods
at future date payment
Situation IV Situation V
Delivery and Delivery or payment
payment both in or both made at a
instalments future date
7. Subject Matter of a Contract of Sale
7.1 Existing or Future Goods [Section 6]
Existing or Future goods

Contingent Goods
The goods which form
the subject matter of a Agreement to Sell
There may be a contract
contract of sale may be for the sale of goods the
either existing goods Where in a contract of
acquisition of which by sale the seller purports
that are acquired, the seller depends upon
owned or possessed by to affect a present sale
a contingency which of future goods, the
the seller, or future may or may not happen.
goods. contract operates as an
agreement to sell the
goods.
7.2 Goods perishing before making of contract [Section 7]
Where there is a contract for the sale of specific goods, if the goods without the knowledge of
the seller have, at the time when the contract was made, perished or become so damaged as no
longer to answer to their description contract - the contract is void.
Example : A agrees to sell B 50 bags of wheat stored in the A’s godown. Due to water logging, all the
goods stored in the godown were destroyed. At the time of agreement, neither parties were aware
of the fact. The agreement is void.

7.3 Goods perishing before sale but after agreement to sell [Section 8]
Where there is an agreement to sell specific goods, and subsequently the goods without any
fault on the part of the seller or buyer perish or become so damaged as no longer to answer to their
description in the agreement before the risk passes to the buyer - agreement is thereby
avoided or becomes void.
7.4 Perishing of future goods
If the future goods are specific, the destruction of such goods will amount to supervening
impossibility and the contract shall become void.
Goods
Perishing
Specific Goods Future Goods
Before Sale but

Before making the Before Sale & after
after Agreement to
Contract [Sec. 7] Agreement to Sell
Sell [Sec. 8]
Amounts to
Contract can be Supervening
Contract is Void
avoided Impossibility, becomes
void
8. Ascertainment of Price
8.1 Ascertainment of price [Section 9]
● The price in the contract of sale may be-
▪ Fixed by the contract, or
▪ Agreed to be fixed in a manner provided by the contract
▪ Determined by the course of dealings between the parties.
● Where the price is not determined in accordance with the foregoing provisions, the buyer
shall pay the seller a reasonable price.
8.2 Agreement to sell at valuation [Section 10]
Price is mutually agreed by the parties to the contract. But in some cases price is determined by
third person like experts and valuers.

Where there is an agreement to sell goods on the terms that the price is to be fixed by the
valuation of third party and –
i) Such third party cannot or does not make such valuation –
● Agreement is avoided.
● If the goods or any part thereof have been delivered to, and appropriated by, the
buyer, he shall pay a reasonable price therefore.
ii) In case the third party is prevented by the default of either party from fixing the price -
the party not in fault may maintain a suit for damages against the party in default.
Example : P is having two bikes. He agrees to sell both of the bikes to S at a price to be fixed by
the Q. He gives delivery of one bike immediately. Q refuses to fix the price. As such P asks S to
return the bike already delivered while S claims for the delivery of the second bike too. In the
given instance, buyer S shall pay reasonable price to P for the bike already taken. As regards the
second bike, the contract can be avoided.

9. Overview
Contract of Sale
Transfer of
Agreement Subject matter Price
property
Immediately - Money
Two parties Goods
Sale consideration
Future date -
Seller Existing Agreement to Ascertainment of
Sell price
Buyer Specific
Agreement to sell
at valuation
May be Ascertained
absolute or
conditional
Unascertained
Future
Contingent

CH-2: UNIT 2 – CONDITIONS AND WARRANTIES
• Stipulation as to Time.
• Conditions and Warranties.
• Express and Implied - Conditions and Warranties.
• Doctrine of ‘Caveat Emptor’.
1. Introduction
At the time of selling the goods, a seller usually makes certain statements or representations
with a view to induce and influence the intending buyer to purchase the goods.
Such representations are generally about the nature and quality of goods, and about their eligibility to
suit buyer’s purpose or requirement.
When these statements or representations do not form a part of the contract of sale, they are not
relevant and have no legal effects on the contract.
But, when these form part of the contract of sale and the buyer relies upon them, they are relevant and
have legal effects on the contract of sale.
Stipulation - A representation which forms a part of the contract of sale and affects the
contract.
2. Stipulation as to Time [Section 11]
• As regard to time for the payment of price, unless a different intention appears from the terms of
contract, stipulation as regard this, is not deemed to be of the essence of a contract of sale.
• Stipulation as to time of delivery are usually the essence of the contract.

Stipulation as to Time
Time for Any other

Time of
Payment stipulation
Delivery
of price as to Time
Not the essence of a

Essence or not
contract of sale, Essence of a contract
depends on the
unless mentioned in of sale
terms of the contract
the Contract
All conditions given in the contract have to be abided by both, buyer and seller.
Stipulation as to Time
Mentioned in Not mentioned

Contract in Contract
Time of payment is essential Time of payment is not essential
3. Conditions and Warranties [Section 12]
According to Section 12 of the Sale of Goods Act, 1930 –
(1) A stipulation in a contract of sale with reference to goods which are the subject thereof may be a
Condition or a Warranty.
(2) A Condition is a stipulation essential to the main purpose of the contract, the breach of which
gives rise to a right to treat the contract as repudiate.
(3) A Warranty is a stipulation collateral to the main purpose of the contract, the breach of which
gives rise to a claim for damages but not to a right to reject the goods and treat the contract as
repudiated.
(4) Whether a stipulation in a contract of sale is a condition or a warranty depends in each

case on the construction of the contract. A stipulation may be a condition, though called a
warranty in the contract.

Stipulation
Very essential / significant to the Less essential / less significant to

Contract of Sale the Contract of Sale
Condition Warranty
Example : Breach of Condition – Prakash wants to purchase a baking oven from Qadir, which should
have a capacity of 5 trays with 4 cakes per tray. Qadir, shows the drawing of the oven and says, “There
are 5 trays which can bake 4 cakes per tray.” Later Prakash buys the oven but finds out later on that the
oven had only 2 trays.
This amounts to a breach of condition because the seller made a stipulation which forms the essence of
the contract. In this case, the 5-tray capacity was a stipulation that was essential to the main purpose of
the contract and hence its breach is a breach of condition. Prakash is therefore entitled to reject the
oven and have a refund of the price.
Example : Breach of Warranty – Ram buys a new Maruti car from the showroom and the car is
guaranteed against any manufacturing defect under normal usage for a period of one year from the
date of original purchase and in the event of any manufacturing defect there will be replacement of
defective part if it cannot be properly repaired. After six months, Ram finds that the horn of the car is
not working.
Here, in this case Ram cannot terminate the contract. The manufacturer can either get it repaired or
replace it with a new horn. Ram gets a right to claim for damages, if any, suffered by him but not the
right of repudiation.
Condition Vs. Warranty
Basis of
Condition Warranty
differences
Meaning A condition is an essential A warranty is a collateral
stipulation to the main purpose stipulation, which is additional
of the contract. [Sec 12(2)] to the main purpose of the
contract. [Sec12(3)]
Right in case of The aggrieved party can The aggrieved party can claim
breach repudiate (cancel) the contract only damages.
or claim damages or both.

Conversion of A breach of condition may be A breach of warranty cannot be
stipulations treated as a breach of warranty treated as a breach of condition.
as per Sec 13.
4. When Condition is to be treated as Warranty [Section 13]
In the following cases, a contract is not avoided even on account of a breach of a condition –
Voluntary Compulsory
waiver waiver
[Sec. 13(1)] [Sec. 13(2)] Buyer accepts the
Buyer waives the goods or part
condition thereof in a non-
severable contract
Buyer elects to
treat the breach Any condition
of condition as a whose fulfillment
breach of is excused by law
warranty
Example : A agrees to supply B 10 bags of first quality sugar @ ₹ 625 per bag but supplies only second
quality sugar, the price of which is ₹ 600 per bag. There is a breach of condition and the buyer can reject
the goods. But if the buyer so elects, he may treat it as a breach of warranty, accept the second quality
sugar and claim damages @ ₹ 25 per bag. – Voluntary waiver.
Example : Mrs. Kumar agrees to buy one six seater dining table from Banta Furnitures looking at
brochure. Banta furniture delivers 6 chairs and six seater table as the chairs are attached to the table
and part of the model chosen. There is a breach of condition but the chairs are non-severable. If Mrs.
Kumar accepts it, the condition would be treated as warranty. – Compulsory waiver.
5. Express and Implied Conditions and Warranties [Sections 14 -17]
‘Conditions’ and ‘Warranties’ may be either express or implied.
5.1 Express Conditions
Agreed upon between the parties at the time of contract and are expressly provided in the
contract.

5.2 Implied Conditions
Those which are presumed by law to be present in the contract. Implied conditions are
incorporated by law in the contract of sale.
Following are the implied conditions in a contract of sale unless otherwise agreed in the contract –
Sale by
Sample as
well as Conditionas
Sale by
Description to quality or
Sample
fitness
Sale by Condition as to
Description merchantability
Condition as Implied Condition as to

to Title conditions wholesomeness
5.2.1 Condition as to title [Section 14(a)]
• In every contract of sale, the condition implied is that the seller has the right to sell the
goods at the time when the property is to pass. i.e.,
▪ In case of a sale, he has a right to sell the goods, and
▪ In the case of an agreement to sell, he will have the right to sell the goods at the
time when the property is to pass.
• If Seller’s title is defective – Then, buyer must return the goods to the true owner and
recover the price from the seller.
Example : If A sells to B tins of condensed milk labelled ‘C.D.F. brand’, and this is proved to be an
infringement of N Company’s trademark, it will be a breach of implied condition that A had the
right to sell.
B in such a case will be entitled to reject the goods or take off the labels, and claim damages for
the reduced value. If the seller has no title and the buyer has to hand over the goods to the true
owner, he will be entitled to a refund of the price.
5.2.2 Sale by description [Section 15]
• If there is a contract of sale of goods by description, a default implied condition is that these
goods must correspond with this description.

• Description usually means the specifications / representations of product.
• The buyer is not bound to accept and pay for the goods which are not in accordance with the
description of goods. The buyer is entitled to reject the goods whether the buyer is able
to inspect them or not.
Example : A ship was given as “copper-fastened vessel” in description but actually it was only
partly copper-fastened. It was held that goods did not match with the description and hence
could be returned or if the buyer took the goods, he could claim damages for breach.
• The Act does not define ‘description’. It could be –
i) Where the class or kind to which the goods belong has been specified, e.g.,
‘Egyptian cotton’, “java sugar”, etc., and
ii) Where the goods have been described by

certain characteristics essential to their
Whether or not such a
identification, e.g., jute bales of specified
statement or
shipment, steel of specific dimension, etc. representation is essential
In these cases, description assumes the form of a depends, in each case, on
the construction of the
statement or representation regarding the
contract.
identity of particular goods by reference to the
place of origin or mode of packing, etc.
5.2.3 Sale by sample [Section 17]
When the goods are to be supplied on the basis of a sample the following conditions are implied:
i) The bulk supplied shall match with the sample in quality.
ii) The buyer shall have a reasonable opportunity of comparing the bulk with the
sample I,e. inspect the final goods.
iii) The goods shall be free from any latent defect i.e. a hidden defect.
Example : In a case of sale by sample of two parcels of wheat, the seller allowed the buyer an
inspection of the smaller parcel but not of the larger parcel. In this case, it was held that the
buyer was entitled to refuse to take the parcels of wheat.
Example : A company sold certain shoes made of special sole by sample for the French Army.
The shoes were found to contain paper not discoverable by ordinary inspection. Held, the
buyer was entitled to the refund of the price plus damages.
In case of latent defects, the buyer has the remedy of
• reject the goods,

• recover the price;
• claim damages

5.2.4 Sale by sample as well as by description [Section 15]
Where the goods are sold by sample as well as by description the implied condition is that the
bulk of the goods supplied shall correspond both with the sample and the description.
Example : A agreed with B to sell certain oil described as refined sunflower oil, warranted only
equal to sample. The goods tendered were equal to sample, but contained a mixture of hemp oil.
B can reject the goods.
Basis Situation 1 Situation 2 Situation 3 Situation 4

Description
Sample
Contract Valid – Buyer Buyer can Buyer can Buyer can
status cannot repudiate repudiate repudiate
repudiate
5.2.5 Condition as to quality or fitness [Section 16(1)]
• Ordinarily, there is no implied condition as to the quality or fitness of the goods sold for any
particular purpose.
• However, there is implied condition on the part of the seller that the goods supplied shall be
reasonably fit for the purpose for which the buyer wants them, provided the following
terms are fulfilled:
a) The buyer should have made known to the seller the particular purpose for which
goods are required.
b) The buyer should rely on the skill and judgement of the seller.
c) The goods must be of a description dealt in by the seller, whether he be a

manufacturer or not.
• Where the goods can be used for only one purpose, the buyer need not tell the seller the
purpose for which he requires the goods.
Example : ‘A’ bought a set of false teeth from ‘B’, a dentist. But the set was not fit for ‘A’s mouth.
‘A’ rejected the set of teeth and claimed the refund of price. It was held that ‘A’ was entitled to do
so as the only purpose for which he wanted the set of teeth was not fulfilled.
Example : ‘A’ went to ‘B’s shop and asked for a ‘Merrit’ sewing machine. ‘B’ gave ‘A’ the same and
‘A’ paid the price. ‘A’ relied on the trade name of the machine rather than on the skill and
judgement of the seller ‘B’. In this case, there is no implied condition as to fitness of the machine
for the buyer’s particular purpose.

As a general rule, it is the duty of the buyer to examine the goods thoroughly before he buys
them in order to satisfy himself that the goods will be suitable for his purpose for which he is
buying them. This is known as Rule of Caveat Emptor which means “Let the buyer beware”.
[discussed in detail later on in the Unit]
5.2.6 Condition as to Merchantability [Section 16(2)]
Where goods are bought by description from a “Merchantable Quality” – goods of such
seller who deals in goods of that description a quality and in such a condition a man
(whether he is the manufacturer or producer or not), of ordinary prudence would accept
there is an implied condition that the goods shall be of them as goods of that description.
merchantable quality.
Essential
requirements
Good should be sold by Seller should be dealing

description in those goods ordinarily
To be merchantable, a good for sale must be usable for the purpose it is made for. Goods should
be in such condition that an ordinary man would purchase and use
It must be of average worth (not necessarily special) in the marketplace and must not be broken,
unworkable, damaged, contaminated or flawed.
Example: A bought a black velvet cloth from C and found it to be damaged by white ants. Held,
the condition as to merchantability was broken.
5.2.7 Condition as to wholesomeness
In the case of eatables and provisions, there is another implied condition that the goods shall
be wholesome, in addition to the implied condition as to merchantability.
Example : A supplied F with milk. The milk contained typhoid germs. F’s wife consumed the milk
and was infected and died. Held, there was a breach of condition as to fitness and A was liable to
pay damages.

5.3 Implied Warranties
It is the stipulation which has not been included in the contract of sale in express words, but the
law presumes that the parties have incorporated it into their contract. Implied warranties are read
into every contract of sale unless they are expressly excluded by the express agreement of the
parties.
Implied warranties may also be excluded by the course of dealings between the parties
or by usage of trade [Section 62].
The Act discloses the following Implied Warranties –
Warranty as Warranty as
Warranty as Disclosure of
to Non- to Quality or
to Dangerous
existence of Fitness by
Undisturbed nature of
Encumbrance usage of
Possession goods
s trade
If express agreement negates the implied warranties, express agreement will prevail.
5.3.1 Warranty as to undisturbed possession [Section 14(b)]
• There is an implied warranty that the buyer shall have and enjoy quiet possession of the
goods.
• This means that, after receiving the title of ownership from the true owner the buyer should
not be disturbed either by the seller or any other person claiming superior title of the
goods. In such a case, the buyer is entitled to claim compensation and damages from the seller
as a breach of implied warranty.
Example : X buys a laptop from Y. After the purchase, X spends some money on its repair and
uses it for some time. Unknown to the parties, it turns out that the laptop was stolen and was
taken from X and delivered to its rightful owner.
Y shall be held responsible for a breach and X is entitled to damages of not only the price but also
the cost of repairs.
5.3.2 Warranty as to non-existence of encumbrances [Section 14(c)]
An implied warranty that
• the goods shall be free from any charge or encumbrance

• in favour of any third party

• not declared or known to the buyer
before or at the time the contract is entered into.
Encumbrance is a mortgage or other claim on property or assets.
Example : A pledges his car with C for a loan of ₹15,000 and promises him to give its possession
the next day. A, then sells the car immediately to B, who purchased it on good faith, without
knowing the fact.
B may either ask A to clear the loan or himself may pay the money and then file a suit against A
for recovery of the money with interest.
5.3.3 Warranty as to quality or fitness by usage of trade [Section 16(3)]
An implied warranty as to quality or fitness for a particular purpose may be annexed or

attached by the usage of trade.
5.3.4 Disclosure of dangerous nature of goods
In case the goods are inherently dangerous, or they are likely to be dangerous to the buyer
and the buyer is ignorant or unaware of the danger, an implied warranty on the part of the seller
emerges. The seller must warn the buyer duly about the dangerous nature of the goods if any. In
case of a breach of this warranty, the seller will be liable in damages.
Example : X purchases a bottle of disinfectant from a person Y. Y knows that the cap of the bottle
is defective or cheap and if opened by a novice without care, it may spill and result in partial
burning or other damages of the person. When X opens the bottle, he is injured.
In this case, X is liable in damages to Y as Y should have been duly warned of the probable danger.
Implied Conditions Implied Warranties

• Condition as to Title • Undisturbed possession
• Sale by Description • Non-existence of Encumbrance
• Sale by Sample • Quality and fitness by usage of

trade
• Sale by sample and description • Disclosure of dangerous

• Condition as to quality and nature of goods
fitness
• Condition as to Merchantability
• Condition as to Wholesomeness
6. Caveat Emptor
In case of sale of goods, the doctrine ‘Caveat Emptor’ means ‘let the buyer beware’.

Section 16 of the Sale of Goods Act, 1930 lays down the rule of ‘Caveat Emptor’ which states that
–
“Subject to the provisions of this Act or of any other law for the time being in force, there is no
implied warranty or condition as to the quality or fitness for any particular purpose of goods
supplied under a contract of sale”.
• It is the duty of the buyer to satisfy himself before buying the goods that the goods will serve the
purpose for which they are being bought.
• If the goods turn out to be defective or do not serve his purpose or if he depends on his own skill or
judgment, the buyer cannot hold the seller responsible.
Example : A sold pigs to B. These pigs being infected, caused typhoid to other healthy pigs of the
buyer. It was held that the seller was not bound to disclose that the pigs were unhealthy. The rule of
the law being “Caveat Emptor”.
Example : A purchases a horse from B. A needed the horse for riding but he did not mention this
fact to B. The horse is not suitable for riding but is suitable only for being driven in the carriage.
Caveat emptor rule applies here and so A can neither reject the horse nor can claim compensation
from B.
Exceptions to Caveat Emptor
• The doctrine of Caveat Emptor is, however, subject to the following exceptions –
Fitness as to Quality or Use
Goods purchased under Patent or Brand name
Goods sold by Description
Goods of Mechantable Quality
Sale by Sample
Goods by Sample as well as Description
Trade Usage
Seller actively conceals a defect/ guilty of Fraud

6.1 Fitness as to quality or use [Section 16(1)]
There is an implied condition that goods shall be reasonably fit for a particular purpose, if –
• The buyer had made known to the seller the purpose of his purchase, and
• The buyer relied on the seller’s skill and judgement, and
• Goods are of a description which is in the course of Seller’s business to supply.
Example : An order was placed for some trucks to be used for heavy traffic in a hilly country. The
trucks supplied by the seller were unfit for this purpose and broke down. There is a breach of
condition as to fitness.
Case Law: Priest vs. Last

Facts: P, a draper, purchased a hot water bottle from a retail chemist, P asked the chemist if it would stand
boiling water. The Chemist told him that the bottle was meant to hold hot water. The bottle burst when hot
water was poured into it and injured his wife.
Judgement: It was held that the chemist shall be liable to pay damages to P, as he knew that the bottle was
purchased for the purpose of being used as a hot water bottle.
Goods which can be used for multiple purposes – Where the article can be used for only one
particular purpose, the buyer need not tell the seller the purpose for which he required the goods.
But where the article can be used for a number of purposes, the buyer should tell the seller the
purpose for which he requires the goods, if he wants to make the seller responsible.
Case Law: Bombay Burma Trading Corporation Ltd. vs. Aga Muhammad
Facts: Timber was purchased for the express purpose of using it as railways sleepers and it was
found to be unfit for the purpose.
Judgement: The Court held that the contract could be avoided.
6.2 Goods purchased under patent or brand name [Proviso to Section 16(1)]
In case where the goods are purchased under its patent name or brand name, there is no implied
condition that the goods shall be fit for any particular purpose.
6.3 Goods sold by description [Section 15]
Where the goods are sold by description there is an implied condition that the goods shall
correspond with the description. If it is not so then the seller is responsible.

6.4 Goods of Merchantable Quality [Section 16(2)]
• Where the goods are bought by description from a seller who deals in goods of that
description there is an implied condition that the goods shall be of merchantable quality.
The rule of Caveat Emptor is not applicable.
• But, where the buyer has examined the goods this rule shall apply if the defects were
such which ought to have not been revealed by ordinary examination.
6.5 Sale by sample [Section 17]
Where the goods are bought by sample, this rule of Caveat Emptor does not apply if the bulk
does not correspond with the sample.
6.6 Goods by sample as well as description [Section 15]
Where the goods are bought by sample as well as description, the rule of Caveat Emptor is not
applicable in case the goods do not correspond with both the sample and description or
either of the conditions.
6.7 Trade Usage [Section 16(3)]
An implied warranty or condition as to quality or fitness for a particular purpose may be annexed
by the usage of trade and if the seller deviates from that, this rule of Caveat Emptor is not
applicable.
Example : In readymade garment business, there is an implied condition by usage of trade that the
garments shall be reasonably fit on the buyer.
6.8 Seller actively conceals a defect or is guilty of fraud
The rule of Caveat Emptor will not apply –
• Where the seller sells the goods by making some misrepresentation or fraud and the
buyer relies on it, or
• When the seller actively conceals some defect in the goods so that the same could not
be discovered by the buyer on a reasonable examination.
In such a case the buyer has a right to avoid the contract and claim damages.

7. Overview
Stipulation with Reference to Goods
Stipulation Doctrine of
as to Time Conditions Warranties Caveat
[Sec 11] Emptor
Essential to Collateral to Let the

Time for
main purpose main purpose buyers
Payment
of the contract of the contract beware
for Price
Breach - Breach - Only Exceptions
Repudiate or claim damages
Time for claim
Delivery damages or
Implied Fitness as to
both
Warranties Quality/use
Implied
Any other Conditions Warranty as Purchased under
stipulatio to Patent or Brand
n as to Undistrurbed name
Condition as to
Time Possession
Title
Sold by Description
Condition as to Warranty as to
Description Non- existence
Sale by Sample
of
Encumbrances
Sale by Sample
Sale by sample and
description
Sale by Sample Warranty as to
as well as Quality/fitness
Description Trade usage
Condition as to Disclosure of Goods of

quality /fitness dangerous Merchantable
goods quality
Condition as to
Merchantability
Actively conceals a
defect/ fraud
Condition as to
Wholesomeness

CH-2: UNIT 3 – TRANSFER OF OWNERSHIP AND DELIVERY OF GOODS
• Passing of property from seller to buyer.
• Appropriation of goods.
• Passing of property Vs. Passing of title.
• Rule ‘Nemo dat quod non habet’ and its exceptions.
• Rules relating to delivery and acceptance of goods.
1. Introduction
• Sale of goods involves transfer of ownership of property from seller to buyer.
• A contract of sale of goods involves transfer of ownership in three stages –
Passing of Delivery of
Passing of Risk
Property Goods
Delivery is voluntary transfer of possession.
• The general rule is that risk prima facie passes with the property.
• If the goods are lost or damaged, the burden of loss is borne by the person who is the owner at the
time when the goods are lost or damaged.
• Where the goods are damaged by the act of the third party, it is the owner who can take action.
Suit for price by the seller can be filed only when the property has passed to the buyer.

2. Passing of Property
• Passing of property implies passing of ownership.
Ownership and possession are two different aspects. Ownership gives Passing or transfer of
right in goods whereas possession gives right only to use goods in the property is the most
manner allowed by the owner. important element to
decide legal rights and
• Once the property has passed to the buyer, the risk in the goods sold liabilities of sellers and
is that of the buyer and not of the seller, though the goods may still be in buyers.
the seller’s possession.
• The rules regarding transfer of property in goods from the seller to

the byer depend on two basic factors:
o Identification of Goods [Section 18] – Where there is a contract for sale of unascertained goods,
the property in goods cannot pass to the buyer unless and until the goods are ascertained.
o Intentions of parties [Section 19] - The property in goods is transferred to the buyer at such
time as the parties to the contract intend it to be transferred. This can be ascertained based
on terms of contract, conduct of parties and circumstances.
Primary rules determining the passing of property from seller

to buyer can be understood w.r.t. following type of goods :-
• Specific or Ascertained Goods

• Passing of Unascertained Goods
• Goods sent on Approval or 'On Sale or Return' basis
• Transfer of Property in case of Reservation of Right of Disposal
2.1 Property (Specific or ascertained goods) passes when intended to pass [Section 19]
• Transfer of Property in case of a contract for sale of Specific or Ascertained Goods – The
property in them is transferred to the buyer at such time as the parties to the contract intend
it to be transferred
[Section 19(1)].
• Ascertaining the Intention of Parties – The intention of the parties shall be ascertained with
due regard to –
o The terms of the contract,
o The conduct of the parties, and
o The circumstances of the case [Section 19(2)].

• Unless a different intention appears, the rules contained in sections 20 to 24 are rules for
ascertaining the intention of the parties as to the time at which the property in the goods is to
pass to the buyer [Section 19(3)].
Transfer of property - Specific / Ascertained

Goods
Separate Intention expressed in Separate Intention expressed in

contract contract
Follow Sec 20 to Sec

Follow contract
24
• The stages of goods while passing of property are as follows:
Sec 22 - specifc goods in a

Sec 20 - specifc Sec 21 - specific
Deliverable state when the
goods in a goods to be put in
seller has to ascertain the
Deliverable state a Deliverable State
Price
2.1.1 Specific goods in a deliverable state [Section 20]
➔ Where there is an unconditional contract for the sale of specific goods in deliverable state,
➔ the property in goods passes to the buyer when the contract is made.
This rule holds true even if the time of payment of price, or the time for delivery of the goods, or
both, is postponed.
Example : X goes into a shop and buys a television and asks the shopkeeper for its home delivery.
The shopkeeper agrees to do it. The television immediately becomes the property of X.
2.1.2 Specific goods to be put into a deliverable state [Section 21]
➔ Where there is a contract for the sale of specific goods, and
➔ the seller is bound to do something to put the goods in deliverable state,

➔ the property does not pass until such thing is done and buyer has notice thereof.
Example : Peter buys a laptop from an electronics store and asks for a home delivery. The
shopkeeper agrees to it. However, the laptop does not have a Windows operating system
installed. The shopkeeper promises to install it and call Peter before making the delivery. In this
case, the property transfers to Peter only after the shopkeeper has installed the OS making the
laptop ready for delivery, and intimated the buyer about it.
2.1.3 Specific goods in a deliverable state, when the seller has to do anything thereto in order
to ascertain price [Section 22]
➔ Where there is a contract for the sale of specific goods in a deliverable state,
➔ but the seller is bound to weigh, measure, test or do some other act or thing with
reference to the goods for the purpose of ascertaining the price,
➔ the property does not pass until such act or thing is done and the buyer has notice
thereof.
Example : Vikas purchases wallpaper from Sneh, however the price of the same will be
determined only after Sneh takes the measurement of the wall in order to ascertain the quantity
of wallpaper required to cover the wall. In this case, property will pass to Vikas only when Sneh
takes the measurements, ascertains the price and informs Vikas about the same.
2.2 Goods must be ascertained
• Where there is a contract for the sale of unascertained goods, property in the goods is not
transferred to the buyer unless and until the goods are ascertained [Section 18].
• The rules in respect of passing of property of unascertained goods are as follows –
1. Sale of unascertained goods by description [Section 23(1)]
In case of contract of sale of unascertained/ future goods by description and such goods
are unconditionally appropriated [i.e., set aside] to the contract, either by seller with the
assent of the buyer or vice versa, the property in goods thereupon passes to the buyer.
Assent may be express or implied and may be given before or after the appropriation is
made.
Appropriation of goods involves selection of goods with the intention of using them in
performance of the contract and with the mutual consent of the seller and the buyer.

There is a Contract of Sale of Unascertained/Future
Goods
Goods confirm to the description and quality
In Deliverable state
Analysis of Unconditionally appropriated to the contract

Sec 23(1)
Appropriation must be made by the seller/ buyer
with the assent of the buyer/ seller respectively
Assent may be Express or Implied
Assent may be given before or after appropriation
2. Delivery to the carrier [Section 23(2)]
When, in pursuance of the contract, the seller delivers the goods to the buyer or to a
carrier or other bailee (whether named by the buyer or not) for the purpose of
transmission to the buyer, and does not reserve the right of disposal, he is deemed to
have unconditionally appropriated the goods to the contract.
Example : A bill of lading of a railway parcel is made out in the name of the buyer and is
sent to him, the ownership in the goods passes from the seller to the buyer. In case the
goods are subjected to accidental loss or by theft, the seller will not be liable.
Example : M places an order for a book with a book seller in Mumbai. He asks him to send
the book by courier. Payment of the book was to be made by cheque. The seller sends the
book by courier. The book is lost in the way. The seller wants the buyer to bear the loss.
According to Section 23 (2), it is an unconditional appropriation of goods because of which
buyer M has become the owner of the goods. Therefore, he will bear the risk of loss of the
book in the way.
2.3 Goods sent on approval or ‘On sale or return’ [Section 24]
A sale on approval, as applicable to the Sale of Goods Act, is a conditional sale of goods that is
made on a trial basis. A buyer who enters into a sale of approval agreement receives the goods
and has to deciding whether to buy within a given time period.
When goods are sent on 'Sale or Approval' basis property in them passes to the buyer when –
i) Buyer signifies his approval to the seller, or
Example : P brought a musical instrument from a musical shop on a condition that he will
purchase it if he likes that instrument. After a week he has informed the shop owner that he
has agreed to purchase the musical instrument. The ownership is transferred when he has
decided to purchase the instrument as his own.

ii) Buyer does not signify his approval but retains the goods without giving a notice of
rejection and
• If a time had been fixed for rejection – Such time has expired, or
• If no time had been fixed for rejection – A reasonable time has expired, or
Example : ‘A’ sends to ‘B’ a water motor on approval or return in March 2020. ‘B’ returns it
after trial in August 2020. The water motor has not been returned within a reasonable time,
and therefore, ‘A’ is not bound to accept it and ‘B’ must pay the price.
iii) Buyer does something to the good which is equivalent to accepting the goods or does
any act adopting the transaction.
Example : ‘A’ delivered some jewellery to ‘B’ on sale or return basis. ‘B’ pledged the jewellery
with ‘C’. It was held that the ownership of the jewellery had been transferred to ‘B’ as he had
adopted the transaction by pledging the jewellery with ‘C’. In this case, ‘A’ has no right against
‘C’. He can only recover the price of the jewellery from ‘B’.
2.3.1 Sale for cash only or Return
When goods are delivered by a person on ‘Sale or return’ on the condition that the goods will
remain the property of the seller till they are paid –
• Property in such goods does not pass to the buyer until the condition is complied
with, i.e., cash is paid for.
Example : ‘A’ delivered his jewellery to ‘B’ on sale for cash only or return basis. It was expressly
provided in the contract that the jewellery shall remain ‘A’s property until the price is paid.
Before the payment of the price, ‘B’ pledged the jewellery with ‘C’. It was held that at the time
of pledge, the ownership was not transferred to ‘B’. Thus, the pledge was not valid, and ‘A’
could recover the jewellery from ‘C’.
2.4 Reservation of right of disposal [Section 25]
• In certain cases, the seller may reserve the right of disposal of goods until certain conditions
are fulfilled, in such a case irrespective of delivery of goods to a buyer the property in goods
does not pass to the buyer until conditions imposed by seller are fulfilled.
Example : X sends furniture to a company by a truck and instructs the driver not to deliver the
furniture to the company until the payment is made by the company to him. The property
passes only when the payment is made.
• Circumstances under which the right to disposal may be reserved –
i) If the goods are shipped or delivered to a railway administration for carriage and
by the bill of lading or railway receipt, the goods are deliverable to the order of the
seller or his agent, then the seller is prima facie deemed to reserve the right of disposal.

ii) Where the seller draws a bill on the buyer for the price and sends to him the bill of
exchange together with the bill of lading or the railway receipt, to secure
acceptance or payment thereof, the buyer must return the bill of lading, if he does
not accept or pay the bill. If he wrongfully retains the bill of lading or the railway
receipt, the property in the goods does not pass to him.
Section 25 deals with ‘Conditional Appropriation’ as distinguished from ‘unconditional

appropriation’ dealt with under Section 23 (2).
3. Risk Prima Facie Passes with Property [Section 26]
“Unless otherwise agreed, the goods remain at the seller’s risk until the property
therein is transferred to the buyer,
but when the property therein is transferred to the buyer, the goods are at the buyer’s
risk whether delivery has been made or not”.
• Thus, in ordinary circumstances, risk is borne by the buyer only when the property in the
goods passes over to him. However, the parties may, agree to the contrary.
For instance, the parties may agree that risk will pass sometime after or before the property
has passed from the seller to the buyer.
Example : ‘A’ bids for an antique painting at a sale by auction. After the bid, when the auctioneer
struck his hammer to signify acceptance of the bid, he hit the antique which gets damaged. The
loss will have to be borne by the seller, because the ownership of goods has not yet passed
from the seller to the buyer.
• Exception to the rule that ‘Risk follows Ownership’ –
i) Where delivery of the goods has been delayed through the fault of either buyer or
seller, the goods are at the risk of the party in fault as regards any loss which might not
have occurred but for such fault [First Proviso to Section 26].
ii) The duties and liabilities of the seller or the buyer as bailee of goods for the other
party remain unaffected even when the risk has passed generally.
Example : ‘A’ contracted to sell 100 bales of cotton to ‘B’ to be delivered in February. ‘B’ took the
delivery of the part of the cotton but made a default in accepting the remaining bales.
Consequently the cotton becomes unfit for use. The loss will have to be borne by the buyer ‘B’.

4. Transfer of Title by Non-Owners
4.1 Sale by person not the owner [Section 27]
“Subject to the provisions of this Act and of any other law for the time being in force, where goods
are sold by a person who is not the owner thereof and who does not sell them under the
authority or with the consent of the owner, the buyer acquires no better title to the goods than
the seller had, unless the owner of the goods is by his conduct precluded from denying the seller’s
authority to sell”.
• The general rule regarding the transfer of title is that the seller cannot transfer to the buyer
of goods a better title than he himself has. If the seller is not the owner of goods, then the
buyer also will not become the owner i.e. the title of the buyer shall be the same as that of the
seller.
• This rule is expressed in the Latin maxim ‘Nemo dat quod non habet’ which means ‘No one can
give what he has not got’.
Example : If A sells some stolen goods to B, who buys them in good faith, B will get no title to
that and the true owner has a right to get back his goods from B.
Example : P, the hirer of vehicle under a hire purchase agreement, sells them to Q. Q, though a
bona fide purchaser, does not acquire the ownership in the vehicle. At the most he acquires the
same right as that of the hirer.
4.2 Exceptions to the rule that Non-owner cannot convey a better Title to the Buyer
If this rule is strictly followed, then the innocent buyers may be put to loss in many cases. Therefore,
to protect the interests of innocent buyers, a number of exceptions have been provided to this rule
as follows –

Cases where a Non-Owner can convey a better
title to bonafide purchaser of goods for value :
• Sale by a Mercantile Agent

• Sale by one of the Joint Owners
• Sale by a person in possession under a voidable contract
• Sale by one who has already sold but continues to be in
possession
• Sale by buyer obtaining possesion before property has been
vested in him
• Effect of Estoppel
• Sale by an Unpaid seller
• Sale under the Provisions of other Acts
4.2.1 Sale by a Mercantile Agent [Proviso to Section 27]
The sale by a mercantile agent of the goods for document of title to goods would pass a good
title if –
• He was in possession of the goods/documents

with consent of the owner,
• He was acting in the ordinary course of business,

Definition of Mercantile Agent has
and
been discussed in Unit 1 of
• The buyer has acted in good faith and has no Chapter 2.
notice, at the time of the contract of sale, of the
fact that the seller had no authority to sell.
4.2.2 Sale by one of the Joint Owners [Section 28]
Where any one of several joint owners has the possession of the goods with the permission
of the other co-owners, the property in goods is transferred to the buyer if –
• The person buys these goods in good faith, and
• Has no notice, at the time of the contract of sale, of the fact that the seller has no
authority to sell.
Example : A, B, and C are three brothers and joint owners of a TV and VCR and with the consent
of B and C, the VCR was kept in possession of A. A sells the TV and VCR to P who buys it in good
faith and without notice that A had no authority to sell. P gets a good title to VCR and TV.

4.2.3 Sale by a person in possession under voidable contract [Section 29]
When a seller who has obtained goods under a voidable contract sells the goods; the buyer will
get a good title to the goods he has bought provided that the contract has not been
rescinded until the time of sale.
Example : X fraudulently obtains a diamond ring from Y. This contract is voidable at the option
of Y. But before the contract could be terminated, X sells the ring to Z, an innocent purchaser. Z
gets the good title and Y cannot recover the ring from Z even if the contract is subsequently set
aside.
4.2.4 Sale by one who has already sold the goods but continues in possession thereof [Section
30(1)]
When even after selling the goods the seller continues to be in possession of the goods/
documents of title to them, he may sell them to a third person, and if such person obtains the
delivery in good faith and without notice of previous sale, he will get a good title to the
goods.
A pledge or other disposition of the goods or documents of title by the seller in possession are
equally valid.
Example : During IPL matches, P buys a TV set from R. R agrees to deliver the same to P after
some days. Meanwhile R sells the same to S at a higher price, who buys in good faith and without
knowledge about the previous sale. S gets a good title.
4.2.5 Sale by buyer obtaining possession before the property in the goods has vested in him
[Section 30(2)]
Where the buyer obtains possession of the goods before property in them has passed to him, he
may sell, pledge, or dispose the goods to a third person, and if such person obtains delivery in
good faith and without notice of the lien or other right of the original seller, he will get a
good title to the goods.
A person in possession of goods under a ‘hire-purchase’ agreement which gives him only
an option to buy is not covered within this section unless it amounts to a sale.
Example : A took a car from B on this condition that A would pay a monthly instalment of ₹5,000
as hire charges with an option to purchase it by payment of ₹1,00,000 in 24 instalments. After the
payment of a few instalments, A sold the car to C. B can recover the car from C since A had neither
bought the car, nor had agreed to buy the car. He had only an option to buy the car.

4.2.6 Effect of Estoppel
Where the owner is estopped by the conduct from denying the seller’s authority to sell, the
transferee will get a good title as against the true owner.
Example : ‘A’ said to ‘B’, a buyer, in the presence of ‘C’ that he (A) is the owner of the horse. But
‘C’ remained silent though the horse belonged to him. ‘B’ bought the horse from ‘A’. Here the
buyer (B) will get a valid title to the horse even though the seller (A) had not title to the horse. In
this case, ‘C’, by his own conduct, is prevented from denying ‘A’s authority to sell the horse. Here,
‘C’s silence has induced ‘B’ to believe that ‘A’ is the owner of the horse.
4.2.7 Sale by an unpaid seller [Section 54(3)]
Where an unpaid seller, who had exercised his right of lien or stoppage in transit resells
the goods, the buyer acquires a good title to the goods as against the original buyer.
4.2.8 Sale under the provisions of other Acts
• Sale by an Official Receiver or Liquidator of the Company will give the purchaser a valid
title.
• Purchase of goods from a finder of goods will get a valid title under circumstances [Section
169 of the Indian Contract Act, 1872]
• A sale by pawnee can convey a good title to the buyer [Section 176 of the Indian Contract
Act, 1872]
5. Performance of the Contract of Sale
The performance of a contract of sale implies
➔ delivery of goods by the seller and

➔ acceptance of the delivery of goods and payment of price for them by the buyer
in accordance with the terms of the contract.
5.1 Delivery
• Delivery means voluntary transfer of possession from one person to another [Section 2(2)]
• For delivery, physical possession is not important.
• If the possession is taken through unfair means, there is no delivery of the goods.
• Delivery of goods is of three types:
▪ Actual Delivery
▪ Symbolic delivery
▪ Constructive Delivery

Delivery of Goods - Forms
Symbolic Constructive
Actual Delivery Delivery Delivery
Transfer of physical Delivery of Delivery by

possession something as token acknowledgement
5.2 Duties of seller and buyer [Section 31]
• Duty of Seller – To deliver the goods
• Duty of the Buyer – To accept the goods and pay for them.
• Delivery, acceptance, and payment should be in accordance with the terms of the Contract of
Sale.
5.3 Payment and delivery are Concurrent Conditions [Section 32]
• Unless otherwise agreed, delivery of the goods and payment of the price are concurrent
conditions.
• This means that,
o The seller shall be ready and willing to give possession of the goods to the buyer in
exchange for the price, and
The buyer shall be ready and willing to pay the price in exchange for possession of
the goods.

5.4 Rules Regarding Delivery of goods
How is Effect of Buyer to

Place of Time of
delivery Part Apply for
Delivery - Delivery -
made - Sec Delivery - Delivery -
Sec 36 Sec 36
33 Sec 34 Sec 35
Goods in Delivery of
Time for Installment
possession Expenses Wrong
Tender of Deliveries -
of Third for Delivery Quantity -
Delivery Sec 38
Party Sec 37
Delivery to Deterioration Buyer's Right

Carrier - during Transit to Examine the
Sec 39 - Sec 40 Goods - Sec 41
5.4.1 Delivery [Section 33]
Delivery of goods sold may be made by doing anything –
• Which the parties agree shall be treated as delivery or
• Which has the effect of putting the goods in the possession of the buyer or of any
person authorised to hold them on his behalf.
5.4.2 Effect of part delivery [Section 34]
• If a part-delivery of the goods is made in progress of the delivery of the whole, then it
has the same effect for the purpose of passing the property in such goods as the delivery
of the whole.
• However, a part-delivery with an intention of severing it from the whole does not
operate as a delivery of the remainder.
Example : Certain goods lying at godown were sold in a lot. The seller instructed the godown
keeper to deliver them to the buyer who had paid for them and the buyer, thereafter,
accepted them and took away part. Held, there was delivery of the whole.
5.4.3 Buyer to apply for delivery [Section 35]
Apart from any express contract, the seller of goods is not bound to deliver them until the
buyer applies for delivery.

5.4.4 Place of delivery [Section 36(1)]
Depends on the
whether buyer to take possession of goods
contract, express
or seller to send them to the buyer
or implied
Place of Delivery
Delivered at the place at

Goods sold which they are at the time
of the sale.
Delivered at the place at

Goods to be
Apart from such which they are at the time
sold
contract, of agreement to sell
Goods not in
Delivered at place where
existence at
they are manufactured or
the time of
produced
agreement
5.4.5 Time of delivery [Section 36(2)]
Where under the contract of sale, the seller is bound to send the goods to the buyer, but no time
for sending them is fixed, the seller is bound to send them within a reasonable time.
5.4.6 Goods in possession of a third party [Section 36(3)]
Where the goods at the time of sale are in possession of a third person, there is no delivery
unless and until such third person acknowledges to the buyer that he holds the goods on
his behalf. However, this shall not affect the operation of the issue or transfer of any document
of title to goods.
5.4.7 Time for tender of delivery [Section 36(4)]

What is ‘reasonable
The demand or tender of delivery is to be made at a hour’ is a question of
reasonable hour. If not, then it is rendered ineffectual. fact.
5.4.8 Expenses for delivery [Section 36(5)]
The seller shall bear all expenses pertaining to putting the goods into a deliverable state unless
the parties agree to some other terms in the contract.
5.4.9 Delivery of wrong quantity [Section 37]
• Delivering lesser quantity – Where the seller delivers to the buyer a quantity of goods less
than he contracted to sell,
➔ the buyer may reject them.

However, if the buyer accepts the goods so delivered, he shall pay for them at the contract
rate.
• Delivering larger quantity – Where the seller delivers to the buyer a quantity of goods larger
than he contracted to sell,
➔ the buyer may accept the goods included in the contract and reject the rest, or
➔ he may reject the whole.
If the buyer accepts the whole of the goods so delivered, he shall pay for them at the contract
rate.
• Delivers goods contracted mixed with goods of different description – Where the seller
delivers to the buyer, the goods he contracted to sell mixed with goods of a different
description not included in the contract,
➔ the buyer may accept the goods which are in accordance with the contract and
reject the rest, or
➔ may reject the whole.
The provisions of this section are subject to any usage of trade, special agreement, or course of
dealing between the parties.
Example : A agrees to sell 1000 quintals of wheat to B at ₹1,000 per quintal. A delivers 1,100
quintals. B may reject the whole lot, or accept only 1,000 quintals and reject the rest or accept
the whole lot and pay for them at the contract of sale.
- May reject goods

Delivery of Wrong quantity
Lesser quantity
- Accept goods and pay at contract price
- May accept goods in contract and reject rest

- Reject the whole
Larger quantity
- Accept whole goods and pay at contract
price
Mix goods with - May accept goods as per contract and reject
different rest
description - Reject the whole

5.4.10 Instalment deliveries [Section 38]
The buyer does not have to accept delivery in instalments unless he has agreed to do so in
the contract. If such an agreement exists, then the parties are required to determine the rights
and liabilities and payments themselves.
5.4.11 Delivery to carrier [Section 39(1)]
Subject to the terms of contract, the delivery of the goods to the carrier for transmission to
the buyer, is prima facie deemed to be delivery to the buyer.
5.4.12 Deterioration during transit [Section 40]
Where goods are delivered at a distant place, the liability for deterioration necessarily
incidental to the course of transit will fall on the buyer, though the seller agrees to deliver at
his own risk.
Example : P sold to Q a certain quantity of iron rods which were to be sent by proper vessel. It
was rusted before it reached the buyer. The rust of the rod was so minimal and was not affecting
the merchantable quality and the deterioration was not necessarily incidental to its transmission.
It was held that Q was bound to accept the goods.
5.4.13 Buyer’s right to examine the goods [Section 41]
The buyer has the right to ascertain that the goods delivered to him are in conformity with
the contract. The seller is bound to honor the buyer’s request for a reasonable opportunity of
examining the goods unless the contrary is specified in the contract.
5.5 Rule related to Acceptance of Delivery of Goods [Section 42]
• Intimates to the seller that he had accepted the

goods; or
• Does any act to the goods, which is inconsistent
with the ownership of the seller; or
Acceptance is
deemed to take • Retains the goods after the lapse of a
place when the reasonable time, without intimating to the seller
buyer that he has rejected them.
5.6 Buyer not bound to return rejected goods [Section 43]
Where goods are delivered to the buyer and he refuses to accept them, having the right so to do,
he is not bound to return them to the seller, but it is sufficient if he intimates to the seller that
he refuses to accept them.

5.7 Liability of buyer for neglecting or refusing delivery of goods
[Section 44]
When the seller is ready and willing to deliver the goods and requests the buyer to take delivery,
and the buyer does not within a reasonable time after such request take delivery of the goods,
he is liable to the seller
• For any loss occasioned by his neglect or refusal to take delivery and
• Also for a reasonable charge for the care and custody of the goods.
The provisions of this section shall not affect the rights of the seller where the neglect or refusal
of the buyer to take delivery amounts to a repudiation of the contract.

6. Overview
Transfer of Ownership
Passing of Passing of Transfer of Title Delivery of

Property Risk by Non-Owners Goods
Specific or Prima facie General Rule - Duties of

Ascertained passes with Seller cannot Seller and
Goods [S.19] Property transfer better title Buyer
[S. 26] to buyer [S. 31]
[S. 27]
In deliverable
State [S.20] Exceptions Rules
regarding
Exceptions -
Delivery of
Goods
To be put in Delivery
[S. 33 - 41]
deliverable delayed due
to fault of Mercantile Agent
state [S. 21]
buyer or
seller Rules relating
Joint Owners to
On which seller Acceptance
has to do of Delivery [S.
Duties or
anything to 42]
liabilities of Person in possession
ascertain price
Buyer or under Voidable
[S.22]
Seller as contract
Bailee Buyer not
bound to
Person who has Return
Unascertained goods Rejected
already sold but
continues with Goods
possession [S. 43]
Sale by
description
[S.23(1)] Buyer obtaining Liability of
possession before Buyer for
Delivery to passing of property neglecting
carrier [S.23(2)] delivery
[S. 44]
Effect of Estoppel
Goods sent on
Approval or 'On Sale
or Return' basis [S.
Unpaid Seller
24]
Reservation of Right Other Acts

of Disposal
[S. 25]

CH-2: UNIT 4 – UNPAID SELLER
• Unpaid Seller.
• Rights of Unpaid Seller.
• Effect of Sub-sale or Pledge by the Buyer.
• Right of Lien Vs. Right of Stoppage in Transit.
• Remedies of Buyer against the Seller.
• Sale by Auction.
• Inclusion of Taxes.
1. Unpaid Seller [Section 45]
The seller of goods is deemed to be an ‘Unpaid Seller’ when-
i) The whole of the price has not been paid or tendered and the seller had an immediate right of
action for the price.
Example : X sold certain goods to Y for ₹ 50,000. Y paid ₹ 40,000 but “Unpaid Seller”
fails to pay the balance. X is an unpaid seller.
➢ Part payment
ii) When a bill of exchange or other negotiable instrument has been
done
received as conditional payment, and the condition on which it was
➢ No payment
received has not been fulfilled by reason of the dishonour of the
done at all.
instrument or otherwise [Section 45(1)].
Example : P sold some goods to R for ₹ 60,000 and received a cheque for
the full price. On presentment, the cheque was dishonoured by the bank. P is an unpaid seller.
Negotiable instrument is an instrument issued by parties to fulfil their payment obligations. It serves
as an unconditional undertaking or promise that the person signing shall be under an obligation to
pay. It is transferable. The different types of negotiable instruments are Bills of exchange, Promissory
Note and Cheque.
The term ‘seller ‘ here includes any person who is in the position of a seller, such
as, an agent of the seller to whom the bill of lading has been endorsed, or a consignor
or agent who has himself paid, or is directly responsible for, the price [Section 45(2)].

2. Rights of an Unpaid Seller
Unpaid Seller's Rights
Right to Lien on Additional right

Right of Stopping
the goods for to Withhold
the goods in
the price when Right of Delivery
Transit where
he is in Re-sale [Property not
buyer becomes
possession of passed to
Insolvent
them Buyer]
An unpaid seller has been expressly given the rights against the goods as well as the buyer
personally.
3. Right of Unpaid Seller Against the Goods
The right of unpaid seller against goods can be categorized under two headings with respect to
property being passed to the Buyer –
Rights of Unpaid Seller
Rights against Rights against

Goods Buyer
When property When property

in goods has in goods has not
passed to buyer passed to buyer
3.1 Seller’s lien [Section 47]
• The unpaid seller of goods who is in possession of them is “Lien” – A right to keep
entitled to retain possession of them until payment or possession of property until
a debt owed is paid off.
tender of the price.

• This right can be exercised by him in the following cases only –
Where goods Where goods

have been sold have been sold
Where the
without any on credit but
buyer becomes
stipulation of the term of
insolvent
credit ( i.e., on credit has
cash sale) expired
• The seller may exercise his right of lien even where he is in possession of the goods as
agent or bailee for the buyer.
• The unpaid seller’s lien is a possessory lien i.e., the lien can be exercised as long as the seller
remains in possession of the goods.
• Right of lien is exercised only to recover the unpaid amount of the Price, no other expense.
Example : A sold certain goods to B for a price ₹ 50,000 and allowed him to pay the price within one
month. B becomes insolvent during this period of credit. A, the unpaid seller, can exercise his right
of lien.
The term insolvent refers to “a person is said to be insolvent who has ceased to pay his debts in
the ordinary course of business, or cannot pay his debts as they become due, whether he has
committed an act of insolvency or not”.
3.1.1 Part delivery [Section 48]
Where an unpaid seller has made part delivery of the goods, he may exercise his right of lien
on the remainder, unless such part delivery has been made under such circumstances as to
show an agreement to waive the lien.
3.1.2 Termination of lien [Section 49]
• The unpaid seller loses his right of lien under the following circumstances –
i) When he delivers the goods to a carrier or other bailee for the purpose of
transmission to the buyer without reserving the right of disposal of the goods.
ii) Where the buyer or his agent lawfully obtains possession of the goods.
iii) Where seller has waived the right of lien.

iv) By Estoppel i.e., where the seller so conducts himself that he leads third parties to
believe that the lien does not exist.
• Once seller has parted with goods, right to lien cannot be exercised.
• Exception: The unpaid seller of the goods, having a lien thereon, does not lose his lien by
reason only that he has obtained a decree for the price of the goods.
Example : A, sold a car to B for ₹ 1,00,000 and delivered the same to the railways for the
purpose of transmission to the buyer. The railway receipt was taken in the name of B and
sent to B. Now A cannot exercise the right of lien.
3.2 Right of stoppage in transit
“Subject to the provisions of this Act, when the buyer of goods becomes insolvent, the unpaid
seller who has parted with the possession of the goods has the right of stopping them in transit,
that is to say, he may resume possession of the goods as long as they are in the course of transit,
and may retain them until paid or tendered price of the goods”.
• The right of stoppage in transit means the right of

stopping the goods while they are in transit, to regain “The Right of Stoppage in
Transit” is the extension of the
the possession and to retain them till the full price is paid.
right of lien because it entitles
• When the unpaid seller has parted with the goods to a the seller to regain possession
carrier and the buyer has become insolvent, he can even when the seller has
exercise this right of asking the carrier to return the goods parted with the possession of
the goods.
back, or not to deliver the goods to the buyer.
Example : A of Mumbai sold certain goods to B of Delhi. He

delivered the goods to C, a common carrier for the purpose of transmission of these goods to B.
Before the goods could reach him, B became insolvent and A came to know about it. A can stop
the goods in transit by giving a notice of it to C.
Essentials for • Goods are in Transit

excercising the Right • Buyer has become Insolvent
of Stoppage in • Seller has Parted with goods
Transit (T-I-P-U) • Seller is Unpaid seller
[Section 50]

Example : B at Delhi, orders goods of A, at Mumbai. A consigns and forwards the goods to B. On
arrival at Delhi, they are taken to B‘s warehouse and left there. B refuses to take these goods and
stop payment. The goods are in transit and the unpaid seller can take them back.
3.2.1 Duration of transit [Section 51]
The goods are deemed to be in course of transit from the time when they are delivered to
a carrier or other bailee for the purpose of transmission to the buyer, until the buyer or his
agent in that behalf takes delivery of them from such carrier or other bailee.
• Goods rejected by the buyer when the carrier continues to be in possession – The transit
is not deemed to be at an end, even if the seller has refused to receive them back.
• Goods delivered to a ship chartered by the buyer – It is a question depending on the

circumstances of the particular case, whether they are in the possession of the master as a
carrier or as agent of the buyer.
• Part delivery has been made to the buyer or his agent - The remainder of the goods may
be stopped in transit unless such part delivery has been given in such circumstances as to
show an agreement to give up possession of the whole of the goods.
3.2.2 When does the transit come to an end?
The right of stoppage in transit is lost when transit comes to an end. Transit comes to an
end in the following cases –
Buyer or other bailee obtains delivery.
Buyer obtains delivery before the arrival of goods at destination.
When carrier acknowledges to the buyer / his agent that he

holds the goods when the goods are loaded on the ship.
Carrier wrongfully refuses to deliver the goods to the buyer.
Goods delivered to the carrier hired or ship chartered by the

buyer.
Where part delivery has been made to the buyer, transit ends for the
remaining goods (in the course of transmission).

3.2.3 How stoppage in transit is effected [Section 52]
There are two modes of stoppage in transit by an unpaid seller –
By taking Actual
Possession of the By giving Notice to
goods the carrier not to
deliver the goods.
• When giving a notice, to be effectual, it shall be given at such time and in such
circumstances, that the principal, by the exercise of reasonable diligence, may
communicate it to his servant or agent in time to prevent a delivery to the buyer.
• Where the notice of stoppage in transit is given by the seller to the carrier or other bailee in
possession of the goods, he shall re-deliver the goods to, or according to the directions
of, the seller. The expenses of such redelivery shall be borne by the seller.
• The main intention of stoppage in transit is to receive the payment due but not to recover
other expenses.
3.3 Distinction between Right of Lien and Right of Stoppage in Transit
Right of Lien Right of Stoppage in Transit

The essence of a right of lien is to The essence of a right of stoppage in
retain possession. transit is to regain possession.
To exercise the right of lien the seller To exercise the right of stoppage in
must be in possession of the goods. transit –
i) Seller should have parted with
the possession,
ii) Possession should be with a
carrier, and
iii) Buyer should not have acquired
the possession.
Can be exercised even when the Can be exercised only when the buyer
buyer is not insolvent. is insolvent.
Comes to an end when goods go out Comes to an end as soon as the
of the possession of the seller. goods are delivered to the buyer.
Right of stoppage in transit begins when the right of lien ends. Thus, the end of the right of lien
is the starting point of the right of stoppage in transit.

3.4 Effects of sub-sale or pledge by buyer [Section 53]
• The right of lien or stoppage in transit is not affected by the buyer selling or pledging the
goods unless the seller has assented to it.
Example : A sold certain goods to B of Mumbai and the goods are handed over to railways for
transmission to B. In the meantime, B sold these goods to C for consideration. B becomes
insolvent. A can still exercise his right of stoppage in transit.
Case Law: Mount D. F. Ltd. vs Jay & Jay (Provisions) Co. Ltd
Facts: A entered into a contract to sell cartons in possession of a wharfinger to B and agreed
with B that the price will be paid to A from the sale proceeds recovered from his customers.
Now B sold goods to C and C duly paid to B. But anyhow, B failed to make the payment to A.
A wanted to exercise his right of lien and ordered the wharfinger not to make delivery to C.
Judgement: The Court held that the seller had assented to the resale of the goods by the
buyer to the sub-buyers. As a result A’s right to lien is defeated.
• The seller loses right to lien / stoppage when:
o The seller himself assets to the sub-sale/ pledge.
o Transfer of document of title from seller to buyer
• When a document of title to goods has been transferred to the buyer and the buyer
transfers the documents to a person who has bought goods in good faith and for a
consideration, then –
o If the last mentioned transfer is by way of sale
– Right of lien or stoppage in transit is defeated
o If the last mentioned transfer is by way of pledge
– The unpaid seller’s right of lien or stoppage be exercised subject to the rights
of the pledgee.
However, the pledgee may be required by the unpaid seller to use in the first instance, other
goods or securities of the pledger available to him to satisfy his claims.
3.5 Effect of stoppage
• The contract of sale is not rescinded when the seller exercises his right of stoppage in transit.
• The contract still remains in force and the buyer can ask for delivery of goods on payment of
price.
3.6 Right of Re-sale [Section 54]
The unpaid seller can exercise the right to re-sell the goods under the following conditions:

He has Where
Goods are of exercised his property in
perishable right or lien or goods has not
nature stoppage in passed to the
transit buyer
Seller gives
Right of resale
notice to the
is expressly
buyer of his
reserved in the
intention to re-
contract of sale
sell
3.6.1 Where the goods are of a perishable nature
Where the goods are of a perishable nature, the buyer need not be informed of the intention
of resale.
3.6.2 Where he gives notice to the buyer of his intention to re-sell the goods
If after the receipt of such notice the buyer fails within a reasonable time to pay or tender
the price, the seller may resell the goods.
• In such cases, on the resale of the goods, the seller is also entitled to:
a) Recover the difference between the contract price and resale price, from the original
buyer, as damages.
b) Retain the profit if the resale price is higher than the contract price.
• If the goods are resold by the seller without giving any notice to the buyer –
o He cannot recover the loss suffered on resale
o If there is any profit on resale, he must return it to the original buyer,
3.6.3 Where an unpaid seller who has exercised his right of lien or stoppage in transit resells
the goods
The subsequent buyer acquires the good title thereof as against the original buyer, despite
the fact that the notice of re-sale has not been given by the seller to the original buyer.
3.6.4 Where a right of re-sale is expressly reserved in a contract of sale
• In such cases, the seller is said to have reserved his right of resale, and he may resell the
goods on buyer’s default.
• Also, the seller is not required to give notice of resale.

• He is entitled to recover damages from the original buyer even if no notice of resale is given.
3.6.5 Where the property in goods has not passed to the buyer
The unpaid seller has in addition to his remedies a right of withholding delivery of the goods.
This right is similar to lien and is called “Quasi-lien”.
Under this, both ownership and possession are with the seller as the property has not passed to
the buyer.
4. Rights of Unpaid Seller Against the Buyer
• Rights of unpaid seller against the buyer are otherwise known as seller’s remedies for breach of
contract of sale. These are in addition to his right against the goods.
Rights of Unpaid Seller against the

Buyer
Suit for Price
Suit for Damages for non-acceptance
Repudiation of Contract before due date
Suit for Interest
4.1 Suit for Price [Section 55]
i) Property has passed to the buyer – Where under a contract of sale, the property in the goods
has passed to the buyer and the buyer wrongfully neglects or refuses to pay for the goods
according to the terms of the contract, the seller may sue him for the price of the goods.
ii) Price payable on a certain day irrespective of delivery – Where under a contract of sale, the
price is payable on a certain day irrespective of delivery and the buyer wrongfully neglects or
refuses to pay such price, the seller may sue him for the price although the property in the
goods has not passed and the goods have not been appropriated to the contract.
4.2 Suit for Damages for Non-acceptance [Section 56]
Where the buyer wrongfully neglects or refuses to

Damages shall be measured in
accept and pay for the goods, the seller may sue him accordance with the provisions of
for damages for non-acceptance. Section 73 of the Indian Contract
Act, 1873.

4.3 Repudiation of contract before due date [Section 60]
Where the buyer repudiates the contract before the date of delivery, the seller may treat the
contract as rescinded and sue for damages for the breach [Rule of Anticipatory Breach of
Contract].
4.4 Suit for Interest [Section 61]
• Where there is specific agreement between the seller and the buyer as to interest on the price
of the goods from the date on which payment becomes due, the seller may recover
interest from the buyer.
• However, in case there is no specific agreement to this effect, the seller may charge interest
on the price when it becomes due from such day as he may notify to the buyer.
• In the absence of a contract to the contrary, the court may award interest to the seller in
a suit by him at such rate as it thinks fit on the amount of the price from the date of tender of
goods or from the date on which the price was payable.
5. Remedies of Buyer Against the Seller
5.1 Breach of contract by seller
The seller breaches a contract of sale, where he –
• Fails to deliver the goods at the time or in the manner prescribed,
Example: Ramesh sells shoes to Suresh on 10th March and agrees to deliver on 12th of March
but fails to send the shoes even till 15th March.
• Repudiates the contract, or
Example: Ramesh sells shoes to Suresh, on 10th March and agrees to deliver on 12th of March
but later decides to sell it to Ravi and delivers the shoes to Ravi on 13th March.
• Delivers non-configuring goods and the buyer rejects and revokes the acceptance of such
goods
Example: Ramesh sells running shoes to Suresh, on 10th March and agrees to deliver on 12th
of March but later delivers normal canvas shoes on 13 th March which Suresh rejects to
accept.

5.2 Rights of the buyer against the seller
Where the seller commits a breach of contract, the buyer gets the following rights against the seller
Rights of the Buyer

Damages for Non-delivery
Suit for Specific Performance
Suit for Breach of Warranty
Suit for Anticipatory Breach
Suit for Interest
–
5.2.1 Damages for Non-delivery [Section 57]
Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer
may sue the seller for damages for non-delivery.
Example : ‘A’, a shoe manufacturer, agreed to sell 100 pairs of shoes to ‘B’ at the rate of ₹1,050/-
per pair. ‘A’ knew that ‘B’ wanted the shoes for the purpose of further reselling them to ‘C’ at the
rate of ₹1,100/- per pair. On the due date of delivery, ‘A’ failed to deliver the shoes to ‘B’. In
consequence, ‘B’ could not perform his contract with 'C’ for the supply of 100 pairs of shoes. In
this case, 'B’ can recover damages from ‘A’ at the rate of ₹ 50/- per pair (the difference between
the contract price and resale price).
[The damages could be recovered based on current market price in case the resale is not done.]
5.2.2 Suit for Specific Performance [Section 58]
Where the seller commits of breach of the contract of sale, the buyer can appeal to the court
for specific performance. This remedy is allowed by the court subject to following conditions –
• The contract must be for the sale of specific and ascertained goods.
• The power of the court to order specific performance is subject to provisions of Specific
Relief Act of 1963.
• Specific performance can be ordered where damages would not be an adequate

remedy.
• It will be granted as remedy if goods are of special nature or are unique.
Example : ‘A’ agreed to sell a rare painting of Mughal period to ‘B’. But on the due date of
delivery, ‘A’ refused to sell the same. In this case, ‘B’ may file a suit against ‘A’ for obtaining an
order from the Court to compel ‘A’ to perform the contract.

5.2.3 Suit for Breach of Warranty [Section 59]
When there is breach of warranty by the seller, or when the buyer elects to treat breach of
condition as breach of warranty, the buyer is prevented from rejecting the goods only on
that basis.
The buyer has two options in that case –
i) Set up against the seller the breach of warranty in diminution or extinction of the price;
or
ii) Sue the seller for damages for breach of warranty.
5.2.4 Repudiation of Contract before due date [Section 60]
When either party to a contract of sale repudiates the contract before the date of delivery the
other party may either –
• Treat the contract as subsisting and wait till the date of delivery, or
• Treat the contract as rescinded and sue for damages for the breach.
5.2.5 Suit for Interest
The Act specifically states that nothing in this Act will affect the right of the seller or the buyer
to recover interest or special damages due to him by the contract.
In the absence of a contract to the contrary, the court may award interest at such rate as it
thinks fit on the amount of the price to the buyer in a suit for the refund of the price in a case
of a breach of the contract on the part of the seller from the date on which the payment was
made.
Example : In case of a sale of cigarettes which turned out to be mildewed and unfit for
consumption, damages were awarded on the basis of the difference between the contract price
and the price released.
Example : In case of absence of transfer of title or registration, the purchaser cannot claim
damages for breach of conditions and warranties relating to sale.
6. Auction Sale [Section 64]
• ‘Auction Sale’ is a mode of selling property by inviting bids publicly and the property is sold to the
highest bidder.

AUCTION
People
Highest
gather and
Sale done bidder gets
bid
publicly the
different
property
prices
• When the Auctioneer sells, he is only the agent of the seller.
• The Auctioneer may also sell his own property as the principal and need not disclose the fact
that he is so selling.
• The rules to regulate the Sale by Auction are as follows –
Goods sold in • Each lot is prima facie deemed to be subject of a

Lots separate contract of sale.
• When the auctioneer announces its completion by

Completion of the fall of the hammer or in any other customary
the Contract manner.
of Sale • Until such announcement is made, a bidder may
retract from his bid.
• The right to bid may be reserved expressly by, or on

Reserving the
behalf of, the seller in which case the seller or any
Right to Bid
one person on his behalf, may bid at the auction.
Sale not • In that case it shall not be lawful for the seller to bid
notified to be himself/employ any person to bid at such sale, or
subject to a for the auctioneer knowingly to take any such bid.
right to bid by • A sale in contravention of this rule shall be treated
the seller as fraudulent by the buyer.
• The sale may be notified to be subject to a reserve

Reserved Price
or upset price
• If the seller makes use of pretended bidding to raise

Pretended
the price, the sale is voidable at the option of the
Bidding
buyer.

Example : P sold a car by auction. It was knocked down to Q who was only allowed to take it away on
giving a cheque for the price and signing an agreement that ownership should not pass until the cheque
was cleared. Meanwhile before the cheque was cleared, Q sold the car to R. It was held that the property
was passed on the fall of the hammer and therefore R had a good title to the car. Both sale and sub-sale
are valid in favour of Q and R respectively.
7. Inclusion of Increased or Decreased Taxes in Contract of Sale [Section 64A]
• This Section deals with the event where any tax is being imposed, increased, decreased, or remitted
in respect of any goods after the making of a contract of sale
• Unless a different intention appears from the terms of the contract, in the event of any tax is being
o imposed,
o increased,
o decreased, or
o remitted
in respect of any goods after the making of any contract for the sale without stipulation / terms
as to the payment of tax [i.e. where tax was not chargeable at the time of the making of the contract]-
(a) if such imposition or increase increases the amount due - the seller may add so much to the
contract price as will be equivalent to the amount paid or payable in respect of such tax or
increase of tax, and he shall be entitled to be paid and to sue for and recover such addition; and
(b) if such decrease or remission decreases the amount due - the buyer may deduct so much
from the contract price as will be equivalent to the decrease of tax or remitted tax, and he shall
not be liable to pay, or be sued for, or in respect of, such deduction.
• The provisions of this section apply to the following taxes, namely;-–
✓ Any duty of customs or excise on goods
✓ Any tax on sale or purchase of goods
• The buyer would have to pay the increased price where the tax increases and may derive the
benefit of reduction if taxes are curtailed.
• The effect of provision can, however, be excluded by an agreement to the contrary. It is open
to the parties to stipulate anything or agree on terms with regard to taxation.

8. Overview
Unpaid Seller [Sec. 45]
Increased or Remedies of
Rights of an Auction Sale
decreased Buyer against
Unpaid Seller [Sec. 64]
taxes [Sec. 64A] the Seller
Against the Against the Damages for Non-

Goods Buyer delivery
[Sec. 57]
Suit for Price

Seller's Lien Suit for Specific
[Sec. 47] [Sec. 55] Performance
[Sec. 58]
Suit for
Right of Damages for
Stoppage in Non- Suit for Breach of
Transit acceptance Warranty
[Sec. 50] [Sec. 56] [Sec. 59]
Right of Re- Repudiation of Repudiation of

sale Contract before Contract before
[Sec. 54] due date due date
[Sec. 60] [Sec. 60]
Suit for Interest

Suit for Interest
[Sec. 61]

CH-3: UNIT 1 – GENERAL NATURE OF PARTNERSHIP
● Concept of Partnerships & its essentials
● ‘Principal – Agent’ relationship among partners
● Distinction with other forms of organization
● Kinds of Partnerships
● Types of Partners
1. Definitions [Section 4]
Partnership Partners and Firm Firm Name
The relation between Persons entering into

persons who have partnership with one
The name under
agreed to share the another are
which the business is
profits of a business individually called as
carried on is called
carried on by all or ‘partners’ and
the ‘Firm name’.
any of them acting collectively called ‘a
for all. firm’.
2. Elements of Partnership
2.1 Association of two or more persons

● Partnership is an association of 2 or more persons.
● Only persons recognized by law can enter into an agreement

The limit on maximum number
of partnership –
of partners is 50 which is put by
o A firm cannot be a partner as it is not recognized as Sec 464 and related rules of the
a person in the eyes of law. Companies Act, 2013
The Partnership Act 1932 is

o A minor cannot be a partner in a firm, but with the
silent in this regard.
consent of all the partners, may be admitted to the
benefits of partnership.
2.2 Agreement
● There must be an agreement entered into by all the persons concerned.
● The nature of the partnership is voluntary and contractual.
● The agreement from which relationship of partnership arises may be express. It may be oral or
in writing.
2.3 Business
Two propositions must be kept in mind –
● Firstly, there must exist a business,
o The term ‘business’ includes every trade, occupation and profession, and
● Secondly, the motive of the business is to earn profits.
Therefore, there can be no partnership where there is no intention to carry on the business
and to share the profit thereof.
Existence of
Business
Acquisition of Gains
2.4 Agreement to Share Profits
● There can be no partnership where only one of the partners is entitled to the whole of the profits
of the business. Partners must agree to share the profits in any manner they choose.
● Agreement to share losses - An agreement to share losses is not an essential element.
o It is open to one or more partners to agree to share all the losses.
o However, in the event of losses, unless agreed otherwise, these must be borne in the
profit-sharing ratio.

2.5 Business carried on by all or any of them acting for all
● The business must be carried on by all the partners or

by anyone or more of the partners acting for all. This is True test of partnership is
the cardinal principle of the Partnership Law. mutual agency rather than
sharing of profits.
● There should be a binding contract of mutual agency
If element of mutual agency is
between the partners.
absent, then there will be no
● An act of one partner in the course of the business of partnership.
the firm is an act of all partners. Each partner carrying
on the business is the principal as well as the agent
for all the other partners.
Case Law: K D Kamath & Co.

The Supreme Court has held that two essential conditions to be satisfied are that:
• There should be an agreement to share the profits as well as the
losses of business and
• Business must be carried on by all or any of them acting for all, within
the meaning of definition of ‘partnership’ u/s 4.
The fact that exclusive power and control, by agreement of the parties, is vested in one
partner or the further circumstance that only one partner can operate bank account or borrow
on behalf of the firm are not destructive of the theory of partnership provided the two
essential conditions are satisfied.
Example : Co-owners who share amongst themselves the rent derived from a piece of land are not
partners, because there does not exist any business.
Example : X and Y buy certain bales of cotton which they agree to ‘Partnership Agreement’ is
sell on their joint account and to share the profits equally. In also known as ‘Partnership
thesecircumstances, X and Y are partners in respect of such cotton Deed’.
business
Existence of a
business
Result of an Agreement to
agreement share profits
Association of 2 Elements of Business carried on

or more persons by all or any of
Partnership
them for all

3. True Test of Partnership [Section 6]
In determining whether a group of persons is or is not a firm, or whether a person is or not a partner in
a firm, regard shall be had to the real relation between the parties.
To determine the existence of partnership, it must be proved that –

✓ The agreement was to share the profits of a business
✓ The business was carried on by all or any of them acting for all
✓ There was an agreement between all the persons concerned.
3.1 Agreement
Partnership is Created by agreement and not by status [Section 5]
Example : The members of a Hindu Undivided family carrying on a family business as such, or a
Burmese Buddhist husband and wife carrying on a business as such are not partners in such
business.
3.2 Sharing of Profit
● The sharing of profits or of gross returns arising from property by persons holding a joint or
common interest in that property does not of itself make such person partners.
● The receipt by a person of a share of the profits of a business, or of a payment contingent

upon the earning of profits or varying with the profits earned by a business, does not of itself
make him a partner with the persons carrying on the business; and in particular, the receipt
of such share or payment-
(a) by a lender of money to persons engaged or about to engage in any business,
(b) by a servant or agent as remuneration,
(c) by a widow or child of a deceased partner, as annuity, or
(d) by a previous owner or part owner of the business, as consideration for the sale of the
goodwill or share thereof,
does not of itself make the receiver a partner with the persons carrying on the business.
Sharing of profit is an essential element to constitute a partnership. But it is only a prima

facie evidence and not conclusive evidence, in that regard.
• To share the profit of a business and the business is being carried on by all or any of them acting
for all, if there is –

Express agreement
No specific agreement
between partners
There is no difficulty in determining For testing the existence or otherwise

the existence or otherwise of of partnership relation, Sec 6 has to be
partnership. referred.
● According to Section 6, regard must be had to the real relation between the parties as shown
by all relevant facts taken together.
● Cumulative effect of all relevant facts such as written or verbal agreement, real intention and
conduct of the parties, other surrounding circumstances etc., are to be considered while
deciding the relationship between the parties and ascertaining the existence of
partnership.
3.3 Agency
● Each partner carrying on the business is the principal as well as an agent of other
partners. So, the act of one partner done on behalf of firm, binds all the partners.
● If the elements of mutual agency relationship exist between the parties constituting a group
formed with a view to earn profits by running a business, a partnership may be deemed
to exist.
Case Law: Santiranjan Das Gupta Vs. Dasyran Murzamull (SC)
In this case, the following factors weighed upon the Supreme Court to reach the conclusion that
there is no partnership between the parties:
➔ Parties have not retained any record of terms and conditions of partnership.
➔ Partnership business has maintained no accounts of its own, which would
be open to inspection by both parties.
➔ No account of the partnership was opened with any bank.
➔ No written intimation was conveyed to the Deputy Director of Procurement
with respect to the newly created partnership.
4. Partnership Distinguished from Other Forms of Organisation
4.1 Partnership Vs. Joint Stock Company
Basis Partnership Joint Stock Company

Legal status No legal personality distinct its Separate legal entity distinct from
constituent members. its members
Agency Every partner is an agent of the A member is not an agent of the

other partners as well as of the other members or of the company.
firm.
Distribution of Distributed among the partners There is no such compulsion to

profits according to terms of partnership distribute its profits among its
deed. members.
Extent of liability Liability of the partners is Limited liability – limited by shares

unlimited. or limited by guarantee.
Property The firm’s property is the ‘joint In a company, its property is

estate’ of all the partners. separate from that of its members.
Transfer of shares A share in a partnership cannot be Unrestricted in case of public

transferred without the consent of companies. In private companies, it
all the partners. shall be subject to provisions
contained in the Articles.
Management In the absence of express Members are not entitled to take

agreement to contrary, all partners part in management unless they are
are entitled to appointed as directors. They,
however,
participate in management
enjoy right of attending general
meeting and voting where they can
decide questions such as election of
directors, appointment of auditors,
etc.
Registration Not compulsory Comes into existence only after it is

registered under the Companies
Act, 2013.
Winding up Can be dissolved at any time if all Either wound up by the NCLT or its
the partners agree. name is struck off by the ROC.

Number of Restricted by the Companies Act, Public Co. – May have any number
members 2013 and Rules thereon to 50. of members but not less than 2.
Private Co. – Minimum 2 members

and maximum 200. Can also be
formed as One Person Company.
Duration of Death, retirement, or insolvency of Perpetual succession

existence a partner results in the dissolution
of the firm.
4.2 Partnership Vs. Club
Basis Partnership Club
Definition An association of persons formed for An association of persons formed

earning profits from a business with the object of promoting some
carried on by all or any one of them beneficial purposes, and not for
acting for all. earning profit.
Relationship A partner of a firm is an agent for A member of a club is not agent of

other partners. other members.
Interest in the Partner has interest in the property A member of club has no interest in
property of the firm. property of club.
Dissolution A change in partners of the firm A change in membership of a club

affect its existence. does not affect its existence.
4.3 Partnership vs. Hindu Undivided Family
Basis Partnership Hindu Undivided Family
Mode of creation By an agreement. Right in business is created by birth

in the family.
Death of a Leads to the dissolution of Does not give rise to dissolution of

member partnership. the family business.
Management All the partners are equally entitled The right of management of joint
to take part in the partnership family business generally vests in the
business. Karta.

Authority to bind Every partner can, by his act, bind the Karta or manager, has the authority
firm. to contract for the family business
and the other members.
Liability The liability of a partner is unlimited. Only the liability of Karta is unlimited,
and other coparceners are liable only
to extent of their share in profits of
family business.
Calling for A partner can bring a suit against On separation of the joint family, a
accounts on firm for accounts, provided he also member is not entitled to ask for the
closure seeks the dissolution of the firm. account of family business.
Governing Law Indian Partnership Act, 1932 The Hindu Law.
Minor’s capacity A minor cannot become a partner, A minor becomes a member of the
though he can be admitted to ancestral business by the incidence
benefits of partnership. of birth.
Continuity A firm gets dissolved by death or A Joint Hindu family has continuity till
insolvency of a partner. it is divided.
Number of Should not exceed 50. Members may be unlimited in

Members number.
Share in the Each partner has a defined share by In a HUF, no coparceners have a
business agreement between the partners. definite share. The share fluctuate.
4.4 Partnership Vs. Co-Ownership or joint ownership
Co-Ownership or joint ownership is the relation which subsists between persons who own property
jointly or in common.
Basis Partnership Co-Ownership
Formation Partnership always arises out of a Co-ownership may arise either from
contract, express or implied. agreement or by the operation of
law, such as by inheritance.
Implied agency A partner is the agent of the other A co-owner is not the agent of other
partners. co-owners.

Nature of There is a community of interest Co-ownership does not necessarily
interest which means that profits and losses involve sharing of profits and losses.
must have to be shared.
Transfer of A share in the partnership is A co-owner may transfer his

interest transferred only by the consent of interest/ rights in property without
other partners. consent of other co-owners.
4.5 Partnership vs. Association
Partnership Association
Partnership means and involves setting up Association evolves out of social cause where
relation of agency between two or more there is not necessarily a motive to earn and
persons who have entered into a business share profits. The intention is not to enter in a
for gains, with the intention to share profits business for gains.
of such a business.
5. Kinds of Partnerships
5.1 Various kinds of Partnership
With regard to duration With regard to the extent of

Business
Partnership at Will Particular Partnership

Partnership for a Fixed Period General Partnership
5.1.1 Partnership at will [Section 7]
● Partnership at will is a partnership when –
a) No fixed period has been agreed upon for the duration of the partnership, and
b) There is no provision made as to the determination of the partnership duration.
● Where a partnership entered into for a fixed term is continued after the expiry of such
term, it is to be treated as having become a partnership at will.
● A partnership at will may be dissolved by any partner by giving notice in writing to all the
other partners of his intention to dissolve the same.
5.1.2 Partnership for a fixed period

● Where a provision is made by a contract for the duration of the partnership, the
partnership is called ‘partnership for a fixed period’.
● Such a partnership comes to an end on the expiry of the fixed period.
5.1.3 Particular partnership
● Where a person becomes a partner with another person in any particular adventure or
undertaking, the partnership is called ‘particular partnership’.
● Particular partnership is, subject to any agreement, dissolved by the completion of the
adventure or undertaking.
5.1.4 General partnership
● Where a partnership is constituted with respect to the business in general, it is called a

general partnership.
● Unlike a particular partnership in a general partnership the scope of business to be carried

out is not defined. So, all partners will be liable for all the actions of the partnership.
5.2 Partnership Deed
● No particular formalities are required for a partnership agreement.
● It may be in writing or formed verbally
● The document in writing containing the various terms and conditions as to the
relationship of the partners to each other is called the ‘partnership deed’.
● Where the partnership comprises immovable property, the instrument of partnership must be
in writing, stamped and registered under the Registration Act.
Partnership deed should be drafted with care and be stamped according to the provisions
of the Stamp Act, 1899.

Contents of a Partnership Deed
• Name of the Partnership Firm.

• Names of all the partners.
• Nature and place of business of the firm.
• Date of Commencement of partnership.
• Duration of the partnership firm.
• Capital contribution of each partner.
• Profit sharing ratio of the partners.
• Admission and retirement of a partner.
• Rates of Interest on capital, drawings and loans.
• Provisions for settlement of accounts in the case of dissolution of
the firm.
• Provisions for salaries or commissions, payable to the partners
• Provisions for expulsion of a partner in case of breach of duty or
fraud.
Partnership firm may add or delete any provision according to needs of the firm.
6. Types of Partners
Active or Partner in Profits

Incoming
Ostensible only
Sleeping or Partner by
Nominal
Dormant holding out
Sub-partner Outgoing
6.1 Active or Actual or Ostensible partner
● It is a person who has become a partner by agreement, and who actively participates in the
conduct of the partnership.
● In the event of his retirement, he must give a public notice in order to absolve himself of liabilities
for acts of other partners done after his retirement.
6.2 Sleeping or Dormant Partner
● It is a person who is a partner by agreement, and who does not actively take part in the
conduct of the partnership business.

● They share profits and losses and are liable to the third parties for all acts of the firm. They are,
however not required to give public notice of their retirement from the firm.
6.3 Nominal Partner
● A person who lends his name to the firm, without having any real interest in it, is called a
nominal partner.
● He is not entitled to share the profits of the firm.
● He does not take part in the conduct of the business.
● He is, however, liable to third parties for all acts of the firm.
6.4 Partner in profits only
A partner who is entitled to share the profits only without being liable for the losses is known
as the partner for profits only and also liable to the third parties for all acts of the profits only.
6.5 Incoming partners
● A person who is admitted as a partner into an already existing firm with the consent of all
the existing partners is called an “incoming partner”.
● Such a partner is not liable for any act of the firm done before his admission as a partner.
6.6 Outgoing partner
● A partner who leaves a firm in which the rest of the partners continue to carry on business is
called a retiring or outgoing partner.
● Such a partner remains liable to third parties for all acts of the firm until public notice is
given of his retirement.
6.7 Partner by holding out [Section 28]
● Where a man holds (represents) himself out as a

partner, or allows others to do it, he is then stopped The rule given in Section 28 is
from denying the character he has assumed and upon also applicable to a former
the faith of which creditors may be presumed to have partner who has retired from
acted. the firm without giving proper
public notice of his retirement.
● Partnership by holding out is also known as partnership
by estoppel.
Example : X and Y are partners in a partnership firm. X

introduced A, a manager, as his partner to Z. A remained silent. Z, a trader believing A as a partner
supplied 100 TV sets to the firm on credit. After the expiry of the credit period, Z did not get the
amount of TV sets sold to the partnership firm. Z filed a suit against X and A for the recovery of

price. Here, in the given case, A, the Manager is also liable for the price because he becomes a
partner by holding out.
● It is only the person to whom the representation has been made and who has acted
thereon that has right to enforce liability arising out of ‘holding out’.
Example : A partnership firm consisting of P, Q, R and S. S retires from the firm without giving
public notice and his name continues to be used on letterheads. Here, S is liable as a partner by
holding out to creditors who have lent on the faith of his being a partner.
• For fixing liability on a person who has, by representation, led another to act, it is not
necessary to show that he was actuated by a fraudulent intention.
7. Overview
Partnership
What is Distinction with Kinds of Types of

Partnership other forms of Partnerships Partners
Organisation
Essential True Test of Active

Partnership at
Elements Partnership Vs. Joint Stock will
Company
Sleeping
Association of two or
more persons Partnership for
Vs. Club a fixed period
Nominal
Agreement
Vs. HUF Particular
partnership Partner in
profits only
Business
Vs. Co-ownership
General
Partnership Incoming
Agreement to share
profits
Vs. Association
Outgoing
Business carried on by
all or any of them for
all Partner by
holding out

CH-3: UNIT 2 – RELATIONS OF PARTNERS
• Relations of Partners to one another and with Third Parties
• Implied Authority of a Partner
• Situations – Change in the constitution of a Firm and its effects
• Rights and Obligations of Transferee of a Partners’ Share
1. Relation of Partners to One Another
1.1 General Duties of Partners [Section 9]
• To carry on the business of the firm to the greatest common advantage of the firm and its
partners.
• To observe utmost good faith in his dealings with the other partners.
• To render to any partner or his legal representatives full information of all things affecting
the firm.
Where some of the accounts are kept by one of the partners, prima facie he would be
the proper person to explain and give full information about them.
Example : In a transaction between partners for the sale and purchase of a share in the business,
if one of them is better acquainted with the accounts than the other, it is his duty to disclose all
material facts.
1.2 Duty to Indemnify for Loss caused by Fraud [Section 10]
Every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the
business of the firm. The amount so brought in the partnership should be divided between the
partners.
An act of a partner imputable (i.e., chargeable) to the firm or the principles of agency, which
is a fraud on his co-partners, entitles the co-partners as between themselves, to make the partner
responsible for consequences.
1.3 Determination of Rights and Duties of Partners by Contract between the Partners [Section
11]
• The rights and duties of the partners may be determined by contract between the partners,
whether express or implied.

• Such contract may be varied by consent of all the partners, which may also be express or
implied.
• Agreements in restraint of trade – The contract of partnership may provide that a partner
shall not carry on any business other than that of the firm while he is a partner.
1.4 The Conduct of the Business [Section 12]
Rights of the Partners in relation to Conduct of the Business
Every partner has the right to take part in the conduct of the
business
Every partner is bound to attend diligently to his duties in the
conduct of the business
Every partner has the right to express opinion on difference
arising as to ordinary matters
Every partner has the right to have access to and inspect the
books of the firm
In the event of death of any partners, legal representative or
heir or authorised agents shall have right to access and inspect
the books.
1.4.1 Right to take part in the conduct of the Business [Section 12(a)]
Every partner has the right to take part in the business of the firm, provided there is no contract
to the contrary between the partners.
In case of partnership agreements which
• gives only limited power of management to a partner Partnership business is a

or business of the partners,
and their management
• contains a term that the management of the powers are generally co-
partnership will remain with one or more of the extensive.
partners to the exclusion of others,
the Court will normally be unwilling to intervene in the

management with such partner or partners, unless it is clearly made out that something was
done illegally or in breach of the trust reposed in such partners.

1.4.2 Right to be consulted [section 12(c)]
• Where any difference arises between the partners with

regard to the business of the firm, it shall be determined by In routine matters, the
the views of the majority of them, and every partner shall opinion of the majority of
have the right to express his opinion before the matter is the partners will prevail.
decided.
• However, no change in the nature of the business of the

firm can be made without the consent of all the partners. In such a case, the unanimous
consent of the partners is needed.
1.4.3 Right of access to books [Section 12 (d)]
Every partner whether active or sleeping is entitled to have access to any of the books of the
firm and to inspect and to copy any of the books thereof.
The right must, however, be exercised bona fide.
1.4.4 Right of legal heirs/ representatives/ their duly authorised agents [Section 12(e)]
In the event of the death of a partner, his heirs or legal representatives or their duly authorised
agents shall have a right of access to and to inspect and copy any of the books of the firm.
1.5 Mutual Rights and Liabilities [Section 13]
Right to
Right to receive Right to be
Remuneration Interest on Indemnified
Capital
Right to
Right to
Right to Share receive
Indemnify the
Profits Interest on
Firm
Advances

1.5.1 Right to remuneration [Section 13(a)]
• No partner is entitled to receive any remuneration

Where it is customary to pay
in addition to his share in the profits of the firm for
remuneration to a partner for
taking part in the business of the firm.
conducting the business of the
• However, this rule can always be varied by an firm he can claim it even in the
express agreement, or by a course of dealings, in absence of a contract for the
payment of the same.
which event the partner will be entitled to remuneration.
1.5.2 Right to share Profits [Section 13 (b)]
Partners are entitled to share in the profits earned and so also to contribute to the losses
sustained by the firm.
The amount of a partner’s share must be

ascertained by enquiring whether there is any
There is no connection between the
agreement in that behalf between the partners. proportion in which the partners shall
share the profits and the proportion
The profits and losses are shared equally in absence of
in which they have contributed
an agreement.
towards the capital of the firm.
1.5.3 Interest on Capital [Section 13 (c)]
The partners of a firm shall be entitled to interest on

moneys brought by him in the partnership business, provided, there is –
a) An express agreement to that effect, or practice of the particular partnership or
b) Any trade custom to that effect; or
c) A statutory provision which entitles him to such interest.
In the absence of any agreement, no interest on capital is payable.
1.5.4 Interest on advances [Section 13 (d)]
Where a partner makes an advance to the firm in addition to the amount of capital to be
contributed by him, he shall be entitled to claim interest thereon @ 6% per annum, unless
agreed otherwise.
Interest on capital account ceases to run on dissolution, whereas, the interest on advances keep
running even after dissolution and up to the date of payment.
1.5.5 Right to be indemnified [Section 13 (e)]
Every partner has the right to be indemnified by the firm in respect of –

a) Payments made and liabilities incurred by him in the ordinary and proper conduct
of the business of the firm, and also
b) Payment made in the performance of an act in an emergency for protecting the firm
from any loss, if the payments, liability, and act are such as a prudent man would make,
incur, or perform in his own case, under similar circumstances.
1.5.6 Right to indemnify the firm [Section 13 (f)]
A partner must indemnify the firm for any loss caused to it by wilful neglect in the conduct of
the business of the firm.
2. Partnership Property
2.1 The Property of the Firm [Section 14]
• The property of the firm, in the absence of any agreement

Property of the firm is also
between the partners showing contrary intention, is referred to as ‘partnership
comprised of the following items: property’, ‘partnership assets’,
‘joint stock’, ‘common stock’ or
i. All property, rights, and interests which partners
‘joint estate’.
may have brought into the common stock as their
contribution to the common business,
ii. All the property, rights and interest acquired or purchased by or for the firm, or for
the purposes and in the course of the business of the firm, and
iii. Goodwill of the business.
• The determination of the question whether a particular property is or is not ‘property’ of

the firm ultimately depends on the real intention or agreement of the partners.
Mere fact that property of a partner is being used for purposes of the firm shall not by
itself make it partnership property, unless it is intended to be treated as such.
• Partners may, by an agreement at any time, convert the

property of any partner or partners or the separate property Such conversion, if made in
of any partner into a partnership property. good faith, would be
effectual between partners
• Goodwill –
and against creditors of firm.
o Defined as value of the reputation of a business house
in respect of profits expected in future over and above
normal level of profits earned by undertaking belonging to the same class of business.
o Goodwill is a part of the property of the firm.

o It can be sold separately or along with the other properties of the firm.
o Any partner may upon the sale of the goodwill of a firm, make an agreement with the
buyer that such partner will not carry on any business similar to that of the firm within a
specified period or within specified local limits.
2.2 Application of the Property of the Firm [Section 15]
Subject to contract between partners, the property of the firm shall be held and used exclusively
for the purpose of the firm.
During the subsistence of the partnership, a particular partner does not have any proprietary
interest in the assets of the firm.
3. Personal Profit Earned by Partners [Section 16]
1) Where a partner derives any profit for himself from any transaction of the firm or from the use
of the property or business connection of the firm or firm name, he must account for that profit
and pay it to the firm. This rule, however, is subject to a contract between partners.
Example : A, B, C & D established partnership business for refining sugar. A, who was himself a
wholesale grocer, was entrusted with the work of selection and purchase of sugar. As a wholesale
grocer, A was well aware of the variations in the sugar market and had the suitable sense of propriety
as regards purchases of sugar. He had already in stock sugar purchased at a low price which he sold
to the firm when it needed some, without informing the partners that the sugar sold had belonged
to him. It was held that A was bound to account to the firm for the profit so made by him.
2) Where a partner carries on a competing business, he must account for and pay to the firm all
profits made by him in that business. This rule is also subject to a contract between the partners.
Example : A, B, C and D started a business in partnership for importing salt from foreign ports and
selling it at Chittagong. A struck certain transactions in salt on his own account, which were found to
be of the same nature as the business carried on by the partnership. It was held that A was liable to
account to the firm for profits of the business so made by him.
4. Rights and Duties of Partners after a Change in the Constitution of the Firm [Section 17]
The constitution of a firm changes in the following four ways –

A new partner(s) Some partner(s)
comes in goes out
Carries out a Carries on

different business business after the
that which it was expiry of its fixed
originally formed term
for
• Where a change occurs in the constitution of a firm, the

mutual rights and duties of the partners in the These are subject to contract
reconstituted firm remain the same as they were between partners.
immediately before the change.
• Where a firm constituted for a fixed term continues to carry on business after the expiry of
that term, the mutual rights and duties of the partners remain the same as they were before the
expiry.
• Where a firm constituted to carry out one or more adventures or undertakings carries out other
adventures or undertakings, the mutual rights and duties of the partners are the same as
those in respect of the original adventures or undertakings.
5. Relation of Partners to Third Parties
5.1 Partner to be Agent of the Firm [Section 18]
Subject to the provisions of the Act, a partner is the agent of the firm for the purpose of the
business of the firm.
The rule that a partner is the agent of the firm for the purpose of the business of the firm cannot
be applied to all transactions and dealings between the partners themselves. It is applicable only
to the act done by partners for the purpose of the business of the firm.
5.2 Implied Authority of Partner as Agent of the Firm [Section 19]
• Subject to the provisions of section 22, the act of a partner which is done to carry on, in the
usual way, business of the kind carried on by the firm, binds the firm. The authority of a
partner to bind the firm conferred by this section is called his “implied authority”.
• Section 22: In order to bind a firm, an act or instrument done or executed by a partner or other
person on behalf of the firm shall be done or executed in the firm name, or in any other
manner expressing or implying an intention to bind the firm

Sec 19(2): In the absence of any usage or custom of trade to the
contrary, the implied authority of a partner does not empower
him to –
Submit a dispute relating to the business of the firm to
arbitration,
Open a banking account on behalf of the firm in his own name,
Compromise or relinquish any claim or portion of a claim by
the firm,
Withdraw a suit or proceedings filed on behalf of the firm,
Admit any liability in a suit or proceedings against the firm,
Acquire immovable property on behalf of the firm,
Transfer immovable property belonging to the firm, and
Enter into partnership on behalf of the firm.
Example : X, a partner in a firm of solicitors, borrows money and executes a promissory note in
the name of firm without authority. The other partners are not liable on the note, as it is not part
of the ordinary business of a solicitor to draw, accept, or endorse negotiable instruments.
• If partnership be of a general commercial nature, any partner may
o Pledge or sell the partnership property,
o Buy goods on account of the partnership,
o Borrow money, contract debts and pay debts on account of the partnership,
o Draw, make, sign, endorse, transfer, negotiate and procure to be discounted,

Promissory notes, bills of exchange, cheques and other negotiable papers in the
name and on account of the partnership.
5.3 Extension and Restriction of Partners’ Implied Authority [Section 20]
• The implied authority of a partner may be extended or restricted by contract between

the partners.
• Under the following conditions, restrictions imposed on the implied authority of a partner by
agreement shall be effective against third party –
o The third party knows about the restrictions, and
o The third party does not know that he is dealing with a partner in a firm.
• However, such extension or restriction is only possible with the consent of all the partners.
Any one partner, or even a majority of the partners, cannot restrict or extend the implied
authority.

Example : A, a partner, borrows from B ₹1,000 in the name of the firm but in excess of his authority,
and utilizes the same in paying off the debts of the firm. Here, the fact that the firm has contracted
debts suggests that it is a trading firm, and as such it is within the implied authority of A to borrow
money for the business of the firm. This implied authority, as you have noticed, may be restricted
by an agreement between him and other partners. Now if B, the lender, is unaware of this restriction
imposed on A, the firm will be liable to repay the money to B. On the contrary, B’s awareness as to
this restriction will absolve the firm of its liability to repay the amount to B.
5.4 Partner’s Authority in an Emergency [Section 21]
In case of an emergency, a partner has authority to do all such acts for the purpose of protecting
the firm from loss as would be done by a person of ordinary prudence, in his own case, acting
under similar circumstances, and such acts bind the firm.
6. Effect of Admissions by a Partner [Section 23]
• An admission or representation made by a partner concerning the affairs of the firm is evidence
against the firm if it is made in the ordinary course of business.
• However, an admission or representation by a partner will not bind the firm if his authority on the
point is limited and the other party knows of the restriction.
Example : X and Y are partners in a firm dealing in spare parts of different brands of motorcycle
bikes. Z purchases a spare part for his Yamaha motorcycle after being told by X that the spare part
is suitable for his motorcycle. Y is ignorant about this transaction. The spare part proves to be
unsuitable for the motorcycle and it is damaged. X and Y both are responsible to Z for his loss.
7. Effect of Notice to Acting Partner [Section 24]
• Notice to a partner who habitually acts in the business of the firm of any matter relating to the
affairs of the firm operates as notice to the firm.
• The only exception is in the case of a fraud on the firm committed by or with the consent of
that partner.
Example : P, Q, and R are partners in a business for the purchase and sale of second-hand goods. R
purchases a second-hand car on behalf of the firm from S. In the course of dealings with S, he comes
to know that the car is a stolen one and it actually belongs to X. P and Q are ignorant about it. All the
partners are liable to X, the real owner.
Example : A, a partner who actively participates in the management of the business of the firm,
bought for his firm, certain goods, while he knew of a particular defect in the goods. His knowledge
as regards the defect, ordinarily, would be construed as the knowledge of the firm, though the other
partners in fact were not aware of the defect. But because A had, in league with his seller, conspired
to conceal the defect from the other partners, the rule would be inoperative and the other partners
would be entitled to reject the goods, upon detection by them of the defect.

Received
Relates to
Actual by Notice to
firm's
Notice Working the Firm
business
partner
8. Liability to Third Parties
8.1 Liability of a Partner for acts of the Firm [Section 25]
• Every partner is liable, jointly with all the other partners and also severally, for all acts of the
firm done while he is a partner.
• The expression ‘act of firm’ connotes any act or omission by all the partners or by any
partner or agent of the firm, which gives rise to a right enforceable by or against the firm.
To bring a case under Section 25, it is necessary that the act of the firm, in respect of which
liability is brought to be enforced against a party, must have been done while he was a
partner.
Example : Certain persons were found to have been partners in a firm when the acts
constituting an infringement of a trademark by the firm took place, it was held that they were
liable for damages arising out of the alleged infringement, it being immaterial that the damages
arose after the dissolution of the firm.
8.2 Liability of the Firm for Wrongful Acts of a Partner [Section 26]
The firm is liable to the same extent as the partner for any loss or injury caused to a third party
by the wrongful acts of a partner, if they are done by the partner while acting –
• in the ordinary course of the business of the firm, or

If act fall within these 2
• with the authority of the partners. categories, fact that method
employed by partner in
Furthermore, all the partners in a firm are liable to a third party doing it was
for loss or injury caused to him by the negligent act of a partner unauthorized/wrongful,
acting in the ordinary course of the business. doesn’t matter.
Example : One of the two partners in coal mine who acted as a

manager was guilty of personal negligence in omitting to have the shaft of the mine properly fenced.
As a result thereof, an injury was caused to a workman. The other partner was also held responsible
for the same.

8.3 Liability of Firm for Misapplication by Partners [Section 27]
• Where-
a) a partner acting within his apparent authority receives money or property from a
third party and misapplies it, or
b) a firm in the course of its business receives money or property from a third party, and
the money or property is misapplied by any of the partners while it is in the custody of
the firm,
the firm is liable to make good the loss.
• If receipt of money by one partner is not within the scope of his apparent authority, his
receipt cannot be regarded as a receipt by the firm and the other partners will not be liable,
unless the money received comes into their possession or under their control.
Example : A, B, and C are partners of a place for car parking. P stands his car in the parking place,
but A sold out the car to a stranger. For this loss, the firm is liable for the acts of A.
9. Rights of Transferee of a Partner’s Interest [Section 29]
A share in a partnership is transferable like any other property, but as the partnership relationship is
based on mutual confidence, the assignee of a partner’s interest by sale, mortgage or otherwise
cannot enjoy the same rights and privileges as the original partner.
The rights of such a transferee are as follows –
• The transferee is not entitled to - interfere

with the conduct of the business, or to require
During the accounts, or to inspect books of the firm.
Continuance of
• Only entitled to receive the share of the profits
Partnership
of the transferring partner.
• He cannot challenge the accounts.
On Dissolution of
• Entitled to receive the share of the assets of
the firm/
the firm, and
Retirement of
• for this purpose, to an account as from the
transferring
date of the dissolution.
partner

A partner cannot by transferring his own interest, make anybody else a partner in his place,
unless the other partners agree to accept that person as a partner.
10. Minors Admitted to the Benefits of Partnership [Section 30]
A minor cannot become a partner in a firm; however, he can be admitted to the benefits of
partnership under Section 30 of the Act, with the consent of all the partners for the time being.
In such a case, the rights and liabilities of a minnow are as follows –
10.1 Rights of the Minor
i) A minor partner has a right to his agreed share of the profits and of the firm.
ii) He can have access to, inspect and copy the accounts of the firm.
iii) He can sue the partners for accounts or for payment of his share but only when severing
his connection with the firm, and not otherwise.
iv) On attaining majority he may within 6 months elect to become a partner or not to
become a partner.
• If he elects to become a partner, then he is entitled to the share to which he was entitled
as a minor.
• If he does not, then his share is not liable for any acts of the firm after the date of the
public notice served to that effect.
Right to Right to elect

Right to access, to become
share of inspect and Right to sue partner on
profits copy the attaining
accounts majority
10.2 Liabilities of the Minor
• Before attaining majority –
o Liability is confined only to the extent of his share in the profits and the property
of the firm.
o Minor has no personal liability for the debts of the firm incurred during his minority.
o Minor cannot be declared insolvent, but if the firm is declared insolvent his share in
the firm vests in the Official Receiver/Assignee.

• After attaining majority –
o When he becomes partner –

i) He becomes personally liable to third parties for all acts of the firm done
since he was admitted to the benefits of partnership.
ii) His share in the property and the profits of the firm remains the same to
which he was entitled as a minor.
o When he elects not to become a partner –

Where he has elected not to become partner he shall give public notice that he has
elected not to become partner and such notice shall determine his position as regards
the firm. If he fails to give such notice he shall become a partner in the firm on the
expiry of the said 6 months.
i) His rights and liabilities continue to be those of a minor up to the date of

giving public notice.
ii) His share shall not be liable for any acts of the firm done after the date of
the notice.
iii) He shall be entitled to sue the partners for his share of the property and
profits.
Confined to the extent of his

share in the profit
Before attaining
No personal liability for debts of
majority
Liabilities of the minor
the firm
Cannot be declared insolvent
Becomes personally liable to

third parties
Elects to be
partner
Share in profits and
property remains the same
After attaining
majority
Not liable for the acts of the
firm
Elects not to be
partner
Entitled to sue the partners

11. Legal Consequences of Partner Coming In and Going Out
11.1 Introduction of a Partner [Section 31]
• Subject to a contract between partners and to the provisions regarding minors, no person
shall be introduced as a partner into a firm without the consent of all the existing
partners.
• Rights and liabilities of new partner –
o The liabilities of the new partner ordinarily commence from the date when he is
admitted as a partner, unless he agrees to be liable for obligations incurred by the
firm prior to the date.
o The new firm, including the new partner who joins it, may
agree to assume liability for the existing debts of the
old firm, and creditors may agree to accept the new
firm as their debtor and discharge the old partners. The The technical term in a
contract for substituted
creditor’s consent is necessary in every case to make
liability is Novation.
the transaction operative.
[refer chapter 1]
o An agreement between the partners and the
incoming partner that he shall be liable for existing
debts will not ipso facto give creditors of the firm any
right against him.
This section does not apply to a partnership of two partners which is automatically dissolved by
the death of one of them.
11.2 Retirement of a Partner [Section 32]
• A partner is said to retire when he ceases to be a member of the firm without bringing to an
end the subsisting relations between the other members, or between the firm and third
parties.
• Retirement of a partner from a firm does not dissolve it.
A partner may retire

With the consent of In accordance with In case of Partnership at Will -
all the other parties, express agreement by giving notice in writing of
or by the partners, or all the other partners
Example: Mere retirement of a partner, who was the tenant of the premises in which the
partnership business was carried out, would not result in assignment of the tenancy rights in

favour of the remaining partners even though the retiring partner ceases to have any right, title
or interest in the business as such.
Case Law: Vishnu Chandra Vs. Chandrika Prasad (SC)
The Supreme Court held that the expression ‘if any partner wants to dissociate from the partnership
business’, in a clause of the partnership deed which was being construed, comprehends a situation where
a partner wants to retire from the partnership. The expression clearly indicated that in the event of
retirement, the partnership business will not come to an end.
• Liabilities of an outgoing partner –
▪ A retiring partner continues to be liable to third party for acts of the firm after his
retirement until public notice of his retirement has been given either by himself or by
any other partner.
▪ But the retired partner will not be liable to any third party if the latter deals with the firm
without knowing that the former was partner.
▪ As regards the liability for acts of the firm done before his retirement, the retiring
partner remains liable for the same, unless there is an agreement made by him with
the third party concerned and the partners of the reconstituted firm. Such an
agreement may be implied by a course of dealings between the third party and the
reconstituted firm after he had knowledge of the retirement.
• If the partnership is at will, the partner by giving notice in writing to all the other
partners of his intention to retire will be deemed to be relieved as a partner without giving
a public notice to this effect.
11.3 Expulsion of a Partner [Section 33]
The expulsion is not deemed to be in bona fide interest of the business of the firm, unless all
the following conditions are present –
• The power of expulsion must have existed in a contract

between the partners, If a partner is
otherwise expelled,
• The power has been exercised by a majority of the
the expulsion is null
partners, and
and void.
• It has been exercised in good faith.
The test of good faith as required u/s 33(1) includes 3 things –

Expulsion is in the He is given an
Partner to be expelled
interest of the opportunity of being
is served with a notice
partnership heard
The expulsion of partners does not necessarily result in dissolution of the firm. The invalid
expulsion of a partner does not put an end to the partnership even if the partnership is at will
and it will be deemed to continue as before.
Example : A, B and C are partners in a Partnership firm. They were carrying their business successfully
for the past several years. Spouses of A and B fought in ladies club on their personal issue and A’s
wife was hurt badly. A got angry on the incident and he convinced C to expel B from their partnership
firm. B was expelled from partnership without any notice from A and C. According to the test of good
faith as required u/s 33(1), expulsion of Partner B is not valid.
The provisions of Section 32(2), 32(3), 32(4) shall apply to an expelled partner as if he were a
retired partner.
11.4 Insolvency of a Partner [Section 34]
• Where a partner in a firm is adjudicated as an insolvent he ceases to be a partner on the

date on which the order of adjudication is made, whether or not the firm is hereby
dissolved.
• Ordinarily, but not invariably, the insolvency of a partner results in dissolution of a firm,
but the partners are competent to agree among themselves that the adjudication of a
partner as an insolvent will not give rise to dissolution of the firm.
• The estate of such partner (which thereupon vests in the official assignee) ceases to be
liable for any act of the firm done after the date of the order.
• The firm also is not liable for any act of such a partner after such date.

11.5 Liability of Estate of Deceased Partner [Section 35]
Ordinarily, the effect of the death of a partner is the dissolution of the partnership, but the
partners are competent to agree that the death of one will not have the effect of dissolving
the partnership as regards the surviving partners unless the firm consists of only two partners.
Where under a contract between the partners, the firm is not dissolved by the death of a partner,
the estate of a deceased partner is not liable for any act of the firm done after his death. It
is not necessary to give any notice either to the public or the persons having dealings with the
firm.
Example : X was a partner in a firm. The firm ordered goods in X’s lifetime; but the delivery of the
goods was made after X’s death. In such a case, X’s estate would not be liable for the debt; a
creditor can have only a personal decree against the surviving partners and a decree against the
partnership assets in the hands of those partners. A suit for goods sold and delivered would not
lie against the representatives of the deceased partner. This is because there was no debt due in
respect of the goods in X’s lifetime.
12. Rights of Outgoing Partner to carry on Competing Business [Section 36]
• An outgoing partner may carry on business competing with that of the firm and he may advertise
such business.
• However, he may not –
o use the firm name,
o represent himself as carrying on the business of the firm or
o solicit the custom of persons who were dealing with the firm before he ceased to be a partner.
• The partner may agree with his partners that on his ceasing to be so, he will not carry on a
business similar to that of the firm within a specified period or within specified local limits.
Such an agreement will not be in restraint of trade if the restraint is reasonable.
13. Right of Outgoing Partner in certain cases to Share Subsequent Profits [Section 37]
• Where any person ceases to be a partner because of his death or retirement, and the other partners
continue the business of the firm without final settlement of accounts, in such a situation the
outgoing partner or his representatives are entitled to either –
i) Share in the profits of the firm made since he ceased to be a partner as attributable to the use
of his share of property of the firm, or
ii) Interest at the rate of 6% per annum on the amount of his share in the property of the firm.
• Where, by a contract between the partners, an option is given to surviving or continuing partners
to purchase the interest of a deceased or outgoing partner, and that option is duly exercised,
the estate of the deceased partner/ outgoing partner/ his estate, is not entitled to any further
or other share of profits.

Example : A, B and C are partners in a manufacture of machinery. A is entitled to three-eighths of
the partnership property and profits. A becomes bankrupt whereas B and C continue the business
without paying out A’s share of the partnership assets or settling accounts with his estate. In this
case, A’s estate is entitled to three-eighths of the profits made in the business, from the date of his
bankruptcy until the final liquidation of the partnership affairs.
Example : A, B and C are partners. C retires after selling his share in the partnership firm. A and B
fail to pay the value of the share to C as agreed to. The value of the share of C on the date of his
retirement from the firm would be pure debt from the date on which he ceased to be a partner as
per the agreement entered between the parties. C is entitled to recover the same with interest.
14. Revocation of Continuing Guarantee by Change in Firm [Section 38]
Mere changes in the constitution of the firm, in the absence of an agreement to the contrary,
operates to revoke a continuing guarantee given to a firm or a to a third party as to all future
transactions.

CH-3: UNIT 3 – REGISTRATION AND DISSOLUTION OF A FIRM
• Mode of Registration of a Firm
• Effect of Registration
• Consequences of Non-Registration
• Circumstances when a firm is dissolved
• Consequences of Dissolution
1. Registration of Firms
The registration of a partnership is optional, and one partner cannot compel another partner to join
in the registration of the firm.
It is not essential that the firm should be registered from the very beginning. When the partners
decide to get the firm registered as per the provisions of Section 58 of the Indian Partnership Act,
1932, they have to file the statement in the prescribed form.
1.1 Application for Registration [Section 58]
• The registration of a firm may be effected at any time by sending by post or delivering to
the Registrar of the area in which any place of business of the firm is situated or proposed to
be situated, a statement in the prescribed form and accompanied by the prescribed fee.
• Contents in the application for registration –
Other
Date on Full name
place(s)
Principal which and Duration
Firm's where
place of each address of the
name firm
business partner of each firm
carries on
joined partner
business
• The statement shall be signed by all the partners, or by their agents specially authorised in this
behalf. Each person signing the statement shall also verify it in the manner prescribed.
• Subsequent alterations in the name, place, constitution, etc., of the firm that may occur during
its continuance should also be registered.

A firm name shall not contain any of the following words – ‘Crown’, ‘Emperor’, ‘Empress’,
‘Empire’, ‘Imperial’, ‘King’, ‘Queen’, ‘Royal’, or words expressing or implying the sanction,
approval or patronage of Government except when the State Government signifies its consent to
the use of such words as part of the firm-name by order in writing.
1.2 Registration [Section 59]
• When the Registrar is satisfied that the provisions of

section 58 have been duly complied with, he shall Registration is deemed to be
record an entry of the statement in a register called the completed as soon as application
Register of Firms, and shall file the statement. form is delivered to the Registrar.
The recording of an entry in the
• Then he shall issue a certificate of Registration. register of firms is a routine duty
• The Firm when registered shall use the bracket and of Registrar.
word (Registered) immediately after its name.
• Registration may also be effected even after a suit has

been filed by the firm but in that case it is necessary to withdraw the suit first and get the firm
registered and then file a fresh suit.
1.3 Late Registration on Payment of Penalty [Section 59A-1]
According to Section 58(1A) of the Indian Partnership Act, 1932 –
“The statement under sub-section (1) [i.e., for the purpose of registration of firm] shall be sent
or delivered to the Registrar within a period of one year from the date of constitution of the
firm”.
In case of failure to send and deliver the statement within a time specified in sub-section (1A) of
Section 58, the firm may get registration on payment of ₹ 100/- per year of delay or part thereof
as penalty to the Registrar of Firms.
2. Consequences of Non-Registration [Section 69]
The Indian Partnership Act does not make the registration of firms compulsory nor does it impose any
penalty for non-registration. However, u/s 69 non-registration of partnership gives rise to a number
of disabilities which are as follows –

2.1 No suit in a civil court by firm or other co-partners against third party
The firm or any other person on its behalf cannot bring an action against the third party for
breach of contract entered into by the firm, unless –
✓ The firm is registered, and
✓ The persons suing are or have been shown in the register of firms as partners in the
firm.
2.2 No relief to partners for set-off of claim
If an action is brought against the firm by a third party, then neither the firm nor the partner
can claim any set-off, if the suit be valued for more than ₹ 100 or pursue other proceedings to
enforce the rights arising from any contract.
2.3 Aggrieved partner cannot bring legal action against other partner or the firm
A partner of an unregistered firm (or any other person on his behalf) cannot bring any legal action
against the firm or any other partner.
2.4 Third party can sue the firm
Even if the firm is unregistered, a third party may bring an action against the firm.
No suit in a
civil court by a No relief to
firm or other partners for
co-partners set-off of
against third claim
party
Aggrieved
partner
Third party cannot bring
can sue the legal action
firm against other
partner or the
firm
2.5 Exceptions – Rights not affected by non-registration of a firm
Non-registration of a firm does not, however effect the following rights –
✓ The right of third parties to sue the firm or any partner.

✓ The right of partners to sue for the dissolution of the firm or for the settlement of the
accounts of a dissolved firm, or for realization of the property of a dissolved firm.
✓ The power of an Official Assignees, Receiver of Court to release the property of the
insolvent partner and to bring an action.
✓ The right to sue or claim a set-off if the value of suit does not exceed ₹ 100 in value.
✓ The right to suit and proceeding instituted by legal representatives or heirs of the
deceased partner of a firm for accounts of the firm or to realise the property of the firm.
Example: A & Co. is registered as a partnership firm in 2017 with A, B and C partners. In 2018, A
dies. In 2019, B and C sue X in the name and on behalf of A & Co. without fresh registration. To
decide whether the suit is maintainable, the test applied was whether the plaintiff satisfied the only
two requirements of Section 69 (2) of the Act namely –
• the suit must be instituted by or on behalf of the firm which had been registered,
• the person suing had been shown as partner in the register of firms.
In view of this position of law, the suit is in the case by B and C against X in the name and on behalf
of A & Co. is maintainable.
Now, in this example, if in 2019 B and C had taken a new partner, D, and then filed a suit against X
without fresh registration, it will not be valid. The firm cannot sue as D’s (new partner’s) name has
not been entered in the register of firms.
3. Dissolution of Firm
3.1 Meaning of ‘Dissolution of the Firm’ [Section 39]
The dissolution of partnership between all partners of a firm is called the ‘dissolution of the
firm’.
• Thus, the dissolution of firm means the discontinuation of the legal relation existing
between all the partners of the firm.
• But, when only one or more partners retires or becomes incapacitated from acting as a
partner due to death, insolvency or insanity, the partnership, i.e. the relationship between
such a partner and other is dissolved, but the rest may decide to continue. In such
cases, there is in practice, no dissolution of the firm.
3.2 Dissolution of Firm Vs. Dissolution of Partnership
Basis of Dissolution of Firm Dissolution of Partnership

Difference
Continuation of It involves discontinuation of It does not affect continuation
business business in partnership. of business. It involves only
reconstitution of the firm.

Winding up It involves winding up of the It involves only reconstitution
firm and requires realization of and requires only revaluation
assets and settlement of of assets and liabilities of the
liabilities. firm.
Order of court A firm may be dissolved by the Dissolution of partnership is
order of the court. not ordered by the court.
Scope It necessarily involves It may or may not involve
dissolution of partnership. dissolution of firm.
Final closure of It involves final closure of It does not involve final closure
books books of the firm. of the books of the firm.
3.3 Modes of Dissolution of a firm
3.3.1 Dissolution without the Order of the Court or Voluntary Dissolution
Dissolution by Compulsory
Agreement Dissolution
Dissolution on Dissolution by
happening of notice of
certain partnership at
contingencies will
a) Dissolution by Agreement [Section 40]
A firm may be dissolved –
• With the consent of all the partners, or
• In accordance with a contract between the partners.
Contract between the partners means a contract already made.
b) Compulsory dissolution [Section 41]
A firm is compulsorily dissolved –
✓ by the adjudication of all the partners or of all the partners but one as insolvent,
or

✓ by the happening of any event which makes it unlawful for the business of the
firm to be carried on or for the partners to carry it on in partnership.
Example: A firm is carrying on the business of trading a particular chemical and a law is
passed which bans on the trading of such a particular chemical. The business of the firm
becomes unlawful and so the firm will have to be compulsorily dissolved.
Where more than one separate adventure or undertaking is carried on by the firm – the illegality
of one or more shall not of itself cause the dissolution of the firm in respect of its lawful
adventures and undertakings.
c) Dissolution on the happening of certain contingencies [Section 42]
Subject to contract between the partners, a firm can be dissolved on the happening of any
of the following contingencies –
• Where the firm is constituted for a fixed term, on the expiry of that term.
• Where the firm is constituted to carry out one or more adventures or undertaking,
then by completion thereof.
• By the death of a partner.
• By the adjudication of a partner as an insolvent.
d) Dissolution by notice of partnership at will [Section 43]
Where the partnership is at will, the firm may be dissolved by any partner giving notice in
writing to all the other partners of his intention to dissolve the firm.
Date from which firm is

dissolved
No date is mentioned in the

Date is mentioned in the notice
notice
From the date of communication

From such date
of notice
3.3.2 Dissolution by the Court [Section 44]
Court may, at the suit of the partner, dissolve a firm on any of the following ground –
a) Insanity/unsound mind

Where a partner (not a sleeping partner) has become of unsound mind, the court may
dissolve the firm on a suit of the other partners or by the next friend of the insane partner.
Temporary sickness is no ground for dissolution of firm.
b) Permanent incapacity
When a partner, other than the partner filing the suit, has become in any way permanently
incapable of performing his duties as partner, then the court may dissolve the firm. Such
permanent incapacity may result from physical disability or illness etc.
c) Misconduct
Where a partner, other than the partner filing the suit, is

guilty of conduct which unreasonably affects the Nature of business will
business of the firm, the court may order dissolution of the decide whether an act is
firm, giving regard to the nature of the business. misconduct or not.
d) Persistent breach of agreement
When a partner, other than the partner filing the suit,

• wilfully or continuously commits breach of agreements relating to the
management of the affairs of the firm or conduct of the business, or
• so conduct himself in matters relating
to the business that it is not reasonably Following comes into the category of
practicable for other partners to carry on breach of contract:
the business in partnership with him, • Embezzlement
• Keeping erroneous accounts
then the court may dissolve the firm at the instance
• Holding more cash than allowed
of any of the partners.
• Refusal to show accounts despite
Example : If one of the partners keeps erroneous repeated requests.
accounts and omits to enter receipts or if there is
continued quarrels between the partners or there is
such a state of things that destroys the mutual confidence of partners, the court may order
for dissolution of the firm.
e) Transfer of interest
Where a partner, other than the partner filing the suit, has transferred whole of his interest
to a third party or has allowed his share to be charged or sold by the court for recovery
of arrears of land revenue due by him, the courts may dissolve the firm at the instance of
any other partner.
f) Continuous/Perpetual losses
Where the business of the firm cannot be carried on except at a loss in future also, the
court may order for its dissolution.
g) Just and equitable grounds

Where the court considers any other ground just and equitable for dissolution of the firm, it
may dissolve the firm. The following are the cases of just and equitable grounds –
• Deadlock in the management
• Partners not in talking terms
• Loss of substratum
• Gambling by a partner on stock exchange
Insanity
Just and
Permanent
equitable
Incapicity
ground
Grounds
for
dissolution
Continuous by Court Misconduct
loss
Persistent
Transfer of
breach of
Interest
agreement
4. Consequences of Dissolution
Consequent to the dissolution of a partnership firm, the partners have certain rights and liabilities,
as are discussed –
4.1 Liability for acts of partners done after dissolution [Section 45]
• Even after the dissolution of a firm, the partners continue to be liable as such to third parties
for any act done by any of them which would have been an act of the firm if done before the
dissolution, until public notice is given of the dissolution.
• This provision has two objectives –
i) It seeks to protect third parties dealing with the firm who had no notice of prior
dissolution and

ii) It also seeks to protect partners of a dissolved firm from liability towards third parties.
• Exceptions – Even where notice of dissolution has not been given, there will be no liability for
subsequent acts in the case of –
o The estate of a deceased partner,
o An insolvent partner, or
o A dormant partner, i.e., a partner who was not known as a partner to the person dealing
with the firm.
4.2 Right of partners to have business wound up after dissolution

[Section 46]
On the dissolution of a firm every partner or his representative is entitled, as against all the
other partners or their representative –
• To have the property of the firm applied in payment of the debts and liabilities of the
firm, and
• To have the surplus distributed among the partners or their representatives according to
their rights.
4.3 Continuing authority of partners for purposes of winding up

[Section 47]
After the dissolution of a firm the authority of each partner to bind the firm, and the other
mutual rights and obligations of the partners, continue so far as may be necessary
• to wind up the affairs of the firm and
• to complete transactions begun but unfinished at the time of the dissolution, but not
otherwise.
However, the firm is in no case bound by the acts of a partner who has been adjudicated
insolvent.
4.4 Mode of Settlement of partnership accounts [Section 48]
Prima facie, accounts between the partners shall be settled in the manner prescribed by
partnership agreement. However, any such agreement cannot affect the rights of the creditors of
the firm.
In settling the accounts of a firm after dissolution, the following rules shall, subject to
agreement by the partners, be observed –

Losses [including capital Assets, including contributions
deficiencies] by partners to cover capital
deficiencies
Applied first to paying the debts

Paid first out of profits
of firm to third parties
Next, to pay each partner

Next, out of capital rateably due to him from capital
Next, to each partner rateably

If necessary, by the partners due to him on account of capital
individually in their profit
sharing ratio Any residue shall be divided in
their profit sharing ratio
Example : X and Y were partners sharing profits and losses equally and X died. On taking
partnership accounts, it transpired that he contributed ₹ 6,60,000 to the capital of the firm and Y
only ₹40,000. The assets amounted to ₹ 2,00,000. In such situation, the deficiency (₹ 6,60,000 + ₹
40,000 – ₹ 2,00,000 i.e. ₹ 5,00,000) would have to be shared equally by Y and X’s estate.
However, if the agreement provided that on dissolution surplus assets would be divided between
the partners according to their respective interests in the capital, then the assets would be divided
between the partners in proportion to their capital with the result that X’s estate would be the main
loser.
4.5 Payment of firm debts and of separate debts [Section 49]
Where there are joint debts due from the firm and also separate debts due from any partner, it shall
be settled in the following manner –
Partners' property
First First
Firm's Property
•Applied in the payment of •Applied in payment of his

debts of the firm, separate debts,
Any surplus Any surplus
•Each partners' share applied •Applied in the payment
to payment of his separate of debts of the firm.
debt or paid to him.

5. Overview
Registration of Dissolution of
the Firm the Firm
Consequences Modes of Consequences

Mode of
of Non- Dissolution of Dissolution
effecting
Registration
Registration
Dissolution
Dissolution by Liability for acts
No suit by without
the Court of partners
firm order of the
Application [Sec. 44] done ater
[Sec. 58] Court
dissolution
No relief to [Sec. 45]
By agreement Unsound
partners mind
Certificate [Sec. 40]
of Right to have
registration No suit by Permanent business
[Sec. 59] aggrieved Compulsory incapacity
dissolution wound up after
partner dissolution
[Sec. 41]
[Sec. 46]
Late Misconduct
registration Third party
[Sec. 59A] can sue Contingencies
[Sec. 42] Continuing
Persistent authority
breach of [Sec. 47]
By Notice agreement
[Sec. 43]
Transfer of Mode of
agreement settlement of
accounts
[Sec. 48]
Perpetual
losses
Payment of firm
Just and debts and
equitable separate debts
grounds [Sec. 49]

6. Overview
Mutual Rights and

Duties [Sec. 13]
Relation with Third

Acts beyond
Parties [Sec. 18-21]
Implied Authority
[Sec. 19]
Implied Authority
of a Partner Extension and
Restriction of
Implied Authority
Admission by [Sec. 20]
Partners [Sec. 23]
Liabilities to third
parties [Sec. 25-27]
Relations of Not allowed
Partners
Minor as Partner
Can be admitted to
the benefits of a
firm [Sec. 30]
New Partner [Sec.

31]
Retirement [Sec.
32]
Legal
Consequenses of
Expulsion [Sec. 33]
Partner coming in
and going out
Insolvency [Sec. 34]
Death [Sec. 35]

CH-4 – THE LIMITED LIABILITY PARTNERSHIP ACT, 2008
• Meaning and characteristics of Limited Liability Partnership
• Incorporation of LLP
• Partners and their relations
• Financial Disclosures
• Conversion into LLP
• Winding up and Dissolution of LLP
• Difference with other forms of organisations
1. Introduction
9th January 2007

The Ministry of Law 7th January 2009
and Justice notified the President of India has
LLP Act, 2008 assented the LLP Bill
12th December 2008

The LLP Bill was
passed in the
Parliament
• The Limited Liability Partnership Act, 2008 is applicable to the whole of India.
• The LLP Act, 2008 has 81 sections and 4 schedules.
First Schedule Mutual rights and duties of partners, as well limited liability
partnership and its partners where there is absence of a
formal agreement with respect to them.
Second Schedule Conversion of a firm into LLP.
Third Schedule Conversion of a private company into LLP.
Fourth Schedule Conversion of unlisted public company into LLP.
• The Ministry of Corporate Affairs and the Registrar of Companies (ROC) are entrusted with the
task of administrating the LLP Act, 2008.
• The Central Government has the authority to frame the Rules with regard to the LLP Act, 2008,
and can amend them by notifications in the Official Gazette, from time to time.

The Indian Partnership Act, 1932 is not applicable to LLPs [Section 4]
• Need for new form of Limited Liability Partnership
In order to meet the contemporary growth of the Indian Economy, the lawmakers contemplated
the need for bringing out the new legislation for creation of LLP.
LLP is an alternative corporate business form that gives the benefits of limited liability company
and the flexibility of partnership. In order to enable professional expertise and entrepreneurial
initiative and combine, organize and operate in flexible, innovative and efficient manner, the LLP Act,
2008 was enacted.
LLP as a form of business organization is an alternative corporate business vehicle. LLPs allow for
a partnership structure where each partner’s liability is limited to the amount they put in the
business. Owing to flexibility in its structure and operation, LLP is a suitable vehicle for small
enterprises and for investment by venture capital. LLPs are common in professional business like
law firms, accounting firms, and wealth managers.
2. Limited Liability Partnership – Meaning and Concept
Section 2(n) of the Limited Liability Partnership Act, 2008 defines Limited Liability Partnership –
“Limited Liability Partnership means a partnership formed and registered under this Act”.
The LLP is a separate legal entity and, while the LLP itself will
Since LLP contains elements of both ‘a
be liable for the full extent of its assets, the liability of the corporate structure’ as well as ‘a
partners will be limited. partnership firm structure’ LLP is called
a hybrid between a company and a
partnership.

Limited Liability Partnership
New form of Alternative Allows the partners LLP itself will Liability of
legal business corporate flexibility of be liable for partners
entity with business organising their the full extent will be
limited liability vehicle internal structure of its assets limited
Small Limited Liability Partnership – Section 2(1)(ta)
It means a limited liability partnership –
(i) Contribution of which does not exceed ₹ 25 lakh or such higher amount, not exceeding ₹ 5 crore,
as may be prescribed; and
(ii) Turnover of which as per Statement of Accounts and Solvency for immediately preceding financial
year, does not exceed ₹ 40 lakh or such higher amount, not exceeding ₹ 50 crore, as may be
prescribed; or
(iii) Which meets other requirements as may be prescribed, and fulfils such terms and conditions as
may be prescribed.
2.1 Partners [Section 5]
Section 2(1)(q) of the LLP Act, 2008 defines Partner –
“Partner, in relation to a LLP, means any person who becomes a partner in the LLP in accordance
with the LLP agreement”.
• Any individual or body corporate may be a partner in a LLP.
• However, an individual shall not be capable of becoming a partner of a LLP, if –
a) he has been found to be of unsound mind by a Court of competent jurisdiction and

the finding is in force,
b) he is an undischarged insolvent, or
c) he has applied to be adjudicated as an insolvent and his application is pending.
2.2 Minimum number of partners [Section 6]
• Every LLP shall have at least 2 partners.
• Person carrying on business with less than 2 partners –
If at any time the number of partners of a LLP is reduced below 2 and the LLP carries on
business for more than 6 months while the number is so reduced, the person, who is the
only partner of the LLP during such time and has the knowledge of the fact that it is carrying

on business with him alone, shall be liable personally for the obligations of the LLP incurred
during that period.
Section 2(1)(e) of the Limited Liability Partnership Act, 2008 defines business-
“Business” includes every trade, profession, service and occupation except any activity
which the Central Government may, by notification, exclude.
2.3 Designated partners [Section 7]
Section 2(1)(j) of the Limited Liability Partnership Act, 2008 defines Designated Partner–
Any partner designated as such pursuant to section 7.
• Every LLP shall have at least 2 designated partners who are individuals and at least one of
them shall be a resident in India. [Section 7(1)]
• If in LLP, all the partners are bodies corporate or in which one or more partners are individuals
and bodies corporate, at least 2 individuals who are partners of such LLP or nominees of
such bodies corporate shall act as designated partners.
• Resident in India – A person who has stayed in India for a period of not less than 120 days during
the financial year.
Example: There is an LLP by the name Indian Helicopters LLP having 5 partners namely Mr. A
(Non-resident), Mr. B (Non-resident), Ms. C (resident), Ms. D (resident) and Ms. E (resident).
In this case, at least 2 should be named as Designated Partner out of which 1 should be resident.
Hence, if Mr. A and Mr. B are designated then it will not serve the purpose. One of the designated
partners should be there out of Ms. C, Ms. D and Ms. E.
• Subject to the provisions of Sub-section(1),

➢ If the incorporation document,
▪ Specifies who are to be designated partners, such persons shall be designated partners
on incorporation; or
▪ States that each of the partners from time to time of LLP is to be designated partner,
every partner shall be a designated partner.
➢ Any partner may become a designated partner by and in accordance with the LLP
Agreement and a partner may cease to be a designated partner in accordance with LLP
agreement.
• An individual shall not become a designated partner in any limited liability partnership unless he
has given his prior consent to act as such to the limited liability partnership in such form and
manner as may be prescribed.

• Every limited liability partnership shall file with the Registrar the particulars of every individual
who has given his consent to act as designated partner in such form and manner as may be
prescribed within thirty days of his appointment.
• An individual eligible to be a designated partner shall satisfy such conditions and requirements
as may be prescribed.
• Every designated partner of a limited liability partnership shall obtain a Designated Partners
Identification Number (DPIN) from the Central Government and the provisions of sections 153
to 159 (both inclusive) of the Companies Act, 2013 shall apply mutatis mutandis for the said
purpose.
2.4 Characteristic of LLP
2.4.1 LLP is a body corporate
Section 3 of LLP Act provides that a LLP is a body corporate formed and incorporated under this
Act and is a legal entity separate from that of its partners.
Section 2(1)(d) of the LLP Act states that Body Corporate means –
“A company as defined in clause (20) of Section 2 of the Companies Act, 2013 and includes –
i) a LLP registered under this Act,
ii) a LLP incorporated outside India, and
iii) a company incorporated outside India,
but does not include –

i) a corporation sole,
ii) a co-operative society registered under any law for the time being in force, and
iii) any other body corporate (not being a company as defined in Section 2(20) of the Companies Act, 2013 or
LLP as defined in this Act) which the Central Government may, by notification in the Official Gazette, specify
in this behalf “.
2.4.2 Perpetual Succession
The LLP can continue its existence irrespective of changes in partners. Death, insanity,
retirement or insolvency of partners has no impact on the existence of LLP.
2.4.3 Separate Legal Entity
The LLP as a separate legal entity, is liable to the full extent of its assets but liability of the
partners is limited to their agreed contribution in the LLP. Creditors of LLP shall be the creditors
of LLP alone.
2.4.4 Mutual Agency
Partners act as agents of the LLP but not of the other partners. No partner is liable on
account of the independent or un-authorized actions of other partners. Thus, all

partners will be the agents of the LLP alone. No one partner can bind the other partner by
his acts.
2.4.5 LLP Agreement
• Mutual rights and duties of the partners within a LLP are governed by an agreement
between the partners.
• In the absence of any such agreement, the mutual rights and duties shall be governed by
the provisions of the LLP Act, 2008.
Section 2(1)(o) of the Limited Liability Partnership Act, 2008 defines Limited Liability partnership agreement as
–
“Any written agreement between the partners of the LLP or between the LLP and its partners which determines
the mutual rights and duties of the partners and their rights and duties in relation to that LLP“.
2.4.6 Artificial Legal Person
• A LLP is an artificial legal person because it is created by a legal process and is clothed with
all rights of an individual.
• It can do everything which any natural person can do, except of course that, it cannot be sent
to jail, cannot take an oath, cannot marry or get divorce nor can it practice a learned
profession like CA or Medicine.
• A LLP is invisible, intangible, immortal (can be dissolved by law alone) but not fictitious
because it really exists.
2.4.7 Common Seal
• The LLP may have a common seal if it decides to have one [Section 14(c)]. Thus, it is not
mandatory for a LLP to have a common seal.
• It shall remain under the custody of some responsible official and it shall be affixed in the
presence of at least 2 designated partners of the LLP.
2.4.8 Limited Liability

This feature has encouraged
Liability of the partners will be limited to their
professionals like Engineering
agreed contribution in LLP. Such contribution
consultants, Legal Advisors and
may be of tangible or intangible nature or both. Accounting Professionals to enter into
2.4.9 Management of Business business through LLP.
The partners in the LLP are entitled to manage the

business of LLP. But only the designated partners are responsible for legal compliances.
2.4.10 Minimum and Maximum number of Partners

• Every LLP shall have at least 2 partners and shall also have at least 2 individuals as
designated partners, of whom at least one shall be resident in India.
• There is no maximum limit on the partners in LLP.
2.4.11 Business for Profit Only
The essential requirement for forming LLP is carrying on a lawful business with a view to earn
profit. Thus, LLP cannot be formed for charitable or non-economic purpose.
2.4.12 Investigation
The Central Government shall have powers to investigate the affairs of an LLP by appointment
of competence authority for the purpose.
2.4.13 Compromise or Arrangement
Any compromise or agreements including merger and amalgamation of LLPs shall be in

accordance with the provisions of the LLP Act, 2008.
2.4.14 Conversion into LLP
A firm, private company, or an unlisted public company are allowed to be converted into LLP
in accordance with the provisions of LLP Act, 2008.
2.4.15 E-Filling of Documents
Every form or application of document required to be filed or delivered under the act and rules
made thereunder, shall be filed in computer readable electronic form on its website
www.mca.gov.in and authenticated by a partner or designated partner of LLP by the use of
electronic or digital signature.
2.4.16 Foreign LLPs
As per section 2(1)(m), “foreign limited liability partnership” means –
a limited liability partnership formed, incorporated, or registered outside India which

establishes a place of business within India.
• Foreign LLP can become a partner in an Indian LLP.

Characteristics of LLP
Body Limited Management

Foreign LLPs
Corporate Liability of Business
Perpetual No. of E-filing of

Common Seal
Succession Members documents
Separate Artificial Legal Business for Conversion

Legal Entity Person profit only into LLP
Compromise
Mutual LLP Investigation
or
Agency Agreement by CG
Arrangement
2.5 Advantages of LLP form
Organised Provides
All
and flexibility Flexible
partners
operates without Easy to Capital Easy to
enjoy
on the imposing legal form Structur dissolve
limited
basis of and procedural e
liability
agreement requirements
3. Incorporation of LLP
3.1 Incorporation document [Section 11]
1. For a LLP to be incorporated two or more persons associated for carrying on a lawful
business with a view to earn profit shall subscribe their names to an incorporation
document. [Sub-section 1(a)]
2. It shall be filed in such manner and with such fees, as may be prescribed with the Registrar of
the State in which the registered office of the LLP is to be situated. [Sub-section 1(b)]
3. Statement to be filed –

• Along with the incorporation document a statement in the prescribed form shall be filed that
all the requirements of this Act and the rules made thereunder have been complied
with in respect of incorporation and matters precedent and incidental thereto.
• The statement shall be made by –
o Either an advocate, or a Company Secretary or a Chartered Accountant or a Cost

Accountant, who is engaged in the formation of the LLP and
o By anyone who subscribed his name to the incorporation document. [Sub-section

1(c)]
4. The incorporation document shall be in a form as may be prescribed.
5. Contents of the Incorporation Document –
Name and
Address of the
Address of the
Name of the registered
proposed
LLP office of the
designated
LLP
partners
Name and
Proposed Such other
Address of
business of the information as
proposed
LLP prescribed
partners
6. Penalty for false statement –
If a person makes a statement which he knows to be false or does not believe to be true, shall
be punishable with –
• Imprisonment for a term which may extend to 2 years and
• Fine which shall not be less than ₹ 10,000 but which may extend to ₹ 5 lakhs.
3.2 Incorporation by registration [Section 12]
• Where the Incorporation Document has been filed and complies with the requirements of
Section 11 the Registrar shall retain the incorporation document and, he shall, within a period
of 14 days –
a) Register the incorporation document; and
b) Give a certificate, signed by the Registrar and authenticated by his seal, that the LLP is
incorporated by the name specified therein.

• The Registrar may accept the statement delivered u/s 11(1)(c) as sufficient evidence that the
requirement imposed by clause (a) of that sub-section has been complied with.
• The certificate shall be conclusive evidence that the LLP is incorporated by the name specified
therein.
3.3 Registered office of LLP and change therein [Section 13]
1. Every LLP shall have a registered office to which all communications and notices may be
addressed and where they shall be received.
2. Serving documents on LLP or its partner or designated partner – A document may be served
on a LLP or a partner or designated partner thereof –
• by sending it by post under a certificate of posting or by registered post or by any

other manner, as may be prescribed,
• at the registered office and any other address specifically declared by the LLP for the
purpose in such form and manner as may be prescribed.
3. Change of Registered Office – A LLP may change the place of its registered office and file the
notice of such change with the Registrar in such form and manner and subject to such
conditions as may be prescribed and any such change shall take effect only upon such filing.
4. Punishment for contravention – If the LLP contravenes any provisions of this section, the LLP
and its every partner shall be liable to a penalty of ₹ 500 per day during which the default
continues, subject to maximum of ₹ 50,000.
3.4 Effect of registration [Section 14]
On registration the LLP shall, by its name, be capable of -
Acquiring, owning, Doing and

Having a
holding and developing suffering such acts
common
Suing and or disposing of and things as
seal, if it
being sued property, whether bodies corporate
decides to
movable or immovable, may lawfully do
have one
tangible or intangible and suffer
3.5 Name [Section 15]
• Every LLP shall have either the words “Limited Liability Partnership” or the acronym “LLP”
as the last words of its name.
• No LLP shall be registered by a name which, in the opinion of the Central Government is—
✓ Undesirable, or

✓ Identical or too nearly resembles to that of any other LLP or company or a registered
trademark of any other person under the Trade Marks Act, 1999.
3.6 Reservation of name [Section 16]
• A person may apply in such form (e-Form 1) and manner and accompanied by such fee as may
be prescribed to the Registrar for the reservation of a name set out in the application as –
a) The name of a proposed LLP; or
b) The name to which a LLP proposes to change its name.
• Upon receipt of an application and on payment of the prescribed fee, the Registrar may, if he
is satisfied that the name to be reserved is not one which may be rejected on any ground
referred to in section 15, reserve the name for a period of 3 months from the date of
intimation by the Registrar.
3.7 Change of name of LLP [Section 17]
• If through inadvertence or otherwise, a LLP on its first registration or on its registration by a new
body corporate, is registered by a name–
Identical with or too nearly resembles
➔ name of any other LLP or company, or

➔ a registered trade mark of a proprietor under the Trade Marks Act, 1999, as is likely to
be mistaken for it,
then on an application of such LLP or proprietor or a company,
the Central Government (CG) may direct such LLP to change its name.
• The LLP shall comply with such direction within 3 months from the date of issue of such
direction.
• An application of the proprietor of the registered trade mark shall be maintainable within a
period of 3 years from the date of incorporation or registration or change of name of the LLP
under this Act.
• Where LLP changes its name or obtains a new name, it shall within a period of 15 days from the
date of such change, give notice of the change to Registrar along with the order of the Central
Government, who shall carry out necessary changes in the certificate of incorporation and within
30 days of such change in the certificate of incorporation, such LLP shall change its name in
the LLP agreement.
• If the LLP defaults in complying with direction of the CG, the CG shall allot a new name to the
LLP in such manner as may be prescribed and Registrar shall enter the new name in the register
of LLP and issue a fresh Certificate of Incorporation.
• The LLP can subsequently change its name in accordance with the provisions of Section 16.

3.8 Steps to incorporate LLP
Name Reservation
Incorporate LLP
Applicant shall file e-
Form 1 for LLP Agreement
File e-Form 2 for
ascertaining the
incorporating a new
availability and To be filed with the
LLP, containg details of
reservation of the Registrar in e-Form 3
proposed LLP, partners
name of the LLP. within 30 days of
and designated
incorporation.
partners and their
consent Mandatory u/s 23.
4. Partners and their Relations
4.1 Eligibility to be partners [Section 22]
• On the incorporation of a LLP, the persons who subscribed their names to the incorporation
document shall be its partners.
• Any other person may become a partner of the LLP by and in accordance with the LLP
agreement.
4.2 Relationship of partners [Section 23]
The mutual rights and duties of partners

of LLP and that of LLP and its partners
shall be governed by the LLP Agreement.
In the absence of agreement as to any

matter, such mutual rights and duties
shall be determined according to the
provisions of the First Schedule.
• The LLP agreement and any changes, if any, made therein shall be filed with the Registrar
in such form, manner and accompanied by such fees as may be prescribed.
• An agreement in writing made before the incorporation of a LLP between the persons who
subscribe their names to the incorporation document may impose obligations on the LLP.
However, such agreement should be ratified by all the partners after the incorporation
of the LLP.

4.3 Cessation of partnership interest [Section 24]
1. A person may cease to be a partner of a LLP –
• In accordance with an agreement with the other partners or,
• In the absence of agreement with the other partners as to cessation of being a partner, by
giving a notice in writing of not less than 30 days to the other partners of his intention to
resign as partner.
2. A person shall cease to be a partner of a LLP –
a. On his death or dissolution of the LLP; or
b. If he is declared to be of unsound mind by a competent court; or
c. If he has applied to be adjudged as an insolvent or declared as an insolvent.
3. Where a person has ceased to be a partner of a LLP such partner (to be called ‘former partner’)
shall be regarded by a person dealing with the LLP as still being a partner of the LLP unless
–
✓ The person has notice that the former partner has ceased to be a partner of the LLP; or
✓ Notice that the former partner has ceased to be a partner of the LLP has been delivered
to the Registrar.
4. Rights and liabilities of former partner –
• The cessation of a partner from the LLP does not by itself discharge the partner from
any obligation to the LLP or to the other partners or to any other person which he
incurred while being a partner.
• The former partner or a person entitled to his share in consequence of the death or
insolvency of the former partner, shall be entitled to receive from the LLP –
✓ An amount equal to the capital contribution of the former partner actually made to
the LLP; and
✓ His right to share in the accumulated profits of the LLP, after the deduction of
accumulated losses, determined as at the date the former partner ceased to be
a partner.
• A former partner or a person entitled to his share in consequence of the death or

insolvency of the former partner shall not have any right to interfere in the
management of the LLP.

4.4 Registration of changes in partners [Section 25]
Partner to inform Changes in name within 30 days of

the LLP [Sec. 25(1)] or address such change
LLP to file notice Change in name or

within 30 days of
with Registrar address of a
such change
[Sec. 25(2)] partner
LLP to file notice Person becomes/

with Registrar ceases to be within 30 days
[Sec. 25(2)] partner
• A notice filed with the Registrar –
o Shall be in such form and accompanied by such fees as may be prescribed,
o Shall be signed by the designated partner of the LLP and authenticated in a manner
as may be prescribed, and
o If it relates to an incoming partner, shall contain a statement by such partner that

he consents to becoming a partner, signed by him and authenticated in the manner
as may be prescribed.
• Punishment for contravention –
Penalty
Contravention of Sec 25(2) – LLP & Designated Partner ₹ 10,000

Contravention of Sec 25(1) – Partner ₹ 10,000
• Any person who ceases to be a partner of a LLP may himself file the notice with the
Registrar –
o If he has reasonable cause to believe that the LLP may not file the notice with
the Registrar and
o In case of any such notice filed by a partner, the Registrar shall obtain a
confirmation to this effect from the LLP unless the LLP has also filed such notice.
However, where no confirmation is given by the LLP within 15 days, the registrar
shall register the notice made by a person ceasing to be a partner under this
section.

5. Extent and Limitation of Liability of LLP and Partner
5.1 Partner as agent [Section 26]
Every partner of a LLP is, for the purpose of the business of the LLP, the agent of the LLP, but not
of other partners.
5.2 Extent of liability of LLP [Section 27]
LLP is not bound by LLP is liable if a partner is

anything done by a liable to any person -
partner in dealing with a • As a result of wrongful act
person if - or omission in the course
• Partner is acting without of business, or
authority • Acting with its authority.
• The person knows that he [Sub-section (2)]
has no authority or does
not know or believe him to
be a partner [Sub-section (1)]
✓ An obligation of the LLP whether arising in contract or otherwise, shall be solely the
obligation of the LLP [Sub-section (3)].
✓ The liabilities of the LLP shall be met out of the property of the LLP. [Sub-section (4)]
5.3 Extent of liability of partner [Section 28]
• A partner is not personally liable, directly or indirectly for an obligation referred to in section
27(3) solely by reason of being a partner of the LLP.
• A partner shall be personally liable for his own wrongful act or omission, but a partner
shall not be personally liable for the wrongful act or omission of any other partner of the
LLP.
5.4 Holding out [Section 29]
i) Any person,
• who by words spoken or written or by conduct,
• represents himself, or knowingly permits himself to be represented to be a partner in

a LLP
• is liable to any person

• who has on the faith of any such representation
• given credit to the LLP, whether the person representing himself or represented to be
a partner does or does not know that the representation has reached the person so
giving credit.
ii) However, where any credit is received by the LLP as a result of such representation, LLP
shall, without prejudice to the liability of person so representing himself or represented to be a
partner, be liable to extent of credit received by it or any financial benefit derived thereon.
iii) Where after a partner’s death the business is continued in the same LLP name, the continued
use of that name or of the deceased partner’s name as a part thereof shall not of itself
make his legal representative or his estate liable for any act of the LLP done after his
death.
5.5 Unlimited liability in case of fraud [Section 30]
• Where the LLP or any of its partners act with the intent to defraud creditors of the LLP or any
other person, or for any fraudulent purpose, the liability of the LLP and partners who acted
with intent to defraud creditors or for any fraudulent purpose shall be unlimited for all or any
of the debts or other liabilities of the LLP.
• However, in case any such act is carried out by a partner, the LLP is liable to the same extent
as the partner unless it is established by the LLP that such act was without the knowledge or
the authority of the LLP.
• Punishment –
1. Every person who was knowingly a party to the carrying on of the business in the
fraudulent manner or with the intention to defraud shall be punishable with
✓ Imprisonment for a term which may extend to 5 years and
✓ Fine which shall not be less than ₹ 50,000 but which may extend to ₹ 5 lakhs.
2. Apart from the criminal proceedings which may arise, the LLP and any such partner or
designated partner or employee shall be liable to pay compensation to any person who
has suffered any loss or damage by reason of such conduct.
However, such LLP shall not be liable if any such partner or designated partner or employee
has acted fraudulently without knowledge of LLP.
5.6 Whistle blowing [Section 31]
1. Reduced Penalty –
The Court or Tribunal may reduce or waive any penalty leviable against any partner or
employee of a LLP, if it is satisfied that –

• Such partner or employee of a LLP has provided useful information during
investigation of such LLP; or
• When any information given by any partner or employee (whether or not during
investigation) leads to LLP or any partner or employee of such LLP being convicted
under this Act or any other Act.
2. Protection for partner/ employee –
No partner or employee of any LLP may be discharged, demoted, suspended, threatened, harassed or
in any other manner discriminated against the terms and conditions of his LLP or employment merely
because of his providing information or causing information to be provided.
6. Financial Disclosures
6.1 Maintenance of books of account, other records and audit, etc.

[Section 34]
Proper Books of Account

LLP to maintain proper books According to To be kept at the
On cash basis
as prescribed relating to its double entry registered office for
or accrual
affairs for each year of its system of such period as
basis.
existence. accounting prescribed.
Statement of Account and Solvency

To be prepared within 6 To be signed by
As at the last To be filed with the
months of the end of the the designated
day of each Registrar every year
F.Y. in such form as partners of the
F.Y. within prescribed time
prescribed. LLP.
Audit of Accounts
To be audited in accordance with CG may, by notification in the Official Gazette, exempt
the prescribed rules. any class or classes of LLP
Failure to comply with Sec. 34

LLP - Fine not less than ₹25,000/- but Designated Partner - Fine not less than
which may extend to ₹5 lakhs ₹10,000/- but which may extend to ₹ 1 lakh.
➔ Penalty for failure to file Statement of Solvency with the Registrar-

LLP and Designated Partners – ₹ 100 per day during which the default continues subject to maximum
of ₹ 1,00,000 for LLP and ₹ 50,000 for designated partners.
➔ Fine in case of non-compliance with provisions of Sec 34(1), 34(2) and 34(4) –
LLP – Minimum Rs. 25,000 and Maximum – Rs. 5,00,000
Designated Partner – Minimum Rs. 10,000 and Maximum – Rs. 1,00,000
6.2 Accounting and auditing standards [Section 34A]
The Central Government may, in consultation with the National Financial Reporting Authority
constituted under section 132 of the Companies Act, 2013,—
(a) prescribe the standards of accounting; and
(b) prescribe the standards of auditing,
as recommended by the Institute of Chartered Accountants of India constituted under section 3 of the
Chartered Accountants Act, 1949, for a class or classes of limited liability partnerships.
6.3 Annual return [Section 35]

The LLP contra-distinct from
• Every LLP shall file an annual return duly authenticated
Partnership Act, 1932 has
with the Registrar within 60 days of closure of its prescribed the filing of Annual
financial year in such form and manner and accompanied Return in accordance with
by such fee as may be prescribed. Companies Act, 2013.
• Punishment for failure to comply –
Minimum fine Maximum Fine
LLP ₹ 100/day ₹ 1 lakh

Designated Partner ₹ 100/day ₹50,000
As per section 2(1)(l), “Financial Year” in relation to LLP means –
the period from the 1st day of April of a year to the 31st day of March of the following year.
Provided that in the case of a limited liability partnership incorporated after the 30th day of
September of a year, the financial year may end on the 31st day of March of the year next
following that year.

Example: If a LLP has been incorporated on 15th October, 2020, then its financial year may be from
15th October, 2020 to 31st March, 2022.
In keeping with the Income tax law, the financial year for LLP should be from 1st April to 31st
March each year.
7. Conversion into LLP
Unlisted Public
Firm to LLP Private Company to LLP
Company to LLP
Section 55 Section 56 Section 57
In accordance with In accordance with In accordance with

Chapter X and Second Chapter X and Third Chapter X and Fourth
Schedule Schedule Schedule
1. Certificate of Registration –
The Registrar, on satisfying that a firm, private company, or an unlisted public company, as the
case may be, has complied with the provisions of the various Schedules, provisions of this Act
and the rules made thereunder, register the documents and issue a certificate of
registration in such form as the Registrar may determine stating that the LLP is, on and from
the date specified in the certificate, registered under this Act.
2. LLP to inform the Registrar –
The LLP shall, within 15 days of the date of registration, inform the concerned Registrar of
Firms or Registrar of Companies, as the case may be, with which it was registered under the
provisions of the Indian Partnership Act, 1932 or the Companies Act, 2013 about the
conversion and of the particulars of the LLP in such form and manner as may be prescribed.
3. Effects of conversion –
• Upon such conversion, the partners of the firm, the shareholders of private company
or unlisted public company, as the case may be, the LLP to which such firm or such
company has converted, and the partners of the LLP shall be bound by the provisions
of the various Schedules, as the case may be, applicable to them.

• On and from the date of certificate of registration, the effects of the conversion shall be
such as specified in the various schedules, as the case may be.
4. Effect of Registration –
i) There shall be a LLP by the name specified in the certificate of registration registered
under this Act.
ii) All tangible and intangible property vested in the firm or the company, all assets,
interests, rights, privileges, liabilities, obligations relating to the firm or the company,
as the case may be, and the whole of the undertaking of the firm or the company, as
the case may be, shall be transferred to and shall vest in the LLP without further
assurance, act or deed.
iii) The firm or the company, as the case may be, shall be deemed to be dissolved and
removed from the records of the Registrar of Firms or Registrar of Companies, as the
case may be.
8. Foreign LLP [Section 59]
The Central Government may make rules for provisions in relation to –
• Establishment of place of business by foreign LLP within India and
• Carrying on their business therein by applying or incorporating, with such modifications, as

appear appropriate, the provisions of the Companies Act, 2013 or such regulatory mechanism
with such composition as may be prescribed.
9. Winding Up and Dissolution
• The winding up of a LLP may be either voluntary or by the Tribunal and
• LLP, so wound up may be dissolved [Section 63].
• Circumstances in which LLP may be wound up by Tribunal [Section 64]

LLP decides that LLP be wound up by the Tribunal
No. of partners is reduced below 2 for a period of more than 6

months
LLP is unable to pay its debts
LLP has acted against the sovereignty and integrity of India,

the security of the State or public order
LLP has defaulted in filing the Statement of Account and

Solvency or Annual Return for 5 consecutive F.Y.
Just and equitable grounds
• The Central Government may make rules for the provisions in relation to winding up and
dissolution of LLP [Section 65].
10. Miscellaneous
10.1 Business transactions of partner with LLP [Section 66]
A partner may lend money to and transact other business with the LLP and has the same rights
and obligations with respect to the loan or other transactions as a person who is not a
partner.
10.2 Application of the provisions of the Companies Act [Section 67]
• The Central Government may, by notification in the Official Gazette, direct that any of the
provisions of the Companies Act, 2013specified in the notification –
▪ shall apply to any LLP, or
▪ shall apply to any LLP with such exception, modification and adaptation, as may be
specified, in the notification.
• A copy of every notification proposed to be issued under sub-section (1)

▪ Shall be laid in draft before each House of Parliament, while it is in session, for a
total period of 30 days which may be comprised in one session or in two or more
successive sessions, and
▪ If both Houses agree in disapproving the issue of the notification or both Houses
agree in making any modification in the notification, the notification shall not be
issued or, as the case may be, shall be issued only in such modified form as may
be agreed upon by both the Houses.
10.3 Establishment of Special Courts [Section 67A]
(1) Central Government may, for the purpose of providing speedy trial of offences under this Act, by
notification, establish or designate as many Special Courts as may be necessary for such area (s), as may
be specified in notification.
(2) Special Court shall consist of—
(a) single judge holding office as Sessions Judge or Additional Sessions Judge, in case of offences
punishable under this Act with imprisonment of 3 years or more; and
(b) Metropolitan Magistrate or a Judicial Magistrate of the first class, in the case of other
offences, who shall be appointed by Central Government with concurrence of Chief Justice of the
High Court:
➔ Provided that until Special Courts are designated or established under sub-section (1), the Courts
designated as Special Courts in terms of section 435 of Companies Act, 2013 shall be deemed to
be Special Courts for the purpose of trial of offences punishable under this Act
➔ Provided further that notwithstanding anything contained in the Code of Criminal Procedure, 1973,
any offence committed under this Act, which is triable by a Special Court shall, until a Special Court is
established under this Act or the Companies Act, 2013, be tried by a Court of Sessions or the Court of
Metropolitan Magistrate or a Judicial Magistrate of the first class, as the case may be, exercising
jurisdiction over the area.]
10.4 Procedure and powers of Special Court [Section 67B]
(1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973, all offences specified
under section 67A(1) shall be triable only by the Special Court established or designated for the area in
which the registered office of the LLP is situated in relation to which the offence is committed or where
there are more than one Special Courts for such area, by such one of them as may be specified in this
behalf by the High Court concerned.
(2) While trying an offence under this Act, a Special Court may also try an offence other than an
offence under this Act with which the accused may, under the Code of Criminal Procedure, 1973 be
charged at the same trial.

(3) Notwithstanding anything contained in the Code of Criminal Procedure, 1973, the Special Court may,
if it thinks fit, try in a summary way any offence under this Act which is punishable with imprisonment
for a term not exceeding 3 years:
➔ Provided that in the case of any conviction in a summary trial, no sentence of imprisonment for a
term exceeding 1 year shall be passed
➔ Provided further that, when at commencement of or in course of a summary trial, it appears to the
Special Court that nature of the case is such that the sentence of imprisonment for a term exceeding
1 year may have to be passed or that it is, for any other reason, undesirable to try the case summarily,
the Special Court shall, after hearing the parties, record an order to that effect and thereafter recall
any witnesses who may have been examined and proceed to hear or re- hear the case in accordance
with the procedure for the regular trial.
10.5 Appeal and revision [Section 67C]
The High Court may exercise, so far as may be applicable, all powers conferred by Chapters XXIX and
XXX of the Code of Criminal Procedure, 1973 on a High Court, as if a Special Court within the local limits
of the jurisdiction of the High Court were a Court of Sessions trying cases within the local limits of the
jurisdiction of the High Court.
10.6 Electronic filing of documents [Section 68]
• Any document required to be filed, recorded or registered under this Act may be filed,
recorded or registered in such manner and subject to such conditions as may be prescribed.
• A copy of or an extract from any document electronically filed with or submitted to the
Registrar which is supplied or issued by the Registrar and certified through affixing digital
signature to be a true copy of or extract from such document shall, in any proceedings, be
admissible in evidence as of equal validity with the original document.
• Any information supplied by the Registrar that is certified by the Registrar through
affixing digital signature to be a true extract from any document filed with or submitted
to the Registrar shall, in any proceedings, be admissible in evidence and be presumed,
unless evidence to the contrary is adduced, to be a true extract from such document.
10.7 Registration offices [Section 68A]
(1) For the purpose of

o exercising such powers and
o discharging such functions as are conferred on Central Government by or under this Act or
under rules made thereunder
o registration of LLPs under this Act,
Central Government shall, by notification, establish such number of registration offices at such places
as it thinks fit, specifying their jurisdiction.
(2) Central Government may appoint such Registrars, Additional Registrars, Joint Registrars, Deputy
Registrars and Assistant Registrars as it considers necessary, for the registration of LLPs and discharge
of various functions under this Act.

(3) Powers and duties of the Registrars and the terms and conditions of their service shall be such as
may be prescribed.
(4) Central Government may direct Registrar to prepare a seal or seals for the authentication of
documents required for, or connected with registration of LLP.
10.8 Payment of additional fee [Section 69]
If any document or return required to be filed or registered under this Act with the Registrar is not filed
or registered in time provided therein –
✓ It may be filed or registered after that time on payment of such additional fee as may be
prescribed in addition to any fee as is payable for filing of such document or return,
✓ Such document or return shall be filed after due date of filing, without prejudice to any other action
or liability under this Act.
✓ A different fee or additional fee may be prescribed for different classes of LLP or for different
documents or returns required to be filed under this Act or rules made thereunder.
11. Differences with other Forms of Organisation
11.1 Distinction between LLP and Partnership Firm
Basis LLP Partnership firm
Regulating The Limited Liability Partnership The Indian Partnership Act, 1932.
Act Act, 2008.
Body It is a body corporate. It is not a body corporate
corporate
Separate legal It is a legal entity separate from It is a group of persons with no
entity its members. separate legal entity.
Creation By a legal process called By an agreement between the
registration under the LLP Act, partners.
2008.
Registration Registration is mandatory. Registration is voluntary.
Perpetual The death, insanity, retirement Death, insanity, retirement or
succession or insolvency of the partner(s) insolvency of the partner(s) may
does not affect existence of LLP. affect its existence. It has no
perpetual succession.
Name Name of the LLP to contain the No guidelines. The partners can
word limited liability partners have any name as per their
(LLP) as suffix. choice.
Liability Liability of each partner limited Liability of each partner is
to the extent to agreed unlimited. It can be extended up
contribution except in case of to the personal assets of the
willful fraud. partners.

Mutual Each partner can bind the LLP by Each partner can bind the firm
agency his own acts but not the other as well as other partners by his
partners. own acts.
Designated At least 2 designated partners There is no provision for such
partners and at least one of them shall be partners under the Partnership
resident in India. Act, 1932.
Common seal It may have its common seal as There is no such concept in
its official signatures. partnership
Legal Only designated partners are All partners are responsible for
compliances responsible for all the all the compliances and
compliances and penalties under penalties under the Act.
this Act.
Annual filing LLP is required to file: Partnership firm is not required
of documents i) Annual statement of to file any annual document with
accounts the registrar of firms.
ii) Statement of solvency
iii) Annual return every year.
Foreign Foreign nationals can become a Foreign nationals cannot
partnership partner in a LLP. become a partner in a
partnership firm.
Minor as Minor cannot be admitted to the Minor can be admitted to the
partner benefits of LLP. benefits of the partnership with
the prior consent of the existing
partners.
11.2 Distinction between LLP and Limited Liability Company
Basis LLP Limited Liability Company
Regulating The Limited Liability Partnership The Companies Act, 2013.

Act Act, 2008.
Members/ The persons who contribute to The persons who invest the
Partners LLP are known as partners of the money in the shares are known
LLP. as members of the company.
Internal Governed by contract Regulated by statute (i.e.,
governance agreement between the Companies Act, 2013).
structure partners.
Name To contain word “Limited To contain word “limited” and
Liability partnership” or “LLP” as Pvt. Co. to contain the word
suffix. “Private limited” as suffix.
No. of Minimum – 2 members • Private company: Minimum –
members/ Maximum – No such limit on the 2 members Maximum 200
partners members in the Act. members
• Public company:

Minimum – 7 members
Maximum – No such limit on
the members.
• OPC – One member
Members Members of the LLP can be Members can be organizations,
individuals/or body corporate trusts, another business form or
through the nominees. individuals.
Liability of Limited to the extent of agreed Limited to the amount unpaid
members/ contribution in except in case on the shares held by them.
partners intention is fraud.
Management Managed by the partners Managed by the partners
including the designated including the designated
partners authorized in the partners authorized in the
agreement. agreement.
Minimum Minimum 2 designated partners. Pvt. Co. – 2 directors
number of Public co. – 3 directors
directors/
designated
partners
12. Overview

Minimum 2 partners
Characteristics
Minimum 2 designated partners and
one should be resident in India
Name Reservation
Incorporation Incorporate LLP
LLP Agreement
Mutual rights and liabilities to be

governed by LLP Agreement/ First
Schedule
Partners and their
relations Cessation of partnership
Limited Liability
Changes in Partners to be registered

Partnership
Partner is not an agent of other

Liability of LLP and partner
Partners
Unlimited liability in case of fraud
Maintenance of Books of Accounts
Financial Disclosure Statement of Account and Solvency
Annual Return
Firm to LLP
Conversion into LLP
Company to LLP
Voluntary
Winding Up and
dissolution
By tribunal
Differences with other forms of oragnisation

CH-5 – THE COMPANIES ACT, 2013
• Company as a form of business organisation
• Corporate Veil Theory
• Classes of Companies
• Incorporation of Companies
• Classification of Capital and Shares
• Memorandum of Association and Articles of Association
• Doctrine of Ultra Vires and Indoor Management
1. Introduction
• The Companies Act, 2013 was enacted to consolidate and amend the law relating to the companies.
• The Companies Act, 2013 was preceded by the Companies Act, 1956.
• The Companies Act, 2013 contains 470 sections and 7 schedules. The entire Act has been divided
into 29 chapters.
• A substantial part of this Act is in the form of Companies Rules.
• The Companies Act, 2013 aims to improve corporate governance, simplify regulations, strengthen
the interests of minority investors and for the first time legislates the role of whistle-blowers and
provisions relating to class action suit.
• Applicability of the Companies Act, 2013 (Section 1) –

Companies incorporated under this Act or any previous Company law.
Insurance Companies
•Except where the Act is inconsistent with the provisions of the
Insurance Act, 1938 or the IRDA Act, 1999
Banking Companies
Banking Regulation Act, 1949
Companies engaged in the generation or supply of Electricity

Electricity Act, 2003
Any other companies governed by any Special Act for the time
being in force
Such body corporate which are incorporated by any Act for time being in
force, and as the Central Government may by notification specify in this
behalf.
2. Company: Meaning and its Features
2.1 Meaning of the term ‘Company’
Section 2(20) of the Companies Act, 2013 defines Company as –
“Company means a company incorporated under this Act or under any previous company law”.
In the words of Professor Haney “A company is an incorporated association, which is an

artificial person created by law, having a separate entity, with a perpetual succession and a
common seal.”
2.2 Features of a Company
2.2.1 Separate Legal Entity

• When a company is registered, it acquires a separate legal status. Its existence is distinct and
separate from that of its members. Although the capital and assets are contributed by the
shareholders, the company becomes the owner of its capital and assets.
Case Law: Lee V. Lee’s Air Farming Co. Ltd

Facts: Mr. Lee incorporated a company Lee’s Air Farming Co. Ltd. He was the Managing Director and employed as
Chief Pilot of the company. One day while performing his duty as a chief pilot, he loses his life in an air crash. Mrs.
Lee approaches the company to claim compensation for her husband’s death under The Workmen’s Compensation
Act, 1922. She was denied the compensation stating that Lee cannot be both employer and employee at the same
time.
Judgement: Mrs. Lee’s claim was allowed stating that though Mr. Lee was the controller of the company, in the
eyes of law both Lee and the company are different and therefore Mrs. Lee is entitled to receive compensation.
Note: Above case law is not mentioned in ICAI study material. It is given here for better understanding.
• A company can own property, have bank account, raise loans, incur liabilities, and
enter into contracts.
• Even members can contract with company, acquire right against it, or incur liability to it.
• A member does not even have an insurable interest in the property of the company.
Case Law: Macaura v. Northern Assurance Co. Limited (1925)

Facts: Macaura (M) was the holder of nearly all (except one) shares of a timber company. He was also a major
creditor of the company. M insured the company’s timber in his own name. The timber was lost in a fire. M claimed
insurance compensation.
Judgement: The Court held that the insurance company was not liable to him as no shareholder has any right to
any item of property owned by the company, for he has no legal or equitable interest in them.
2.2.2 Perpetual Succession
• Members may die or change, but the company goes on till it is wound up on the grounds
specified by the Act. The shareholders keep changing but that does not affect the existence
of the company.
• The existence of a company is not affected by the death or insolvency of its members.
Example : Many companies in India are in existence for over 100 years. This is possible only due
to the fact that the company has perpetual existence.
2.2.3 Limited Liability
The liability of a member depends upon the kind of company of which he is a member.
• In case of a limited liability company – The liability of the members of the company is
limited to the extent of the nominal value of shares held by them.

• In case of a company limited by guarantee – Members are liable only to the extent of the
amount guaranteed by them and that too only when the company goes into liquidation.
• In case of an unlimited company – Liability of its members is unlimited.
2.2.4 Artificial Legal Person
• A company is an artificial person as it is created by a process other than natural birth.
• A company is legal or judicial as it is created by law.
• A company is a person since it is clothed with all the rights of an individual.
• Further, a company is a separate legal entity. It can do everything which any natural
person can do except be sent to jail, take an oath, marry, or practice a learned profession.
• As the company is an artificial person, it can act only through some human agency, (i.e.)
directors. The directors can act as a company’s agency but are not the agents of the
members of the company. They can either on their own or through a common seal
authenticate the formal acts of the company.
2.2.5 Common Seal
• Common seal is the official signature of a company, which is affixed by the officers and
employees of the company on its every document.
• The common seal is a seal used by a corporation as the symbol of its incorporation.
• However, the Companies Amendment Act, 2015 has made the common seal optional.
• In case a company does not have a common seal, the authorization shall be made by two
directors or by a director and the Company Secretary, wherever the company has appointed
a Company Secretary

Separate Legal Entity
• Distinct and separate from its members
Perpetual Succession
• Not affected by the death or insolvency of its members
Limited Liability
• Liability of Company is different from that of its members
Artificial Legal Person

• Act through human agency but has its own separate legal entity
Common Seal
• Official signature of a company affixed on every document
(optional)
3. Corporate Veil Theory
3.1 Corporate Veil
‘Corporate Veil’ is a legal concept which separates the identity of the company from its members.
Members of a company are shielded from liability connected to the company’s actions. If the
company incurs any debts or contravenes any laws, the corporate veil concept implies that
members should not be liable for those errors. Thus, the shareholders are protected from the
acts of the company.
Salomon Vs. Salomon and Co Ltd. laid down the foundation of the concept of corporate veil or
independent corporate personality.
Case Law: Salomon Vs. Salomon and Co Ltd.

Facts: Salomon incorporated a company named ‘Salomon & Co. Ltd., with seven subscribers consisting of himself, his
wife, four sons and one daughter. This company took over the personal business assets of Salomon for £38,782 and in
turn, Salomon took 20,000 shares of £1 each, debentures worth £10,000 of the company with charge on the company’s
assets and the balance in cash. His wife, daughter and four sons took up one £1 share each. Subsequently, the company
went into liquidation due to general trade depression. The unsecured creditors to the tune of £7,000 contended that
Salomon could not be treated as a secured creditor of the company, in respect of the debentures held by him, as he
was the managing director of one-man company, which was not different from Salomon and the cloak of the company
was a mere sham and fraud.
Judgement: It was held that upon incorporation; a company gets legality of its own and manage it. Even though the
hands receiving the profits may be the same and the same person manage the company. The company in the eyes of
law is not an agent of the people who own it or manage it therefore Salomon & Co. are separate person. Hence,
Salomon being a secured debenture holder is entitled to a repayment prior to other creditors.

3.2 Lifting of Corporate Veil
Lifting the Veil means looking behind the company as a legal person, i.e., disregarding the
corporate entity and paying regard, instead, to the realities behind the legal facade.
Where the Courts ignore the company and concern themselves directly with the members or
managers, the corporate veil may be said to have been lifted.
The following are the cases where company law disregards the principle of corporate
personality or the principle that the company is a legal entity distinct and separate from its
shareholders or members –
3.2.1 To determine the character of the company (enemy or friend)
A company does not have mind or conscience; therefore it cannot be a friend or a foe. It may be
characterized as an enemy company if its affairs are under control of people of an enemy
country. For this purpose, the court may determine the character of persons who are in charge
of the affairs of the company.
Case Law: Daimler Co. Ltd. vs. Continental Tyre & Rubber Co.
Facts: A company was formed in England (Continental Tyre & Rubber Co.) for the purpose of selling tyres made by a
German Company. The German Company held the entire share capital of the English Company and majority directors
of the company were German residents. During the First World War, the English Company commenced an action to
recover trade debt from other English Company (Daimler Co. Ltd.). To which the other company refused to pay the
amount.
Judgement: It was held that the corporate personality of the company be ignored and persons in ultimate control of
the company shall be considered and in this situation the persons controlling the company i.e., Continental Tyre &
Rubber Co. were enemies and hence the amount is not payable.
3.2.2 To protect revenue/tax
Where corporate entity is used to evade or circumvent tax, the Court can disregard the
corporate entity.
Case Law: Dinshaw Maneckjee Petit

Facts: The assessee earned huge income by way of dividends and interest. So, he opened some companies and
purchased their shares in exchange of his income by way of dividend and interest. This income was transferred back
to assessee by way of loan.
Judgement: It was held that the company was not a genuine company at all
but merely the assessee himself disguised under the legal entity of a limited company. Court decided that the private
companies were a sham and the corporate veil was lifted to decide the real owner of the income.
Other Case Laws : Juggilal vs. Commissioner of Income Tax, S. Berendsen Ltd. vs. Commissioner of Inland Revenue
*Assessee is a person liable to tax,
3.2.3 To avoid a legal obligation

Where the courts find that there is avoidance of welfare legislation, it will be free to lift the
corporate veil.
Case Law: Workmen of Associated Rubber Industry ltd., v. Associated Rubber Industry Ltd.
Facts: ‘A Limited’ purchased shares of ‘B Limited by investing a sum of ₹4,50,000. The dividend in respect of these
shares was shown in the profit and loss account of the company, year after year. It was considered for the purpose
of calculating the bonus payable to workmen of the company. Sometime in 1968, the company transferred the
shares of ‘B Limited’, to ‘C Limited’ a subsidiary, wholly owned by it. Thus, the dividend income did not find place in
the Profit & Loss Account of ‘A Limited’, with the result that the surplus available for the purpose for payment of
bonus to the workmen got reduced.
Judgement: It was found that the sole purpose for the formation of the company was to use it as a device to reduce
the amount to be paid by way of bonus to workmen. Thus, the Supreme Court brushed aside the separate existence
of the subsidiary company.
3.2.4 Formation of subsidiaries to act as agents
A company may sometimes be regarded as an agent or trustee of its members, or of another

company, and may therefore be deemed to have lost its individuality in favour of its
principal. Here the principal will be held liable for the acts of that company.
Case Law: Merchandise Transport Limited vs. British Transport Commission

Facts: A transport company wanted to obtain licences for its vehicles, but could not do so if applied in its own
name. It therefore, formed a subsidiary company, and the application for licence was made in the name of the
subsidiary. The vehicles were to be transferred to the subsidiary company.
Judgement: It was held that the parent and the subsidiary were one commercial unit and the application for
licences was rejected.
3.2.5 Company formed for fraud/improper conduct or to defeat law
The legal personality of a company may also be disregarded in the interest of justice where the
company has been incorporated for some fraudulent purpose like defrauding creditors or
defeating or circumventing law.
Case Law: Gilford Motor Co. vs. Horne

Facts: An employee entered a contract with his employer that he will not solicit the customers of the employer after
leaving the employment. After leaving the employment he incorporates a company along with his wife and starts
soliciting customers of the employer.
Judgement: The courts held that the purpose of formation of the company was to avoid a legal obligation arising
from a contract which was not permissible. Therefore, the company was restrained from soliciting the customers
of the employer.

To avoid a
legal
obligation
To protect
To act as
revenue/
agents
evade tax
Lifting of
For trading Corporate For
with the Veil - where fraudulent
enemy company is purpose
formed
4. Classes of Companies under the Act
4.1 On the basis of liability
4.1.1 Company limited by shares
When the liability of the members of a company is limited by its memorandum of association to
the amount (if any) unpaid on the shares held by them, it is known as a company limited by
shares [Section 2(22)].
Thus, for meeting the debts of the company, the shareholder may be called upon to contribute
only to the extent of the amount, which remains unpaid on his shareholdings. His separate
personal property cannot be used to meet the company’s debt.
4.1.2 Company limited by guarantee
• The company having the liability of its members

limited by the memorandum to such amount as
the members may respectively undertake by Guarantee company does not raise its
the memorandum to contribute to the assets of initial working funds from its members.
the company in the event of its being wound up Therefore, such a company may be
[Section 2(21)]. useful only where no working funds are
needed or where funds can be held
Thus, the liability of the member of a company from other sources like donations, fees,
limited by guarantee is limited up to a stipulated etc.
sum mentioned in the memorandum. Members
cannot be called upon to contribute beyond that
stipulated sum.

In case of a ‘Company limited by Guarantee’ the members may be called upon to discharge their liability only
after commencement of the winding up and only subject to certain conditions; and in case of a ‘Company
Limited by Shares’ they may be called upon to do so at any time, either during the company’s life-time or during
its winding up.
• The right of a guarantee company to refuse to accept the transfer by a member of his
interest in the company is on a different footing than that of a company limited by
shares. The membership of a guarantee company may carry privileges much different from
those of ordinary shareholders [Narendra Kumar Agarwal vs. Saroj Maloo (SC)].
4.1.3 Unlimited company
• A company not having any limit on the liability of its members [Section 2(92)].
• In such a company, the liability of a member ceases when he ceases to be a member.
• The liability of each member extends to the whole amount of the company’s debts and
liabilities, but he will be entitled to claim contribution from other members.
• In case the company has share capital, as long as the company is a going concern the
liability on the shares is the only liability which can be enforced by the company.
Member can be called upon to contribute only in the event of winding up of the Company.
4.2 On the basis of members
4.2.1 One person company
• A company which has only one person as a member [Section 2(62)].
• OPC is a private limited company with the minimum paid up share capital as may be
prescribed*and has at least one member
[Section 3(1)(c)].
* No limit prescribed
OPC differs from sole proprietary concern in an aspect that OPC is a separate legal entity with a limited liability of
the member, whereas in the case of sole proprietary, the liability of owner is not restricted, and it extends to the
owner’s entire assets both official and personal.
ints about One Person Company (OPC)

1. Only one person as member.
2. Minimum paid up capital – no limit prescribed

3. The memorandum of OPC shall indicate the name of the other person (nominee), who
shall, in the event of the subscriber’s death or his incapacity to contract, become the
member of the company.
4. Nominee shall give his prior written consent in prescribed form and the same shall be
filed with Registrar of companies (ROC) at the time of incorporation.
5. Nominee may be given the right to withdraw his consent.
6. The member of OPC may at any time change the name of nominee by giving notice to
the company and the company shall intimate the same to the Registrar. Any such change in
the name of the person shall not be deemed to be an alteration of the memorandum.
7. Only a natural person who is an Indian citizen whether resident in India or otherwise
• shall be eligible to incorporate a OPC,
• shall be a nominee for the sole member of a OPC.
Resident – person who has stayed in India for a period of not less than 120 days during
the immediately preceding financial year.
8. No person shall be eligible to incorporate more than one OPC or become nominee in
more than one such company.
9. No minor shall become member or nominee of the OPC or can hold share with beneficial
interest.
10. OPC cannot be incorporated or converted into a company under section 8 of the Act.
Though it may be converted to private or public companies any time after it’s incorporation.
11. OPC cannot carry out Non-Banking Financial Investment activities including
investment in securities of anybody corporate.
12. If OPC or any officer of such company contravenes the provisions, they shall be
punishable with fine –
• which may extend to ₹10,000/- and
• with a further fine which may extend to ₹1,000/- for every day after the first during
which such contravention continues.
4.2.2 Private Company [Section 2(68)]
• Private company means a company having a minimum

paid-up share capital as may be prescribed*, and which by *Nothing has been
its articles, — prescribed.
i) Restricts the right to transfer its shares, and
ii) Except in case of one person company, limits the number of its members to 200.
iii) Prohibits any invitation to the public to subscribe for any securities of the
company.
• Where two or more persons hold one or more shares in a company jointly, they shall, for
the purposes of this clause, be treated as a single member.
• Following persons shall not be included in the number of members –
o Persons who are in the employment of the company; and

o Persons who, having been formerly in the employment of the company, were
members of the company while in that employment and have continued to be
members after the employment ceased.
• Significant Points about a Private Company –
No Maximum
Prohibition OPC can be
minimum number of
on invitation formed only
paid-up Members -
to subscribe as a Private
capital 200 (except
to securities Company
requirement OPC)
Minimum Right to Small

number of transfer company is
Members - 2 shares a Private
(except OPC) restricted Company
• Small Company [Section 2(85)] –
A company, other than a public company, whose –
i) Paid up share capital does not exceed ₹ 2 crores, and
ii) Turnover as per the profit and loss account for the immediately preceding financial
year does not exceed ₹ 20 crores.
Exceptions –
This clause shall not apply to:
✓ A holding company or a subsidiary company,
✓ A company registered under section 8, or
✓ A company or body corporate governed by any Special Act.
Paid up share capital and turnover limits for small company may be increased to such
higher amount as may be prescribed, but which shall not be more than ₹10 crore and
₹100 crore, respectively.
4.2.3 Public company [Section 2(71)]

• ‘Public company’ means a company which –
i) is not a private company; and

*Nothing has been
ii) has a minimum paid-up share capital, as may be prescribed.
prescribed*.
• A company which is a subsidiary of a company, not being a private company, shall be

deemed to be public company for the purposes of this Act even where such subsidiary
company continues to be a private company in its articles.
• Significant Points about a Public Company –
No minimum
Maximum No.
Not a Private paid up
of Members -
Company capital
No limit
prescribed
Subsidiary of
a public
Shares are Minimum No.
company -
freely of Members -
Deemed
transferable 7
Public
Company
4.3 On the basis of control
4.3.1 Holding and subsidiary companies
• Holding company in relation to one or more other

For Sections 2(46) & 2(87),
companies, means a company of which such companies
the expression ‘company’
are subsidiary companies [Section 2(46)].
includes any ‘body
• Subsidiary company in relation to any other company, corporate’.
means a company in which the holding company –
i) controls the composition of the Board of Directors; or
ii) exercises or controls more than one-half of the total voting power either at its own
or together with one or more of its subsidiary companies [Section 2(87)].

a) A company shall be deemed to be a subsidiary company of the holding company even if the control is of
another subsidiary company of the holding company.
b) The composition of a company’s Board of Directors shall be deemed to be controlled by another company
if that other company by exercise of some power can appoint or remove all or a majority of the directors.
Example : B Ltd. controls the composition of the Board of Directors of A Ltd. Thus, A Ltd. will be a
subsidiary of B Ltd.
Example : B Ltd. holds more than 50% of the share capital of A Ltd. A Ltd. will be subsidiary of B Ltd.
Example : B Ltd. is a subsidiary of A Ltd. and C Ltd. is a subsidiary of B Ltd. In such a case, C will be the
subsidiary of A.
4.3.2 Associate company [Section 2(6)]
• Associate Company, in relation to another

company, means a company in which that
Significant Influence means control of
other company has a significant influence,
at least 20% of total voting power, or
but which is not a subsidiary company of the control of or participation in business
company having such influence and includes a decisions under an agreement.
joint venture company.
• Joint Venture – A joint arrangement whereby

the parties that have joint control of the arrangement have rights to the net assets of the
arrangement.
The shares held by a company in another company in a ‘fiduciary capacity’ shall not be counted
for the purpose of determining the relationship of ‘associate company’ under section 2(6) of the
Companies Act, 2013.
Total Share Capital = Paid-up Share Capital + Convertible Preference Share Capital
Example : A Ltd. is a Public Company and holds 23% of share capital in B Ltd. and 15% share
capital of C Ltd. By virtue of the shareholding pattern –
✓ B Ltd. will be known as the Associate Company of A Ltd. (as the holding is more than 20%)
, whereas
✓ C Ltd. will not be Associate as the required 20% holding is not there and hence no
significant influence.

4.4 On the basis of access to capital
4.4.1 Listed company [Section 2(52)]
Listed company is a company which has any of its securities listed on any recognised stock
exchange.
Provided that such class of companies, which have listed or intend to list such class of securities,
as may be prescribed in consultation with the Securities and Exchange Board, shall not be
considered as listed companies.
Example : Tata Motors Limited is a Public Limited Company whose shares are listed in the Stock
Exchange – NSE and BSE. Hence, Tata Motors Limited is a Listed Company.
4.4.2 Unlisted company
Unlisted Company means company other than listed company.
4.5 Other companies
4.5.1 Government company [Section 2(45)]
• Government Company means any company in

which not less than 51% of the paid-up share
capital is held by – For Section 2(45), paid up share
capital shall be construed as total
i) the Central Government, or
voting power, where shares with
ii) by any State Government or Governments, or differential voting rights have been
issued.
iii) partly by the Central Government and
partly by one or more State Government(s)
• A company which is subsidiary of a government company as described above, is also

deemed to be a government company.
4.5.2 Foreign Company [Section 2(42)]
Any company or body corporate incorporated outside India which –
i) has a place of business in India whether by itself or through an agent, physically or

through electronic mode; and
ii) conducts any business activity in India in any other manner.

4.5.3 Formation of companies with charitable objects etc. [i.e., Section 8 company]
• Section 8 of the Companies Act, 2013 deals

with the formation of companies which are
formed to promote the charitable objects
Examples of Section 8 Companies –
of commerce, art, science, sports, education,
FICCI, CII, ASSOCHAM, National
research, social welfare, religion, charity,
Sports Club of India, etc.
protection of environment etc.
• Such company intends to –
▪ Apply its profits or other income in promoting its objects, and
▪ Also prohibit the payment of any dividend to its members.
• Where these conditions specified above are satisfied, the Central Government may
register such person or association of persons as a company with limited liability
without the addition of words ‘Limited’ or ‘Private limited’ to its name, by issuing
licence on such conditions as it deems fit.
• Upon registration the company shall enjoy same privileges and obligations as of a limited
company.
• Revocation of Licence by the CG in the following cases –
▪ The company contravenes any of the requirements or the conditions of this

sections subject to which a licence is issued
▪ The affairs of the company are conducted fraudulently, or violative of the

objects of the company or prejudicial to public interest.
• Before such revocation, the Central Government must give it a written notice of its
intention to revoke the licence and opportunity to be heard in the matter.
• Upon revocation the ROC shall put ‘Limited’ or ‘Private Limited’ against the
company’s name in the register.
• Where a licence is revoked there the Central Government may, in the public interest
order –
▪ The company to be amalgamated with another Section 8 company having

similar objects, or
▪ The company to be wound up
• Penalty/punishment for contravention –
Minimum fine Maximum fine

Company ₹ 10 lakhs ₹ 1 crores
₹ 25,000/- ₹ 25 lakhs

Directors and
If it is proved that the affairs of the company were
every officer
conducted fraudulently, every officer in default shall be
who is in
liable for action under section 447.
default
Significant Points about Section 8 Company

1. Objective – Formed for the promotion of commerce, art, science, religion, charity,
protection environment, sports, etc.
2. Requirement of minimum share capital does not apply.
3. Uses its profits for the promotion of the objective for which formed.
4. Does not declare dividend to members.
5. Operates under a special licence from Central Government.
6. Need not use the word Limited / Pvt. Limited in its name and adopt a more suitable
name such as club, chambers of commerce, etc.
7. Licence shall be revoked if conditions contravened.
8. On revocation, Central Government may direct it to –
• Converts its status and change its name ,
• Wind – up,
• Amalgamate with another company having similar object.
9. Can call its general meeting by giving a clear 14 days’ notice instead of 21 days.
10. Requirement of minimum number of directors, independent directors etc. does not apply.
11. Need not constitute Nomination and Remuneration Committee and Shareholders
Relationship Committee.
12. A partnership firm can be a member of Section 8 company.
4.5.4 Dormant company [Section 455]
• The following companies may make an application to the ROC for obtaining the status of
a dormant company –
i) Inactive company,
ii) A company formed and registered for
✓ A future project or
✓ To hold an asset or intellectual property, and
✓ Has no significant accounting transaction.
• Inactive company – A company which
o has not been carrying on any business or operation, or
o has not made any significant accounting transaction during the last 2 financial
years, or

o has not filed financial statements and annual returns during the last 2 financial
years.
• Significant accounting transaction – Any transaction other than –
i) Payment of fees by a company to the ROC,
ii) Payments made by it to fulfil the requirements of this Act or any other law,
iii) Allotment of shares to fulfil the requirements of this Act, and
iv) Payments for maintenance of its office and records.
4.5.5 Nidhi Companies [Section 406(1)]
Nidhi or Mutual Benefit Society means a company

which the Central Government may, by notification in These companies are formed
the Official Gazette, declare to be a Nidhi or Mutual to promote the habit of saving
Benefit Society, as the case may be. among its members.
4.5.6 Public Financial Institutions (PFI) [Section 2(72)]
The following institutions are regarded as public financial

institutions –
• The Life Insurance Corporation of India, established under the Life Insurance
Corporation Act, 1956,
• The Infrastructure Development Finance Company Limited,
• Specified company referred to in the Unit Trust of India (Transfer of Undertaking and
Repeal) Act, 2002,
• Institutions notified by the Central Government under section 4A(2) of the

Companies Act, 1956 so repealed under section 465 of this Act,
• Such other institution as may be notified by the Central Government in consultation

with the Reserve Bank of India.

Conditions for an Institution
to be notified as PFI
Established or
At least 51% of the
constituted by or
paid-up share
under any Central
capital is held by -
or State Act
Partly by the CG
By any State
and partly by one
The CG, or Government(s),
or more State
or
governments
5. Mode of Registration/Incorporation of a Company
5.1 Promoters [Section 2(69)]
Section 2(69) of the Companies Act, 2013 defines Promoters as a person –
a) who has been named as such in a prospectus or is identified by the company in the
annual return referred to in section 92; or
b) who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise; or
c) in accordance with whose advice, directions, or instructions the Board of Directors of

the company is accustomed to act.
• Persons who form the company are known as promoters.
• They conceive the idea of forming the company and take all necessary steps for its
registration.
• However, persons acting in a professional capacity such as, the solicitor, banker,
accountant etc. are not regarded as promoters.
5.2 Formation of Company [Section 3]
A company may be formed for any lawful purpose by –
a) 7 or more persons in case of a Public Company,

b) 2 or more persons in case of a Private Company, and
c) 1 person in case of a One Person Company,
by subscribing their names to Memorandum of Association and complying with the requirements
of this Act in respect of registration.
Public Private
OPC
Company Company
7 or more 2 or more
1 person
persons persons
5.3 Incorporation Of Company [Section 7]
Filing of
Issue of
documents and
Certificate of Allotment of CIN
information with
Incorporation
the ROC
Effect of Maintenance of
Order of the furnishing false or copies of all
Tribunal incorrect documents and
information information
5.3.1 Filing of the documents and information with the registrar
The following documents and information shall be filed with the registrar within whose
jurisdiction the registered office of the company is proposed to be situated –
MOA and AOA The Memorandum of Association (MOA) and the Articles of
Association (AOA) signed by all the subscribers.
Declaration • By a person engaged in the formation of the company
(like advocate, CA, CS etc.) and a person named in the
AOA (director, manager etc).
• Declaration that all the requirements of this Act and
the Rules in respect of Registration have been
complied with.
Declaration from • He is not convicted of any offence in connection with
each of the the promotion, formation, or management of any
Subscribers and company,
First Directors

• He has not been found guilty of any fraud or
misfeasance or of any breach of duty to any company
during the last five years, and
• That all the documents filed with the Registrar for
registration of the company contain information that is
correct and complete and true to the best of his
knowledge and belief.
Address The address for correspondence till its registered office is
established
Particulars of • Including name, surname or family name, residential
every subscriber address, nationality, and other particulars.
• Along with proof of identity, and in the case of a
subscriber being a body corporate, such particulars as
may be prescribed.
Particulars of Including their names, surnames, Director Identification
First Directors Number (DIN), residential address, nationality etc., along
with proof of identity.
Particulars of • Particulars of Interests of the persons mentioned in the
Interests articles as the first directors of the company in other
firms or bodies corporate, and
• their consent to act as directors of the company in such
form and manner as may be prescribed.
5.3.2 Issue of certificate of incorporation on registration
The Registrar shall, on the basis of documents and information filed, register all the documents
and information in the register and issue a certificate of incorporation in the prescribed
form to the effect that the proposed company is incorporated under this Act.
5.3.3 Allotment of Corporate Identity Number (CIN)
• On and from the date mentioned in the certificate of incorporation, the Registrar shall
allot to the company a corporate identity number (CIN).
• CIN shall be a distinct identity for the company and shall also be included in the certificate.
5.3.4 Maintenance of copies of all documents and information
• At its registered office.
• Till the company is dissolved under this act.
5.3.5 Furnishing of false or incorrect information or suppression of material fact at the time of
incorporation
If any person furnishes any false or incorrect particulars, or suppress any material information,
of which he is aware, in any of the documents filed with the ROC in relation to registration of a
company, he shall be liable for fraud u/s 447.

5.3.6 Company already incorporated by furnishing any false or incorrect information or
representation or by suppressing any material fact
Where, at any time after the incorporation of a company, it is proved that the company has
been got incorporated by
i) furnishing any false or incorrect information or representation or by suppressing any

material fact or information in any of the documents or declaration filed or made for
incorporating such company, or
ii) any fraudulent action,
the promoters, the persons named as the first directors of the company and the persons
making declaration under this section shall each be liable for action for fraud u/s 447.
5.3.7 Order of the Tribunal
Where a company has been got incorporated by furnishing false or incorrect information or
representation or by suppressing any material fact or information in any of the documents or
declaration filed or by any fraudulent action, the Tribunal may, on an application made to it,
on being satisfied that the situation so warrants,—
a) Pass such orders, as it may think fit, for regulation of the management of the
company including changes, if any, in its memorandum and articles, in public interest or
in the interest of the company and its members and creditors; or
b) Direct that liability of the members shall be unlimited; or
c) Direct removal of the name of the company from the register of companies; or
d) Pass an order for the winding up of the company; or
e) Pass such other orders as it may deem fit.
Before making any order –
• The company shall be given a reasonable opportunity of being heard in the matter;
and
• The tribunal shall take into consideration the transactions entered into by the
company, including the obligations, if any, contracted or payment of any liability.
Simplified Proforma for Incorporating Company Electronically (SPICe)
In a step towards easy setting up of business, MCA has simplified the process of filing of forms for incorporation
of a company through Simplified Proforma for incorporating company electronically. Now, SPICe+ form has also
been launched that further eases the registration process.

5.4 Effect of Registration [Section 9]
From the date of incorporation,
✓ The subscribers to the memorandum and all other persons, who may from time to time
become members of the company, shall be a body corporate by the name contained in
the memorandum,
✓ Capable of exercising all the functions of an incorporated company under this Act, and
✓ Having perpetual succession,
✓ With power to acquire, hold and dispose of property, both movable and immovable,
tangible, and intangible, to contract and to sue and be sued, by the said name.
Various Case Laws relating to the effect of registration of a Company

Hari Nagar Sugar Mills Ltd. From the date of incorporation mentioned in the certificate, the
vs. company becomes a legal person separate from the incorporators
S.S. Jhunjhunwala and there comes into existence a binding contract between the
company and its members as evidenced by the MOA & AOA.
State Trading Corporation A company on registration acquires a separate existence and the
of India vs. Commercial law recognises it as a legal person separate and distinct from its
Tax Officer members.
Spencer & Co. Ltd. Madras Merely because a company purchases all shares of another
vs. company it will not serve as a means of putting an end to the
CWT Madras corporate character of another company and each company is a
separate juristic entity.
Heavy Electrical Union The mere fact that the entire share capital has been contributed by
vs. the Central Government and all its shares are held by the President
State of Bihar of India and other officers of the Central Government does not
make any difference in the position of registered company and it
does not make a company an agent either of the President or the
Central Government.
5.5 Effect of Memorandum and Articles [Section 10]
• Memorandum and articles when registered, shall bind the company and the members thereof
to the same extent as if they respectively had been signed by the company and by each member,
and an agreement to observe all the provisions of the memorandum and of the articles.
• All monies payable by any member to the company under the memorandum or articles shall
be a debt due from him to the company.

6. Classification of Capital
• In relation to a company limited by shares, the word capital means share-capital, i.e., the capital
or figure in terms of so many rupees divided into shares of fixed amount.
• The proportion of the capital to which each member is entitled, is his share.
• A share is not a sum of money; it is rather an interest in the company measured by a sum of
money and made up of various rights contained in the contract.
6.1 Nominal or authorised or registered capital [Section 2(8)]
• ‘Authorised capital’ or ‘Nominal capital’ means such capital as is authorised by the

memorandum of a company to be the maximum amount of share capital of the company.
• Thus, it is the maximum amount which the company is authorised to raise by issuing shares,
and upon which it pays the stamp duty.
6.2 Issued capital [Section 2(50)]
• ‘Issued capital’ means such capital as the company

Schedule III to the Companies Act,
issues from time to time for subscription.
2013, makes it obligatory for a
• It is that part of authorised capital which is offered company to disclose its issued
by the company for subscription capital in the balance sheet.
• It includes the shares allotted for consideration other

than cash.
6.3 Subscribed capital [Section 2(86)]
‘Subscribed capital’ means such part of the capital which is for the time being subscribed by
the members of a company.
Where any notice, advertisement or other official communication or any business letter, bill head or letter paper
of a company states the authorised capital, the subscribed and paid-up capital must also be stated in equally
conspicuous characters.
A default in this regard will make the company and every officer who is in default liable to pay penalty extending
₹ 10,000 and ₹ 5,000 respectively. [Section 60].
6.4 Called-up capital [Section 2(15)]
‘Called-up capital’ means such part of the capital, which has been called for payment.
6.5 Paid-up capital

The total amount paid or credited as paid up on shares issued.
Paid-up share capital = Called-up capital – Calls in arrears
Authorised Capital
Issued Capital
Subscribed Capital
Called-up Capital
Paid-up Capital
7. Shares
• Section 2(84) of the Companies Act, 2013 defines the term ‘share’ which means a share in the share
capital of a company and includes stock.
• Share is an interest in the company [Borland Trustees vs. Steel Bors. & Co. Ltd.]
• It represents such proportion of the interest of the shareholders as the amount paid up thereon
bears to the total capital payable to the company.
• It is a measure of the interest in the company’s assets to which a person holding a share is entitled.
• The shares or debentures or other interests of any member in a company shall be movable
property transferable in the manner provided by the articles of the company [Section 44].
• Every share in a company having a share capital, shall be distinguished by its distinctive number
[Section 45]. (Doesn’t apply in the case of shares held in dematerialised form in the depository)

Types of Share Capital
[Section 43]
Equity Share Preference Share

Capital Capital
With uniform With Differential

Voting Rights Voting Rights
7.1 Equity share capital
‘Equity share capital’, with reference to any company limited by shares, means all share capital
which is not preference share capital. It comprises shares
(1) with voting rights; or

(2) with differential rights as to dividend, voting or otherwise in accordance with prescribed rules
Note: Tata Motors in 2008 introduced equity shares with differential voting rights called ‘A’ equity
shares in its rights issue. In the issue, every 10 ‘A’ equity shares carried only one voting right but
would get 5 percentage points more dividend than that declared on each of the ordinary shares.
Since ‘A’ equity share did not carry the similar voting rights, it was being traded at discount to other
common shares having full voting. Such shares are called equity shares with differential voting
rights (DVRs).
7.2 Preference share capital
• ‘Preference share capital’, with reference to any company limited by shares, means that part of
the issued share capital of the company which carries or would carry a preferential right
with respect to—
a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate,

and
b) repayment, in the case of a winding up or repayment of capital, of the amount of the

share capital paid-up or deemed to have been paid-up.
• Capital shall be deemed to be preference capital despite that it is entitled to either or both of
the following rights –
i) that in respect of dividends, in addition to the preferential rights to the amounts

specified as above, it has a right to participate with capital not entitled to the
preferential right aforesaid,
ii) that in respect of capital, in addition to the preferential right to the repayment, on a
winding up, of the amounts specified above, it has a right to participate with capital

not entitled to that preferential right in any surplus which may remain after the
entire capital has been repaid.
In case of private company, Section 43 shall not apply where memorandum or articles of
association of the private company so provides.
8. Memorandum of Association
The Memorandum of Association defines the company’s constitution and the scope of the powers
of the company with which it has been established under the Act. It is the very foundation on which the
whole edifice of the company is built.
8.1 Object of registering a memorandum of association
MOA identifies the scope of operations of a company beyond

which it cannot go.
MOA enables all those who deal with the company to

know what its powers are and what activities it can engage
in.
MOA helps the shareholders to know the purposes for which

his money can be used by the company and the risk he is
taking by investing therein.
• A company cannot enter into a contract or engage in any trade or business, which is
beyond the power confessed on it by the memorandum. If it does so, it would be ultra vires
the company and void.
• MOA of a company shall be drawn up in such form as is given in Tables A, B, C, D and E in

Schedule I of the Companies Act, 2013 [Section 4].
Table A Form for MOA of a company limited by shares.

Form for MOA of a company limited by guarantee and not
Table B
having a share capital.
Form for MOA of a company limited by guarantee and having a
Table C
share capital.

Table D Form for MOA of an unlimited company.
Form for MOA of an unlimited company and having share
Table E
capital.
8.2 Contents of the memorandum
8.2.1 Name Clause
• The memorandum of the company shall state, in relation to the name clause, the name of the
company with the last word
o ‘Limited’ in the case of a public limited company, or
o ‘Private Limited’ in case of a private limited company.
• Section 8 company –
o This clause is not applicable to Section 8 company.
o In case of Section 8 company formed in accordance with the Electoral Trusts

Scheme, 2013 notified by the Central Board of Direct Taxes (CBDT), the name including
phrase ‘Electoral Trust’ may be allowed.
o Also, for the Companies under section 8 of the Act, the name shall include the words
foundation, Forum, Association, Federation, Chambers, Confederation, council,
Electoral trust, and the like etc.
• Government Company – A Government company’s name must end with the word
‘Limited’.
• One Person Company – In the case of One Person Company, the words ‘One Person
Company’, should be included below its name.
8.2.2 Registered Office clause
The State in which the registered office of the company is to be situated.
8.2.3 Object clause
• The objects for which the company is proposed to be incorporated and any matter
considered necessary in furtherance thereof.
• If Company has changed its activities which are not reflected in its name – It shall
change its name in line with its activities within a period of 6 months from the change of
activities after complying with all the provisions as applicable to change of name.
8.2.4 Liability clause
This clause covers details on liability of members of a company, whether limited or unlimited,
and also state –

• In the case of a company limited by shares, that the liability of its members is limited to
the amount unpaid, if any, on the shares held by them; and
• In the case of a company limited by guarantee, that the liability of its members is limited
to the amount up to which each member undertakes to contribute –
o to the assets of the company in the event of its being wound-up, for payment of
the debts and liabilities of the company
o to the costs, charges, and expenses of winding-up and for adjustment of the rights of
the contributories among themselves
8.2.5 Capital Clause
The amount of authorized capital divided into share of fixed

amounts and the number of shares which the subscribers to
A company not having share
the memorandum have agreed to take, indicated opposite their capital need not have the
names, which shall not be less than one share. Capital Clause.
8.2.6 Association Clause
Every subscriber to the memorandum shall take at least one share and shall write against his
name the number of shares taken by him.
8.2.7 Nomination Clause
In the case of OPC, the name of the person who, in the event of death of the subscriber, shall
become the member of the company.
The above clauses of the Memorandum are called compulsory clauses, or ‘Conditions’. In addition
to these a memorandum may contain other provisions, for example rights attached to various
classes of shares.
8.3 Signatories to the memorandum
• The memorandum must be printed, divided into paragraphs, numbered consecutively.
• It should be signed by at least 7 persons (two in the case of a private company and one in the
case of One Person Company) in the presence of at least one witness, who will attest the
signatures. The particulars about the signatories to the memorandum as well as the witness, as
to their address, description, occupation etc., must also be entered.

A company being a legal person can through its agent, subscribe to the memorandum. However, a minor cannot
be a signatory to the memorandum as he is not competent to contract. The guardian of a minor, who subscribes
to the memorandum on his behalf, will be deemed to have subscribed in his personal capacity.
9. Doctrine of Ultra Vires
• The term ultra vires means ‘beyond (their) powers’. The legal phrase “ultra vires” is applicable only
to acts done in excess of the legal powers of the doers.
• When an act is performed, which though legal in itself, is not authorized by the object clause of
the memorandum, or by the statute, it is said to be ultra vires the company, and hence null and
void.
• An act which is ultra vires (i.e., beyond the powers of) is void and does not bind the company.
Neither the company nor the contracting party can sue on it.
• An act which is ultra vires the company being void, cannot

be ratified by the shareholders of the company.
An ultra vires contract can never be
Example : If you have supplied goods or performed service on made binding on the company. It
such a contract or lent money, you cannot obtain payment or cannot become “Intra vires” by
recover the money lent. reasons of estoppel, acquiescence,
Iapse of time, delay, or ratification.
▪ But if the money advanced to the company has not
been expended, the lender may stop the company from
parting with it by means of an injunction; this is because
the company does not become the owner of the money, which is ultra vires the company.
▪ If the ultra vires loan has been utilised in meeting lawful debt of the company then the lender
steps into the shoes of the debtor paid off and consequently he would be entitled to recover
his loan to that extent from the company.
• Sometimes, act which is ultra vires can be regularised by ratifying it subsequently –
o If the act is ultra vires the power of the directors, the shareholders can ratify it,
o If the act is ultra vires the articles of the company, the company can alter the articles,
o If the act is within the power of the company but is done irregularly, shareholder can
validate it.

Case Law: Ashbury Railway Carriage and Iron Company Limited v. Riche
Facts: The main objects of a company were:
a) To make, sell or lend on hire, railway carriages and wagons.
b) To carry on the business of mechanical engineers and general contractors.
c) To purchase, lease, sell and work mines.
d) To purchase and sell as merchants or agents, coal, timber, metals etc.
Directors of the company entered a contract with Riche, for financing the construction of a railway line in Belgium,
and the company further ratified this act of the directors by passing a special resolution. The company however,
repudiated the contract as being ultra-vires. And Riche brought an action for damages for breach of contract. His
contention was that the contract was well within the meaning of the word general contractors and hence within its
powers. Moreover, it had been ratified by a majority of share-holders.
Judgement: It was held that the contract was null and void. The Court held that the word 'general contractors' had
to be given a restricted meaning. Only such contracts could be covered in the term 'general contractors' as are in
some way related or connected with mechanical engineering. Therefore, the company could not finance the
construction of a railway line by alleging that such a business falls under the business of general contractors.
10. Articles of Association
• The articles of association (AOA) of a company are its rules and regulations, which are framed to
manage its internal affairs.
• Just as the memorandum contains the fundamental conditions upon which the company is allowed
to be incorporated, so also the articles are the internal regulations of the company [Guiness vs. Land
Corporation of Ireland].
• It regulates domestic management of a company and creates certain rights and obligations
between the members and the company [S.S. Rajkumar vs. Perfect Castings (P) Ltd.].
• AOA are the bye-laws of the company according to which director and other officers are required to
perform their functions as regards the management of the company, its accounts and audit
10.1 Contents of the Articles [Section 5]
• The articles of a company shall contain the regulations for management of the company.
• The articles shall also contain such matters, as are prescribed under the rules.
• However, a company may also include such additional matters in its articles as may be
considered necessary for its management.
10.2 Entrenchment Provision [Section 5]
• The articles may contain provisions for entrenchment (to protect something). It is such
provision in AOA that makes certain amendments either more difficult or impossible to
pass, making such amendments inadmissible.

• The provision for entrenchment may be made –
i) at the time of formation of the company; or
ii) by an amendment to the articles,
▪ with the consent of all members, in case of a private company
▪ by passing a special resolution, in case of a public company.
• Where the articles contain provisions for entrenchment, the company shall give notice to the
Registrar of such provisions in such form and manner as may be prescribed.
10.3 Forms of Articles [Section 5]
• The articles of a company shall be in respective forms specified in Tables, F, G, H, I and J

in Schedule I as may be applicable to such company.
• A company may adopt all or any of the regulations contained in the model articles applicable
to such company.
• Where the registered articles of a company registered after the commencement of this Act
do not exclude or modify the regulations contained in the model articles applicable to
such company, those regulations shall, so far as applicable, be the regulations of that
company as if they were contained in the duly registered articles of the company.
Memorandum of Association vs. Articles of Association
Basis of
Memorandum of Association (MOA) Articles of Association (AOA)
Difference
Objectives Defines and delimits the objectives of the Lays down the rules and regulations for
company. the internal management of the
company. AOA determine how objectives
of company are to be achieved.
Relationship Defines relationship of company with Define relationship between company

outside world. and its members.
Alteration Can be altered only under certain Can be altered simply by passing a
circumstances and in manner provided special resolution.
in the Act.
Ultra Vires Acts done by company beyond the scope Acts ultra-vires the articles can be ratified
of MOA are ultra-vires and void. These by a special resolution of the
cannot be ratified even by unanimous shareholders, provided they are not
consent of all shareholders. beyond provisions of MOA.
11. Doctrine of Indoor Management
11.1 Doctrine of Constructive Notice

• Section 399 of the Companies Act, 2013 provides that any person can inspect by electronic
means any document kept by the Registrar, or make a record of the same, or get a copy
or extracts of any document, including certificate of incorporation of any company, on
payment of prescribed fees.
• The doctrine of Constructive Notice means that –
o Whether a person reads the documents or not, he is presumed to have knowledge

of the contents of the documents. He is not only presumed to have read the documents
but also understood them in their true perspective, and
o Every person dealing with the company not only has the constructive notice of the
memorandum and articles, but also of all the other related documents, such as Special
Resolutions etc., which are required to be registered with the Registrar.
Thus, if a person enters a contract which is beyond the powers of the company as defined
in the memorandum, or outside the authority of directors as per memorandum or articles,
he cannot acquire any rights under the contract
against the company.
It is duty of every person dealing
11.2 Doctrine of Indoor Management with a company to inspect its
documents and make sure that
• The Doctrine of Indoor Management is the exception to his contract is in conformity with
the doctrine of constructive notice. their provisions.
• It can be explained with the help of a landmark case: The
Royal British Bank vs. Turquand, and thus, is popularly
known as Turquand Rule.
Case Law: Royal British Bank vs. Turquand

Facts: Mr. Turquand was the liquidator of the insolvent Cameron’s Coalbrook Steam, Coal and Swansea
and Loughor Railway Company. The company had given a bond for £2,000 to the Royal British Bank,
which secured the company’s drawings on its current account. The bond was under the company’s seal,
signed by two directors and the secretary. When the company was sued, it alleged that under its the
articles of association, directors only had power to borrow up to an amount authorized by a company
resolution. A resolution had been passed but not specifying how much the directors could borrow.
Judgement: It was decided that the bond was valid as the bank was deemed to be aware that the
directors could borrow only up to the amount resolutions allowed. AOA were registered with Companies
House, so there was constructive notice. But the bank could not be deemed to know which ordinary
resolutions passed, because these were not registrable. The bond was valid because there was no
requirement to look into the company’s internal workings. This is the indoor management rule, that the
company’s indoor affairs are the company’s problem.
11.3 Exceptions to the doctrine of Indoor Management

Knowledge of
Irregularity
Suspicion of
Irregularity
Forgery
11.3.1 Actual or constructive knowledge of irregularity
Where the person dealing with the company has knowledge of irregularity within the
company, the benefit under the doctrine of indoor management would not be available.
Example : The directors cannot not defend the issue of debentures to themselves because they
should have known that the extent to which they were lending money to the company required
the assent of the general meeting which they had not obtained [Howard vs. Patent Ivory
Manufacturing Co.].
11.3.2 Suspicion of Irregularity
• If there are suspicious grounds surrounding a transaction, but the person dealing with
company fails to make reasonable inquiry, the benefit of doctrine of indoor management
will not be available.
• The doctrine in no way, rewards those who behave negligently. Where the person dealing
with the company is put upon an inquiry, for example, where the transaction is unusual or
not in the ordinary course of business, it is the duty of the outsider to make the necessary
enquiry.
Example : A person accepted a transfer of a company’s property from its accountant. The
transfer was held void as such person could not have supposed, in absence of a power of attorney
that the accountant had authority to effect transfer of the company’s property [Anand Bihari Lal
vs. Dinshaw & Co.].
Case Law: Haughton & Co. v. Nothard, Lowe & Wills Ltd.
Facts: A person holding directorship in two companies agreed to apply the money of one company
in payment of the debt to other.
Judgement: It was held that the situation was something so unusual that the plaintiff (company
which filed the case and for whose debt, payment was applied), should have made an inquiry to
ascertain whether the person (director who had ownership in both companies) making the
contract had any authority in fact to make it.

11.3.3 Forgery
• The rule of indoor management does not extend to transactions involving forgery.
• In case of forgery, it is not that there is absence of free consent but there is no consent at
all. Since there is no consent at all there is no transaction. Consequently, it is not that the title
of person is defective but there is no title at all.
Case Law: Ruben v Great Fingall Consolidated

Facts: The plaintiff was the transferee of a share certificate issued under the seal of the defendant’s
company. The company’s secretary, who had affixed the seal of the company and forged the signature
of the two directors, issued the certificate. The plaintiff contended that whether the signature were
genuine or forged was part of the internal management, and therefore, the company should be estopped
from denying genuineness of the document.
Judgement: The Court held, that the doctrine of Indoor Management has never been extended to cover
such a complete forgery. Thus, the certificate was held to be invalid.

12. Overview
Separate Legal Entity, Perpetual

Features Succession, Limited liability,
Artificial legal person
Company is different from its

Corporate Veil members
Theory
Lifting of Corporate Veil
On the basis of liability,

Classes of
members, control, access to
Companies
capital
Register with ROC
Incorporation of Certificate of Incorporation and

Company Allotment of CIN
For easy filing - SPICe

Companies Act,
2013 Classification of Nominal, Issued, Subscribed,
Capital Called-up, Paid-up
Equity share capital - with

uniform rights & with differential
Shares rights
Preference Share Capital
Defines object and scope of

MOA
company
Defines rules, regulations, or bye-

AOA
laws of the company
Doctrine of Ultra Vires
Doctrines Doctrine of Constructive Notice
Doctrine of Indoor Management

INCORPORATION OF THE COMPANY AND MATTERS INCIDENTAL
THERETO
• Explain the formation & incorporation of a company (Private Limited/ Public Limited), One Person
company (OPC) and the formation of not for profit organization (Section 8 company).
• Identify the need for Memorandum of Association (MOA) and Articles of Association (AOA) and
changes incidental thereto.
• Know the effect of registration.
• Explain and identify the concept related to registered office of company.
• Know how the service of documents is effected.
• Know about Authentication of documents, proceedings and contracts and Excecution of bills of
exchange, etc.
INTRODUCTION TO INCORPORATION OF COMPANIES
1.1 Incorporation
Incorporation of a company means the process of registration of a company to bring it to

existence as a separate legal entity.
1.2 Promoter
The registration procedure is undertaken by ‘Promoters’ of the company. They are the founders of the
company & they pitch the initial ideas for business.
Section 2(69) of the Companies Act, 2013 defines the term “Promoter” which means a person-
a) Who has been named as such in a prospectus or is identified by the company in the annual
return referred to in section 92; or
b) Who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise; or

c) In accordance with whose advice, directions or instructions the Board of Directors of
the company is accustomed to act.
A person who is acting

Provided that nothing in sub clause (c) shall apply to a merely in professional
person who is acting merely in a professional capacity. capacity shall not be
regarded as promoter,
e.g., the solicitor, banker,
accountant etc. are not
regarded as promoters.
FORMATION OF COMPANY
Section 3 of the Companies Act, 2013 deals with the basic requirement with respect to the constitution of the
company.
2.1 Minimum number of Members [Section 3(1)]
A company may be formed for any lawful purpose by-

a) 7 or more persons, where the company to be formed is to be a public company;
b) 2 or more persons, where the company to be formed is to be a private company; or
c) 1 person, where the company to be formed is to be One Person Company that is to say, a
private company,
by subscribing their names or his name to a memorandum and complying with the
requirements of this Act in respect of registration.
Section 2(62) defines a One Person Company means a company which has only one person as a
member.
One
Public Private
Person
Company Company
Company
7 or more 2 or more
1 person
persons persons

2.2 Types of companies based on Liability [Section 3(2)]
A company formed under sub-section (1) may be either-

a) A company limited by shares; or
b) A company limited by guarantee; or
c) An unlimited company
2.2.1 Company limited by Shares:
Section 2(22) defines a “company limited by shares” which means a company having the liability
of its members limited by the memorandum to the amount, if any unpaid on the shares
respectively held by them.
2.2.2 Company limited by Guarantee:
Section 2(21) defines a “company limited by guarantee” which means a company having the
liability of its members limited by the memorandum to such amount as the members may
respectively undertake to contribute to the assets of the company in the event of its being
wound up.
2.2.3 Unlimited Company:
Section 2(92) defines an “unlimited company” which means a company not having any limit on
the liability of its members.
Company limited by shares
• The Liability of the shareholders is limited to the amount which is

unpaid on shares.
Company limited by guarantee
• Some of the shareholders agree to take up extra guarantee to pay

an extra amount at the time of winding up.
Unlimited Company
• Shareholders who have agreed to take the unlimited liability will

bring any amount of assets in order to satisfy the liabilities and the
payment of the shareholders at the time of winding up.
2.3 Penalty if minimum members criteria not met [Section 3A]
If at any time the number of members of a company is reduced,
✓ In case of a public company, below 7,

✓ In case of a private company, below 2,

And the company carries on business for more than 6 months while the number of members is so
reduced, then,
→ Every person
o who is a member of the company during the time that it so carries on the
business after those 6 months and
o who is cognizant (i.e., aware) of the fact that it is carrying on business with less
than 7 members or 2 members, as the case may be
→ shall be
o severally liable for the payment of the whole debts of the company contracted
during that time (i.e., after 6 months) and
o may be severally sued therefore.
Ltd. by shares
with capital
Ltd. by
Private guarantee without
(including
capital
OPC)
with capital
Unlimited
Company without
capital
Ltd. by shares
with capital
Limited by
guarantee without
Public
capital
with capital
unlimited
without
capital
MEMORANDUM OF ASSOCIATION (MOA)
Section 4 of the Companies Act, 2013 seeks to provide for the requirements with respect to memorandum
of a company.
3.1 Memorandum

Section 2(56) defines “Memorandum” which means the memorandum of association (MOA) of a
company as originally framed or as altered from time to time in pursuance of any previous company law
or of this Act.
The memorandum of a company shall be in respective forms as outlined below (Specified in
Memorandum is the base document for the formation of the company and along with, the Articles of
Association (AOA) is regarded as the Constitution of the Company.
Schedule I):
Sl.No. Table Form

1. Table A MOA of a company limited by shares
2. Table B MOA of a company limited by guarantee and not
having share capital
3. Table C MOA of a company limited by guarantee and
having share capital
4. Table D MOA of an unlimited company and not having
share capital
5. Table E MOA of an unlimited company and having share
capital
3.2 Object of registering a memorandum of association
Enables all the

Identifies the possible
stakeholders to know
scope of its operations
what its powers are and
beyond which its actions
what activities it can
cannot go
engage in
Shareholders
Every person entering
understands the
into a contract with the
purposes for which his
company is presumed to
money can be used by
have the knowledge of
the company and the
the conditions contained
risk he is taking by
therein
making such investment
The company cannot depart from the provisions contained in the memorandum however
imperative (i.e., utmost imperative) may be the necessity for the departure. If it does so, it would
be ultra-vires the company and void.

3.3 Content of Memorandum of Association
Memorandum of Association contains the following clauses:
• Name Clause
• Object Clause
• Liability Clause
• Capital Clause
• Domicile/ Situation Clause
• Subscription Clause
• Nomination Clause
3.4 Name Clause
The memorandum of the company shall state, in relation to the name clause, the name of the
company with the last word
• “Limited” in the case of a public limited company, or
• “Private Limited” in case of a private limited company.
3.4.1 Restrictions on Name of the company
Name of the company should not be:
✓ Offensive
✓ Identical to existing Name of another company
✓ Similar to existing Name of another company
✓ Undesirable w.r.t. the objects of the company
✓ Indicating association with government of India (unless approved by government)
✓ Containing word “national” unless specific permission obtained from central
government
✓ Containing word “bank” unless it is involved in banking business.
Companies (Incorporation) Rules, 2014

Rules governing name of companies
Rule 8B: word or

Rule 8: Names which
expression which can be
resemble too nearly Rule 8A: Undesirable
used only after
with name of existing Names
obtaining previous
company
approval of CG
3.4.2 Reservation of name

a) Application for reserving a name as
• The name of the proposed company; or

• The name to which the company proposes to change its name
Shall be made to the Registrar in the prescribed form and along with fee.
Application for reserving name for proposed company
A person may make an application in SPICe+ (Simplified Proforma for Incorporating Company
Electronically Plus: INC-32) accompanied by fee, as provided in the Companies (Registration Offices
and Fees) Rules, 2014, to the Registrar for reservation of a name set out in the application as name of
the proposed company.
Resubmission shall be allowed within 15 days, for rectification of defect, if any.
A person may make an application, using web service RUN (Reserve Unique Name) along with fee as
provided in the Companies (Registration Offices and Fees) Rules, 201
b) Upon receipt of the application, the Registrar may, reserve the name of the company for a
period of 20 days from the date of approval or such other period as may be prescribed.
c) In case of an application for reservation of name or for change of its name by an existing
company, the Registrar may reserve the name for 60 days from the date of approval.
d) Cancelling the name:

Where after reservation of name, it is found that the name was applied by furnishing wrong or
incorrect information, then:
✓ If the company has not been incorporated:

o The reserved name shall be cancelled, and
o Person who has made the application shall be liable to a penalty which may
extend to Rs. One Lakh.
✓ If the company has been incorporated:
o Direct the company to change its name within a period of 3 months, after
passing an ordinary resolution;
o Take action for striking off the name of the company from the register of
companies; or
o Make a petition for winding up of the company.
3.5 Object Clause
It contains the objects for which the company is proposed to be incorporated and any matter
necessary in furtherance thereof.
Specified IFSC Public Company & IFSC Private company shall state its objects to do financial services
activities as permitted under the Special Economic Zones Act, 2005 read with SEZ Rules, 2006 and any
matter considered necessary in furtherance thereof in accordance with license to operate, from
International Financial Services Centre located in an approved multi services Special Economic Zone,
granted by the RBI, SEBI, or IRDA

3.6 Liability Clause
This clause covers details on liability of members of a company, whether limited or unlimited
3.7 Capital Clause
In case of company limited by shares:
• the amount of share capital with which the company is to be registered,

• The division of share capital into shares of a fixed amount,
• The number of shares which the subscribers to the memorandum agree to
subscribe which shall not be less than one share, and
• The number of shares each subscriber to the memorandum intends to take,
indicated opposite his name.
In case of an OPC, this clause covers the name of the person (i.e., nominee) who in the event of death
of subscriber, shall become the member of the company.
3.8 Domicile/ Situation Clause
This clause mentions the name of the federal state where the registered office of the company is to
be situated.
3.9 Subscription Clause
It states the purpose of the subscribers to incorporate the company wherein they agree to take the
shares in the company based on the number written in the Memorandum. It contains signatures of
such subscribers.
ARTICLES OF ASSOCIATION (AOA)
Section 5 of the Companies Act, 2013 seeks to provide the contents and model of articles of association.
4.1 Articles
Section 2(5) defines “Articles” which means the articles of association of a company as originally framed
or as altered from time to time or applied in pursuance of any previous company law or of this Act.
The articles of a company shall be in respective forms as outlined below (Model Articles -specified
in Schedule I)
Sl.No. Table Form

1. Table F AOA of a company limited by shares
2. Table G AOA of a company limited by guarantee and having share
capital

3. Table H AOA of a company limited by guarantee and not having share
capital
4. Table I AOA of an unlimited company and having share capital
5. Table J AOA of an unlimited company and not having share capital
4.2 Content of Articles
✓ The AOA shall contain the regulations for management of the company.
✓ The AOA shall also contain such matters, as are prescribed under the Rules.
✓ However, a company may also include such additional matters in its AOA as may be
considered necessary for its management.
4.3 Entrenchment Provision
✓ It is such provision in AOA that makes certain amendments either more difficult or
impossible to pass, making such amendments inadmissible.
✓ Time of Entrenchment:
• On formation of a company, or
• By an amendment in the articles
o agreed to by all the members of the company in case of a private company;
and
o by a special resolution in the case of a public company.
✓ Notice to the registrar:
Where the AOA contains provisions for entrenchment, whether made on formation or by
amendment, the company shall give notice to the ROC in such form and manner as may be
prescribed.
The company shall give notice to the Registrar of entrenchment provisions included in article
a. In the SPICe+(Simplified Proforma for Incorporating company Electronically Plus: INC-32), along
with the fee as provided in the Companies (Registration offices and fees) Rules, 2014 at the
time of incorporation of the company, and
b. In case of existing companies, in Form No. MGT-14 within thirty days from the date of
entrenchment of the articles, along with the fee as provided in the Companies (Registration
offices and fees) Rules, 2014
DOCTRINE OF ULTRA VIRES
✓ The doctrine of ultra-vires prohibits any action which is not

stated in the memorandum as the objects or powers of the
company. The doctrine of ultra vires was
✓ An act which is ultra vires (i.e., beyond the powers of) is void first enunciated by the House of
Lords in the classic case,
and does not bind the company. Neither the company nor the
Ashbury Railway Carriage and
contracting party can sue on it.
Iron Co. Ltd v Riche (1878)

Doctrine of Ultra Vires
Any act done by the company which is beyond the MOA shall be void.
Act done
Act ultra vires
against the Act done against the Act done against the
the directors
Companies Act MOA AOA only
2013
Void & cannot be Voidable, as it can be ratified by Voidable, as the

Void & Illegal ratified by the shareholders in the general shareholders can
shareholders meeting by altering AOA ratify it
DOCTRINE OF CONSTRUCTIVE NOTICE
✓ The doctrine of constructive notice is a doctrine where all persons dealing with a company are
deemed (or "construed") to have knowledge of the company's articles of association and
memorandum of association.
✓ The doctrine of indoor management is an exception to this rule.
DOCTRINE OF INDOOR MANAGEMENT
✓ According to this doctrine, persons dealing with the company cannot be assumed to have
knowledge of internal problems of the company. All stakeholders can simply assume that all
the required things were get done properly in the company.
✓ This doctrine helps protect external members from the company and states that the people
are entitled to presume that internal proceedings are as per documents submitted with the
Registrar of Companies.
Enunciation of Doctrine of Indoor Management
The Doctrine of Indoor Management was first laid down in the case of Royal British Bank v.
Turquand
The directors of a company were authorised by the articles to borrow on bonds such sums of
money as should from time to time, by a resolution of the company in general meeting, be
authorised to be borrowed. The directors gave a bond to Turquand without the authority of any
such resolution. The question arose whether the company was liable on the bond. Held, the
company was liable on the bond, as Turquand was entitled to assume that the resolution of the
company in general meeting had been passed

7.1 Exceptions to the Doctrine of Indoor Management
• Knowledge of irregularity: Where the outsider has knowledge of irregularity within the
company, the benefit under the doctrine of indoor management would not be available.
• Negligence: If, with minimum effort, the irregularities within a company could be
discovered by the outsider, the benefit of doctrine of indoor management would not apply.
• Forgery: Where a person relies upon a document that turns out to be forged, the benefit
of doctrine of indoor management would not apply.
ACT TO OVERRIDE MEMORANDUM, ARTICLES, ETC.
Section 6 of the Companies Act, 2013 states that the provisions of this Act shall have an overriding effect.
Save as otherwise expressly provided in this Act –
(a) The provisions of this Act shall have effect

notwithstanding anything to the contrary
The provision of this section starts
contained in
with “Save as otherwise…”. This
✓ the memorandum or articles of a company, or
means that if any other section says
✓ any agreement executed by it, or
that article is superior, then we will
✓ any resolution passed by the company in treat it accordingly.
general meeting or by its Board of directors,
whether the same be registered, executed, or passed, as
the case may be, before or after the commencement of
this Act; and
(b) any provisions contained in the memorandum, articles, agreement, or resolution shall, to the
extent to which it is repugnant (i.e., in conflict) to the provisions of this Act, become or be
void, as the case may be.
EFFECT OF MEMORANDUM AND ARTICLES
Section 10 of the Companies Act, 2013 covers the effects of registration of the memorandum and articles.
The effect of registration of MOA and AOA are as follows:
1) MOA and AOA shall bind the company and the members thereof and
2) All monies which are payable by any member to the company under the memorandum
or articles shall be a debt due from him to the company.
Thus, based on MOA and AOA:

✓ Company is liable to the members
✓ Members are liable to the company
✓ But normally members are not liable to each other.
Hence, a company can recover calls in arrear from a member as forcefully as it is recovering a loan.
INCORPORATION OF COMPANY
Section 7 of the Companies Act, 2013 provides for the procedure to be followed for incorporation of a
company.
10.1 Steps for incorporation of company
10.1.1 Reservation of name

✓ An application for reservation of name can be made through the web service available at
www.mca.gov.in by using the form RUN (Reserve Unique Name) along with prescribed
fees.
✓ The application may either be approved or rejected, as the case may be, by the Registrar,
Central Registration Centre after allowing re-submission of such application within 15
days for rectification of defects, if any.
10.1.2 Drafting and signing of MOA and AOA and its submission to ROC.
✓ Predefined formats given in Schedule I can be used for drafting the MOA and AOA.
✓ These documents have to be e-filed and e-stamped.
10.1.3 Consent of directors to be submitted

Consent of persons nominated as directors to act as directors to be submitted electronically.
10.1.4 Submission of statutory declaration

Statutory declaration of compliance and other declarations are to be submitted electronically.
10.1.5 Payment of fees and amount of stamp duty electronically

10.1.6 Obtain Certificate of Incorporation digitally signed by ROC
✓ The Registrar shall on the basis of documents and information filed, register all the
documents and information in the register and issue a certificate of incorporation to the
effect that the proposed company is incorporated under this Act.
✓ On and from the date mentioned in the Certificate of Incorporation, the Registrar shall allot
to the company a Corporate Identity Number, which shall be a distinct identity for the
company and shall also be included in the certificate.

corporate identity number
On and from the date mentioned in the certificate of incorporation, the Registrar shall allot to
the company a corporate identity number, which shall be a distinct identity for the company
and which shall also be included in the certificate of incorporation.
CIN is a 21 alpha-numeric digit based unique identification number, comprising data

sections/elements that reveals the basis aspects about company.
Example - Decode the CIN
CIN of Infosys Limited is L85110KA1981PLC013115
The first character – L (reveals listing status, L for listed and U for unlisted, for instance Infosys is
Listed one)
The next five digits – 85110
The next two letters – KA (reveals the Indian state where the company is registered, for instance
KA is for Karnataka)
The next four digits – 1981 (reveals the year of incorporation of a company)
The next three characters – PLC (reveals the company classification - PLC for public, PTC for
private, FTC for foreign, and GOI for government)
The last six digits – 013115 (reveals registration number with concerned ROC
10.1.7 File declaration about address of Registered office.

10.2 Documents and information to be filed with the registrar
For the registration of the company, the following documents and information are to be filed with
the registrar within whose jurisdiction the registered office of the company is proposed to be
situated –
i. The MOA and AOA duly signed by all the subscribers to the memorandum.
ii. A declaration that all the requirements of this act and rules thereunder in respect of
registration and related matters have been complied with. This declaration is to be made
by:
• Person who is engaged in the formation of the company (i.e., an advocate, a CA, CS, or CWA in
practice) and
• A person named in the articles (director, manager, or secretary of the company)
iii. A declaration from each of the subscribers and from the persons named as first
directors, if any, in the articles, stating that –
• He is not convicted of any offence in connection with the promotion, formation, or
management of the company, or
• He has not been found guilty of any fraud or misfeasance or of any breach of duty to any
company during the last 5 years, and
• That all the documents filed with the registrar for registration of the company contains
information that is correct, complete, and true to the best of his knowledge and belief.

iv. The address for correspondence till its registered office is established.
v. The particulars (name, residential address, nationality) of every subscriber to

memorandum along with proof of identity.
vi. The particulars (name, DIN, residential address, nationality) of persons mentioned in the
articles as the first directors and such other particulars as may be prescribed.
vii. The particulars of interests of the persons mentioned in the AOA as first directors in other
firms or body corporates along with their consent to act as directors in such form and
manner as may be prescribed.
The duly signed memorandum of association and articles of
association (Ch2a)
Note:
Form No. INC-8 is prescribed form for Declaration of Compliance by Professional & Director,
Manager or Secretary of company
Form No. INC-9 is prescribed form for Declaration by subscribers to the memorandum and
persons named as the first directors
Following particulars of every subscriber to the memorandum shall be filled;
a. Name (including surname or family name) and recent Photograph affixed
b. Father’s/Mother’s name
c. Nationality, Proof of nationality in case the subscriber is a foreign national
d. Date and Place of Birth (District and State)
e. Educational qualification and Occupation
f. Permanent Account Number
g. Email id and Phone number of Subscriber
h. Permanent residential address and also Present address
i. Residential proof such as Bank Statement, Electricity Bill, Telephone / Mobile Bill, provided
that Bank statement Electricity bill, Telephone or Mobile bill shall not be more than two
months old
j. Proof of Identity (For Indian Nationals - Voter’s identity card, Passport copy, Driving License
copy, Unique Identification Number (UIN) & for Foreign nationals and Non Resident Indians –
Passport)
k. If the subscriber is already a director or promoter of a company(s), the particulars relating to
name of the company; Corporate Identity Number; Whether interested as a director or
promoter
Where the subscriber to the memorandum is a body corporate, then the following particulars
shall be filed with the Registrar
a. The name of the body corporate and Corporate Identity Number of the Company or
Registration number of the body corporate, if any
b. GLN, if any
c. The registered office address or principal place of business
d. E-mail Id

e. If the body corporate is a company, certified true copy of the board resolution specifying inter-
alia the authorization to subscribe to the MOA
f. If the body corporate is a limited liability partnership or partnership firm, certified true copy of
the resolution agreed to by all the partners specifying inter alia the authorization to subscribe to
the MOA
g. In case of foreign bodies corporate, the details relating to the copy of certificate of
incorporation of the foreign body corporate; & the registered office address
An application for registration of a company shall be filed, with the Registrar within whose
jurisdiction the registered office of the company is proposed to be situated, in SPICe+(Simplified
Proforma for Incorporating company Electronically Plus: INC32) along with the fee as provided
under the Companies (Registration offices and fees) Rules, 2014 accompanied by following
documents and information;
SPICe+ is an integrated Web form offering 10 services by 3 Central Govt. Ministries &
Departments. (Ministry of Corporate Affairs, Ministry of Labour & Department of Revenue in the
Ministry of Finance) thereby saving as many procedures, time and cost for starting a business in
India. SPICe+ is initiatives towards Ease of Doing Business. Students may refer to FAQs on
SPICe+ form at MCAs’ website for more details
https://www.mca.gov.in/MinistryV2/spicefaq.html
The duly signed memorandum of association and articles of association
The memorandum (e-MOA in Form No. INC-33) and article (e-AOA in Form No. INC-34) of
company so furnished shall be duly signed by all the subscribers to the memorandum in the
manner prescribed by rule 13 of the Companies (Incorporation) Rules, 2014 as stated below:
a. Each subscriber shall add his name, address, description & occupation, if any, in the
presence of at least one witness who shall attest the signature, shall sign and add his
name, address, description and occupation, if any.
b. Where a subscriber is illiterate, he shall affix his thumb impression or mark which shall be
described as such by the person, writing for him, who shall place the name of the subscriber
against or below the mark and authenticate it by his own signature and he shall also write
against the name of the subscriber, the number of shares taken by him.
Note: The type written or printed particulars of the subscribers and witnesses shall be allowed as if it
is written, so long as appends signature or thumb impression.
c. Where the subscriber is a body corporate, the memorandum and articles of association shall
be signed by director, officer or employee of the body corporate duly authorized in this
behalf by a resolution of the board of directors.
d. Where the subscriber is a Limited Liability Partnership, it shall be signed by a partner of
the Limited Liability Partnership, duly authorized by a resolution approved by all the
partners of the Limited Liability Partnership:
Note: In either case c or d stated above, the person so authorized shall not, at the same time, be
a subscriber to the memorandum and articles of Association.

e. Where subscriber to the memorandum is a foreign national residing outside India his
signatures and address on the memorandum and articles of association and proof of identity
shall be notarized by a Notary (Public) with a certificate. Further, if such person residing
in a country outside the Commonwealth or which is not a party to the Hague Apostille
Convention, 1961, the certificate of the Notary (Public) shall be authenticated by a
Diplomatic or Consular Officer.
f. Where subscriber to the memorandum is a foreign national residing outside India and visited
in India and intended to incorporate a company, in such case the incorporation shall be
allowed if, he/she is having a valid Business Visa. In case of Person is of Indian Origin or
Overseas Citizen of India, requirement of business Visa shall not be applicable.
As per rule 12 of the Companies (Incorporation) Rules, 2014
In case any of the objects of a company requires registration or approval from sectoral regulators such
as the RBI and SEBI, then such registration or approval shall be obtained by the proposed company
before pursuing such objects and a declaration in this behalf shall be submitted at the stage of
incorporation. In case of a Company being incorporated as a Nidhi, the declaration by the Central
Government under Section 406 of the Act shall be obtained by the Nidhi before commencing the
business and a declaration in this behalf shall be submitted at the stage of incorporation by the
Company
10.3 Maintenance of copies of all documents and information
The company shall maintain and preserve at its registered office copies of all documents and
information as originally filed, till its dissolution under this Act.
10.4 Furnishing of false or incorrect information or suppression of material fact at the time of
incorporation
✓ If any person furnishes any false or incorrect information or suppresses any material information,
of which he is aware in any of the documents filed with the Registrar in relation to registration of
company, he shall be held liable for action for fraud u/s 447.
✓ If the company has already been incorporated by furnishing false or incorrect information
or suppressing any material fact: - the promoters, persons named as first directors, persons
making declaration shall each be held liable for fraud u/s 447.
✓ Order of the Tribunal: The Tribunal may, on an application made to it, on being satisfied that
the situation so warrants –
o Pass such orders as it thinks fit for regulation of management of the company
including changes, if any, in its MOA and AOA; or
o Direct that liability of the members shall be unlimited; or
o Direct the removal of name of company from the Register of companies; or
o Pass an order for winding up of the company; or
o Pass such orders as it thinks fit.

Before making such order, the company shall be given a reasonable opportunity of
being heard and consider such transactions entered into by the company, including the
obligations, if any, contracted or payment of any liability.
EFFECT OF REGISTRATION
Section 9 of the Companies Act, 2013 provides the effect of registration of a company.
From the date of incorporation, the subscribers to the memorandum and all other persons, who may
from time to time become members of the company,
→ shall be a body corporate by the name contained in the memorandum.

→ Capable of exercising all the functions of an incorporated company under this act and
→ Having perpetual succession with power
✓ to acquire, hold and dispose of property,
✓ to contract, and
✓ to sue and be sued,
by the said name.
COMMENCEMENT OF BUSINESS ETC.
Section 10A of the Companies Act, 2013 covers the provisions relating to commencement of
business after incorporation of a company.
12.1 Declaration to be filed before commencement of business [Sec 10A(1)]
A company incorporated after the commencement of the Companies (Amendment) Ordinance, 2019
and having a share capital shall not commence any business or exercise any borrowing power unless –
(a) A declaration is filed by a director within a period of 180 days of the date of incorporation of
the company with the Registrar that every subscriber to the memorandum has paid the value
of the shares agreed to be taken by him on the date of making such declaration: and
(b) The company has filed with the Registrar a verification of its registered office.
12.2 Penalty on defaultssss
Rule 23A of the Companies (Incorporation) Rules, 2014 states that the declaration u/s 10A by the director shall
be in the prescribed form with prescribed fees and the contents of the form shall be verified by a CS/CA/CWA, in
practice.
If any default is made in complying with these provisions,

→ the company shall be liable to a penalty of Rs 50,000/-, and
→ every officer in default shall be liable to penalty of Rs 1,000/- for each day during which
default continues subject to a maximum penalty of Rs 1,00,000/-.
Where no declaration has been filed with the registrar u/s 10A(1)(a) within 180 days and
→ the Registrar has reasonable cause to believe that the company is not carrying on any
business or operations,
→ he may initiate action for removal of name of Company from the register of
Companies.
AUTHENTICATION OF DOCUMENTS, PROCEEDINGS AND CONTRACTS
Section 21 of the Companies Act, 2013 covers the provisions relating to authentication of
documents or proceedings or contracts made by or on behalf of a company.
13.1 Authentication
A document or proceeding requiring authentication by a company or contracts made by or on behalf of

a company may be signed by –
i. Any key managerial personnel, or
ii. An officer or employee of the company duly authorized by the Board in this behalf.
13.2 Key managerial personnel
Section 2(51) defines “Key managerial personnel”, (KMP) in relation to a company, which means-
(a) the CEO or the MD or the manager.

(b) the company secretary.
(c) the whole-time director.
(d) the CFO.
(e) such other officer not more than one level below the directors who is in whole time
employment, designated as KMP by the Board: and
(f) such other officer as may be prescribed.
EXECUTION OF BILLS OF EXCHANGE, ETC.
Section 22 of Companies Act, 2013 covers provisions relating to execution of Bills of exchange,
hundi and promissory note and other deeds.
(1) A bill of exchange, hundi, or promissory note shall be deemed to have been made, accepted,
drawn or endorsed on behalf of a company, if –

→ Made, accepted, drawn, or endorsed in the name of, or on behalf of, or on account of the
company, by any person authorised by the company in this behalf.
(2) Authorisation of a person by the company:
→ If the company has common seal: Company may, by writing under its common seal,
authorize any person, either generally or for specified matters, as its attorney to execute
other deeds on its behalf in any place in or outside India.
→ If the company does not have a common seal:

• Company has appointed a company secretary: The authorization shall be made
by a director and the CS.
• Company does not have Company Secretary: The authorization shall be made
by 2 directors.
(3) A deed signed by such an attorney on behalf of the company and under his seal shall bind the
company.
Company having Common Seal
Yes No
Authorisation shall be
Company may, in writing made by
under its common seal,
authorize any person as its 2 directors If company has
attorney to execute other company secretary
deeds on its behalf in any
place in or outside India.
By a director+ CS
SERVICE OF DOCUMENTS
Section 20 of the Companies Act, 2013 provides the mode in which documents may be served on the
company, on the members and on the registrars.
15.1 Serving of document to the Company
A document may be served on a company or an officer thereof by sending it to the company or the
officer at the registered office of the company by-

✓ Registered post, or
✓ Speed post, or
✓ Courier service, or Electronic mode means any mode using
✓ Leaving it at its registered office, or electronic media that is capable of
✓ Means of such electronic or other mode as retention, including:
may be prescribed. • Fax or email
15.2 Serving of document to Registrar/
• Posting of an electronic message
Member
board or network designated by
→ A document may be served on registrar/ any the registrar.
member by sending it to him by- • Other means of electronic
✓ Post, or communication
✓ Registered post, or
✓ Speed post, or
✓ Courier service, or
✓ Leaving it at its registered office, or
✓ Means of such electronic or other mode as may be prescribed.
→ A member may request for delivery of any document through a particular mode, for
which he shall pay such fees as may be determined by the company in its AGM.
→ Where the Act or Rules made thereof provided for filing of documents with the Registrar
in electronic mode, it shall only be filed in electronic mode.
15.3 Time when service is effected
In case of delivery by post, such service shall be deemed to have been effected-
→ In case of notice of meeting : at the expiration of 48 hours after the notice is posted; and
→ In other case: at the time at which the letter would be delivered in the ordinary course of
post.
SUBSIDIARY COMPANY NOT TO HOLD SHARES IN ITS HOLDING COMPANY
Section 19 of the Companies Act, 2013 provides the provisions relating to holding of shares by
subsidiary company in its holding company.
16.1 Holding Company [Section 2(46)]
Holding company in relation to one or more other companies, means a company of which such
companies are subsidiary companies.
16.2 Subsidiary Company [Section 2(87)]
Subsidiary company or subsidiary, in relation to any other company, means a company in which the
holding company –

a) Controls the composition of the Board of Directors; or
b) Exercises or controls more than one-half of the total voting power either at its own or
together with one or more of its subsidiary companies.
16.3 Subsidiary company not to hold shares in the Holding Company [Section 19]
No company shall, either by itself, or through its nominees,
→ hold any shares in its holding company

→ and no holding company shall allot or transfer its shares to any of its subsidiary
companies
→ and any such allotment or transfer of shares of a company to its subsidiary company
shall be void.
Exceptions:
a) Subsidiary company holds such shares as legal representative of a deceased member of

the holding company.
b) Subsidiary company holds such shares as trustee.
c) Subsidiary company is a shareholder even before it became a subsidiary of the holding
company. However, the subsidiary company shall have a right to vote at a meeting of the
holding company only in respect of the shares held by it as a legal representative or as a
trustee.
RECTIFICATION OF NAME OF THE COMPANY
Example:
→ RPIP Ltd. has invested 51% in the shares of SSP Pvt. Ltd. on 31st March 2019.
→ SSP Pvt. Ltd. have been holding 2% equity of RPIP Ltd. since 2013.
→ SSP Pvt. Ltd. cannot increase its equity beyond that 2% on or after 31st March 2019.
→ However, it could continue to hold or reduce its initial 2% stake.
17.1 Rectification based on opinion of Central Government [Section 16(1)(a)]
If a company on its first registration, or on its registration by a new name, is registered by a name which,
in the opinion of the Central Government (CG),
→ is identical with or too nearly resembles the name by which a company in existence had
been previously registered,
Section 16 of the Companies Act, 2013 provides the provisions relating to rectification of the
name of a company.
Note: Rectification is different from voluntary change of name.

→ it may direct the company to change its name
→ and the company shall change its name or new name
→ within a period of 3 months from the issue of such direction by passing an ordinary
resolution.
17.2 Rectification based on an application by a registered proprietor of a trademark

[Section 16(1)(b)]
If a company on its first registration, or on its registration by a new name, is registered by a name
which, on an application by a registered proprietor of a trademark,
→ is identical with or too nearly resembles to a registered trademark of such proprietor,

→ made to the CG within 3 years of incorporation or registration or change of name of the
company,
→ the CG may direct the company to change its name or new name
→ within a period of 6 3 months from the issue of such direction by passing an ordinary
resolution.
17.3 Notice of change to registrar [Section 16(2)]
Where a company changes its name or obtains a new name, it shall within a period of 15 days from
the date of such change, give notice of change to the Registrar along with the order of CG, who
shall carry out necessary changes in the certificate of incorporation and the memorandum.
17.4 Default
• Central Government shall allot new name to company in such manner as may be prescribed
and
• Registrar shall enter new name in register of companies in place of old name and issue a fresh
certificate of incorporation with new name, which the company shall use thereafter
• Provided that it shall NOT prevent a company from subsequently changing its name in
accordance with the provisions of section 13
REGISTERED OFFICE OF THE COMPANY
Section 12 of the Companies Act, 2013 seeks to provide for the registered office of the companies for the
communication and serving of necessary documents, notices, letters etc.
The registered office of a company should be a physical office where the corporation will receive service
of legal documents from ROC or in case of lawsuit, etc. This address cannot be a P.O. box but must be
a physical location where someone is present, to receive service of legal documents during normal
business hours.

18.1 Need for Registered office
✓ For communication and serving of necessary documents, notices, letters etc.

✓ To determine the domicile and nationality of a company.
✓ To determine the jurisdiction of the court.
18.2 Verification of registered office
Company shall have a Company shall

registered office send verification
capable of receiving to RoC of the
Incorporation registered office.
communications.
[Sub-section (1)] [Sub- section (2)]
Within 30 days
from
incorporation
18.3 Labelling of Company
Every company shall –
✓ Paint, or affix its name and the address of its registered office, and keep the same
painted and affixed, on the outside of every office or place in which its business is
carried on, in a conspicuous position, in legible letters, and
→ If the characters employed are not those of the language in general use in that
locality, then also in the characters of that language.
✓ Have its name engraved in legible characters on its seal, if any.
✓ Get its name, registered office address, CIN, telephone number, fax number, email, and
website address, if any, printed in all its business letters, bill heads, letter papers and in
all its notices and other official publications.
✓ Have its name printed on hundis, promissory notes, bills of exchange and such other
documents as may be prescribed.
18.3.1 Name change by the company

Where a company has changed its name(s) during the last 2 years, it shall paint or affix or
print, along with its name, the former name(s) so changed during the last 2 years.
18.3.2 In case of OPC

The words “One Person Company” shall be mentioned in the brackets below the name of
such company, wherever its name is printed, affixed, or engraved.
18.4 Change of Registered Office
18.4.1 Notice of change to the Registrar

→ Verified in the manner prescribed,
→ Shall be given to the Registrar within 30 days of the change, who shall record the same.

18.4.2 Change outside the local limits of any city
The registered office of a company shall be changed to outside the local limits of any city, town,
or village where such office is situated by passing a special resolution.
18.4.3 Change outside the jurisdiction of the Registrar

Where a company changes the place of its registered office from the jurisdiction of one Registrar
to the jurisdiction of another Registrar within the same State,
→ Such change is to be confirmed by the Regional Director on an application made by the

company.
→ The confirmation of such change shall be communicated within 30 days from the date of
receipt of application by the regional director to the company.
→ The company shall file the confirmation with the Registrar within 60 days of the date of
confirmation.
→ The Registrar shall register the same and certify the registration within 30 days from the
date of filing such confirmation.
→ The certificate shall be conclusive evidence of compliance of requirements of this Act.
The alteration of the memorandum relating to the place of the registered office from one State to
another shall not have any effect unless it is approved by the Central Government (power delegated to
Regional Director by Central Government) 30 on an application in Form No. INC-23 along with the fee
and shall be accompanied by the following documents, namely;
a. Copy of Memorandum of Association, with proposed alterations;
b. Copy of the minutes of the general meeting at which the resolution authorising such alteration
was passed, giving details of the number of votes cast in favour or against the resolution;
c. Copy of Board Resolution or Power of Attorney or the executed vakalatnama, as the case may
be.
d. List of creditors and debenture holders
e. Acknowledgment of service of a copy of the application with complete annexures to the

Registrar and Chief Secretary of the State Government or Union territory where the
registered office is situated at the time of filing the application.

Change in place
of Registered
Office
Within a State Within a State

From one State to
Within a city (from one city to (from one ROC to
another
another) another)
Change in Place
Board Reolution Special Resolution Special Resolution Clause [covered
by Section
13(4),(5),(6)]
Permission of
Notice to ROC Notice to ROC
Regional Director
within 30 days within 30 days
(RD)
30/60/30
RD/Co./ROC
Certificate -
Conclusive
evidence
18.5 Penalty on default
✓ If any default is made in complying with the requirements of this section, the company and
every officer in default shall be punishable with a penalty of
→ Rs. 1,000/- for each day during which the default continues
→ but not exceeding Rs. 1,00,000/-. [Sub-section (8)]
✓ If the ROC has reasonable cause to believe that company is not carrying on any business or
operations,
→ He may cause a physical verification of the registered office of the company in
prescribed manner and
→ If any default is found to be made in complying with the requirements of sub-section
(1),
→ He may without prejudice to the provisions of sub-section (8), initiate action for the
removal of the name of the company from the register of companies.
CONVERSION OF COMPANIES ALREADY REGISTERED
Section 18 of the Companies Act, 2013 provides the provisions relating to conversion of a company to
some other class of company.

A registered company of any class may convert itself as a company of any other class by
alteration of memorandum and articles of the company.
Where such conversion is required to be done, the company shall file an application to the
Registrar.
The Registrar shall, after satisfying himself that the provisions applicable for registration of
companies have been complied with, close the former registration of the company.
After registering the required documents, the Registrar shall issue a certificate of
incorporation.
The conversion of companies shall not affect any debts, liablities, obligations or contracts
incurred or enterd into, by or on behalf of the company before the conversion. Such debts
etc may be enforced in the manner as if such registration had not been done.
ALTERATION OF ARTICLES
Section 14 of the Companies Act, 2013 vests companies with power to alter or add to its articles.
a) Subject to the provisions of the Act and the conditions contained in the MOA, a company may, by
a special resolution, alter its Articles.
b) Alteration of Articles include the alterations having the effect of conversion of-
✓ A private company to a public company; or

✓ A public company to a private company.
c) An alteration having the effect of conversion of a public company into a private company
shall be valid only if it is approved by the Central Government, on an application made by
the company.
d) Every alteration of AOA and a copy of the order of the Central Government approving the
order, shall be filed with the Registrar, together with a copy of the altered AOA, within 15 days,
who shall register the same.
e) Every alteration made in the AOA shall be noted in every copy of the AOA.
f) ALTERATION BY SPECIAL RESOLUTION
Any alteration having the effect of conversion of a public company into a private company shall
not be valid unless it is approved by an order of the Central Government on an application
made within sixty days from the date of passing of special resolution, be filed with Regional
Director in e-Form No. RD-1 along with the fee as provided in the Companies (Registration
Offices and Fees) Rules, 2014 and shall be accompanied by the following documents, namely;

a. Draft copy of Memorandum of Association and Articles of Association, with proposed
alterations;
b. Copy of the minutes of the general meeting at which the special resolution authorising such
alteration was passed together with details of votes cast in favour and or against with names
of dissenters;
c. Copy of Board resolution or Power of Attorney dated not earlier than thirty days, as the case
may be, authorising to file application for such conversion;
d. Declaration by a key managerial personnel regarding the compliance under difference
section of the Act and rules made there under;
g) Penalty on default: The company and every officer in default shall be liable to a penalty of Rs.
1,000/- for every copy of AOA issued without such alterations.
ALTERATION OF MEMORANDUM
Section 13 of the Companies Act, 2013 provides the provisions that deal with the alteration of the
memorandum.
Section 15 of the Companies Act, 2013 provides that the alteration of MOA/AOA shall be noted in every copy
of the MOA/AOA.
Company may alter the provisions of its MOA with the approval of the members by a Special
resolution.
21.1 Name change of the company
✓ Name change shall be effected only with the approval of the CG in writing.
→ However, such approval of CG is not necessary where the change in the name is
related only to addition/ deletion of the word “Private” upon conversion of any class
of company into another.
✓ Name change is not allowed to a company which has not filed annual returns or financial
statements with the Registrar or failed to pay or repay matured deposits or debentures or
interest thereon.
✓ On change of name, the ROC shall
→ enter the new name in the Register of companies, in the place of the old name and
→ shall issue a fresh certificate of incorporation with the new name, and
→ the change in name shall be complete and effective only on the issue of such a
certificate.
21.2 Change in the registered office
✓ The alteration of the MOA with respect to place of registered office from one State to
another shall not have any effect unless it is approved by the Central Government on an
application filed to it.

✓ The Central Government shall verify that
→ The alteration has the consent of the creditors, debenture holders, and other
persons concerned with the company, or
→ Sufficient provision has been made by the company for due discharge of all its
debts and obligations, or
→ Adequate security has been provided for such discharge.
✓ Once the Central Government is satisfied upon these verifications, it shall dispose off the
application within 60 days.
✓ The company shall file with the Registrar-

→ The special resolution passed by the company, and
→ The approval of the Central Government for change in name of the company, if
the alteration involves any such change.
✓ The company shall file a certified copy of the order of the Central government
approving the alteration with the Registrar of each of the States, who shall register the
same.
✓ The Registrar of the State to which the registered office is being shifted to, shall issue a
fresh certificate of incorporation indicating the alteration.
21.3 Change in liability clause
The change in liability which results in increase in liability of any shareholder shall not be valid
without the consent of such shareholder.
21.4 Change in capital clause
Every alteration of MOA should be approved by the company by passing a Special resolution u/s 13.
Apart from this, Section 61 of the Companies Act, 2013 deals with the power of limited company to
alter its capital clause.
→ A limited company having a share capital may, if so authorized by its Articles, alter its
share capital by passing an ordinary resolution.
→ The notice of such alteration must be given to the registrar within 30 days of such
alteration in Form SH-7 with the certified true copy of ordinary resolution along with the
explanatory statement and altered copy of the MOA.
21.5 Change in the object of the company
→ A company, which has raised money from the public through prospectus and still has
any unutilized amount out of the money so raised, shall not change its objects for which
it raised the money unless a special resolution through postal ballot is passed by the
company.

→ The details of such resolution shall be published in the newspapers (one in English and
one in vernacular language) which is in circulation at the place where registered office of the
company is situated.
→ Also, the details of such resolution shall be placed on the website of the company, if any,
indicating therein the reason for such change.
→ The dissenting shareholders shall be given an opportunity to exit.
→ The registrar shall register any alteration of the MOA with respect to the objects of the
company and certify the registration within 30 days from the date of filing the special
resolution.
21.6 Alteration to be noted in every copy [Section 15]
✓ Every alteration made in the MOA /AOA of a company shall be noted in every copy of the
memorandum or articles, as the case may be.
✓ If the company defaults: The company and every officer in default shall be liable to a
penalty of Rs. 1,000/- for every copy of the MOA/AOA issued without alteration.
COPIES OF MEMORANDUM, ARTICLES, ETC., TO BE GIVEN TO MEMBERS
Where any member of a company requests for the copies of
(a) The memorandum,
Section 17 of the Companies Act, 2013 provides the provisions that deal with providing the members of
the company with the copies of MOA/AOA.
(b) The Articles; and

(c) Every document and every resolution referred in section 117 (i.e., Resolutions and agreements to
be filed), if and in so far as they have not been embodied (i.e., incorporated) in the MOA and AOA,
the company shall, within 7 days of the request on the payment of fees, send copies of these
documents.
In case of default: The company and every officer in default shall be liable for each default, to a penalty
of Rs. 1,000/- for each day during which the default continues, subject to a maximum of Rs. 1,00,000/-
ONE PERSON COMPANY (OPC) [Section 3]
23.1 Nominee of OPC
✓ The MOA of a One Person company shall indicate the name of the other person (i.e.,
Nominee), with his prior consent in the prescribed form, who shall, in the event of death of
the subscriber or his incapacity to contract become the member of the company, and

✓ The written consent of such person shall be filed with the registrar at the time of
incorporation of the company along with its MOA and AOA.
✓ Such nominee may, at any time, withdraw his consent in such manner as may be
prescribed.
✓ The member of OPC may, at any time, change the name of the Nominee by giving a notice
in such manner as may be prescribed.
✓ It shall be the duty of the member of OPC to intimate the company the change, if any, in
the name of the Nominee by indicating in the MOA or otherwise within such time and in such
manner as may be prescribed. However, any change in the name of Nominee shall not be
deemed to be an alteration of the MOA.
23.2 Qualifications of Member/ Nominee of OPC
i. A natural person,
ii. An Indian citizen, whether resident in India or
otherwise Can a minor start a OPC for
(Resident in India means a person who has stayed in India his benefit through his
for a period of not less than 120 days during the guardian?
immediately preceding financial year). Ans: No. A minor cannot hold
iii. Not a minor. shares of OPC with beneficial
interest.
23.3 Member/ Nominee of not more than one OPC
✓ A natural person shall not be a member of more than one OPC at any point of time and the
said person shall not be a nominee of more than one OPC.
This means that a person can be the member of one OPC and nominee of another one OPC at the same time.
However, no person can be the member/nominee of more than one OPC at the same time.
✓ Where a natural person being a member in OPC,

→ Becomes member in another OPC by virtue of his being nominee in that OPC,
→ Such person shall meet the eligibility criteria within a period of 180 days.
23.4 Restrictions upon OPC
i. OPC cannot be incorporated or converted into a Section 8 company though it can be

converted into private or public companies anytime after its incorporation.
ii. OPC cannot carry out Non-Banking Financial Investment activities including
investment in securities of any body corporate.

FORMATION OF COMPANIES WITH CHARITABLE OBJECTS, ETC.
Section 8 of the Companies Act, 2013 deals with the formation of not-for-profit companies.
24.1 Object of formation of Section 8 Company
✓ To promote the charitable objects of commerce, art, science, sports, education, research,
social welfare, religion, charity, protection of environment etc.
✓ Such company intends to apply its profit in promoting its objects.
✓ Section 8 company prohibits the payment of any dividend to its members.
24.2 Power of Central Government to issue the license
The Central Government shall register such person or association of person as a company with limited
liability without the addition of the words ‘Limited’ or ‘Private Limited’ to its name, by issuing
license on such conditions as it deems fit.
The Registrar shall on application register such person or association of persons as a company under
this Section.
REGISTRATION OF COMPANY USING LICENSE

After granting licence, an application shall be made to registrar under section 8(1) itself for registration
of company in the manner specified in rule 19 of the Companies (Incorporation) Rules 2014.
Application for registration
A person or an association of persons desirous of incorporating a company with limited liability under
section 8(1), shall make an application to registrar in Form SPICe+ (Simplified Proforma for
Incorporating company Electronically Plus: INC- 32) along with the fee as provided in the Companies
(Registration offices and fees) Rules, 2014.
Supporting document along with Application
The application furnished as specified above shall be accompanied by the following documents;
a. The memorandum and articles of association of the proposed company in the Form No. INC-
13 and Form No. INC-31, respectively;
b. An estimate of the future annual income and expenditure of the company for next three
years, specifying the sources of the income and the objects of the expenditure;
c. The declaration in by an Advocate, a Chartered Accountant, cost accountant or Company
Secretary in practice Form No. INC-14 and by each of the persons making the application in
Form No. INC-15, that;
 the memorandum and articles of association have been drawn up in conformity with
the provisions of section 8 and rules made thereunder and
 all the requirements of the Act and the rules made thereunder relating to registration
of the company under section 8 and matters incidental or supplemental thereto have

been complied with;
24.3 Special provisions relating to Section 8 company
i. On registration, the Section 8 company shall enjoy same privileges and obligations as of
a limited company.
ii. A firm can be a member of a Section 8 company.
iii. Shall not alter the provisions of its MOA/AOA except with the previous approval of the
Central Government.
iv. Section 8 company which intends to convert itself into a company of any other kind shall
pass a special resolution at a general meeting for approving such conversion.
v. Can call its general meeting by giving a clear 14 days notice instead of 21 days.
vi. Requirement of minimum number of directors, independent directors does not apply.
vii. Need not constitute Nomination and Remuneration Committee and Shareholders
Relationship Committee.
24.4 Revocation of license
24.4.1 Reasons for revocation of license

(a) Company contravenes any of the requirements or conditions of this section subject to
which a license is issued, or
(b) The affairs of the company are conducted fraudulently, or in violation to its objects, or
prejudicial to public interest.
Before such revocation the Central Government must give it a written notice of its intention to revoke
the license and opportunity of being heard.
24.4.2 Effect of revocation of license
✓ The Registrar shall put the words ‘Limited’ or ‘Private Limited’ against the companies
name in the register.
✓ The Central Government may, by order, if it is satisfied that it is essential in the public
interest, direct that the company be wound up under this Act or amalgamated with
another company registered under this Section and having similar objects, after giving the
company an opportunity of being heard.
✓ If upon winding up or dissolution, there remains, after the satisfaction of its debts and
liabilities, any asset,
→ they may be transferred to another company registered under this Section and
having similar objects, subject to such conditions as Tribunal may impose, or
→ may be sold and proceeds thereof credited to the Insolvency and Bankruptcy Fund.

CONVERSION INTO ANY OTHER KIND OF COMPANY
A company registered under this section may convert itself into company of any other kind only after
complying with such conditions as may be prescribed in rule 21 and 22 of the Companies
(Incorporation) Rule 2014 as described below;
a. A company shall pass a special resolution at a general meeting for approving such
conversion
b. An explanatory statement to notice of such general meeting must set-out the details on
reason of such conversion.
c. The company shall file an application in Form No. INC-18 with the Regional Director with the
fee along with a certified true copy of the special resolution and a copy of the Notice
convening the meeting including the explanatory statement for approval for conversion.
Also attach the proof of serving of the notice served by registered post or hand delivery,
to:
1. the Chief Commissioner of Income Tax having jurisdiction over the company,
2. Income Tax Officer who has jurisdiction over the company,
3. the Charity Commissioner,
4. the Chief Secretary of the State in which the registered office of the company is situated,
5. any organisation or Department of the Central Government or State Government or other
authority under whose jurisdiction the company has been operating.
Note: If any of these authorities wish to make any representation to Regional Director, it shall do so
within sixty days of the receipt of the notice, after giving an opportunity to the Company.
d. A copy of the application with annexures as filed with the Regional Director shall also be
filed with the Registrar.
The company shall, within a week from the date of submitting the application to the Regional
Director, publish a notice at its own expense, and a copy of the notice, as published, shall be sent
forthwith to the Regional Director and the said notice shall be in Form No. INC-19 and shall be
published;
1. at least once in a vernacular newspaper in the principal vernacular language of the district
in which the registered office of the company is situated, and having a wide circulation in that
district, and at least once in English language in an English newspaper having a wide
circulation in that district; and
2. on the website of the company, if any, and as may be notified or directed by the Central
Government.
e. The company should have filed all its financial statements and Annual Returns upto the
financial year preceding the submission of the application to the Regional Director and all
other returns required to be filed under the Act up to the date of submitting the application
to the Regional Director

Note: In the event the application is made after the expiry of three months from the date of preceding
financial year to which the financial statement has been filed, a statement of the financial position
duly certified by chartered accountant made up to a date not preceding thirty days of filing the
application shall be attached.
f. On receipt of the application, and on being satisfied , the Regional Director shall issue an order
approving the conversion of the company into a company of any other kind subject to such
terms and conditions as may be imposed in the facts and circumstances of each case.
g. Before imposing the conditions or rejecting the application, the company shall be given a
reasonable opportunity of being heard by the Regional Director
h. On receipt of the approval of the Regional Director, the company shall convene a general
meeting of its members to pass a special resolution for amending its memorandum of
association and articles of association and the Company shall thereafter file these with the
Registrar (with declaration to adhere conditions if any, imposed by Regional Director)
i. On receipt of the documents referred above, the Registrar shall register the documents and
issue the fresh Certificate of Incorporation.
24.5 Penalty/ punishment in contravention
• Company:
→ Fine: varying from Rs. 10 lakhs to Rs. 1 Crore.
• Director and every officer in default:
→ Fine: varying from Rs. 25,000/- to Rs. 25 lakhs,
→ Where the affairs of the company were conducted fraudulently, every officer in
default shall be liable for action u/s 447.

OVERVIEW
Incorporation of company and

related matters
Memorandum
Incorporation Documents Other Provisions
and Articles
Minimum Memorandum Have Registered

Service
members & OPC (MOA) office [Section
[Section 3] [Section 20] 12]
[Section 4]
Documents Commence
Article (AOA) Authentication
required Business
[Section 7] [Section 10A]
Not for profit Act is superior

Execution Rectify Name
company than MOA/AOA
Effect of Changes in MOA Convert

registration company
[Section 9] [Section 13] [Section 18]
Changes in AOA Subsidiary can't

[Section 14] hold shares in
holding
[Section 19]
Updation of changes to be noted in every

copy of MOA/AOA [Section 15]
Give copy of MOA/AOA to

members [Section 37]

PROSPECTUS AND ALLOTMENT OF SECURITIES
• Define prospectus
• Understand various types of prospectus
• Explain the procedure for issue of prospectus and other related concepts
• Know abot the criminal and civil liability for mis-statements in prospectus and punishment fr
fraudulently inducing persons to invest money
• Understand the procedre for allotment of securities by companies
• Know the procedure of private placement of securities.
INTRODUCTION
The provisions relating to raising of capital such as issue of prospectus, allotment of securities etc., and
other matters incidental thereto are contained in Chapter III of the Companies Act, 2013. This Chapter
is divided into two parts:
✓ Part I relates to ‘Public offer’ (Section 23 to 41); and

✓ Part II relates to ‘Private Placement’ (Section 42).
The provisions contained in Part I and II are supplemented by the Companies (Prospectus and
Allotment of Securities) Rules, 2014.
PUBLIC OFFER AND PRIVATE PLACEMENT
2.1 Issue of securities by Public company
Section 23 of the Companies Act, 2013 provides the provisions relating to public offer, private placement,
right issue and bonus shares issue.
As per Section 23(1), a public company may issue securities-
a) To public through prospectus (i.e., public offer); or

b) Through private placement; or
c) Through a rights issue or a bonus issue.
2.2 Issue of securities by Private Company
As per Section 23(2), a private company may issue securities-
a) By way of rights issue or bonus issue; or

b) Through private placement.

Private Company Public Company
Right Issue ✓ ✓
Bonus Issue ✓ ✓
Private Placement ✓ ✓
Public Offer by issue of Allowed to ‘Eligible


prospectus Companies’
Note:
i. Rights issue: It is a group of rights offered to existing shareholders to purchase additional

stock shares in proportion to their existing holdings.
ii. Bonus shares: It is an offer of free additional shares to existing shareholders in proportion
to their existing holdings. (also known as ‘capitalization of profits’).
iii. Private Placement: It means the sale of securities to a relatively small number of selected
investors.
iv. Public offer: It is the offering of securities of a company or a similar corporation to the public.
In order to do that the securities are to be listed on a stock exchange.
Public offer
Initial Public Further Public Offer For Sale of

Offer Offer securities
(IPO) (FPO) (OFS)
FPO is an issue of OFS is a mechanism

Offering the stock of a additional shares where promoters/
company on a public made by a company existing shareholders in
stock exchange for the that is already publicly a listed company sell
first time. listed and has gone their shares directly to
through the IPO the public in a
process. transparent manner.
Note:
To bring ease to doing business for corporates, Sub-section 3 and 4 to section 23 of the Act inserted
vide, the Companies (Amendment) Act, 2020 (enforced w.e.f 28th September 2020) Prior to
Amendments of 2020
Indian companies can access the overseas equity markets only through depository receipts (e.g.
American Depository Receipts (ADRs) or Global Depository Receipts (GDRs) or by listing their debt
securities (such as, foreign currency convertible bonds, masala bonds, etc.) on foreign markets.
Since more and more businesses are going global & capital raised from across the border is cost
effective, hence section 23(3) is inserted to open ways of overseas direct listing for notified class of

public companies by allowing them to issue notified securities for the purpose of listing on permitted
stock exchanges in permissible foreign jurisdictions or such other jurisdictions as may be prescribed.
How overseas direct listing is different from ADRs/GRDs?
In a direct listing, a domestic company can enlist itself with the stock exchanges of other countries
without an intermediary. Unlike American Depositary Receipts (ADRs) and Global Depositary Receipts
(GDRs), the Indian company can directly offer their shares in foreign markets instead of giving them to
a foreign depository bank. Direct listing excludes intermediaries, decreases the overall transaction
cost, and increases transparency.
Section 23(4) of the Act empowers the Central Government to exempt any class or classes of public
companies from complying with the provisions of Chapter III (Prospectus and Allotment of Securities),
Chapter IV (Share Capital and Debentures), section 89 (Declaration in respect of a beneficial interest in
any share), section 90 (Register of significant beneficial owners in a company) or section 127
(Punishment for failure to distribute dividends) of the Act, by issuing notification.
REGULATION OF ISSUE AND TRANSFER OF SECURITIES ETC. [SECTION 24]
Securities and Exchange Board of India is empower to administer those provisions under chapter III
and IV of the Act, which pertains to issue & transfer of securities and non-payment of dividend; by
listed companies or those companies which intend to get their securities listed on any recognised
stock exchange in India, by making regulations in this behalf.
All other matters (including matters relating to prospectus, return of allotment, redemption of
preference shares) specifically provided in this Act, shall be administered by the Central Government,
Tribunal or the Registrar, as the case may be.
SECURITIES
Section 2 (81) of the Companies Act, 2013 defines the term Securities which means the securities as
defined in clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956 [SCRA].
List of securities as per Securities Contracts (Regulation) Act, 1956 –
✓ Shares, stocks, debentures, bonds

✓ Derivatives
✓ Units- Collective Investment Scheme
✓ Mutual Fund Scheme
✓ Government securities
✓ Security receipts
✓ Central Government may declare other securities under this definition
✓ Rights and interests related to securities.
PROSPECTUS
4.1 Meaning of Prospectus

Section 2(70) defines ‘prospectus’ which means any document described or issued as a prospectus
and includes
→ a red herring prospectus referred to in section 32 or

→ a shelf prospectus referred to in section 31 or
→ any notice, circular, advertisement or other document inviting offers from the
public for the subscription or purchase of any securities of a body corporate.
Any document described as Includes red herring

prospectus prospectus
Prospectus
Includes any notice/

circular/ adertisement/
Includes shelf prospectus
other documents inviting
offers from public
4.2 Matters to be stated in the prospectus
Section 26 of the Companies Act, 2013 mentions the various matters which are to be stated in a prospectus.
4.2.1 Prospectus to be dated and signed and to state specified information, etc.
Every prospectus issued by or on behalf of
→ A public company either with reference to its formation or subsequently, or

→ Any person who is or who has been engaged or interested in the formation of a public
company,
→ Shall be dated and signed and
→ shall state such information and set out such reports on financial information as
may be specified by the Securities and Exchange Board of India [SEBI].
The prospectus shall make a declaration about
→ the compliance of the provisions of the Act and

→ a statement to te effect that nothing in the prospectus is contrary to the provisions of
this Act, the Securities Contracts (Regulation) Act, 1956 and the SEBI Act, 1992 and the rues
and regulations made thereunder.
Exceptions:

a) Where the securities are being issued to the existing members or debenture holders of a
company, whether an applicant has the right to renounce the shares or not in favor of any
other person.
b) Where the shares or debentures issued or to be issued are uniform with the shares or
debentures previously issued and are being dealt in or quoted on a recognised stock
exchange.
4.2.2 Prospectus to be issued after delivery to Registrar for

filing
The date indicated in the
→ No prospectus shall be issued unless on or before prospectus shall be deemed
the date of its publication, to be the date of its
→ a copy thereof has been delivered to the Registrar publication.
for filing.
→ Such copy shall be signed by every person who is
named therein as a director or proposed director of the company or by his duly authorised
attorney.
4.2.3 Prospectus not to include Expert’s statement under certain circumstances
A prospectus issued shall not include a statement purporting to be made by an expert unless 2
conditions are satisfied:
i) The expert is a person who is not, and who has not been, engaged or interested in the
formation or promotion or management of the company, and
ii) He has given his written consent to the issue of the prospectus and
→ has not withdrawn such consent before the delivery of a copy of the prospectus to
the Registrar and
→ a statement to that effect has been included in the prospectus.
4.2.4 Cover page of Prospectus
Every prospectus issued shall, on the face of it, state the following matters:
→ State that a copy has been delivered for filing to the ROC
→ Specify any documents required to be attached to the copy delivered or refer to the
statements included in the prospectus which specify these documents.
4.2.5 Prospectus to be issued within specified time
No prospectus shall be valid if it is issued more than 90 days after the date on which a copy
thereof is delivered to the ROC

4.2.6 Punishment for contravention
Punishment for issuing prospectus

in contravention of Section 26
Fine:
Company Not less than Rs. 50,000 but which
may extend to Rs. 3,00,000.
Fine:
Any person who is knowingly a
party to such issue Not less than Rs. 50,000 but which
may extend to Rs. 3,00,000.
4.3 Public offer of Securities to be in Dematerialised Form
Section 29 of the Companies Act, 2013 along with the Companies (Prospectus and Allotment of Securities) Rules,
2014 [PAS Rules] contain provisions which require public offer of securities to be in dematerialised form.
→ Following companies shall issue securities only in dematerialised form by complying with the
provisions of Depositories Act, 1996:
• Every company making public offer, and
• Such other class/ classes of companies as may be prescribed.
→ In case of such class or classes of unlisted companies as may be prescribed, the securities shall
be held or transferred only in dematerialised form in the manner laid down in the Depositories
Act, 1996 and the regulations made thereunder [Sub-section (1A)].
→ Any company, other than a company mentioned above, may convert its securities into
dematerialised form or issue its securities in physical form in accordance with the provisions
of this Act or in dematerialised form in accordance with the provisions of the Depositories Act,
1996 and the regulations made thereunder [Sub-section (2)].

4.4 Advertisement of Prospectus
Section 30 of the Companies Act, 2013 provides the rules relating advertisement of the prospectus.
Wherever there is advertisement of prospectus published, it must contain following details:
• Objects,
• The liability of members and amount of share capital of the company,
• The names of subscribers to the MOA,
• The number of subscribers,
• The number of shares subscribed by each subscriber to the memorandum,
• The capital structure of the company.
4.5 Shelf prospectus
Section 31 of the Companies Act, 2013 contains provisions relating to Shelf Prospectus.
4.5.1 Meaning of Shelf prospectus
It is the prospectus with the shelf life, i.e., a validity period. In this type of public offering,
company is allowed to offer and sell securities to the public without a separate prospectus for
each act of offering.
4.5.2 Maximum period of validity
→ Any class or classes of companies as provided may file a shelf prospectus with the ROC at
the stage of the first offer of securities which shall indicate a period not exceeding 1 year
as the period of validity and,
→ in respect of subsequent offer within that validity period, not further prospectus is
required.
The period of validity shall commence from the date of opening of the first offer of securities
under that prospectus.

4.5.3 Information memorandum
Every subsequent offer requires issuing an ‘information memorandum’ containing the

details of changes that took place from the previous
issue, i.e. Information Memorandum
• Financial changed shall be prepared in Form
• New charges created PAS-2 and filed with the ROC
• Other material facts within 1 month prior to the
issue of a second or
If Advance is received for further shares before the subsequent offer of
issue of Information memorandum: then, securities under the shelf
→ Company must intimate the investor of all changes prospectus. [Rule 10 of PAS
using Information Memorandum and Rules, 2014]
→ Give an ‘Exit Option’ (Investor may withdraw his
money. The refund shall be processed in 15 days).
4.6 Red Herring prospectus
Section 32 of the Companies Act, 2013 contains provisions relating to Red-herring Prospectus.
4.6.1 Meaning of Red Herring prospectus
In this kind of public offering, the Price and quantity of shares to be allotted are not included
in prospectus. Thus the prospectus is incomplete.
Need of Red Herring Prospectus:
Developments taking place in the financial markets from time to time allow innovative methods of
raising funds so as to avail the most of favourable market conditions. Timing the issue and book
building of issue are facilitated by the concept of red herring prospectus whereby the price per
security and number of securities are left open to be decided post closure of the issue.
4.6.2 Issuing and filing Red herring prospectus
→ A company proposing to make an offer of securities may issue a red-herring prospectus

prior to the issue of the prospectus.
→ It shall be filed with the ROC at least 3 days prior to the opening of the subscription
list and the offer.
4.6.3 Filing of the prospectus upon closing of the offer
Upon closing of the offer, the prospectus stating the total capital raised (by debt/share capital)
and closing price of securities along with other prescribed details, shall be filed with the ROC
and SEBI.

Note: Book Building is a price discovery method. In this method, the company doesn't fix up a
particular price for the shares, but instead gives a price range. An underwriter builds a book by
accepting orders from fund managers, indicating the number of shares they desire and the price they
are willing to pay.
4.7 Abridged prospectus
As per Section 2(1), ‘Abridged Prospectus’ means a memorandum containing such salient
features of a prospectus as may be specified by the SEBI.
Abridged prospectus is a summarised form of actual prospectus.
4.7.1 Meaning of Abridged Prospectus [Section 2(1)]
Abridged Prospectus means a memorandum containing such salient features of a

prospectus as may be specified by the Securities and Exchange Board by making
regulations in this behalf.
4.7.2 Need of Abridged Prospectus
In fact, ‘Abridged Prospectus’ is a summarized form of actual prospectus, containing the salient
features of a prospectus to cut the cost involved in the publication of large number of
prospectus which has to accompany the application forms for shares or debentures in case
of public offer.
4.7.3 Abridged Prospectus accompany the application form [Sub-section 1]
Section 33(1) provides that every application form for shares or debentures has to be accompanied
with the abridged prospectus.
Proviso to sub-section 1 provides exceptions, when the requirement of abridged prospectus does not
apply;
a. When application form is issued in connection with a bona fide invitation to a person
to enter into an underwriting agreement with respect to shares or debentures:
b. In relation to shares or debentures which were not offered to the public; or
c. Where offer is made to existing members of the company.
4.7.4 Right to receive prospectus [Sub-section 2]
Sub-section 2 provides that a prospectus (full prospectus) is to be made available to

any person who request for it before the closing of the subscription list and the offer.
4.7.5 Penalty [Sub-section 3]
A company who makes any default in complying with the provisions of section 33, shall
be liable to a penalty of fifty thousand rupees for each default.

4.8 Deemed prospectus
Section 25 of the Companies Act, 2013 provides that a document by which offer of securities to
the public is made, shall be a deemed prospectus.
→ Where a company allots or agrees to allot any securities of the company (i.e., private
placement)
→ with a view to all or any of those securities being offered for sale to the public,
→ any document by which the offer for sale to the public is made shall be deemed to be a
prospectus issued by the company.
→ All the enactments and rules of law as to the contents of prospectus shall apply to the
deemed prospectus.
4.8.1 Offer for sale to the public
Any private placement of securities made by a company shall be considered as securities offered
for sale to the public, if it is shown that –
a) An offer of the securities or any of them for sale to the public was made within 6
months of allotment or agreement to allot; OR
b) At the date when the offer was made, the whole consideration to be received by the
company in respect of the securities has not been received by it.
CASE LAW
Above Sub-section of section 25 are not exhaustive in nature, there may be certain other
situations when issuing document may construe as deemed prospectus.
SEBI v Kunnamkulam Paper Mills Ltd Where a rights issue is made to existing members with
a right to renounce in favour of others, if the number of such others exceeds fifty, it also
becomes a deemed prospectus
4.8.2 Additional matters to be stated in the prospectus in an offer for sale to the public
a) The net amount of consideration received or to be received by the company in respect of
the securities to which the offer relates.
b) The time and place at which the contract where under the said securities have been or
are to be allotted may be inspected.
4.8.3 Signing of document in case of a company or a firm
Where a person making the OFS to the public is a company / firm, the deemed prospectus shall
be signed by:
→ 2 directors of the company, or

→ Not less than one-half of the partners in the firm, as the case may be.
Since the provisions of the Act relating to prospectus and the penal provisions are attracted only when

the prospectus (including deemed prospectus) has been issued. "Issued" means issued to the public.
Hence In context of ‘Invitation to Public’ ‘Inviting offer from the Public’ or ‘Offer of securities for
sale to Public’ two valid questions arise here:
1. What constitute as ‘Public’? Does only ‘Public at large’ constitute as Public?
The term public is not restricted to the public at large. It includes any section of the public, it is
immaterial howsoever such section is selected.
Public connotes persons not personally known to the promoter as distinguished from his own
friends, relatives, connections and acquaintances.
Re, South of England Natural Gas and Petroleum Co. Ltd
Facts – 3000 copies of a document which was offered for subscription of shares in a company and
which was headed “For Private Circulation only,” circulated to the members of certain number of gas
companies only.
Legal Question – Was this a prospectus? Should it contain the particulars required by the Act?
– It was decided that though the offer was only to limited class, it was not less than an offer to the
public in any sense, because those persons from limited class were nonetheless the public. Hence,
the distribution of a document entitled, “For Private Circulation only” offering the company shares was
an offer to the public and their document was a prospectus. Therefore, it must contain the particulars
required by the Act.
2. Whether a single private communication tantamount to issue; can it be construe to a
prospectus to attract the provisions of the Act?
The term "issue" is not satisfied by a single private communication. There must be some measure of
publicity, however modest. A private communication is not thus open and does not construe to be a
prospectus, hence not attracting the provisions of the Act.
Nash Vs Lynde
Facts – Nash applied for certain shares in a company on the basis of a document sent to him by Lynde,
the managing director of the company. The document was marked ‘strictly private and confidential’.
The document did not contain all the material facts required by the Act to be disclosed. Nash filed a
suit for compensation for loss suffered by him by reason of the Omissions.
Decision – Suit was dismissed.
Viscount Summer’s landmark dictum in this case is worth to consider here as basis of above
answer. “The public in the definition is of course a general word, no particular number are prescribed.
Anything from two to infinity may serve, perhaps even one if he is intended to be the first of a series of
subscribers but made further proceedings needless by himself subscribing the whole. The point is
that the offer is such as to be opened to anyone who brings his money and applies in due from,
whether the prospectus was addressed to him on behalf of the company or not. A private
communication is not thus open and does not construe to be a prospectus.”

Prospectus
Red-herring Abridged
Shelf prospectus Deemed
prospectus Prospects
[Section 31] propsectus
[Section 32] [Section 2(1)
In this kind of Abridged Any document by

It is the prospectus
public offering, prospectus is a which the offer for
with the shelf life,
the Price and summarised form sale to the public
i.e., a validity
quantity of shares of actual is made shall be
period.
to be allotted are prospectus deemed to be a
not included in prospectus issued
prospectus. Thus by the company.
Every subsequent the prospectus is
offer requires incomplete.
issuing an All the enactments
‘information and rules of law as
memorandum’ to the contents of
To be filled with prospectus shall
RoC at least 3 days apply to the
prior to issuing to deemed
public. prospectus
4.9 Offer for sale by certain members of the company
Section 28 of the Companies Act, 2013 contains provisions which regulate the offer for sale of
securities by certain members of company.
→ Members may offer whole or part of their shareholding for sale to public provided BOD
approves.
→ Document offered to public inviting subscription shall be Deemed Prospectus. All provisions
applicable to normal prospectus shall apply.
→ Individuals/Body corporates whose shares are being OFS, shall

• authorize company whose shares are being offered for sale to the public, to take all the
actions in respect of OFS on their behalf and
• reimburse the company of all related expenses.

4.9.1 Rule 8 of PAS Rules –
(1) The provisions of Prospectus and Allotment of Securities and rules made thereunder shall be
applicable to an offer of sale referred to in Section 28 except for the following: -
a) Provisions relating to minimum subscription,

b) Provisions for minimum applicable value,
c) Provisions requiring any statement to be made by the BOD in respect of utilization of
money,
d) Any other provision or information which cannot be compiled or gathered by the
offeror, with detailed justification for non-compliance.
(2) The prospectus issued u/s 28 shall disclose the name of the person or persons or entity
bearing the cost of making the offer of sale along with reasons.
4.10 Variation of terms of contract or objects in prospects
Section 27 of the Companies Act, 2013 contains provisions relating to variation in terms of contract or
objects in prospectus.
4.10.1 Variation on approval in general meeting by passing SR

Company may vary terms in the prospectus only by
• passing SR in general Meeting

• Details of the notice in respect of such resolution to the shareholders shall be published
in 2 Newspapers (English and vernacular) in the city where registered office of the
company is situated, and it shall clearly indicate the justification for such variation.
4.10.2 Rule 7 of PAS Rules
(1) Where the company has raised money from public through prospectus and has any unutilised
amount out of the money so raised, it shall not vary the terms of contracts referred to in
the prospectus or objects for which the prospectus was issued except by passing a SR
through postal ballot.
The company shall not use any amount raised by it through prospectus for buying, trading or otherwise dealing
in equity shares of any other listed company.
The notice of the proposed SR shall contain the following particulars –
i) The original purpose/ object of the issue,

ii) The total money raised,
iii) The money utilised for the objects sated in the prospectus,
iv) The extent of achievement of the proposed objects,

v) The unutilised amount,
vi) The particulars of proposed variation,
vii) The reason and justification for seeking variation,
viii) The proposed time limit within which the proposed varied object would be
achieved,
ix) Clause-wise details
x) The risk factors relating to new objects,
xi) Other relevant information.
(2) The advertisement of the notice for getting the SR passed shall be in Form PAS – 1. It shall
be published simultaneously with dispatch of Postal Ballot notices to the shareholders.
(3) The notice shall also be placed on the website of the company, if any.
4.10.3 Exit offer to dissenting shareholders

Those shareholders who have not agreed to the variation shall be given an exit offer by
promoters or controlling shareholders at such exit price as may be specified by the SEBI [Section
27 (2)].
DEMATERIALISATION OF SECURITIES OF UNLISTED PUBLIC COMPANIES
5.1 Issue of securities in dematerialised form [Rule 9A(1)]
Rule 9A of the Companies (Prospectus and Allotment of Securities) Rules, 2014 mentions about
securities in dematerialised form by unlisted public companies.
Every unlisted public company (excluding Nidhi Company, Government Company, and a wholly owned
subsidiary) shall issue the securities only in dematerialised form and also facilitate
dematerialisation of all existing securities.
5.2 Conversion of securities in dematerialised form [Rule 9A(2)]
Also, before making an offer for
a) issue of any securities or

b) buyback of securities or
c) issue of bonus shares or rights offer,
every unlisted company shall ensure that entire holding of securities of its promoters,
directors, key managerial personnel has been dematerialised.
5.3 Responsibility of every holder of securities of an unlisted public company [Rule 9A(3)]
Every holder of securities of an unlisted public company:
→ Who intends to transfer such securities shall get the securities dematerialised before
the transfer or

→ Who subscribes to any securities of an unlisted public company shall ensure that all
his existing securities are held in dematerialized form.
5.4 Application to the depository [Rule 9A(4)]
Every unlisted public companies shall
→ facilitate dematerialisation of all its existing securities by making necessary

application to a depository,
→ secure International Security Identification Number (ISIN) for each type of security
and
→ inform all its existing security holders about such facility.
5.5 Obligations of every unlisted public company [Rule 9A(5 & 6)]
Make timely payment of fees to the depository, registrar to an issue and

to share transfer agent
Maintain security deposit, at all times, of not less than 2 years fees
Comply with the regulations or directions or guidelines or circulars

issued by the SEBI or depository from time to time w.r.t.
dematerialisation of shares of unlisted public companies and matters
incidental thereto
No unlisted public company which has failed to comply with above obligations shall make an
offer of any securities or buyback its securities or issue any bonus or right shares till the payments
to depositories or registrar or share transfer agent are made. [Sub-rule 6]
5.6 Application of certain provisions [Rule 9A(7)]
The provisions of –
d) The Depositories Act, 1996,

e) The Securities and Exchange Board of India (Depositories and Participants)
Regulations, 2018, and
f) The Securities and Exchange Board of India (Registrars to an issue and Share Transfer
Agents) Regulations, 1993
shall apply mutatis mutandis to dematerialisation of securities of unlisted public companies.
5.7 Filing with the Registrar [Rule 9A(8 & 8A)]

✓ Every unlisted public company governed by Rule 9A shall submit Form PAS-6 to the Registrar
within 60 days from the conclusion of each year duly certified by a CS/CA in practice.
✓ The company shall immediately bring to the notice of the depositories any difference observed
in its issued capital and the capital held in dematerialised form [Sub-rule (8A)].
5.8 Grievances redressal mechanism [Rule 9A(9 & 10)]
✓ Grievances of the security holders of unlisted public companies under Rule 9A shall be filed
before the Investor Education and Protection Fund (IEPF).
✓ The IEPF authority shall initiate any action against a depository or participant or registrar
to an issue and share transfer agent after prior consultation with the SEBI.
SECURITIES TO BE DEALT WITH IN STOCK EXCHANGES
Section 40 of the Companies Act, 2013 contains provisions in respect of securities which are to be dealt with in
recognised stock exchanges.
6.1 Listing of Securities
→ Every company, making public offer, shall before making such offer, make an application to
one or more recognised stock exchange and obtain permission for the securities to be dealt
with in such stock exchanges.
→ The prospectus shall state the names of the stock exchange in which securities shall be
dealt with.
→ All monies received on application shall be kept in a separate bank account in a

scheduled bank and shall be used only for adjustment against allotment and for repayment
in case unable to allot.
→ Nothing can be written in the prospectus to waive this section.
→ Default in compliance:
➢ Company: Fine- minimum Rs. 5 lakh and
Maximum Rs. 50 lakhs.
➢ Defaulting officer:
o Fine of minimum Rs. 50,000/- and maximum Rs. 3 lakh, or
6.2 Payment of Commission
A company my pay commission to any person in connection with the subscription to its securities.
The conditions for payment of commission are:
→ Authorized by AOA.
→ May be paid out of proceeds of issue or out of profits of the company or both.

→ Rate of commission:
For shares For Debentures
✓ Rate mentioned in AOA or ✓ Rate mentioned in AOA or
✓ 5 % of price at which shares are ✓ 2.5 % of price at which debentures
issued are issued
Whichever is less Whichever is less
→ Disclosure in prospectus:
Underwriting is the process
• The name of underwriters,
through which an individual or
• The rate and amount of commission payable
institution takes on financial risk
to the underwriters,
for a fee. In this case, such
• The number of securities which is to be
underwritten or subscribed by the institutions agree to take over
underwriter absolutely or conditionally. the un-subscribed portion of
securities offered to public to
→ No commission shall be paid to any underwriter on meet minimum subscription.
securities which are not offered to the public for
subscription.
→ A copy of the contract for payment of commission is delivered to the ROC at the time of
delivery of prospectus for registration.
ALLOTMENT OF SECURITIES BY COMPANY

7.1 Meaning of Allotment
Section 39 of the Companies Act, 2013 contains provisions in respect of allotment of securities when there
is a public offer.
Allotment means the appropriation out of previously un-appropriated capital of a company, of a

certain number of shares to a person. Allotment is when the ownership of shares is given in the name
of shareholder and entry is made in the register of members. It brings shares into existence.

7.2 Allotment of Securities
Allotment of securities
Amount stated in
Sum payable on application for Application money shall not be
prospectus as
the amount stated have been <5% or such other % or amount
minimum amount has
paid to & received by company as may be specified by SEBI
been subscribed
Minimum amount not subscribed and application money not received

within 30 days from date Amount received If not refunded within such period, the
of issue of propsectus, or shall be repaid within directors in default shall be jointly and
such other period as 15 days from the severally be liable to pay that money
specified by SEBI closure of issue. with interest at 15% p.a. [Rule 11]
Return of allotment
Shall be filed by the company with the ROC within 30 days of allotment in Form PAS-3
Punishment for default
Company and its officer in default shall be liable to a penalty of Rs. 1,000/- for each day
during which such default continues or Rs.1 lakh, whichever is less.
7.3 Rule 12 of PAS Rules
Note:
• As per the regulation 45(1) of the Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 201827, the minimum subscription is 90% of the entire
issue.
• As per the regulation 47(4) of the 28Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2018, the minimum sum payable on application per
specified security shall be at least twenty five percent of the issue price.
• Further, proviso to regulation 47(4) provides that in case of an offer for sale, the full issue price
for each specified security shall be payable at the time of application

7.3.1 Time limit for filing Return of Allotment [Rule 12(1)]
Whenever a company having a share capital makes any allotment of its securities, the company
shall, within 30 days, file with the ROC a return of allotment in Form PAS – 3, along with the
specified fees.
7.3.2 Details to be attached with PAS - 3
a) A list of allottees stating their names, address, occupation, and number of securities allotted
and shall be certified by the signatory as being complete and correct as per records of the
company [Sub-rule (2)]
b) Where the securities are issued for consideration other than cash:
→ A copy of the contract duly stamped, pursuant to which the securities have been
allotted [Sub-rule (3)].
→ If such contract for issue of securities for consideration other than cash is not reduced
in writing, the company shall furnish complete particulars of contract stamped with
the same stamp duty as would have been payable if the contract had been reduced in
writing [Sub-rule (4)].
→ A report of a registered valuer in respect of valuation of the consideration [Sub-rule

(5)].
c) In case of issue of bonus shares, a copy of the resolution passed in the GM authorizing
the issue of such shares [Sub-rule (6)].
d) In case shares have been issued in pursuance of section 62(1)(c) (i.e., Preferential issue of
shares) by a company other than listed company whose equity shares or convertible
preference shares are listed on any recognized stock exchange,
→ the valuation report of registered valuer shall be attached along with PAS – 3 [Sub-
rule (7)].
MISSTATEMENT IN PROSPECTUS
A contract of shares in a company is a contract of Uberrimae fides (Latin), which means ‘utmost
good faith’. The legal doctrine of Uberrimae fides provides that all parties to contract must deal in
good faith, making a full declaration of all material facts. The intending purchasers of shares are
entitled to true and correct disclosures of all the facts in the prospectus.
Sections 34 and 35 of the Companies Act, 2013 contains provisions relating to punishment in case of
misstatement in prospectus.
Some of landmark judicial pronouncements –
Mislead through false Statement (prima-facie of facts) - Henderson v. Lacon

It was stated in the prospectus, ‘the directors and their friends have subscribed a large portion of the
capital and they now offer to the public the remaining shares.’ Whereas, in actually each of director
had subscribed only 10 shares. It was held that such a statement is misleading one.
Misled by hiding truth through superficial statement - Rex v. Kylsant
In the prospectus, it is stated that the company had regularly paid dividends, in actual, company has
been incurring substantial losses during all those years. Company used to write back some of the past
provisions to the credit of the profit and loss account. It was held that the prospectus did not disclose
the true picture of the company.
Misled through ambiguous statement - Smith v. Chadwick
The prospectus of a manufacturing company contain, ‘the present value of turnover is £1million
sterling per annum,’ the statement was true only if production capacity is considered but untrue if it
meant the present production level (capacity in utilisation). It was held that, such a statement which
director knew may bear multiple meaning out of which any can be false to their knowledge, considered
to be furnishing of misleading statement
EFFECT OF MISLEADING PROSPECTUS – REMEDIES OF MISREPRESENTATION
The fear of heavy liability and criminal sanctions have controlled the directors' tendency of "using
extravagant terms and flattering description". But if the prospectus contains a misleading or false
statement or omits to disclose a material fact which amounts to misrepresentation, the aggrieved
shareholder has the remedies. The law allows the following remedies for misrepresentation
Remedies for
Misrepresentation
in Prospectus
Against the
Against the
Against the persons
Company &
Company authorised to
others
issue prospectus
Civil Liability Damages for

Rescission Damages Criminal Liability
(Compensation) Deceit
RIGHT OF RESCISSION
When to seek rescission? A person who has purchased shares from the company on the basis of the
prospectus containing untrue and misleading statement of material facts is entitled to apply to the

court for the rescission of the contract, under the relevant provisions of the Indian Contract Act
187225.
Effect of rescission
The agreement to take up shares is voidable at the option of the subscriber to the shares, it will remain
valid unless he actually rescinds it. If the court accepts his application for the repudiation of the
contract, company will remove his name from the register of members and return his money with
interest and other incidental cost.
Entitlement to compensation for any damages which he sustained through the nonfulfilment of the
contract arises under section 75 of the Indian Contract Act 1872.
Exceptions – When right of rescission is not available?
a. Right to rescind allotment of shares will not be available to the subsequent purchasers of shares
from the market.
b. A subscriber to the Memorandum of Association cannot also seek any relief, as the company cannot
be considered to be in existence at the time when he appended his signatures to the Memorandum of
Association. He cannot be said to have been influenced by any statement in the prospectus.
RIGHT OF ACTION FOR DAMAGES
When to evoke?
In the cases where misstatement amounts to fraud, aggrieved investor also gets a right of action for
damages against the company. This right is available even after the company has gone into liquidation.
Pre-requisite to claim for damages
a. Misrepresentation (fraudulent) was there in the prospectus and it is of material fact
b. Person is intended to act upon it
c. Person suffered the damages as consequences of acting upon such fraudulent misrepresentation.

Liability for Mis-statement in
prospectus
Criminal Liability (Section 34): Civil Liability (Section 35):

Involves Mens Rea (guilty mind) It arises out of dispute between
and loss caused to the other party two parties & loss caused to
due to a crime/fraud conducted on either of them thereby claiming
purpose by another party. reimbursement for damages
Liability of the following persons:

Every person responsible for the
a) Director/Named director in
issue of prospectus shall be
Liable u/s 447 prospectus
b) Promotor
c) other person who authorised
issue of prospectus
d) Expert refered u/s 26
Exception:
a) Immaterial Liability:
Exception:
Misstatement pay damages
-consent is withdrawn before issue of
b) Reasonable grounds for loss
prospectus+ it was issued without his
to believe that the caused
authority.
statment was -penalty u/s
-it was published without his knowledge, &
true/ommission was 36
necessary he published notice in newspaper on being
aware of it after issue.
-person relied on a competent expert's
statement included in prospectus & such
expert has not withdrawn the consent
before filing prospectus with RoC
Note
a. Loss from mis-statement is not essential, to held a person guilty under section 34.
b. Liability for offence under section 34, is strict liability, hence it is immaterial where the omission is
intentional or unintentional, in both case person will be held guilty under section 34 and liable for
punishment under section 447 of this Act.
DAMAGES FOR DECEIT
When remedy of damages for deceit is available?
Persons responsible for the issue of prospectus can also be held liable in an action for deceit, under
general law as provided by section 19 of the Indian Contract Act. This remedy shall be available even
where the remedy by way of rescission as against the company is lost either through latches or
negligence or even if the company goes into liquidation.

Prerequisite to claim damages for deceit is available
a. There was a fraudulent mis-statement related to some existing material facts.
b. He is original allottee and had seen the prospectus.
c. He has been actually deceived.
Peek v. Gurney Gurney
issued a fraudulent prospectus on behalf of a company. No shares were purchased by Peek at that
time. Several months afterwards, Peek purchased 2,000 shares of the company from the stock
exchange. He brought an action against the directors for deceit (on the basis of prospectus). Court
held, the directors were not liable as the shares were not purchased on the basis of prospectus.
PUNISHMENT FOR FRAUDULENTLY INDUCING PERSONS TO INVEST MONEY
→ Any person who,

→ knowingly or recklessly,
→ makes any statement, promise or forecast,
Section 36 of the Companies Act, 2013 prescribes punishment for fraudulently inducing persons to invest
money.
• which is false, deceptive or misleading, or

→ deliberately conceals any material facts,
→ to induce another person to enter into, or to offer to enter into,
• any agreement for acquiring, disposing of, subscribing for, or underwriting
securities, or
• any agreement for the purpose of securing any profit to any parties from the yield of
securities, or
• any agreement for obtaining credit facilities from any bank/ financial institution
shall be liable u/s 447.
ACTION BY AFFECTED PARTIES
Any person aggrieved u/s 34, 35, 36 may file a
Section 37 of the Companies Act, 2013 has paved way for class action.
✓ Normal suit or
✓ Class action suit [A group of parties having common grievance against another party, may file
a single case together. In such case, representative of such group may attend the hearings and
follow up with legal proceedings].

PUNISHMENT FOR PERSONATION FOR ACQUISITION, ETC., OF SECURITIES [SECTION 38]
The purpose of the section is to prevent allotment of shares in fictitious names.
Sub-section 1 provides, any person shall be liable for punishment under section 447, if:
a. He makes or abets the making of an application in a fictitious name to a company for acquiring, or
subscribing for, its securities; or
b. He makes or abets the making of multiple applications in different names or different combinations
of his name or surname for acquiring or subscribing for its securities; or
c. otherwise induces, directly or indirectly a company to allot or register any transfer of any securities
to him or to any other person in a fictitious name.
Sub-section 2, provides that every company which issues a prospectus is required to reproduce
prominently the provisions of the sub- section (1) in the prospectus and every form of application
for securities.
Note:
A person who gets shares allotted in a fictitious name becomes liable as a shareholder. Thus, where
a person carried on business under an assumed name and took shares in that name, his trustee
in bankruptcy of the said person, could not avoid liability.
Sub-section 3 provides, where a person has been convicted under the section, the court may order
disgorgement of any gain made by such person. The order may also include seizure and disposal of
securities which may be found in his possession.
The amount received through disgorgement or disposal of securities under sub- section (3), is to be
credited to the Investor Education and Protection Fund. [Sub section (4)]
PUNISHMENT FOR FRAUD
Section 447 of the Companies Act, 2013 describes the punishment for fraud.
Meaning of fraud: The term fraud in relation to affairs of a company or a body corporate includes
→ any act, omission, concealment of fact, or abuse of position

→ committed by any person, or any other person with the connivance (i.e., involvement) in any
manner,
→ with the intent to deceive, to gain undue advantage from, or to injure the interests of the
company or its shareholders or its creditors, or any other person,
→ whether or not there is any wrongful gain or wrongful loss.

Fraud involving less Fraud involving at least Fraud involving at least
than Rs. 10 lakhs or 1% Rs. 10 lakhs or 1% of Rs. 10 lakhs or 1% of
of turnover whichever turnover whichever is turnover whichever is
is lower lower lower
[public interest not [public interest not [PUBLIC INTEREST
involved] involved] INVOLVED]
Fine: Fine:
Fine: Upto Rs. 50 Minimum equal to Minimum equal to
lakhs, OR amount of fraud, amount of fraud,
Maximum: 3 times Maximum: 3 times
the amount of the amount of
fraud, AND fraud, AND
Imprisonment
upto 5 years, OR
Imprisonment: Imprisonment:
Minimum 6 Minimum 3 years
months
Maximum 10
Both fine and Maximum 10 years
imprisonment years
13. GLOBAL DEPOSITORY RECEIPT [SECTION 41]
1. A global depository receipt is a general name for a depository receipt where a certificate issued
by a depository bank, which purchases shares of foreign companies, creates a security on a
local exchange backed by those shares.
2. GDR as per section 2(44) of this Act means any instrument in the form of a depository receipt,
by whatever name called , created by a foreign depository outside India & authorized by a
company making an issue of such depository receipts.
3. Section 41 provides, company may issue depository receipts in any foreign country after
passing a special resolution in its general meeting and subject to such conditions as may be
prescribed in the Companies (Issue of Global Depository Receipts) Rules, 2014 (as further
amended in 2020).
MANNER AND FORM OF DEPOSITORY RECEIPTS
1. The depository receipts can be issued by way of public offering or private placement or in any
other manner prevalent in the concerned jurisdiction and may be listed or traded on the listing
or trading platform in the concerned jurisdiction.
2. The depository receipts may be issued against issue of new shares or may be sponsored
against shares held by shareholders of the company in accordance with such conditions as the
Central Government or Reserve Bank of India may prescribe or specify from time to time.

3. The underlying shares shall be allotted in the name of the overseas depository bank and
against such shares, the depository receipts shall be issued by the overseas depository bank.
VOTING RIGHT
1. A holder of depository receipts may become a member of the company and shall be entitled
to vote as such only on conversion of the depository receipts into underlying shares after
following the procedure provided in the Scheme and the provisions of this Act.
2. Until the conversion of depository receipts, the overseas depository shall be entitled to
vote on behalf of the holders of depository receipts in accordance with the provisions of the
agreement entered into between the depository, holders of depository receipts and the
company in this regard.
PRIVATE PLACEMENT
13.1 Meaning of private placement
Section 42 of the Companies Act, 2013 and Rule 14 of Companies (PAS) Rules, 2014 provides the provisions
which are applicable when shares are issued on private placement basis.
Private placement means any offer or invitation to subscribe or issue of securities to a select
group of persons by a company (other than by way of public offer) through private placement offer-
cum-application.
13.2 Conditions for private placement
a) Offer made only to a select group of persons identified by the BOD.
b) Number of such identified persons shall not exceed 200 in a financial year. [Rule 14(2) of PAS
Rules, 2014]
c) This limit excludes:
→ Employees offered securities under ESOP (Employee stock option plan)

→ Securities issued to Qualified Institutional Buyers
d) Above limit of 200 Private placement in a FY does not apply to
→ NBFC registered with RBI

→ Housing Finance Companies registered with National Housing Bank
if they comply with the regulations made by RBI/National Housing bank in respect of private
placement.
e) As per Explanation given in Rule, it is clarified that the restriction of 200 shall apply individually for
each kind of security that is equity share, preference share or debenture.

f) Requirement of Special Resolution: Prior approval of company by special resolution in the
general meeting for each of the offers/ invitations in a FY is required. [Rule 14(1)]
→ In the explanatory statement annexed to the notice for shareholders' approval, following disclosure
shall be made:-
✓ particulars of the offer including date of passing of Board resolution;

✓ kinds of securities offered and the price at which security is being offered;
✓ basis or justification for the price (including premium, if any) at which the offer or invitation is being
made;
✓ name and address of valuer who performed valuation;
✓ amount which the company intends to raise by way of such securities;
✓ material terms of raising such securities, proposed time schedule, purposes or objects of offer,
contribution being made by the promoters or directors either as part of the offer or separately.
→ Other Provisos to Rule [14(1)]

✓ Rule 14(1) shall not apply: In case of offer or invitation for non-convertible debentures, where the
proposed amount to be raised < limit as specified in Sec 180(1)(c) - Relevant Board resolution under
Section 179(3)(c) would be adequate
✓ Previous special resolution only once in a year sufficient:
• In case of offer or invitation for non-convertible debentures, where the proposed amount to be
raised > limit as specified in Sec 180(1)(c)
• In case of offer or invitation of any securities to qualified institutional buyers
✓ No offer or invitation of any securities under this rule shall be made to a body corporate
incorporated in, or a national of, a country which shares a land border with India,
• unless such body corporate or the national, as the case may be,
• have obtained Government approval under the Foreign Exchange Management (Non-debt
Instruments) Rules, 2019 and
• attached same with private placement offer cum application letter
g) The private placement offer-cum-application letter shall be in Form PAS-4 serially numbered
and addressed specifically to the person to whom the offer is made. [Rule 14(4)]. It shall be issued
only after resolution has been filed in the Registry. [Rule 14(8)]
h) A complete record of private placement offers shall be maintained by the company in Form PAS-
5. [Rule 14(3)]
i) No public advertisement shall be made to inform the public about such an issue.
12.1 Subscribing to the Private Placement Issue
→ Every identified person willing to subscribe to the private placement issue shall apply in the private
placement and application issued.
→ Along with the subscription money paid either by cheque, or DD, or other banking channel (not by
cash).

→ The monies raised shall not be utilised until allotment is made and return of allotment is filed
with the ROC.
→ The payment shall be made from the bank account of the person subscribing and the company
shall keep the record of the bank account from where such payment for subscription has been
received.
→ In case of joint holders, the money shall be paid from the bank account of the person whose name
appears first in the subscription.
→ The monies received on an application shall be kept in a separate bank account in a scheduled
bank and shall be used only for adjustment against allotment or for repayment of money where it
is unable to allot the securities.
12.2 Limit on fresh offer
No fresh offer or invitation shall be made unless –
✓ the allotment w.r.t any offer/ invitation made earlier have been completed, or
✓ that offer or invitation has been withdrawn or abandoned by the company.
12.3 Time limit for allotment of securities
→ Within 60 days of receipt of application money.
→ If the company is unable to allot the securities within that period, it shall repay the money within
15 days from the expiry of 60 days, and
→ If the company fails to repay the money within that period, it shall be liable for interest at 12%
p.a. from the expiry of 60 days.
12.4 Return of allotment
A return of allotment in Form PAS-3 shall be filed by the company with the ROC within 15 days
from the date of allotment including a complete list of allottees, their address, number of securities
allotted, date of allotment, nominal value and amount paid on such securities, particulars of
consideration, etc.
If the company defaults in filing the return of allotment within the above period, the company, its
promoters and directors shall be liable to a penalty of
→ Rs. 1,000 for each default for each day during which the default continues
→ Subject to a maximum of Rs. 25 lakhs.
Note
Proviso to Rule 4(1) states that when a company makes an offer or invitation to subscribe to
securities, no offer or invitation of any securities shall be made to a body corporate incorporated
in, or a national of, a country which shares a land border with India, unless such body corporate or
the national, as the case may be, have obtained Government approval under the FEMA29 Rules,
2019 and attached the same with the private placement offer cum application letter.

This means that companies will now have to obtain government approval under the FEMA Rules
before inviting subscription to securities or offering securities to any entity from a country that
shares a land border with India i.e. China, Bhutan, Nepal, Pakistan, Bangladesh, and Myanmar
12.5 Punishment for contravention of private placement provisions
→ The company, its promoters and directors shall be liable for penalty
→ Which may extend to:
o amount raised through the private placement or
o Rs. 2 crores, whichever is lower
→ And the company shall also refund all monies with interest at 12% to the subscribers within 30
days of order imposing the penalty.
Any offer made without complying this section shall be ‘deemed public offer’ and relevant
provisions of this Act, SEBI Act, 1992 and SCRA 1956 shall apply.

OVERVIEW
Prospectus and allotment of

securities
[Chapter III]
Issue of Private
prospectus Types of placement
and other Securities Penalties
prospectus
related [Section 42]
matters
Misstatement
Public offer Shelf Securities to
in prospectus
and private prospectus be dealt with
placement in Stock [Section 34 &
[Section 31]
exchanges 35]
[Section 23]
[Section 40]
Red Herring Fraudulently

Matters to be inducing
stated in the prospectus
Allotment of persons to
prospectus [Section 32] invest money
securities
[Section 39]
Public offer to Abridged

prospectus Action by
be in Demat affected
form [Section 2(1)] persons
Deemed
Advertisement prospectus Punishment
of prospectus for fraud
[Section 25]
[Sectio 30] [Section 447]
Offer for sale

by certain
members
[Section 28]
Variation of
terms/ objects
in prosspectus
[Section 27]

SHARE CAPITAL AND DEBENTURES
• Know about the kinds of Share Capital

• Explain the basic requirements of issue of share certificates, voting rights and variation of
shareholder’s rights
• Explain calls on unpaid shares
• Know abou the time period permitted for delivery of Certificate of securities
• Understand the application of Securities Premium Account
• Identify prohibition on issue of shares at a discount
• Understand the issue of Sweat Equity Shares, Issue and Redemption of Preference Shares and
creation of Capital Redemption Reserve Account
• Know about the transfer and transmission of securities, refusal to register and appeal against
refusal
• Explain the concepts relating to the alteration of share capital and notice to the Registrar thereof
• Understand the concept relating to further issue of Share capital
• Know about the issue of bonus shares, reduction of share capital, Buy-back of shares and
applicable restrictions thereon
• Know about the issue of debentures and creation of Debenture Redemption Reserve Account
• Identify the punishments and penalties for various offences including impersonation

OVERVIEW
Share capital and Debentures

[Chapter IV]
Issue of Alteration and Debenture

Share Capital Calls
shares further issue [Section 71]
Calls Alteration of
Types of share At premium share capital
capital [Section 49]
[Section 43]
Calls in
advance Further issue
Certificate of At discount
shares [Section 50] of shares
[Section 53]
Dividend in
proportion Sweat equity Issue of bonus
Voting Rights [Section 51] shares shares
[Section 47] [Section 54] [Section 63 &
64]
Variation of Preference
shares Reduction of
shareholders
share capital,
rights [Section 55] puchase of own
[Section 48] shares, buy-back
[Section 66,67, 68-
Transfer and 70]
transmission
of shares
[Section 56,
57,58, 59]

INTRODUCTION
Shares represent ownership interest in a company whereas debentures represent the lenders’ interest
in the company.
Shares and Debentures are financial instruments which help in arranging funds for the company. The
legal provisions relating to Shares and Debentures are covered under Chapter IV of the Companies Act,
2013 (comprising Sections 43 to 72) and the Companies (Share Capital & Debentures) Rules, 2014 as
amended from time to time.
SHARE CAPITAL- TYPES
Section 43 of the Companies Act, 2013 provides the provisions relating to the kinds of share capital.
2.1 Share
Section 2(84) defines ‘share’ as a share in the share capital of a company and includes a stock.
✓ The share capital of a company is divided into small units having a certain face value. Each
such unit is called a share.
✓ The definition of ‘share’ states that the term share includes ‘stock'.
✓ If a company undertakes to aggregate fully paid-up shares of various members as per
their requests and merge those shares into one fund, then such fund is called ‘stock’. Stock is
not issued originally but it is obtained by conversion of fully paid-up shares.
Case:
New London & Brazilian Bank v. Brockle Bank

A share is not a sum of money..., but is an interest measured in a sum of money, and made
up of various rights, contained in the contract, including the right to a sum of money of a
more or less amount.
Around two decade later, J. Farwell in landmark case of Borland’s Trustee v Steel Brothers &
Co Ltd2 place his trust in the opinion stated above, and observe that share is the interest of
a shareholder in the company measured by a sum of money, for the purpose of liability in
the first place and of interest in the second, and also consists of a series of mutual
covenants entered into by all the shareholders inter se in accordance with the provisions of
the Companies Act and the Articles of Association.
2.2 Two kinds of Share Capital

Share Capital
Preference Share
Equity Share Capital
Capital
Section 43 states that, the share capital of a company limited by shares shall be of two kinds, namely:-
a) Equity share capital –

(i) With voting rights; or
(ii) With differential rights as to dividend, voting or otherwise in accordance with such rules
as may be prescribed [prescribed in Rule 4 of Companies (Share Capital & Debentures)
Rules, 2014]; and
b) Preference share capital.
2.3 Equity Share Capital
Equity share capital means all share capital which is not preference share capital.
2.4 Preference Share Capital
Preference share capital means that part of the issued share capital of the company which carries or
would carry a preferential right with respect to-
a) Payment of dividend, and

b) Repayment in case of a winding up or repayment of capital.
2.5 Equity Shares with Differential Rights
Rule 4 of the Companies (Share Capital & Debentures) Rules, 2014 contains provisions which need to be
followed while issuing equity shares with differential voting rights.
2.5.1 Conditions for issue of equity shares with differential rights
(i) Authorised by the AOA,
(ii) Authorised by an Ordinary Resolution passed at a general meeting of the shareholders,

In case of listed company, such issue shall be approved by the shareholders through postal
ballot.
(iii) The voting power of shares with differential rights shall not exceed 74% of the total
voting power, at any point of time,

(iv) Company has not defaulted in filing the financial statements and annual returns for
immediately preceding 3 FYs.
(v) Company has no subsisting default in

→ payment of a declared dividend to its shareholders or
→ repayment of its matured deposits or
→ redemption of its preference shares or debentures,
(vi) In the preceding 5 FYs, company has not defaulted in

→ payment of the dividend on preference shares or
→ repayment of any term loan from a public financial institution/Scheduled bank or
interest payable thereon or
→ dues w.r.t statutory payments relating to employees to any authority or
→ crediting the amount in Investor Education and Protection Fund,
(vii) Company has not been penalized by Court/Tribunal during the last 3 years of any
offence under the
→ RBI Act, 1934
→ SEBI Act, 1992
→ SCRA, 1956
→ FEMA, 1999 or
→ Any other Special Act, under which such company is regulated.
2.5.2 Other Provisions for issue of equity shares with differential rights
✓ Rule 4(2) – The explanatory statement to be annexed to the notice of the general meeting
or of a postal ballot shall contain various matters like particulars of the issue including its size,
details of differential rights etc.
✓ Rule 4(3) – Company shall not convert its existing equity share capital with voting rights
into equity share capital carrying differential voting rights.
✓ Rule 4(4) – The BOD shall, inter-alia, disclose the Inter-alia is a Latin
specified particulars in the Board’s Report for the F.Y. in phrase which means
which issue of equity shares with differential rights was
“among other things”.
completed.
✓ Rule 4(5) – Holders of equity shares with differential rights shall enjoy all other rights such
as bonus shares, right shares, etc., which the holders of equity shares are entitled to.
✓ Rule 4(6) – The Register of Members shall contain all the relevant particulars of the shares
issued with differential voting rights.

Kinds of share
capital
Equity share Preference share

capital capital
with differential carries preferntial right w.r.t.

rights as to payment of dividend and
with voting rights
dividend, voting or repayment of capital at the time
otherwise of winding up.
CERTIFICATE OF SHARES
Section 46 of the Companies Act, 2013 contain provisions which regulate the certificate of shares.
A certificate issued under the common seal, if any, of the company or signed by two directors or by a
director and the CS, if any, specifying the shares held by a person, shall be prima facie evidence of the
title of the person to such shares.
A share certificate must be distinctively numbered.
Where shares are held in depository form, the record of the depository shall be the prima facie
evidence of the interest of the beneficial owner.
Section 43 does not apply to:
a) Private company where the MOA or AOA so provides, provided such company has not defaulted
in filing its FS u/s 137 or Annual Return u/s 92 with the ROC.
b) Specified IFSC Company where MOA or AOA so provides.
Note:
1. Since w.e.f. 29-05-2015 though Companies Amendment Act 2015, requirement to have common
seal is optional for companies, hence physical share certificate issued under sign of two director
or of one director along with company secretary is valid.
2. If the composition of the Board permits of it, at least one of the aforesaid two directors shall be
a person other than the managing or whole-time director

3. A director shall be deemed to have signed the share certificate if his signatureis printed thereon
as a facsimile signature by means of any machine, equipment or other mechanical means such
as engraving in metal or lithography, or digitally signed, but not by means of a rubber stamp,
provided that the director shall be personally responsible for permitting the affixationof his
signature thus and the safe custody of any machine, equipment or other material used for the
purpose.
3.1 Duplicate Certificate
3.1.1 Circumstance for issue of duplicate certificate

Original certificate -
• Is proved to have been lost or destroyed lost or destroyed, or

• Has been defaced, mutilated, or torn and is surrendered to the company.
ISSUE OF RENEWED/DUPLICATE SHARE CERTIFICATE [SUB-SECTION 2 READ WITH RULE 6

OF THE COMPANIES (SHARES AND DEBENTURES) RULES, 2014]
Issue of renewed certificate
A case wherein originally issued share certificate has been defaced, mutilated or torn, a
renewed share certificate in replacement shall be issued, in lieu of surrenderof such
original certificate, to the company.
Note:
1. A company may replace all the existing certificates by new certificates upon sub-division or
consolidation of shares or merger or demerger or any reconstitution without requiring old
certificates to be surrendered
2. On renewed certificate it shall be stated that it is “Issued in lieu of share certificate No sub-
divided/replaced/on consolidation”
3. Company may charge such a fee as board may think fit, but not exceeding
` 50 per certificate; and no fee shall be payable pursuant to scheme of arrangement
sanctioned by the High Court or Central Government.
Issue of duplicate certificate
A case wherein share certificate originally issue has been lost or destroyed, a share
certificate in duplicate may be issued if board is consented for the same basedupon
evidences produced.
Record of renewed and duplicate certificate to be maintained
Particulars of every renewed and duplicate share certificates maintained in FormSH 2

with cross reference to register of members, in shape of register.
Such register shall be kept at registered officer or any other place where register of
members in custody of company secretary or such other person as may be authorised by
the Board.

All entries made in such register shall be authenticated by the company secretary
or such other person as may be authorised by the Board.

MANNER OF ISSUE OF CERTIFICATES/DUPLICATE CERTIFICATES
Sub-section 3 overrule the articles of a company, and say the issue of a certificateof
shares or the duplicate thereof, the particulars to be entered in the register of members
and other matters shall be in manner and form as prescribed in rule 5, 6, and 7 of the
Companies (Shares and Debentures) Rules, 2014.
Rule 5 of the Companies (Shares and Debentures) Rules, 2014 applies, where shares are not
in demat form
Share certificate is in vogue in case of shares which are held in the physical form, not
in the demat form (under the depository mode). Hence provisions contained in rule 5 of the
Companies (Shares and Debentures) Rules, 2014 pertaining to share certificate applicable
where shares are not in demat form.
3.1.2 Punishment for issuing duplicate certificate of shares with intent to defraud
Company:
Officer in default
Fine
Minimum: 5 times
Liable for action
the face value of
u/s 447
shares involved
Maximum: 10 times the face value

of the shares involved, or
₹ 10 Crores
whichever is higher
3.2 Dematerialisation of shares
✓ Listed shares are required to be held in electronic At present, there are two
form (i.e., dematerialised form) depositories in India, i.e.,
✓ Rule 9A of the Companies (Prospectus and Allotment • National Securities
of Securities) Rules, 2014, requires every unlisted Depository Ltd. (NSDL) ,
public company to issue the securities in and
dematerialised form and facilitate the • Central Securities
dematerialisation of all its existing securities.
Depository (India) Ltd.
(CSDL)

Rule 9A shall not apply to an unlisted public company which is:
a) A Nidhi
b) A government company
c) A wholly owned subsidiary
[Rule 9A has been covered in detail in Chapter 3 ‘Propsectus and allotment of securities]
VOTING RIGHTS
Section 47 of the Companies Act, 2013 governs the voting rights of the members of a company.
Voting rights of members Voting rights of members holding

holding Equity Share Capital Preference Share Capital
Right to vote only on resolution :

Every member shall have a right a) directly affecting the rights attached to
to vote on every resolution preference shares, and
placed before the company (one
b) for winding up of company,
member one vote)
c) for repayment/ reduction of its equity or
preference share capital
Where dividend in respect of a class of
Voting right on a poll shall be in preference shares has not been paid for 2
proportion to share in the paid- years or more, such class of prefernce
up equity share capital of the shareholders shall have a right to vote on all
company the resolutions placed before the company.
The proportion of the voting rights of equity shareholders to the voting rights of preference
shareholders shall be in the same proportion as the paid-up capital in respect of the equity shares bears
to the paid-up capital in respect of the preference shares.

VARIATION OF SHAREHOLDERS’ RIGHTS
Where a share capital of the company is divided into different classes of shares, the rights attached to
the shares of any class may be varied.
Section 47 shall not apply to a private company, where MOA or AOA of the private company
so provides and which has not defaulted in filing its financial statements or annual return
with the Registrar.
Section 48 of the Companies Act, 2013 deals with the variation of shareholder’s rights.
5.1 Consent for variation
Such variation requires the consent –
• In writing of the holders of not less than 3/4th of the issued shares of that class, OR
• By means of a SR passed at a separate meeting of the holders of shares of that class.
• If the variation affects the rights of any other class of shareholders, the consent of 3/4 th of
such other class of shareholders is also to be obtained.
5.2 Conditions for variation in rights of shareholders
• Provision w.r.t such variation must be contained in the MOA/AOA, OR

• In the absence of such provision in the MOA/AOA, variation should not be prohibited by the
terms of issue of the shares of that class.
5.3 No consent given for variation
• Where holders of not less than 10% of the issued shares of a class did not consent to the
variation, they may apply to the Tribunal to have the variation cancelled.
• The application shall be made within 21 days after the date on which consent was given or
resolution was passed.
• The application may be made on behalf of all shareholders entitled to make an application
by any one or more person as they may appoint in writing for this purpose
• Where such application has been made, the variation shall not have effect unless and until
it is confirmed by the Tribunal.
• The decision of the Tribunal shall be binding on the shareholders.
• Within 30 days of order of the Tribunal, company shall file a copy thereof with the
Registrar.

CALLS, CALLS-IN-ADVANCE AND MATTERS INCIDENTAL THERETO
Section 49, 50 & 51 of the Companies Act, 2013 deals with making calls in respect of partly paid-up shares,
call-in-advance and all the matters incidental thereto.
When the shares are partly paid up, the company issuing them can make calls asking the shareholders
to pay the amount ‘called up’ in respect of such partly paid-up shares.
6.1 Calls [Section 49]
✓ Calls have to be uniformly made.

✓ There should be no/ differentiation for a given class of shareholders.
✓ However, where different amounts are paid for shares of the same nominal value by
the shareholders, such shares shall be deemed to be different class of shares (i.e., this
section shall not be applicable).
6.2 Calls-in-advance [Section 50]
✓ Company may accept from a member, the

whole or a part of the amount remaining unpaid Advance payment will not lead
on any shares held by him, even if no part of that to increased voting rights.
amount has been called up (i.e., calls in advance) However, delayed payment of
✓ However, this should be authorised by the AOA. call money could lead to
✓ However, such member shall not have voting decreased voting rights.
right in respect such advance amount paid by
him till the amount is duly called up by the
company.
6.3 Dividend in proportion [Section 51]
The company is permitted to pay dividends in proportion to the amount paid-up on each share, if
authorised by the AOA.
ISSUE OF SHARES AT PREMIUM
Section 52 of the Companies Act, 2013 deals with the provisions relating to issue of shares at a premium and the
application of such premium.
7.1 Premium
When a company issues shares at a price higher than their face value, the shares are said to be
issued at premium, and the differential amount is termed as premium

7.2 Application of Premiums
The aggregate amount of premium received shall be transferred to an account called “Securities
premium Account”.
Example: A share having face value of ₹10 is issued at ₹14. The amount over and above ₹ 10 is called
premium (i.e., ₹4).
Issue of fully
paid bonus
shares
Writing off the
Buy back of preliminary
shares u/s 68 expenses
Application
of Securities
premium
Account
Providing for Writing of the
premium payable expenses of, or the
on redemption of commission paid or
prference shares or discount allowed on,
debenture issue of shares or
debentures.
The Securities premium Account may be applied by such class of

companies as may be prescribed and whose FS comply with the accounting No such cos.
standards u/s 133 for such class of companies, for the following purposes: have been
a) For paying up unissued equity shares of the company to be issued prescribed so
to members of the company as fully paid bonus shares, or far.
b) For writing off expenses of or commission paid or discount
allowed on any issue of equity shares of the company, or
c) For the purchase of its own shares or other securities u/s 68.
Transfer of premium to Securities Premium Account [Sub-section1]
Sub-section 1 lay-down following principles that shall be observed in regards to premium;
a. Premium may be received in cash or in kind.
b. The amount of premium so received, whether in cash or kind, shall be carried to a separate
account to be known as the Securities Premium Account.
c. The amount to the credit of share premium account has to be maintained with the same
sanctity as paid-up share capital
d. It can be reduced only in the manner of paid-up share capital can be reduced under this act.

ISSUE OF SHARES AT DISCOUNT
Section 53 of the Companies Act, 2013 prohibits the issue of shares at discount.
8.1 Discount
Where the issue price is lower than the face value of shares, such issue of shares is regarded as being
at discount and the differential amount is known as discount.
8.2 Prohibition on issue of shares at discount
Example: A share having face value of ₹5 is issued at a lower price of ₹4. The differential amount of ₹1
is known as discount.
✓ A company shall not issue shares at a discount, except as provided in Section 54 (i.e.,
Sweat equity Shares).
✓ Any share issued by a company at a discount shall be void.
✓ Exception: A company may issue shares at a discount to its creditors when its debt is
converted into shares under any statutory resolution plan/ debt restructuring scheme as per RBI.
8.3 Punishment for default
1) Fine: Company and every officer in default shall be liable to penalty which may extend to
• Amount raised through issue

of shares at discount, or
Whichever is less
• ₹ 5 lakhs
2) Company shall also refund all monies received with interest at 12% p.a. from the date
of issue of such shares to the persons to whom such shares have been issued
Restrictions mentioned in Section 52 & 53 apply only in respect of issue of shares but not to the
issue of debt related products like bonds/ debentures.

ISSUE OF SWEAT EQUITY SHARES
9.1 Sweat Equity Shares [Section 2(88)]
Section 54 of the Companies Act, 2013 mention the provisions to be adhered to by a company issuing sweat
equity shares
Sweat Equity Shares means such equity shares as are

issued by a company to its directors or employees at a Employee means –
discount or for consideration other than cash, a) A permanent employee working
in/outside India,
→ for providing their know-how or
b) A director of the company, or
→ making available rights in the nature of
c) An employee or director as defined
intellectual property rights or
in sub-clauses (a) or (b) above in a
→ value additions, by whatever name called.
subsidiary, in/outside India, or of a
holding company of the company
9.2 Conditions for issue of sweat equity shares
[Rule 8]
✓ Authorised by a SR passed by the company.
✓ The resolution shall specify:
→ number of shares,
→ current market price,
→ consideration, if any,
→ class or classes of directors or employees to whom such equity shares are to be
issued.
✓ Listed companies shall follow the regulations made by SEBI in this behalf.
✓ Unlisted company shall comply with the provisions of Rule 8 of the Companies (Share and
Debentures) Rules, 2014.
9.3 Important provisions contained in Rule 8 of the Companies (Share and Debentures) Rules,
2014
✓ The SR authorising the issue of Sweat Equity shares shall be valid only for 12 months from
the date of passing [Rule 8 (3)].
Limit on issue of Sweat equity share [Rule 8(4)]

Maximum issue of sweat equity shares The issuance of sweat equity shares in a
shall be - company shall not exceed 25% of paid-
o15% of existing paid-up share capital in a up capital of the company at any time.
year OR •Exception: A start-up company may issue
oShares of issue value of Rs. 5 crores, sweat equity shares not exceeding 50% of
whichever is higher its paid-up capital up to 10 years.

✓ Lock-in-period: Sweat equity shares issued shall be non-transferable for 3 years from the
date of allotment [Rule 8(5)].
✓ Valuation of Sweat Equity shares: Shall be at a price determined by a registered valuer

as the fair price giving justification for such valuation [Rule 8(6)].
✓ The valuation of intellectual property rights or of know how or value additions for
which sweat equity shares are to be issued shall be carried out by a registered valuer. A
proper report giving justification for such valuation shall also be given to the BOD by such
valuer [Rule 8(7)].
✓ Treatment of non-cash consideration: Where the sweat equity shares are issued for non-
cash consideration, the treatment of such non-cash consideration shall be as follows:
→ Where non-cash consideration is a depreciable asset – presented in the Balance sheet
in accordance with the Accounting standards.
→ Other items – expensed as provided in the Accounting standards. [Rule 8(9)].
✓ Disclosure in the Director’s Report: The BOD shall, inter-alia, disclose in the Director’s
Report for the year in which such shares are issued, the specified details of issue of sweat
equity shares [Rule 8(13)].
✓ Maintenance of Register: Company shall maintain a register of sweat equity shares in Form
SH 3 at the registered office of the company or such other place as BOD may decide in this
behalf [Rule 8(14)].
Value additions means actual or anticipated economic benefits derived or to be derived by

company from an expert or a professional for providing know-how or making available rights
intellectual property rights, by such person to whom sweat equity is being issued for which the
consideration is not paid or included in the normal remuneration payable under the contract of
employment, in the case of an employee.
9.4 Sweat Equity shares to rank pari passu [Sec 54(2)]
✓ The rights, limitations, restrictions, and provisions as are for

the time being applicable to equity shares shall be applicable
Expression pari
to the sweat equity shares.
passu mean ‘to be
✓ The holders of sweat equity shares shall be ranked pari passu
with other equity shareholders. in equal footing’.
PREFERENCE SHARES - ISSUE AND REDEMPTION
Section 55 of the Companies Act, 2013 along with Rule 9 of the Companies (Share Capital and
Debentures) Rules, 2014. contains the provisions for regulation of issue & redemption of
preference shares.

10.1 Types of Preference shares
Types of preference
shares
On the basis of On the basis of On the basis of
dividend payout convertability to redeemability
shares
Cumulative Redeemable
Convertible
Non cumulative Irredeemable
Non-convertible
Participatory
Non-participatory
A Company limited by shares shall issue only Redeemable Preference Shares.
10.2 Conditions for issuing preference shares
(i) Authorised by passing a SR in the general meeting of the company [Rule 9(1)].
(ii) Company should not have subsisting default in the redemption of preference shares
issued earlier or in payment of dividend thereof [Rule 9(1)].
(iii) Register of members shall contain the particulars in respect of such preference shareholders
[Rule 9(4)].
10.3 Redemption of Preference Shares
Only fully paid preference shares are to be redeemed.
10.3.1 Time period within which Preference shares are to be redeemed
✓ 20 years, or whichever is less

✓ Time specified in AOA
Exception: For Infrastructure projects as specified in Schedule VI, preference shares can be
issued for a period exceeding 20 years but not exceeding 30 years subject to the redemption of
10% of such preference shares beginning in 21st year onwards or earlier, on a proportionate basis, at
the option of such preference shareholders.
10.3.2 Source of redemption of Preference shares
Preference shares shall be redeemed only out of

→ profits of the company which would otherwise be available for dividend, or
→ proceeds of fresh issue of shares made for the purpose of such redemption.
10.3.3 Transfer to CRR Account

Where the preference shares are proposed to be
CRR may be applied for
redeemed out of profits of the company,
issue of fully paid bonus
→ out of such profits, a sum equal to the nominal shares [Sec 55(4)].
amount of the shares to be redeemed, shall be
transferred to a reserve called the Capital
Redemption Reserve (CRR) Account.
There is no need to transfer to the CRR account any amount paid towards premium.
10.3.4 Payment of Premium on redemption
In case of such class of companies, as may be prescribed and whose FS

comply with the Accounting standards prescribed u/s 133,
• Premium, if any, payable on redemption shall be provided for out of the profits of
the company, before the shares are redeemed.
In case of redemption of preference shares issued on or before the
commencement of this Act,
• premium shall be provided for out of the profits of the company or out of the
company's security premium account, before such shares are redeemed.
In a case not meeting above criteria,
• Premium payable on redemption shall be provided for out of the profits of the
company or out of the company's securities premium account, before such shares
are redeemed.
10.3.5 Deemed Redemption

Where a company is not in a position to redeem any preference shares or to pay dividend on
such shares (called unredeemed preference shares),
→ It may issue further redeemable preference shares equal to the amount due, including
dividend thereon and
→ On such issue of further redeemable preference shares, such unredeemed preference
shares shall be deemed to have been redeemed.
→ Conditions:
o Consent of holders of 3/4th in value of such preference shares
o Approval of Tribunal.
o Tribunal may pass order to redeem shares of dissenting shareholders.

TRANSFER AND TRANSMISSION OF SECURITIES
Section 56 of the Companies Act, 2013 deals with the transfer and transmission of securities or
interest of a member of the company.
11.1 Transfer of Securities
✓ A company shall not register the transfer of securities of the company, unless a proper
instrument of transfer in Form SH-4,
→ duly stamped, dated, and executed by or on behalf of the transferor and the transferee,
→ specifying the name, address, and occupation of the transferee
→ has been delivered to the company by the transferor or the transferee within 60 days
from the date of execution,
→ along with the certificate of securities or the letter of allotment of securities.
✓ Exception: Where the transfer is between persons both of whose names are entered as holders
of beneficial interest in the records of a depository.
✓ Where the instrument is lost or not delivered within prescribed time:

The company may register the transfer on such terms as to indemnity as the Board may think fit.
Instrument Lost
Signed by Name, With share
of transfer in Delivered instument/
transferor address and certificate/
Form SH-4, within 60 delayed
and occupation of letter of
dated and days delivery- give
transferee transferee allotment
stamped indeminity
11.2 Transmission of Shares
Transmission of shares shall take place in following cases:
a) Death → Transmitted to Legal Representative

b) Insolvency → Transmitted to his Official Receiver
c) Lunacy → Transmitted to the administrator appointed by
of original the Court
shareholder
A company shall register an intimation of transmission of any right to securities, received by it,
from any person to whom such right has been transmitted.
11.3 Transfer of partly paid shares
Where an application for transfer of partly paid shares is made by the transferor,

→ the company shall give the notice of such application in Form SH-5 to the transferee
[prescribed by Rule 11 (3) of the Companies (Share Capital and Debentures) Rules, 2014],
and
→ the transferee gives no objection to the transfer within 2 weeks from the date of receipt
of notice, and
→ the company shall register such transfer of partly paid shares
11.4 Time period for delivery of certificates
To subscribers In case of In case of Allotment of

to MOA allotment of transfer/ debenture
shares transmission
of shares
•Within 2 •Within 2 •Within 1 •Within 6

months from months from month from months from
date of the date of the date of the date of
incorporation allotment receipt of allotment
instrument of
transfer/
intimation of
transmission
11.5 Transfer of securities of a deceased shareholder
The transfer of any securities or interest of a deceased person in a company by the legal representative
shall be valid as if he had been the holder at the time of execution of the instrument of transfer.
11.6 Punishment for default
Officer of the company

Company Depository
in default
Penalty of ₹50,000 Penalty of ₹50,000 Where any depository or

depository participant has
transferred shares with an
intention to defraud a
person, it shall be liable
u/s 447.
11.7 Forged transfer
Forged transfer takes place when a company effects the transfer of shares on the basis of an instrument
of transfer containing forged signatures of the transferor.

A forged transfer is a ‘nullity’ and is not legally binding.
However, if the transferee of the ‘forged transfer’ transfers the shares to another buyer who does not
know about the forgery and the company also registers the transfer in the name of the new buyer and
endorses the share certificates,
→ The company cannot deny the ownership rights of the new genuine buyer but
→ It cannot also deny the ownership rights of the original shareholder as forged transfer is
void-ab-initio, and therefore the company has to restore his name.
→ Hence, the company shall compensate the new genuine buyer who exercised good faith
in purchasing the shares.
→ The company shall get itself indemnified by the first transferee who used the forged
instrument to get the shares transferred to his name.
PUNISHMENT FOR PERSONATION OF SHAREHOLDER
Section 57 of the Companies Act, 2013 contains provisions relating to punishment for personation of a
shareholder.
If
any person deceitfully personates –
a) As the owner of any security or interest in a company, or

b) As an owner of any share warrant or coupon issued in pursuance of the Companies Act, 2013
Such person shall be punishable with:
✓ Imprisonment – not less than 1 year but may extend to 3 years, and
✓ Fine – not less than ₹1 lakhs but which may extend to ₹5 lakhs.
REFUSAL OF REGISTRATION AND APPEAL AGAINST REFUSAL
Section 58 of the Companies Act, 2013 contains procedures to be followed by a company while refusing to
register the transfer of securities and the process for filing appeal against such refusal.
13.1 Private Company refuses to register transfer/ transmission of securities
→ The company shall send a notice of refusal to the transferor and the transferee or to the
person giving intimation of such transfer, within 30 days from the date on which the
instrument of transfer, or the intimation of such transmission, was delivered to the company.
→ The transferee may appeal to the Tribunal against the refusal

o Within 30 days of receipt of notice of refusal, or

o Where notice of refusal is not sent by the company, within 60 days from the date on
which the instrument of transfer/ intimation of transmission was delivered to the
company.
13.2 Public Company refuses to register transfer/ transmission of securities without sufficient
cause
The securities or other interest of any member in a public company are freely transferrable.
If a public company refuses without sufficient cause to register transfer/ transmission of securities
within a period of 30 days from the date on which the instrument of transfer/ intimation of transmission
was delivered to the company, the transferee may appeal to the Tribunal –
o Within 60 days of receipt of notice of refusal, or

o Where notice of refusal is not sent by the company, within 90 days from the date on
which the instrument of transfer/ intimation of transmission was delivered to the
company.
13.3 Order of the Tribunal
Tribunal shall either dismiss the appeal or order –
a) Transfer/ transmission to be registered within 10 days, or

b) Rectification of register and also direct the company to pay damages, if any, sustained
by any aggrieved party.
Punishment for contravention of order of Tribunal:
→ Imprisonment: for not less than 1 year which may extend to 3 years, and
→ Fine: not less than ₹1 lakhs which may extend to ₹5 lakhs.
RECTIFICATION OF REGISTER OF MEMBERS
Section 59 of the Companies Act, 2013 provides the procedure for rectification of register of members.

If the name of any person is, without sufficient cause,
after having been if a default is made, or unnecessary

entered in the register
entered, is omitted delay takes place in entering in the
of members, or
therefrom, or register
Then appeal can be made to the Tribunal, or to a competent court outside India, in
respect of foreign members or debenture holders residing outside India, by
any member of the

the person aggrieved, or the company
company, or
The Tribunal may, after hearing the parties to the appeal,
direct rectification of records

order the transfer/
and order company to pay
dismiss the appeal, or transmission to be registered
damages sustanined by the
within 10 days of order, or
aggrieved parties.
ALTERATION OF SHARE CAPITAL
A limited company having a share capital may alter its MOA in its general meeting to:
Section 61 of the Companies Act, 2013 provides provisions for alteration of capital clause of the
MOA.
(i) Increase its Authorised share capital,

(ii) Consolidate and divide all or any of its share capital
Section 2(8) defines
into shares of a larger amount than its existing shares,
Authorised Share Capital to
[Consolidation which results in change in the voting
mean such capital as is
percentage of shareholders should be approved by the
Tribunal] authorised by the MOA of a
company to be the maximum
(iii) Convert all or any of its fully paid-up shares into stock, amount of share capital of
(iv) Reconvert stock into fully paid-up shares of any the company.
denomination,

(v) Sub-divide its shares into shares of smaller amount than is fixed by the MOA [However, the
ratio between the amount paid and unpaid shall remain unchanged].
(vi) Cancel the unsubscribed shares and thus diminish the amount of share capital. [Such
cancellation shall not be deemed to be a reduction of share capital].
The company shall within 30 days of alteration of share capital, give a notice to the
Registrar in Form SH-7 along with the altered MOA.
The alteration must be authorised by the Articles of Association.
Section 62 of the Companies Act, 2013 deals with further issue of share capital.
FURTHER ISSUE OF SHARE CAPITAL
Further issue of shares can be through:
✓ Rights issue,
✓ Employee Stock Options, or
✓ Preferential allotment
A right issue involves pre-emptive subscription rights to buy additional securities in a
company offered to existing shareholders.
If a company announces ‘1:10 rights issue’, it means an existing shareholder can buy one extra share
for every 10 shares held by him/her. Usually, right shares are issued at less than the prevailing
market price to encourage subscription.
Employees Stock Option means
→ the option given to the directors, officers or employees of a company or of its holding
company or subsidiary company or companies, if any,
→ which gives such directors, officers or employees, the benefit or right to purchase or to
subscribe for, the shares of the company at a future date at a pre-determined price
[Section 2 (37)].
Preferential allotment means issue of shares or other securities by a company to any selected
person or group of persons, whether or not those persons include existing shareholders or employees,
on a preferential basis.
→ Thus, company is authorised to issue to persons other than its existing shareholders
and to employees under ESOP. The issue of those shares is covered u/s 42 of the Act
(Private Placement).

Further shares shall be offered to:
The employees Any persons

Existing equity shareholders in
under a scheme of authorised by a
proportion to their paid-up capital
Employees Stock SR, either for cash
Option [ESOP] or for
consideration
other than cash
by a notice# specifying the number of
shares offered and the validity of the Subject to Special
offer Resolution passed by
company [in case of Issue of shares to
Private company persons other than
Ordinary resolution] its existing
Validity of offer: not less than 15 days shareholders or
or such lesser number of days as employees under
prescribed* but not exceeding 30 days ESOP is also
from the date of offer. If not exercised authorised here.
within this time it shall be deemed to Conditions under Rule
The process of
have been declined. 12 of the Companies
issue in this case is
(Share Capital and
as prescribed u/s
Debentures) Rules,
42 (i.e., Private
2014 shall apply.
Placement)
The offer shall include a right to
renounce the shares offered to him in
favour of any other person, unless
prohibited by the AOA
If right to purchase shares is not

exercised nor renounced by the
members within time, then BoD may
dispose off the shares in such manner
which is not dis-advantageous to
shareholders and company
#
The notice shall be dispatched through registered post/ speed post/through electronic mode/
courier/ any other mode having proof of delivery to all the existing shareholders at least 3 days
before the opening of the issue.
*As per Rule 12A time period within which offer shall be made for acceptance shall be not less than
seven days from date of offer.
Section 62 shall not apply to conversion of Convertible Preference shares/ Debentures into shares.
16.1 Conversion of Debentures issued by/ Loan obtained from the government

✓ Where any debenture issued/ loan obtained from any government by a company, the
Government may if it is considered necessary in public interest to do so, by an order,
direct that such debenture/ loans or part thereof shall be converted into shares of the
company. This is possible even if the original terms of issue of debenture/ raising of loan did
not include a term for conversion.
✓ If the terms and conditions of such conversion are not acceptable to the company, it may
appeal to the Tribunal within 60 days of communication of such order.
✓ The Tribunal shall hear the company and the government and pass such order as it thinks fit.
✓ In case of conversion, the fresh issue of shares shall be deemed increase in ‘authorised
share capital’ of the company. Accordingly, MOA shall be altered.
16.2 Conditions for issue of shares under ESOP Scheme [Rule 12]
In case of an unlisted company desirous to issue shares under ESOP Scheme to its directors, officers
or employees, Rule 12 requires certain conditions to be fulfilled.
The conditions prescribed by Rule 12 are as follows:
Listed company while issuing shares under ESOP Scheme shall follow the provisions under
SEBI (Share Based Employee Benefits) Regulations, 2014.
(i) Approved by the shareholders of the company by passing a SR [Rule 12 (1)].
(ii) Specified disclosures shall be made by company in the explanatory statement annexed to
the notice for passing SR [Rule 12 (2)].
(iii) The companies granting the ESOP will have the freedom to determine the exercise price
[Rule 12 (3)].
(iv) Rule 12 (6) –

a. There shall be a minimum period of one year between the grant of options and
vesting of option.
b. The company shall have freedom to specify the lock-in-period for the shares pursuant
to exercise of option.
c. The employees shall not have right to receive any dividend or to vote or in any
manner enjoy the benefits of a shareholder, till the shares are issued on exercise of
option.
(v) Rule 12 (8) –

a. The option granted shall not be transferrable to any other person.
b. The option granted to employees shall not be pledged, hypothecated, mortgaged,
or otherwise encumbered or alienated in any other manner.
c. No person other than the employees to whom the option is granted shall be entitled
to exercise the option.

d. In the event of death of the employee while in employment, all the options granted
to him till such date shall vest in the legal heirs or nominees of the deceased employee.
e. In case employee suffers a permanent incapacitation, all the options granted shall
vest in him on that day.
f. In the event of termination of employment,
• all options not vested in the employee on that day shall expire.
• The options which are vested within the period specified in this behalf, can be
exercised by the employee subject to the terms and conditions under the
scheme.
ISSUE OF BONUS SHARES
Section 63 of the Companies Act, 2013 prescribes the condition and the manner of issue of fully
paid-up bonus shares.
17.1 Source of issue of bonus shares
Free Reserves
Bonus shares may
be issued from
Securities Premium Account
Capital Redemption Reserve
not from reserves created by the

revaluation of assets
17.2 Other conditions for the issue of bonus shares
a) Authorised by the AOA,

b) Authorised in the general meeting of the company on the recommendation of the Board,
c) Not defaulted in payment of interest/ principal in respect of fixed deposits or debt
securities issued by it,
d) Not defaulted in the payment of statutory dues of the employees,
e) Partly paid-up shares, if any, outstanding on the date of allotment are made fully paid-
up,
f) such conditions as prescribed by Rule 14 – company which has once announced the
decision of its Board recommending a bonus issue, shall not subsequently withdraw the
same
Hon’ble Supreme Court in case of Standard Chartered Bank v Custodian

Bonus share is an accretion. A bonus share is issued when the company capitalises its profits by
transferring an amount equal to the face value of the share from its reserve to the nominal capital.
In other words, the undistributed profit of the company is retained by the company under the head of
capital against the issue of further shares to its shareholders. Bonus shares have, therefore, been
described as a distribution of capitalised undivided profit.
In the case of issue of bonus share there is an increase in the capital of the company by transferring of
an amount from its reserve to the capital account and thereby resulting in additional shares being
issued to the shareholders.
A bonus share is a property which comes into existence with an identity and value of its own and
capable of being bought and sold as such.
17.3 Not issued in lieu of dividend
According to Section 63 (3), the bonus shares shall not be issued in lieu of dividend. But its
permissible for a company to capitalise its profits or reserves for the purpose of issuing bonus shares.
NOTICE TO BE GIVEN TO REGISTRAR FOR ALTERATION OF SHARE CAPITAL
Section 64 of the Companies Act, 2013 provides provisions for notifying the Registrar in case of alteration of
Share capital.
Where a company alters its share capital as specified u/s 61 or 62, or redeems any redeemable
preference share, the company shall file a notice in Form SH-7 with the Registrar within 30 days of
such alteration/ redemption, along with an altered memorandum.
Upon default, the company and every officer in default shall be liable to a penalty of
✓ ₹500 for each day during which the default continues,

✓ subject to maximum of ₹5L in case of company, and ₹1L in case of an officer who is in default.
REDUCTION OF SHARE CAPITAL
Section 66 of the Companies Act, 2013 deals with the reduction of share capital.

Reduction of Share capital
Extinguish or reduce the With or without Nothing in this section

liability on any shares in extinguishing or reducing shall not apply to the buy-
respect of share capital not liability on any shares: back of its own securities
paid-up by a company u/s 68.
Cancel any paid-up share

Pay -off any paid-up share
capital which is lost or is
capital which is in excess of
unrepresented
the wants of the company
by available assets
18.1 Conditions for reduction of Share Capital
(i) Applicable to company limited by shares or limited by guarantee and having share capital,
(ii) Prior confirmation by the Tribunal is required
(iii) Authorised by Special resolution
(iv) No reduction shall be made if the company is in arrears in repayment of any deposits
accepted by it or the interest payable thereon.
18.2 Issue of Notice to the Tribunal and order of the Tribunal
→ The Tribunal shall notify the CG, Registrar and SEBI, in case of listed companies, and the
creditors and also consider the representations made to it by these parties within 3
months within the date of receipt of the notice. If no representation is received within this
time, it shall be presumed that there is no objection to the reduction.
→ The Tribunal may make an order confirming the reduction of share capital if it is satisfied
that the debt or claim of every creditor of the company has been discharged or determined
or has been secured or his consent is obtained.
→ The Tribunal shall not sanction an application for reduction of share capital unless
• the accounting treatment, proposed by the company for such reduction is in
conformity with the accounting standards u/s 133 or any other provision of the Act,
and
• a certificate to that effect by the company’s auditor has been filed with the
Tribunal.
→ A certified copy of the order of the Tribunal and of the minute approved by the Tribunal
showing –
• The amount of share capital,
• The number of shares into which it is to be divided,

• The amount of each share, and
• The amount if any, deemed to be paid up on each share.
shall be delivered to the ROC within 30 days of receipt of order of the Tribunal. The ROC
shall register the same and issue a certificate to that effect.
→ Order of the Tribunal confirming the reduction in share capital shall be published in
such manner as may be directed by the Tribunal.
18.3 No liability to members
No member of the company, past or present, shall be liable to any call or contribution in respect of
any share held by him, which exceeds the difference, if any, between –
a) The amount paid on the share, or reduced amount, if any, which is deemed to have been
paid thereon, and
b) The amount of the share as fixed by the order of reduction.
18.4 In case a creditor who was entitled to object has not been included in the list of Creditors
[Section 66 (8)]
Where the name of any creditor entitled to object to the reduction of capital is not entered into the list
of creditors by reason of his ignorance, and after such reduction, the company commits a default,
within the meaning of Section 6 of the Insolvency and bankruptcy Code, 2016 –
a) Every person who was a member of the company on the date of registration of the
order of reduction by the ROC, shall be liable to contribute to the payment of that
debt or claim, an amount not exceeding that which would have been liable to contribute if
the company had commenced winding up on the day immediately before the said date and
b) If the company is wound up, the Tribunal may, on an application made by any such
creditor and proof of his ignorance, if it thinks fit,
→ settle a list of person so liable to contribute and
→ make and enforce calls and orders on the contributories settled on the list, as if they
were ordinary contributories in a winding up.
Nothing contained in sub-section (8) shall affect the rights of the contributories among
themselves.
18.5 Punishment
If any officer of the company –

• Knowingly conceals the name of the creditor
entitled to object to the reduction, liable u/s 447
• Knowingly misrepresents the nature or amount of
debt or claim of any creditor, or

• Assists or is party to any such concealment or
misrepresentation
RESTRICTION ON PURCHASE BY COMPANY OR GIVING OF LOANS BY IT FOR PURCHASE OF ITS

SHARES
Section 67 of the Companies Act, 2013 deals with the restrictions on purchase by the company of its own
shares.
✓ No.company having a share capital shall buy its own shares unless the consequent reduction
of share capital is effected under the provisions of this Act.
✓ A public company cannot, directly or indirectly, lend money/give financial assistance to any
person to purchase its own shares or the shares of its holding company.
Exceptions to this:
a) Lending by a banking company in the ordinary course of business,

b) Lending money by a company in accordance with any scheme approved by the
company by a SR for the employees.
c) Loan to employees (other than directors or KMP) for purchase of shares of company
up to 6 months of their annual salary. Disclosure in board report must be made if such
employees have not exercised voting rights.
Note1:
1. In case the shares of the company are listed - Such purchase of shares shallbe made only
through a recognized stock exchange and not by way of private offers or arrangements.
2. Where shares of a company are not listed - the valuation at which shares are to be
purchased shall be made by a registered valuer.
3. The value of shares to be purchased or subscribed in the aggregate shallnot exceed
five percent of the aggregate of paid up capital and free reserves of the company;
4. Disclosures in respect of voting rights not exercised directly by the employees in respect
of shares to which the scheme relates shall be made in theBoard’s report for the relevant
financial year, namely:
(a) Names of the employees who have not exercised the voting rightsdirectly;
(b) Reasons for not voting directly;
(c) Name of the person who is exercising such voting rights;
(d) Number of shares held by or in favour of, such employees and the percentage of such
shares to the total paid up share capital of thecompany;
(e) Date of the general meeting in which such voting power was exercised;

(f) Resolutions on which votes have been cast by persons holding suchvoting power;
(g) Percentage of such voting power to the total voting power on eachresolution;
(h) Whether the votes were cast in favour of or against the resolution.
Note2:
Section 67 sub section (1) shall not apply to Nidhi Companies, when shares are purchased by the
company from a member on his ceasing to be a depositor or borrower and it shall not be considered
as reduction of capital under Section 66 of the Companies Act, 2013. While complying with such
exception, the Nidhi Companies shall ensure that the interests of their shareholders are protected.
(Sub section 1 is No.company having a share capital shall buy its own shares unless the consequent
reduction of share capital is effected under the provisions of this Act)
Section 67 does not affect the right of a company to redeem any preference shares.
20.1 Non applicability of Section 67
In whose share capital no other

body corporate has invested any
money,
Such private company has
not defaulted in filing its
Section 67 shall not financial statement and If the borrowings of such
annual return with ROC. companies from banks/financial
apply to private
companies and institutions or any body corporate
specified IFSC Public is less than twice its paid-up share
Company capital or ₹ 50 crores, whichever
is lower,
If such a company is not in default

of repayment of such borrowings.
20.2 Punishment for contravention:
Company: Every officer in default:

Fine: Minimum ₹1 lakh Imprisonment : may extend to 3 years
Maximum ₹25 lakhs Fine : Minimum ₹1 lakh
Maximum ₹25 lakhs

BUY-BACK OF SECURITIES
Section 68 to 70 of the Companies Act, 2013 contains the provisions for buy back of securities by
the issuer company.
21.1 Power of company to purchase its own securities [Section 68]
A company may
purchase its own
shares/ specified
securities out of:
Not out of proceeds of

Proceeds of issue of
Securities Premium an earlier issue of the
Free Reserves any shares/ specified
Account same kind of shares/
securiities
specified securities
*
Specified securities includes ESOP or other securities as may be specified by the CG.
21.1.1 Conditions for Buy-back
→ Authorised by the AOA,

→ Authorised by SR passed in the general meeting,
Exception: No SR is required where the buy-back is 10% or less of the total paid-up equity
capital and free reserves of the company, and it has been authorised by a Board resolution.
→ Buy-back is 25% or less of aggregate of paid up capital and free reserves of the company.
→ Maximum buy-back in a financial year shall not
exceed 25% of its total paid up equity capital in The expression “free
that F.Y. reserves” includes
The ratio of aggregate debts owed by the company after buy- securities premium
back is not more than twice the paid-up share capital and its free account.
reserves.
→
𝐷𝑒𝑏𝑡𝑠(𝑠𝑒𝑐𝑢𝑟𝑒𝑑 𝑎𝑛𝑑 𝑢𝑛𝑠𝑒𝑐𝑢𝑟𝑒𝑑)𝑎𝑓𝑡𝑒𝑟 𝑏𝑢𝑦𝑏𝑎𝑐𝑘
𝑃𝑎𝑖𝑑 𝑢𝑝 𝑠ℎ𝑎𝑟𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙+𝐹𝑟𝑒𝑒 𝑟𝑒𝑠𝑒𝑟𝑣𝑒𝑠
≤2
→ All the shares/ specified securities for buy-back are fully paid up,
→ The buy-back of listed shares/ specified securities is in accordance with the regulations of
SEBI,

21.1.2 Whose shares are to be purchased under buy-back
Open market
Existing Securities issued

shareholders on a to employees
proportionate under ESOP/
basis Sweat equity
Whose
shares can
be purchased
under buy-
back
21.1.3 Procedure for Buy-back
(1) The notice of meeting at which SR is proposed to be passed shall be accompanied by an

explanatory statement. Such explanatory statement shall contain following details:
• Full and complete disclosure of all material facts,
• Necessity for buy-back,
• Class of shares/ securities intended to be bought back,
• Amount to be invested under buy-back,
• Time limit for completion of buy-back.
(2) The buy-back shall be completed within 12 months of passing the SR or a resolution
passed by the Board authorising the buy-back.
(3) Before making the buy-back, the company shall file with the ROC and SEBI (if listed
company),
• a declaration of solvency in Form SH-9 and
• verified by an affidavit to the effect that the Board has made a full enquiry of the
company and that the company is capable of meeting its liabilities and will not be
rendered insolvent within a period of 1 year from the date of declaration of
solvency.
• This declaration shall be signed by at least 2 directors, one of whom shall be the
MD, if any.
(4) The company shall extinguish and physically destroy the shares or securities so
bought-back within 7 days of the last date of completion of buy-back.
(5) After buy-back of shares, the company shall not make further issue of the same kind
of shares including allotment u/s 62 or specified securities within 6 months except-
• By way of bonus shares or
• In discharge of subsisting obligations such as conversion of warrants, stock option
schemes, sweat equity shares, or conversion of preference shares/ debenture into
equity shares.

(6) After completion of buy-back company shall file a return in Form SH-11 with the ROC
and SEBI (if listed company), within 30 days of completion.
(7) A company shall maintain a register of shares or securities bought back in Form SH-10.
Time Check Points and Procedural aspects of Buy-Back
The company before the buy-back of shares, file with the Registrar a letter ofoffer in Form No.
SH.8, along with the fee. The letter of offer shall be dispatchedto the shareholders or security holders
immediately after filing the same with the Registrar of Companies but not later than twenty days from
its filing with the Registrar of Companies.
The offer for buy-back shall remain open for a period of not less than fifteendays and not
exceeding thirty days from the date of dispatch of the letter of offer, but where all members of a
company agree, the offer for buy-back may remain open for a period less than fifteen days.
In case the number of shares or other specified securities offered by the shareholders or security
holders is more than the total number of shares or securities to be bought back by the company, the
acceptance per shareholder shall be on proportionate basis out of the total shares offered for being
bought back.
The company shall complete the verifications of the offers received within fifteen days from the
date of closure of the offer and the shares or other securities lodged shall be deemed to be accepted
unless a communication ofrejection is made within twenty one days from the date of closure of
the offer.
The company shall make payment within seven days of verification process and make
payment in cash to those shareholders or security holders whose securities have been accepted.
Company will return the share certificates to the shareholders or security holders whose
securities have not been accepted at all or the balance of securities in case of part acceptance
21.1.4 Penalty for default
Company: Every officer in default:

Fine: Minimum ₹1 lakh Fine : Minimum ₹1 lakh
Maximum ₹3 lakhs Maximum ₹3 lakhs
21.2 Transfer of certain sums to CRR Account [Section 69]
Where a company purchases its own shares out of free reserves or securities premium account,
then a sum equal to the nominal value of share so purchased shall be transferred to the CRR
and details of such transfer shall be disclosed in the balance sheet.
21.3 Prohibition for buy-back in certain cases [Section 70]

Prohibited Buy-back through any subsidiary company includings its own
Buy-back subsidiary
of shares/ Buy-back through any investment company or group thereof
specified
securities Buy-back if a default is made in repayment of deposits or interest
payments thereon, redemption of prefernce shares, payment of
dividend to any shareholder, or repayment of any term loan or
interest thereon to any financial institutions.
However where default is remedied and 3 years have lapsed after
such default ceased to subsist, then buy-back is not prohibited.
If company has not complied with provisions of :

Section 92- Annual Return
Section 123- Declaration and payment of dividend
Section 127- Punishment for failure to distribute dividend
Section 129- Financial Statement
DEBENTURES
Section 71 of the Companies Act, 2013 provides the manner in which a company may issue debentures.
22.1 Debenture
As per Section 2(30), 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.
However, the following shall not be treated as debentures:
a) Instruments referred to in Chapter III-D of the RBI Act, 1934, and

b) Such other instrument as may be prescribed by the CG in consultation with the RBI, issued
by a company.
22.2 Features of a Debenture

Smallest unit of a Debture certificates are May be redeemed at
sizeable amount of issued(sealed and signed) the end of full term or
loan within 6 months in installemts
Rate of Voting Periodic May be

May be converted at
interest rights interest is
secured or maturity into
is pre- are not paid till fully equity shares
unsecured
fixed available redeemed [approved by SR]
22.3 Types of Debentures
Debentures
On the basis of On the basis of On the basis of

Security convertability redeemability
Secured* Convertible Redeemable
Non-
Unsecured Irredeemable
convertible
*Secured debentures shall be issued in compliance with Rule 18 of Companies (Share Capital
and Debentures) Rules, 2014, which states that:
a) Date of redemption of secured debentures shall not exceed 10 years,
b) Following companies can issue debentures for a period exceeding 10 years but not
exceeding 30 years,
• Companies engaged in setting up of infrastructure projects,

• Infrastructure finance companies,
• Infrastructure debt fund NBFC,
• Companies permitted by Ministry or Department of CG, RBI, or by the National
Housing Bank or any other statutory body.
c) Shall be secured by creation of a charge on the properties or assets of the company/ its
subsidiaries/ its holding company/ associate companies. Such assets or properties shall be of
value which is sufficient for the due repayment of the amount of debentures and interest
thereon.

d) The company shall appoint a debenture trustee before issuing prospectus or letter of offer
for subscription.
e) Within 60 days of allotment of debentures, company shall execute a debenture trust deed
in Form SH-12 to protect the interest of the debenture holders.
22.4 Creation of Debenture Redemption Reserve (DRR) and Investment
Where debentures are issued by a company, the company shall create a DRR out of the profits of the
company available for payment of dividend and the amount credited shall be utilised only for
redemption of debentures.
For this, provision of Rule 18(7) are as follows:
Type of Company Mode of Issue of Debenture How much DRR? Investment till 30th
April of each FY
All India Financial Public issue/ Private Placement N/A N/A
Institutions and Banking
Company
Other Financial Public issue/ Private Same as on NBFC N/A
Institution u/s 2(72) Placement (i.e., N/A)
Companies Act 2013
Listed companies. Public issue of debentures by N/A 15% of outstanding
except 1. (i) NBFC registered with RBI & Debenture **
(ii) Housing finance companies
registered with National
Housing Bank.
(iii) Other listed company
Or Private placement of N/A N/A
debentures by above
companies
Unlisted Companies Private placement of N/A N/A

except 1 Debentures by
(i) NBFC registered with RBI &
(ii) Housing finance Companies
registered with National
housing bank
Other Unlisted Companies 10% of 15% of outstanding
outstanding Debenture**
debentures
**Note: Provided that the amount remaining invested or deposited shall not any time fall below 15%
of the amount of the debentures maturing during the year ending on 31st day of March of that year.
Allowed Investments:
• (A) in deposits with any scheduled bank, free
• (B) in unencumbered securities of the Central methods of deposits or from any charge
or lien; Government or any State Government.

• (C) in unencumbered securities mentioned in sub-clause (a) to (d) and (ee) of section 20
of the Indian Trusts Act, 1882.
• (D) in unencumbered bonds issued by any other company which is notified under sub-
clause (f) of section 20 of the Indian Trusts Act, 1882
→ Use of DRR and Investments = Only for the redemption of Debentures.
22.5 Limitation on issue of prospectus/offer/invitation to the public [Section 71 (5)]
No company shall issue a prospectus/make an offer or invitation to the public or its members exceeding
500, unless company has before issue/offer appointed one or more debenture trustees.
22.6 Conditions for appointment of Debenture Trustee [Rule 18 (2)]
The company shall appoint debenture trustee u/s 71 (5), after complying with the following conditions
given in the rule:
→ The names of debenture trustee shall be stated in the letter of offer and in all subsequent
notices/other communications sent to debenture holders.
→ Before appointment, a written consent shall be obtained from such proposed debenture
trustees.
→ Disqualifications to be appointed as a debenture trustee –

(1) Beneficially holds shares in the company,
(2) Is a promoter, director, or KMP, or any other officer or employee of the
company/holding/subsidiary/associate company,
(3) Beneficially entitled to moneys which are to be paid by the company otherwise than
as remuneration payable to the debenture trustee,
(4) Indebted to the company/holding/subsidiary/associate/subsidiary of such holding
company,
(5) Furnished any guarantee for debts secured by debentures/ interest thereon,
(6) Pecuniary relationship with company amounting to-
▪ 2% or more of its gross turnover, or Total income, or
▪ ₹ 50 lakhs, or such higher amount as prescribed,
Whichever is lower, during the 2 immediately preceding F.Y. or during current F.Y.
(7) Relative of promoter/ any person in employment as director/KMP of the company.
→ Casual vacancy in the office of the debenture trustee may be filled by the BOD. However,
while such vacancy continues, remaining trustee or trustees, if any, may act.
→ Where the casual vacancy is caused by the resignation of the debenture trustee, the
vacancy shall only be filled with the written consent of the majority of debenture holders.
→ Removal of debenture trustee from office before the expiry of his term – Only if it is
approved by the holders of not less than 3/4th in value of the debentures outstanding, at
their meeting.

22.7 Debenture trustee to protect the interest of debenture holders
A debenture trustee shall take steps to protect the interests of the debenture holders and redress
their grievances.
Convening of meetings of debenture holders to protect their interests [Rule 18 (4)]: The meeting
of all the debenture holders shall be convened by the debenture trustee on –
a) Requisition in writing signed by debenture holders having at least 1/10th in value of the
debentures for the time being outstanding.
b) The happening of any event which constitutes a breach, default or which affects the
interest of the debenture holders.
22.8 Liability of debenture trustee [Section 71 (7)]
There shall be no provision in a trust deed for securing the issue of debenture trust deed, or in any
contract with the debenture holders, or in any contract with the debenture holders, which would have
the effect of exempting a trustee thereof from, or indemnifying him against, any liability for
breach of trust, where he fails to show the degree of care and due diligence required of him as a trustee.
Such a provision shall be void.
Also, the liability of the debenture trustee shall be subject to such exemptions as may be agreed upon
by a majority of debenture holders holding not less than 3/4th in value of the total debentures at
a meeting held for the purpose.
→ He can file a petition with the tribunal if he concludes that assets of the company are
insufficient to meet its debts.
22.9 Payment of Interest and Redemption of Debentures
A company shall pay interests and redeem the debentures in accordance with the terms and
conditions of their issue.
22.10 Filing of Petition before the Tribunal and order thereon [Section 71 (9)]
✓ The debenture trustee may file a petition before the Tribunal where at any time he concludes
that the assets of the company are insufficient or likely to be insufficient to discharge
the principal amount as and when it becomes due.
✓ The Tribunal may, after hearing the company and or any other person interested in the
matter, by an order, impose restrictions on the incurring of any further liabilities by the
company as considered necessary by the Tribunal.
22.11 Failure to redeem debenture or pay interest [Section 71(10)]
Where a company fails to redeem the debentures on the date of their maturity or fails to pay
interest thereon when it is due, the Tribunal may,
• On an application of all or any of the debenture holders or debenture trustee, and

• After hearing the parties concerned,

direct, by an order, the company to redeem the debentures forthwith on payment of
principal and interest due thereon.
22.12 Specific Performance of the contract [Section 71(12)]
A contact with the company to take up and pay for any debentures of the company may be
enforced by a decree for specific performance.
22.13 Procedure to be prescribed by the CG [Section 71(13)]
The CG may prescribe the procedure –

The procedures have been
• For securing the issue of debentures, prescribed in Rule 18 of the
• For the form of debenture trust deed, Companies (Share capital and
• For inspection of the trust deed by the debenture Debentures) Rules, 2014.
holders and to obtain copies thereof,
• For the quantum of DRR required to be created, and
• Such other matters.
22.14 Limit on Borrowing through Debentures* [Section 71(14)]
•The borrowings by issue of debentures

together with the amount already borrowed
Limit shall not exceed the aggregate of company's
paid-up share capital, free reserves and
securities premium account.
Exceeding •The approval of

shareholders through
the limit SR is required.
•Obtained from the

company's bankers in
Temporary the ordinary course of
loans business are not to be
included in the
borrowings
*Not applicable to a Private Company
22.15 Return of Allotment [Section 71(15)]
If a company having share capital makes an allotment of any debentures, a Return of Allotment
in Form PAS 3 shall be filed with the Registrar within 30 days of allotment.

ACCEPTANCE OF DEPOSITS BY COMPANIES
• Understand the meaning of the term ‘Deposit’.

• Know the requirements for and restrictions on acceptance of deposits from members and public.
• Know about the ‘eligible companies’ which can accept deposits from public in addition to their
members.
• Know the punishment for contravention of the provisions related to acceptance of deposits by
companies.
INTRODUCTION
Deposits are an importance source of finance for companies. It is necessary to control the companies
which invite deposits to safeguard the general and wider interest of all those persons who offer deposits
out of their hard-earned money.
The statutory provisions as contained in Chapter V (Section 73 to 76A) of the Companies Act, 2013 and
the Companies (Acceptance of Deposits) Rules, 2014 govern the acceptance of deposits and their
renewal.
DEPOSIT
2.1 Meaning of Deposit
According to Section 2(31), the term ‘deposit’
→ Includes any receipt of money by way of deposit or loan or in any other form, by a company,
→ But does not include such categories of amount as may be prescribed in consultation with the
RBI.
Types of
Deposits
Secured Unsecured
Deposits Deposits
2.2 Features
(i) The above definition of ‘deposit’ is inclusive one.
(ii) It includes any money received by way of:

a) deposit; or
b) loan; or
c) in any other form.

(iii) Repayment of ‘deposit’ is time-bound.
(iv) It can be secured or unsecured.

(v) It does not include prescribed categories of amounts (as stated in the ‘Acceptance of
Deposits’ Rules).
(vi) It may be accepted in joint names not exceeding three persons.
(vii) A depositor may nominate any person at any time.
(viii) Every deposit accepted by the company shall be repaid with interest.
(ix) Premature repayment of a deposit can be made by the company.
(x) A private company can accept deposits from its members only.
(xi) A public company can accept deposits from its members and also from the public if it fulfills
certain parameters.
2.3 Amounts not considered as Deposits
(1) Amount received from the Central government (CG) / State government (SG), or from any other
source whose repayment is guaranteed by the CG/SG, or from any local authority, or any amount
received from a statutory authority constituted under any Act,
(2) Any amount from foreign governments, foreign or international banks, multinational financial
institution, foreign governments owned development financial institutions, foreign export credit
agencies, foreign collaborators, foreign bodies corporate and foreign citizens, foreign authorities or
persons resident outside India subject to FEMA, 1999,
(3) any amount received as a loan or facility from any banking company or from State Bank of India
or its subsidiary banks or from a notified banking institution or a corresponding new bank or from
any co-operative bank,
(4) any amount received as a loan or financial assistance from Public Financial Institutions, any
regional financial institutions or insurance companies or any scheduled banks.
(5) any amount received against issue of commercial paper or any other instruments issued in
accordance with the guidelines or notification issued by the Reserve Bank of India;
(6) any amount received by a company from any other company. (Mainly known as Inter Company
Deposits (ICD))

(7) any amount received and held towards
subscription to any securities (including share
application money or advance towards allotment If the securities for which application money
of securities, pending allotment), so long as such or advance for such securities was received
amount is appropriated only against the amount cannot be allotted within 60 days from the
due on allotment of the securities applied for; date of receipt of the application money or
(8) any amount received from a person who, at the time advance for such securities and such
of the receipt of the amount, was a director of the application money or advance is not refunded
to the subscribers within 15 days from the
company or a relative of the director of the
date of completion of 60 days, such amount
private company;
shall be treated as a deposit under these
The director of the company or relative of the rules.
director of the private company from whom money
is received is required to furnish to the company at
the time of giving the money, a declaration in
writing to the effect that the amount is not being given out of funds acquired by him by borrowing
or accepting loans or deposits from others and the company shall disclose the details of money
so accepted in the Board's report;
(9) any amount raised by the issue of bonds or
However, if such bonds or
debentures secured by a first charge or a charge debentures are secured by the
ranking pari passu with the first charge on any assets charge of any assets referred to in
referred to in Schedule III of the Act excluding intangible Schedule III of the Act, excluding
assets of the company or bonds or debentures intangible assets, the amount of
compulsorily convertible into shares of the company such bonds or debentures shall not
exceed the market value of such
within 10 years; assets as assessed by a registered
(9a) any amount raised by issue of non valuer.
convertible debenture not constituting a charge on
the assets of the company and listed on a recognized stock
exchange;
(10) any amount received from an employee of the company not exceeding his annual salary
under a contract of employment with the company in the nature of non-interest bearing security
deposit;
(11) any non-interest bearing amount received or held in trust;
(12) any amount received in the course of, or for the purposes of, the business of the company–
(a) as an advance for the supply of goods or provision of services accounted for in any
manner whatsoever provided that such advance is appropriated against supply of
goods or provision of services within a period of 365 days from the date of acceptance
of such advance:
However, in case of any advance which is subject matter of any legal proceedings before
any court of law, the said time limit of three hundred and sixty five days shall not apply.
(b) as advance, accounted for in any manner whatsoever, received in connection with
consideration for an immovable property under an agreement or arrangement,
provided that such advance is adjusted against such property in accordance with the

terms of agreement or arrangement;
(c) as security deposit for the performance of the contract for supply of goods or
provision of services;
(d) as advance received under long term projects for supply of capital goods except
those covered under item (b) above;
However, it is clarified that if the amount received under items (a), (b) and (d) above becomes
refundable (with or without interest) due to the reasons that the company accepting the money does not
have necessary permission or approval, wherever required, to deal in the goods or properties or services
for which the money is taken, then the amount received shall be deemed to be a deposit on the expiry of
15 days from the date they become due for refund under these rules.
(e) as an advance towards consideration for providing future services in the form of
a warranty or maintenance contract as per written agreement or arrangement, if
the period for providing such services does not exceed the period prevalent as per
common business practice or five years, from the date of acceptance of such service
whichever is less;
(f) as an advance received and as allowed by any sectoral regulator or in accordance
with directions of Central or State Government;
(g) as an advance for subscription towards publication, whether in print or in electronic

to be adjusted against receipt of such publications;
(13) any amount brought in by the promoters of the company by way of unsecured loan in
pursuance of the stipulation of any lending financial institution or a bank subject to the fulfilment of
following conditions:
(a) the loan is brought because of the stipulation imposed by the lending institutions on the
promoters to contribute such finance;
(b) the loan is provided by the promoters themselves or by their relatives or by both; and
(c) Such exemption shall be available only till the loans of financial institution or bank are
repaid and not thereafter.
(14) any amount accepted by a Nidhi company in accordance with the rules made under section 406
of the Act;
(15) any amount received by way of subscription in respect of a chit under the Chit Fund Act, 1982
(16) any amount received by the company under any collective investment scheme in compliance
with regulations framed by the Securities and Exchange Board of India;

(17) an amount of twenty five lakh rupees or more
received by a start-up company, by way of a
convertible note (convertible into equity shares or
repayable within a period not exceeding ten years from Convertible note means an instrument
evidencing receipt of money initially as a
the date of issue) in a single tranche, from a person;
debt, which is repayable at the option of the
holder, or which is convertible into such
(18) any amount received by a company from Alternate
number of equity shares of the start-up
Investment Funds, Domestic Venture Capital Funds,
Infrastructure Investment Trusts, Real Estate company upon occurrence of specified
Investment Trusts and Mutual Funds registered with events and as per agreed terms and
conditions.
the Securities and Exchange Board of India in
accordance with regulations made by it.
Example: Greedwood limited (‘the company) which is

register as start-up company register under Companies Act, 2013 has received an amount of ` 20
lacs and ` 10 lakh on different date by way of a convertible note. Though the company has
received an amount of twenty-five lakh rupees or more, the said amount will be considered as
deposit since the aggregate amount has not received in single tranche in terms of the rule stated
above Sub-clause (xvii)]
DEPOSITOR
As per Rule 2(1)(d), the term ‘Depositor’ means:
(a) Any member of the company who has made a deposit with the company in accordance with
section 73(2) of the Act, or
(b) Any person who has made a deposit with a public company in accordance with section 76 of
the Act.
ELIGIBLE COMPANY
As per Rule 2(1)(e), the term’Eligible Company’ means a public company as referred to in section 76(1),
having
→ a networth of not less than ₹ 100 crores or

→ a turnover of not less than ₹ 500 crores and
→ which has obtained the prior consent in general meeting by means of a SR and
→ also filed the SR with the Registrar before making the invitation to the public for acceptance of
deposits.
An ordinary resolution is sufficient if an eligible company is accepting deposits within the limits
specified under section 180(1)(c).
PROHIBITION ON ACCEPTANCE OF DEPOSITS FROM PUBLIC

Section 73 of the Companies Act, 2013 prohibits the acceptance of deposits from the public by
companies.
Company
Private Public
Company Company
Can accept Eligible Normal

deposits public public
from company company
Members Directors Can accept can accept

deposits deposits
[Sec. 73] [Sec. 73] from from
Members Directors Public Members Directors

[Sec. 73] [Sec. 73] [Sec. 76] [Sec. 73] [Sec. 73]
5.1 Acceptance of deposits from public [Section 73(1)]
No company shall invite, accept or renew deposits from public unless it follows the manner
provided under this chapter (i.e., Chapter V of the Act).
However, this prohibition shall not apply to the following companies:
• A banking company,
• A non-banking financial company (NBFC) as defined in the RBI Act, 1934,
• Any housing finance company (HFC) registered with the National Housing Bank, and
• Such other company as the CG may specify, after consultation with the RBI.

Prohibition on
Acceptance of
Deposits from public
No company shall invite,

accept or renew deposits
from public, except
Other company
A banking
NBFC HFC as specified by
company
CG
5.2 Acceptance of deposits from members [Section 73(2)]
A company may accept or renew deposits from its members subject to the following conditions:
(a) A resolution is passed in the general meeting.
(b) Circular is issued by the company to its members including therein a statement showing:
• The financial position of the company,
• The credit rating obtained,
• The total number of depositors and
• The amount due towards deposits in respect of any previous deposits accepted by
the company and
• Such other particulars in prescribed form and manner.
(c) The copy of the circular shall be filed with the Registrar 30 days before issue of the
circular.

Rule 4 - Such circular shall be issued to all its members by registered post
Form and with acknowledgement due or speed post or by electronic mode
in Form DPT-1.
Particulars
of Circular may be published in English language in an english
newspaper and in vernacular language in a vernacular newspaper
Advertise- having wide circulation in the State where Registered office of the
ments or company is situated.
Circulars A certificate of the statutory auditor shall be attached in Form DPT-
1, stating that the comapny has not committed default in the
repayment of deposits or payment of interest thereon.
If the company had made such a default, the certifcate of the
statutory auditor shall state that company has made good the
default and a period of 5 years has lapsed since the date of making
good such default.
The advertisement shall remain valid till the earliest of:
(a) upto 6 months from the closure of the F.Y. or
(b) the date on which FS are laid down before the company at AGM,
(c) or in case no AGM has been held, the latest day on which AGM
should have been held.
A fresh circular shall be issued for each F.Y. for inviting deposits
during that fiancial year.
(d) Deposit, on or before 30th April of each year, at least 20% of the amount of deposits
maturing during the following F.Y. and kept in a scheduled bank account to be called the
deposit repayment reserve account.
Such amount shall not at any time fall below 20% of the amount of deposits maturing during
the F.Y.
(e) Company certifies that it has not committed any default in repayment of deposits
accepted or payment of interest thereon. In case any default had occurred, the company
shall make good the default and 5 years had lapsed since the date of making good the
default.
(f) Company may provide security for the due repayment of the amount of deposit or the
interest thereon. In case company does not secures or only partially secures such deposits,
then the deposits shall be termed as “unsecured deposits”.
Example: Ray Pharmaceuticals Limited issued a Circular inviting ‘deposits’ from its
members on 14-02-2022. Its Annual General Meeting (AGM) was held on 07-09-2022.
Since, six months from the closure of FY 2021-22 end on 30-09-2022, the Circular remains

valid till 07-09-2022 only. After this date, a fresh Circular shall be issued if the company
wants to invite further deposits from its members.
5.2.5 Repayment of Deposits

✓ Every deposit accepted shall be repaid with interest in accordance with the
terms and conditions of the agreement.
Conditions (b) to (e) shall not apply to a private company:
✓ Which accepts from its members monies not exceeding (paid up share capital + free reserves
+ securities premium account), or
✓ Which is a start-up, for 5 years from the date of its incorporation, or
✓ Which fulfils all of the following conditions:
• Not an associate or subsidiary company of any other company,
• Borrowings from such banks or financial institutions or body corporates is less than
twice the paid-up share capital or ₹ 50 crores, whichever is less, and
• Such company has not defaulted in repayment of such borrowings subsisting at the
time of accepting deposits.
However, these companies shall file the details of such deposits accepted to the Registrar in Form
DPT-3.
✓ In case a company fails to repay the deposit or part thereof or any interest thereon, the
depsoitor concerned may apply to the Tribunal for an order directing the company to pay the
sum due or for any loss or damage incurred by him due to such non-payment.
✓ The amount deposited in the Deposit Repayment Reserve Account shall be utilised only for
repayment of deposits.
5.2.6 Maximum amount of deposits from members [Rule 3(3)]

✓ The maximum amount of deposits that a company can accept or renew, including other
deposits outstanding as on a date, from its members, shall be 35% of aggregate of Paid-
up share capital+ Free reserves+ securities premium account.
✓ Exception: Specified IFSC Public Company and private company can accept deposits
from its members up to 100% of aggregate of Paid-up share capital+ Free reserves+
securities premium account.
✓ Maximum limit not applicable to following class of private companies:

→ A private company which is a start-up, for 10 years from date of incorporation,
→ A private company which fulfils all of the following conditions:
(a) Not associate/ subsidiary of another company,
(b) Borrowings from such banks or financial institutions or body corporates is less
than twice the paid-up share capital or ₹ 50 crores, whichever is less, and

(c) Such company has not defaulted in repayment of such borrowings subsisting
at the time of accepting deposits.
5.2.7 Deposits in Joint names [Rule 3(2)]

Deposits may be accepted in joint name but not more than 3 joint depositors.
5.2.8 Ceiling on rate of interest and brokerage payable [Rule 3(6)]

Interest rate on deposits & Brokerage shall not exceed the maximum rate prescribed by RBI in
case of NBFCs for acceptance of deposits.
5.2.9 Altering the terms [Rule 3(7)]

The company has no right to alter any terms and conditions of the deposit, deposit trust deed
and deposit insurance contract which may be detrimental to the interest of the depositors after
circular is issued and deposits are accepted.
ACCEPTANCE OF DEPOSITS FROM PUBLIC BY ELIGIBLE COMPANIES
Section 76 of the Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014 deals with
the acceptance of deposits from public by eligible companies.
Only ‘eligible companies’ are permitted to accept deposits from the public, in addition to their
members.
A special resolution shall be passed in the general meeting which shall be filed with the ROC before
making any invitation to the public for acceptance of deposits.
6.1 Obtaining Credit Rating
The eligible company shall be required to obtain the rating from a recognised credit rating agency at
least once in a year. The copy of the credit rating shall be sent to the ROC along with the Return of
deposits in Form DPT-3.
6.2 Charge creation on assets
✓ Every company which accepts secured deposits from the public shall within 30 days, create
a charge on its assets.
✓ Charge shall be created only on tangible assets and not on intangible assets.
6.3 Appointment of Trustee for depositors [Rule 7]
✓ The company shall appoint one or more trustees for creating security for depositors.
✓ A written consent shall be obtained from the trustees before their appointment and a
statement to this effect shall be given in the circular or advertisement.
✓ The company shall execute a trust deed in Form DPT-2 at least 7 days before issuing the
circular.
Trustee to call Meeting of Depositors :

The trustee for depositors shall call a meeting of all the depositors in the following cases:
(a) on receipt of a requisition in writing signed by at least one-tenth of the depositors in value
for the time being outstanding;
(b) on the happening of any event, which constitutes a default or which, in the opinion of the
trustee for depositors, affects the interest of depositors.
Disqualification of Trustee
A person shall not be eligible to be appointed as the trustee if the person:
(a) Is a director, KMP or any other officer or an employee of the company/ its holding/
subsidiary/ associate company or a depositor in the company,
(b) Is indebted to the company/ its holding/ subsidiary/ associate company/ subsidiary of
such holding company,
(c) Has any material pecuniary relationship with the company,
(d) Has entered into any guarantee arrangement in respect of principal debts secured by
the deposits or interest thereon,
(e) Is related to any person specified in (a) above.
Removal of Trustee
✓ No trustee for depositors shall be removed from office after the issue of circular or
advertisement and before the expiry of his term except with the consent of all the directors
present at a meeting of the Board.
✓ In case the company is required to have independent directors, at least one
independent director shall be present in such meeting of the Board.
6.4 Maximum amount of deposits [Rule 3(4), (5)]
Eligible company
Eligible government
From its members From persons other than company
members
Amount of deposit together Amount of deposit together Amount of deposit together

with outstanding deposit on with outstanding deposit on with outstanding deposit on
the date of acceptance or the date of acceptance or the date of acceptance or
renewal can be maximum renewal can be maximum renewal can be maximum 35%
10% of aggregate of paid-up 25% of aggregate of paid-up of aggregate of paid-up share
share capital, free reserves, share capital, free reserves, capital, free reserves, and
and securities premium and securities premium securities premium account.
account. account.
𝑵𝒆𝒘 𝒅𝒆𝒑𝒔𝒐𝒊𝒕
𝑵𝒆𝒘 𝒅𝒆𝒑𝒔𝒐𝒊𝒕 𝑵𝒆𝒘 𝒅𝒆𝒑𝒔𝒐𝒊𝒕 + 𝒐𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈 𝒅𝒆𝒑𝒐𝒔𝒊𝒕
+ 𝒐𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈 𝒅𝒆𝒑𝒐𝒔𝒊𝒕 + 𝒐𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈 𝒅𝒆𝒑𝒐𝒔𝒊𝒕 ≤ 𝟑𝟓% (𝒑𝒂𝒊𝒅 𝒖𝒑 𝒔𝒉𝒂𝒓𝒆 𝒄𝒂𝒑𝒊𝒕𝒂𝒍
≤ 𝟏𝟎% (𝒑𝒂𝒊𝒅 𝒖𝒑 𝒔𝒉𝒂𝒓𝒆 𝒄𝒂𝒑𝒊𝒕𝒂𝒍 ≤ 𝟐𝟓% (𝒑𝒂𝒊𝒅 𝒖𝒑 𝒔𝒉𝒂𝒓𝒆 𝒄𝒂𝒑𝒊𝒕𝒂𝒍 + 𝒇𝒓𝒆𝒆 𝒓𝒆𝒔𝒆𝒓𝒗𝒆𝒔
+ 𝒇𝒓𝒆𝒆 𝒓𝒆𝒔𝒆𝒓𝒗𝒆𝒔 + 𝒇𝒓𝒆𝒆 𝒓𝒆𝒔𝒆𝒓𝒗𝒆𝒔 + 𝒔𝒆𝒄𝒖𝒓𝒊𝒕𝒊𝒆𝒔 𝒑𝒓𝒆𝒎𝒊𝒖𝒎 𝒂𝒄𝒄𝒐𝒖𝒏𝒕)
+ 𝒔𝒆𝒄𝒖𝒓𝒊𝒕𝒊𝒆𝒔 𝒑𝒓𝒆𝒎𝒊𝒖𝒎 𝒂𝒄𝒄𝒐𝒖𝒏𝒕)+ 𝒔𝒆𝒄𝒖𝒓𝒊𝒕𝒊𝒆𝒔 𝒑𝒓𝒆𝒎𝒊𝒖𝒎 𝒂𝒄𝒄𝒐𝒖𝒏𝒕)

6.5 Issuance of Circular in the form of Advertisement [Rule 4]
✓ An eligible company intending to invite deposits is required to issue a circular in the form of
an advertisement in DPT-1.
✓ Such advertisement shall be published in English and vernacular language in an English
newspaper and vernacular newspaper having wide circulation in the state in which registered
office is located. It shall also be placed on the website of the company, if any.
✓ A copy of the circular duly signed by a majority of directors or their authorised representatives
shall be filed with the ROC for registration at least 30 days before the issue of
advertisement.
✓ The advertisement shall remain valid till the earliest of:
(a) up to 6 months from the closure of the F.Y. or
(b) the date on which FS are laid down before the company at the AGM.
(c) or in case no AGM has been held, the latest day on which AGM should have been held.
✓ A fresh advertisement shall be issued in each succeeding F.Y. for inviting deposits during
that F.Y.
6.6 Deposit Receipt [Rule 12]
✓ The company shall furnish a deposit receipt to the depositor or his agent within 21 days
receipt of money or realization of cheque or renewal.
✓ It shall be signed by the duly authorised officer.
✓ It shall state the date of deposit, the name and address of the depositor, the amount of
deposit, the rate of interest and maturity date.
6.7 Register of Deposits [Rule 14]
Name, Address,
other relevant PAN of the Particulars of
particulars depositor guardian, in case
of minor
Security or particulars of
charge created nominee
date(s) on which Contents of

interest shall be Register of deposit receipt
paid Deposits number
instructions for
payment of date and amount
interest and TDS of each deposit
rate of interest duration of the

& due date deposit and date
of repayment
• The Register of Deposits shall be maintained in the registered office of the company.

• The entries shall be made within 7 days from the date of issue of receipt and it shall be
duly authenticated by a director or secretary of the company or any other authorised by
the Board for this purpose.
• The register shall be maintained for not less than 8 years from the F.Y. in which the latest
entry is made in the register.
6.8 Premature Repayment of Deposits [Rule 15]
Where a company makes a repayment of deposits,
→ on the request of the depositor,

→ after the expiry of a period of six months from the date of such deposit but before the
expiry of the period for which such deposit was accepted,
→ the rate of interest payable on such deposit shall be reduced by 1% from the rate which
the company would have paid had the deposit been accepted for the period for which such
deposit had actually run.
Where the premature closure of a deposit is for the purpose of earning a higher rate of interest,
the higher interest shall be paid by the company only if the deposit is renewed for a period longer than
the unexpired period of deposit.
Non- applicability of
Rule 15
Where premature repayment is to

Where premature repayment is
provide for war risks or other related
done to comply with Rule 3, i.e., to
benefits to the personnel of navel,
reduce the total amount to bring it
military or air forces or their families
within the permissible limits
during the period of emergency
TENURE FOR WHICH DEPOSITS CAN BE ACCEPTED [RULE 3(1)]
✓ A company shall not accept or renew any deposit repayable on demand.
✓ The minimum tenure for which a deposit shall be accepted is 6 months and maximum period of
acceptance shall be 36 months.
Exception: A company may accept or renew deposits for repayment earlier than 6 months to meet
any short-term fund requirements, subject to the condition that:

(i) Such deposits shall not exceed 10% of (paid-up share capital+ free reserves+ securities
premium account), and
(ii) Such deposits are repayable only on or after 3 months from the date of such deposits or
renewal.
Example : Continuing the example of Swapnil Traders Private Limited, it is assumed that
aggregate of its paid-up share capital, free reserves and securities premium account is `
2,00,00,000. In order to meet its short-term requirement of funds, it can raise deposits
maximum up to ` 20,00,000 (being 10% of ` 2,00,00,000) whose repayment tenure can be
less than six months; but such tenure cannot be less than three months. Therefore, Swapnil
Traders Private Limited must ensure that the short-term deposits so accepted are repaid
only on or after three months from the date of such deposits.
OTHER RULES RELATED TO DEPOSITS
8.1 Filing return of deposits [Rule 16]
A duly audited return of deposits in DPT-3 shall be filed with the ROC along with fees on or before 30th
June of that year and declaration to that effect shall be submitted by the auditor in Form DPT-3.
8.2 Penal rate of Interest [Rule 17]
In case a company fails to repay deposits on maturity, after they are claimed, it shall pay penal interest
of 18% for the overdue period.
8.3 Punishment for contravention [Rule 21]
If any company inviting deposits or any other person contravenes any of the ‘deposit rules’ for which
no punishment has been provided, the company and every officer-in-default shall be punishable as
under:
→ Fine which may extend to ₹ 5,000/-, and

→ In case of continuing contravention, further fine upto ₹ 500/- for each day during
which the contravention continues.
PUNISHMENT FOR CONTRAVENTION OF SECTION 73 OR 76
Section 76A of the Companies Act, 2013 provides the punishments for contravention of the provisions of
Section 73 or Section 76.

•Fine
•Minimum: Lower of - Rs. 1
Company crore or twice the deposit
accepted.
•Maximum: Rs. 10 crores.
•Imprisonment: may extend

to 7 years and
Officer in default •Fine: Minimum- Rs. 25
lakhs and maximum - Rs. Rs.
2 crores
Officer in default has

contravened such
provisions
•liable for action u/s 447
knowingly/ wilfully
with an intention to
deceive
REPAYMENT OF DEPOSITS ACCEPTED BEFORE COMMENCEMENT OF THE COMPANIES ACT, 2013
10.1 Filing of statement of deposits and repayment thereafter
Section 74 of the Companies Act, 2013 contains the provisions regarding repayment of deposits accepted
before the commencement of this Act.
In case of a deposit accepted by a company before the commencement of this Act, the company
shall:
→ File with the ROC, within 3 months from the date of commencement or from the date on which
payments are due, a statement of all the deposits accepted by the company and sums remaining
unpaid and interest payable thereon along with the arrangements for repayment, and
→ Repay within 3 years from the date of commencement of this Act or on or before the expiry of
the period for which deposits were accepted, whichever is earlier.
10.2 Extension of time for repayment
The Tribunal may, on an application made by the company, allow further time as considered
reasonable to the company to repay the deposit.
For this purpose, the Tribunal shall consider:
(a) Financial condition of the company,

(b) Amount of deposit and interest payable thereon, and
(c) Such other matters.
10.3 Punishment for Non-repayment of deposits
• Company – Fine minimum of ₹ 1 crores and maximum of ₹ 10 crores.

Every officer in default –
•
o Imprisonment extendable to 7 years, or
o Fine minimum of ₹ 25 lakhs and maximum of ₹ 2 crores, or
o Both.
POWER OF CENTRAL GOVERNMENT TO DECIDE CERTAIN QUESTIONS
As per Rule 18, If any question arises as to the applicability of these rules to a particular company, such
question shall be decided by the Central Government in consultation with the Reserve Bank of India.

OVERVIEW
Acceptance of Deposits
[Chapter V] & Companies (Acceptance of
Deposits) Rules, 2014
Companies (Acceptance of Deposits)

Rules, 2014
Chapter V
Amounts not considered as Deposits [Rule 2(1)(c)
Prohibition on Terms and conditions of acceptance of deposits by

acceptance companies
[Section 73] [Rule 3]
Issuance of Circular conatining statement u/s 73(2)

[Rule 4]
Repayment of
Deposits
[Section 74] Appointment of trustees for deposits
[Rule 7]
Acceptance of Deposit Receipt

Deposits from [Rule 12]
public
[Section 76]
Register of deposits
[Rule 14]
Punishment Premature repayment of deposits

[Section 76A] [Section 15]
Filing return of deposits

[Section 16]
Penal rate of interest

[Rule 17]
Punishment for contravention

[Rule 21]

REGISTRATION OF CHARGES
• Understand the meaning of ‘Charge’.

• Understand the difference between a Floating charge and a Fixed charge.
• Know the steps involved in registration of charges.
• Understand the consequences of non-registration of a charge and the steps to be followed for
registering satisfaction of charge.
• Know the penal provisions in case of default.
INTRODUCTION
Whenever a company borrows money by way of loans including term loans or working capital loans
from financial institutions or banks or any other persons, by offering its property or assets, a charge is
created on such property or assets in favour of the lender. Such a charge is compulsorily registrable.
The law relating to registration of charges has been dealt in Chapter VI of the Companies Act, 2013
consisting of sections 77 to 87 as well as the Companies (Registration of Charges) Rules, 2014.
1.1 Charge
Section 2(16) defines “charge” as an interest or lien created on the property or assets of a company
or any of its undertakings or both as security and includes a mortgage.
Charge is an interest or lien
It is created on the property or assets of a company/

any of its undertakings
It is created as security for repayment of a loan
Charge includes mortgage
1.2 Types of Charge

Based on type
of property
Movable Immovable
Property property
Hypothecation Pledge Mortgage
A charge may be either fixed or floating.
1.2.1 Fixed charge

→ A fixed charge is a charge on specific assets of the borrowing company.
→ These assets are of permanent nature like land & building, office premises, machinery etc.
→ These assets are identified at the time of creation of charge.
→ Usually created by way of mortgage or deposit of title deeds.
→ The borrowing company is not permitted to sell such assets though it may use them. They
can be sold only with the permission of the charge-holder.
→ A fixed charge is vacated when the money borrowed against the assets subject to fixed
charge is repaid in full.
Example : Pearl Electronics Limited raised a term loan ` 10 lakh from Everest Commercial
Bank Limited, against the security of its office building. In this case, the company shall create
a charge on specific asset i.e. its office building and such charge shall be a fixed charge. The
company can sell this particular office building either by repaying the borrowed amount in
full or after seeking permission from the charge-holder i.e. lender bank.
1.2.2 Floating charge

→ Created on assets or a class of assets which are of fluctuatig nature like raw material, stock-
in-trade, debtors, etc.
→ The assets under floating charge keep on changing because company is pemitted to use
them for trading or producing final goods for sale.
Example: A retail showroom contains numerous articles for sale. The owner may borrow against the security
of all those goods. But he can still sell or deal with them in the ordinary course of business. The buyer of such
goods will get it free of charge.

→ When the creditor enforces the security or the company goes into liquidation, the floating
charge will become fixed charge on all the assets available on that date and which may come
into existence thereafter. This is called crystallization of floating charge.
→ Crystallization of floating charge occurs –
o When the terms & conditions of the floating charge are violated, or
o Company ceases to continue its business, or
o Company goes into liquidation, or
o The creditors enforce the security covered by the floating charge.
Example: Prism Limited had taken a loan from ABC Bank, on the security of it stock. Now, in the event
of Prism Limited failing to repay the security interest or entering liquidation, the floating charge will
change to a fixed charge. Once a floating charge gets converted to a fixed charge, the stock can neither
be sold nor used by the company in its business operations.
DUTY TO REGISTER CHARGES, ETC.
Section 77 of the Companies Act, 2013 contains provisions regarding registration of charges by the company
with the Registrar.
2.1 Registration of Charges
Regsitration of charges
By the company creating By the charge-holder By the purchaser
the charge [Section 77] [Section 78] [Section 79]
• It shall be the duty of the • In case the company • Where a company
company creating the creating a charge fails to purchased some property
charge, within or outside register the charge within in whose case a charge
India, on its property or the time limit, the person was already registered,
assets or any of its in whose favour the the company purchasing
undertakings, whether charge is created can get the property shall get the
tangible or otherwise and the charge registered. charge registered in its
situated in or outside name in place of seller in
India, to register the the records of the
particulars of the charge. Registrar.
✓ The charge may be created in or outside India,

✓ The subject matter of the charge, i.e., the property or assets or any of the companies
undertakings, may be situated within or outside India,
✓ The property may be tangible / intangible / financial asset.

✓ A charge created by depsoit of title deeds is also registrable by the borrowing company.
Thus, the requirements of Rule 3 relating to Registration of Creation or Modification of Charge doesn’t apply
to above company.
2.2 How to register charge
The particulars of the charge –
✓ in Form CHG-1 or
✓ in Form CHG-9 (in case of debentures),
along with the copy of the instrument of charge, if any, creating the charge duly signed by the company
and the charge-holder shall be filed with the ROC within 30 days of creation of charge along with the
prescribed fees.
2.3 Verification of Instrument of charge
Instrument or deed Instrument or deed

relates solely to a relates to the property
property situated sitauted in India
outside India (wholly or partially)
The copy shall be verified The copy shall be verified

by a certificate issued by a certificate issued
(a) under the seal, if any, of the under the hand of any
company, or director or CS of the
(b) under the hand of any director or company, or an authorised
CS of the company, or an authorised officer of the charge
officer of the charge holder, or holder
(c) under the hand of some person
other than the company who isintered
in the mortgage or charge.
2.4 Exception – Registration of Creation/Modification of Charge
→ Any charge required to be created or modified by a banking company under section 77 in favour
of the Reserve Bank of India
→ when any loan or advance has been made to it under sub-clause (d) of clause (4) of section 17 of
the Reserve Bank of India Act, 1934 (2 of 1934)

2.5 Extension of Time Limit
Charge created before 02-11- Charge created on or after

2018 02-11-2018
Register charge within 30 days Register charge within 30 days
If not, then register within 300 If not, then register within

days of creation on payment of next 30 days with additional
additional fees fees
If not regsitered within 300 days, In not registered in next 30

register within 6 months from days, register within further
02-11-2018 with additional fees. 60 days with ad valorem fees*
*ad valorem fees means fees in proportion to the value of the charge.
→ The company shall make an application to the ROC in Form CHG-1 or CHG-9 (in case of
debentures) seeking for extension of time.
→ The application shall be supported by a declaration from the company signed by its CS or a
director that such belated filing shall not adversely affect the rights of any other intervening
creditors of the company.
→ The ROC, upon being satisfied that the company had sufficient cause for not filing the particulars of
charge and instrument of charge, if any, within 30 days, shall allow the extension of period.
2.6 Certificate of Registration
• Upon due registration of a charge, the ROC shall issue a certificate of registration in Form
CHG-2. (Form CHG-3 for modification of charge)
• Such certificate shall be conclusive evidence that the requirements of this Chapter and
rules thereunder have been complied with.
Section 77 shall not apply to certain charges which are prescribed in consultation with RBI .
It may be noted that the failure to

2.7 Consequences of Non- Registration of Charges register charge shall not absolve the
company from its liability in respect of
✓ No charge shall be taken into account by the
any offence under this Chapter.
liquidator appointed under this Act or the

Insolvency and bankruptcy Code, 2016 or any other creditor unless it is duly registered, and
a certificate of registration is given by the ROC.
✓ This means that the charge will be void.
✓ However, the debt is valid and may be enforced against the company through the courts
by filing a suit, but the security is lost.
✓ Charge-holder loses his priority.
APPLICATION FOR REGISTRATION OF CHARGE BY CHARGE-HOLDER
→ If a charge is created but the company primarily responsible for registering the charge
fails to do so within the prescribed preriod of 30 days, the charge-holder (i.e., person in
whose favour charge is created) may apply to the Registrar for registration of the charge along
with the instrument of charge within the prescribed time, form and manner.
Section 78 of the Companies Act, 2013 empowers the holder of charge to get the charge registered in case
the company creating the charge on its property fails to do so.
→ The ROC shall, upon receipt of the application from the charge holder, give a notice to the
company.
→ If no objection is received from the company, the

ROC shall register the charge within 14 days of Where registration of charge is
giving the notice to the company on payment of effected on application by the charge-
prescribed fees. holder, such person shall be entitled
to recover from the fees and
→ The ROC shall not allow registration by the charge additional fees paid by him to the ROC
holder if: for the purpose of registration of
i. Company itself registers the charge, or charge.
ii. Company shows sufficient cause why such
charge should not be registered.
ACQUISITION OF PROPERTY SUBJECT TO CHARGE AND MODIFICATION OF CHARGE
4.1 Company acquiring any property subject to charge
Section 79 of the Companies Act, 2013 deals with the provisions relating to acquisition of a property
already subject to charge and the modification of charge.
Where a property where charge is already registered is sold with the permission of the charge
holder, it shall be the duty of the company acquiring such property to get the charge registered in
accordance with section 77.

This means that the earlier charge would get vacated and a new charge is registered by the company
acquiring the property.
4.2 Modification of charge when there is change in terms and conditions etc.
Where there is any modification in the charge, it shall be registered by the company in accordance
with section 77 and the Registrar shall issue a certificate of modification of charge in Form CHG-3.
Examples of modification:
a) Change in terms & conditions of the existing charge through an agreement,

b) Any agreement for enhancing or decreasing the limits,
c) Ceding a pari passu charge*,
d) Change in rate of interest,
e) Change in repayment schedule of loan,
f) Partial release of the charge on a particular asset or property.
*A pari passu charge holder is entitled to a proportionate share in the mortgaged property. When this is ceded
a charge holder will become a second charge holder and his right of entitlement will be subject to full
satisfaction of the First charge holders claim.
REGISTER OF CHARGES
5.1 Register of Charges to be kept by the Registrar
Section 81 of the Companies Act, 2013 contains provisions regarding Register of Charges to be
kept by the Registrar.
Section 81 (1) states that the Registrar shall, in respect of every company, keep a register
containing particulars of the charges registered under Chapter VI in the prescribed form and
manner.
In addition, Rule 7 (1) states that the particulars of charges maintained on the Ministry of
Corporate Affairs portal (www.mca.gov.in/MCA21) shall be deemed tobe the register of
charges for the purposes of Section 81.
Inspection of Register: According to section 81 (2) such register shall be open to inspection by
any person on payment of such fees as may be prescribed for each inspection.
Similarly, Rule 7 (2) states that the Register shall be open to inspection by any person on
payment of fee.
5.2 Register of Charges to be kept by the company
Section 85 of the Companies Act, 2013 contains provisions regarding Register ofCharges to
be kept by a company.
(i) According to section 85 (1):
• Every company shall keep a Register of Charges in the prescribed form17 and manner at
its registered office.
• The Register shall include all charges and floating charges affecting any property or assets

of the company or any of its undertakings, indicating in each case the prescribed particulars.
(ii) According to Proviso to section 85 (1):
• A copy of the instrument creating the charge shall also be kept at the registered office along
with the Register of Charges.
(iii) Provisions of Rule 10 are as under:
• According to Rule 10 (1), the company shall enter in the Register particulars of all the charges
registered with the Registrar on any of its property, assets or undertakings and the particulars of
any propertyacquired subject to a charge as well as particulars of any modificationof a charge
and satisfaction of charge.
• According to Rule 10 (2), the entries in the Register shall be madeforthwith after the creation,
modification or satisfaction of charge, asthe case may be.
• According to Rule 10 (3), the entries in the Register shall beauthenticated by a director or the
secretary of the company or anyother person authorised by the Board for the purpose.
Inspection of Register of Charges and Instrument of Charges:
As regards inspection, section 85 (2) states that the register of charges and the instrument of
charges shall be open for inspection18 during business hours:
(a) by any member or creditor without any payment of fees; or
(b) by any other person on payment of prescribed fees. subject to suchreasonable restrictions
as the company may, by its articles, impose.
Preservation of Register:
According to Rule 10 (4) the register of charges shall be preserved permanentlyand the
instrument creating a charge or modification thereon shall be preservedfor a period of eight
years from the date of satisfaction of charge.
REGISTRATION OF CHARGE TO ACT AS A CONSTRUCTIVE NOTICE
Section 80 of the Companies Act, 2013 provides that the registration of charge shall act as a constructive
notice.
→ All charges registered with the ROC are public documents.

→ Where a charge is registered u/s 77, any person acquiring such property, assets, undertakings or part
thereof or any share or interest therein shall be deemed to have notice of the charge from the
date of such registration.
→ In case a person enters into a transaction without making any enquiry and later on suffers any
loss/ damage, he cannot claim the loss from the company for it shall be deemed that he had
notice of the charge.
COMPANY TO REPORT SATISFACTION OF CHARGE

✓ A company shall give an intimation of payment or satisfaction* in full of any charge earlier
registered, to the ROC in Form CHG-4 within a period of 30 days (may be extended to 300
Section 82 of the Companies Act, 2013 deals with the requirement to intimate the Registrar of satisfaction
any registered charges.
Satisfaction happens when the

days on an application made to the Registrar) from the date of such amount is not repaid but an
payment or satisfaction. asset of equal value is offered in
the place of the property being
✓ On receipt of such application, ROC shall cause a notice to be sent released from charge.
to the charge holder calling upon him to show cause within such
time as may be specified in the notice but not exceeding 14
days, as to why payment/ satisafction in full should not be recorded.
• No cause is shown:- ROC shall order entering a memorandum of satisfaction in the
register of charges kept by him and inform the company of having done so.
ROC shall issue a certificate of registration of satisfaction of charge in Form CHG- 5 (Rule 8)
• If any cause is shown:- ROC shall register a note to that effect in the Register of charges
and inform the company.
✓ The instrument creating a charge/ modification shall be preserved for 8 years from the date of
satisfaction of charge by the company.
POWER OF THE REGISTRAR TO MAKE ENTRIES OF SATISFACTION AND RELEASE IN THE ABSENCE OF
INTIMATION FROM COMPANY
Section 83 of the Companies Act, 2013 empowers the ROC to make entries with respect to satisfaction
and release of charges even if no intimation has been received from the company.
If the company hasnot informed the satisfaction of charge to the ROC & ROC receives evidence of
satisfaction of charge from other source, then,
→ ROC will enter in the Register of Charges himself as a memorandum and

→ within 30 days, intimate affected parties.
→ Accordingly, ‘Certificate of satisfaction of Charge’ in Form CHG-5 shall be issued by ROC
(Rule 8).
INTIMATION OF APPOINTMENT OF RECEIVER OR MANAGER

Section 84 of the Companies Act, 2013 deals with the appointment of a receiver or manager and
of giving intimation to the company and the Registrar.
Section 86 of the Companies Act, 2013 deals with the punishments for the company and officer
in default in case of contravention of the provisions relating to registration of charges.
PUNISHMENT FOR CONTRAVENTION
If any person obtains an order for the appointment of a receiver or a person to

manage the property subject to any charge, or if any person appoints such receiver
or manager under any power contained in any instrument, he shall give a notice of
such appointment in Form CHG-6 to the company and the receiver along with a
copy of the order/ instrument within 30 days of passing such order or making the
appointment.
The ROC shall register the particluars of the receiver, person, or instrument in the
register of charges.
On ceasing to hold the appointment the person appointed as receiver/ manager

shall give a notice to that effect in Form CHG-6 to the company and the ROC, and
ROC shall register such notice.
Any person wilfully

furnishes any false or
incorrect information
Every defaulting or knowingly
officer: supresses material
Company: Penalty - ₹50,000 information which is
required to be
Penalty - ₹5L registered u/s 77 -
liable u/s 447.
RECTIFICATION BY CENTRAL GOVERNMENT IN REGISTER OF CHARGES
10.1 Defaults upon which rectification order may be passed by CG
Section 87 of the Companies Act, 2013 and Rule 12 empowers the CG to order rectification of Register of
Charges.

The CG may order rectification of Register of Charges in the following cases of default:
a) Omission in giving intimation to the ROC w.r.t. payment or satisfaction of charges within
specified time,
b) Omission or misstatement of any particulars in any filing previously made to the ROC
relating to any charge or related matters.
10.2 Application to the CG
Where such default is made, the company or any interested person shall make an application to the
CG in Form CHG-8.
Before making an order for rectification, the CG needs to be satisfied that such default was
• accidental or
• due to inadvertence or
• because of some other sufficient cause or
• it did not prejudice the position of the creditors/ shareholders.
10.3 Order of the CG
The Central Government may-
1) Direct rectification of the omission/ misstatement of any particulars in any filing

previously recorded with the ROC,
2) Direct extension of time for satisfaction of charge, if such filing is not made within 300
days from the date of payment or satisfaction of charge.
SIGNING OF CHARGE E-FORMS FOR COMPANIES UNDER RESOLUTION OR LIQUIDATION
➔ Form No. CHG-1, CHG-4, CHG-8 and CHG-9

➔ shall be signed by
o Insolvency resolution professional or
o resolution professional or
o liquidator
for companies under resolution or liquidation, as the case may be and
➔ filed with the Registrar [Rule 13]
LIST OF FORMS TO BE FILLED WITH ROC
S.No. E-Form Purpose
1. CHG-1 Creating or Modifying charge (for other than Debentures)
2. CHG-2 Certificate of Registration of charge.
3. CHG-3 Certificate of Modification of charge.

4. CHG-4 Intimation of the satisfaction to the Registrar.
5. CHG-5 Memorandum of satisfaction of charge.
6. CHG-6 Notice of appointment or cessation or receiver or manager.
7. CHG-7 Register of charges.
8. CHG-8 Application for condonation of delay shall be filed the CG
9. CHG-9 Creating or modifying the charge in (for debentures including

rectification)
10. CHG-10 Application for delay to the registrar.
OVERVIEW
Meaning of Charge [Section2 (16)]
Duty to register charge

[Section 77]
Application for registration of charge by charge holder

Registration of Charges
[Section 78]
Acquisition of property subject to charge and modification of
charge
[Chapter VI]
[Section 79]
Registration of charge to act as constructive notice
[Section 80]
Satisfaction of charge
[Section 82 & 83]
Intimation of appointment of receiver/ manager

[Section 84]
Punishment for cotravention

[Section 86]
Rectification of Register of Charges

[Section 87]

MANAGEMENT AND ADMINISTRATION
• State the meaning, need and importance of management & administration of company.
• Learn about the maintenance of registers and other documentation required to be kept by a
company.
• Know about meeting for conduct of the business.
• Explain the requirements for convening of a valid meeting.
INTRODUCTION
The provisions relating to management and admisnistration of companies have been dealt with under
Chapter VII of the Companies Act, 2013 [Section 88 to 122] and the Companies (Management &
Administration) Rules, 2014.
This Chapter applies to all companies, public and private, and has special provisions applicable to One
Person Company (OPC).
REGISTER OF MEMBERS, ETC
2.1 Register of members, debenture holders & other security holders
Section 88 of the Companies Act, 2013 contains provisions regarding maintenance of registers of members,
debenture holders and other security holders.
✓ Every company shall keep and maintain the register of members, debenture holders and other
security holders.
✓ Form of Register :
Register of Members (company limited by shares) Form MGT-1
Register of debenture holders/ other security Form MGT-2

holders
✓ Entries have to made in the Register within 7 days of the date of approval by the Board or
Committee thereof, the allotment/transfer of shares, debentures, or any other securities.
✓ The Register shall be maintained at the registered office of the company.

Other Requirements applicable to all the Registers
Rule 5 contains certain requirements which are applicable to all types of registers (i.e. Register
of Members, Register of Debenture-holders and Register of any Other Security Holders).
These are stated as under:
 Time period for making entries in Register
As per Rule 5 (1), entries have to be made in the Register within 7 days of the date of
approval by the Board or Committee thereof by approving the allotment or transfer of
shares, debentures or any other securities, as the case may be.
 Place of maintaining Register
According to Rule 5 (2), the registers shall be maintained at the registered office of the company
unless a special resolution is passed ina general meeting authorising the keeping of the
register at any other place within the city, town or village in which the registered office is
situated or any other place in India in which more than 1/10th of thetotal members
entered in the register of members reside.
 Other information also to be referred in register
1. In terms of Rule 5 (6), if any order is passed by any judicial or revenue authority or by Security
and Exchange Board of India (SEBI) or competent authority attaching the shares, debentures
or other securities and giving directions for remittance of dividend or interest, the necessary
reference of such order shall be indicated in the respective register.
2. According to Rule 5 (7), in case of companies whose securitiesare listed on a stock exchange
in or outside India, the particulars of any pledge, charge, lien or hypothecation created by the
promoters in respect of any securities of the company held bythe promoter including the
names of pledgee/pawnee and any revocation therein shall be entered in the register within
fifteendays from such an event.
3. According to Rule 5 (8), if promoters of any listed company, which has formed a joint venture
company with another company have pledged or hypothecated or created charge or lien in
respect of any security of the listed company in connection with such joint venture company,
the particulars ofsuch pledge, hypothecation, charge and lien shall be entered inthe register
members of the listed company within fifteen days from such an event.
 Updating of change in status of members
Rule 5 (4) states that if any change occurs in the status of a member or debenture-holder or
any other security holder:
- whether due to death or insolvency or change of name or due to transfer to Investor Education
Protection Fund (IEPF) or due to any other reason entries thereof explaining the change shall
be made in the respective registers.
 Rectification in register
According to Rule 5 (5), if any rectification is made in the register maintained under section 88 by
the company pursuant to any order passed by the competent authority under the Act, the
necessary reference of such order shall be indicated in the respective register

✓ Particulars in register of members [Rule 3]:
• Name of the member, address, email address, PAN/CIN, Nationality,
• In case member is a minor – name of his guardian and the date of birth of the member,
name, and address of the nominee
• Date of becoming the member,
• Date of cessation,
• Amount of guarantee, if any,
• Any other interest, if any, and
• Instructions, if any, given by the member with regard to sending of notices, etc.
✓ Every register shall include an index of names included therein. Index is not required wherein
the number of members is less than 50.
✓ The register and index of beneficial owners maintained by a depository shall be deemed to
be corresponding register and index.
✓ The entries made in the registers and index shall be authenticated by the CS of the company or
any other person authorised by the Board for this purpose.
2.2 Foreign Register [Section 88(4) r.w. Rule 7]
A company may, if so authorised by the AOA, keep in any country outside India, a part of the
register of members, or debenture holders, or other security holders, or of beneficial owners,
resident in that country. Such a register may be referred to as “Foreign Register”.
2.2.1 Conditions:
a) Within 30 days of opening the foreign register, file with the ROC notice of the situation of
the office in Form MGT-3.
b) In case of change in situation of such office or of its discontinuance, within 30 days file
a notice in Form MGT-3 with ROC of such change or discontinuance.
c) Maintained in the same format as the principal register.
d) Inspection of foreign register, closing, taking extracts therefrom and copies thereof – same
manner as applicable to principal register. Exception: The advertisement before closing the
register shall be inserted in at least 2 newspapers circulating in the place wherein foreign
register is maintained.
e) The company shall –

• Transmit a copy of every entry made in foreign register to its registered office
in India within15 days of making such entry.
• Keep at such office a duplicate register of every foreign register, duly updated
from time to time.
• Not register any transaction relating to any share, debenture or security holder
which is registered in a foreign register, in any other register.

f) Where the company discontinues the keeping of any foreign register, all the entries
in that register shall be transferred to some other foreign register kept by the company
outside India or to the principal register.
g) The entries made in the foreign register shall be authenticated by the CS of the company
or any other person authorised by the Board by appending his signature to each entry.
2.3 Penalty for failure to maintain the register
The company and every officer in default shall be liable to penalty of ₹3L and ₹50,000 respectively.
Register of Register of debenture- Maintenance of

members - Rule 3; holders/any OSH - Rule Registers of members
Form MGT - 1 4; Form MGT - 2 etc.- Rule 5
Index of names of Foreign Register -

members - Rule 6 Rule 7
DECLARATION IN RESPECT OF BENEFICIAL INTEREST IN ANY SHARE
Section 89 of the Companies Act, 2013 contains provisions relating to declaration in respect of
beneficial interest in any share.
Members not holding Person holding beneficial Any changes in the

beneficial interest in the interest in the shares beneficial interest [Sec.
company [Sec. 89(1)] [Sec. 89(2)] 89(3)]
•File declaration in Form MGT-4. •Declaration to the company in •Change occurs in the beneficial
•Specify the name and other Form MGT- 5. interest in any shares in respect
particulars of the person who •Specify the nature of interest, of which a declaration has been
holds the beneficial interest in particulars of the person in filed u/s 89(1) & (2).
such shares. whose name such shares stand
registered in the books of the
company and other particulars
Shall file a declartion of beneficial interest with the company within 30

days and company shall file a return to ROC in Form MGT- 6 within 30
days.

Where any declaration required u/s 89 is not filed by the beneficial owner, then any right w.r.t. such
shares shall not be enforceable by the beneficial owner or any person claiming through him.
The duty of the company to pay dividend shall not be affected by this section.
3.1 Beneficial interest [Section 89(10)]
Beneficial interest in a share includes
→ Directly or indirectly, Trust which is created, to set up a

→ Through any contract, arrangement or otherwise, Mutual Fund or Venture Capital Fund
→ the right or entitlement of a person alone or or such other fund as may be
together with any person to- approved by SEBI, need not file the
(i) exercise or cause to be exercised any or all declarations as envisaged under this
the rights attached to such share, or section
(ii) receive or participate in any dividend or
other distribution in respect of such share.
3.2 Penalty for default
Any person fails to Company fails to file

make declaration u/s the return to ROC
89 within 30 days
• Penalty - ₹50,000 • Company and every officer in
• In case of continuing default default shall be liable to
further penalty of ₹200 for penalty of ₹1,000 for each day
each day after the first during during which such failure
which failure continues. continues, subject to max. of
• Subject to a maximum of ₹5L ₹5L - in case of company
₹2L - in case of officer in
default
- Section 89 shall not apply to a government company which has not committed a
default in filing its financial statements u/s 137 or Annual Return u/s 92 with the ROC.
- Central Government may, by notification, exempt any class (es) of persons from
complying with any of requirements of section 89, except sub-section (10), if it is
considered necessary to grant such exemption in public interest and any such exemption
may be granted either unconditionally or subject to such conditions as may be specified
in the notification.

REGISTER OF SIGNIFICANT BENEFICIAL OWNERS IN A COMPANY
4.1 Significant Beneficial Owner (SBO)
Section 90 of the Companies Act, 2013 states the requirement for every significant beneficial owner to state
his interest and other particulars to the company. MCA has issued Companies (Significant Beneficial Owners)
Rules, 2018 (SBO), which deals with identification and reporting in connection with SBO.
holds indirectly, or together

with direct holdings, not less
than 10% shares
Has the right to An individual who, acting has the right to receive
exercise, or actually alone or together, or or participate in not less
exercises, significant through one or more than 10% of the total
influence or control, in persons or trust, distributable dividend, or
any manner other than posesses one or more of any other distributions,
through direct holdings following entitlements in in a FY through indirect
alone. the Reporting Company: holdings, or together
with direct holdings
holds indirectly, or together
with any direct holdings, not
less than 10% of voting rights
in the shares
4.1.1 Direct or indirect shareholding
Direct shareholding: Indirect shareholding:

• Shares in the relevant company are When a shareholder is a
held in the name of such individual, or • Body corporate,
• The individual holds or acquires a • HUF,
beneficial interest in the shares of the • Partnership,
relevant company and has made a • Trust,
declaration in this regard. • Pooled Investment vehicle.
4.1.2 Significant Influence
The power to participate, directly or indirectly, in the financial and operating policy decisions
of the reporting company but is not control or joint control of those policies.
4.1.3. Majority Stake

✓ holding more than one-half of the equity share capital in the body corporate; or
✓ holding more than one-half of the voting rights in the body corporate; or
✓ Having the right to receive or participate in more than one-half of the distributable dividend
or any other distribution by the body corporate.

4.2 Duty of the reporting company
(1) To give notice in the Form BEN-4 to the person whom the company knows or has reasonable
cause to believe –
→ To be an SBO of the company,
→ To be having knowledge of the
identity of an SBO or another
person likely to have such Who have not registered
knowledge, or themselves with the
→ To have been an SBO of the company as SBO.
company at any time during (i.e., unregistered SBOs)
the 3 years immediately
preceding the date on which
notice is issued
(2) Maintain a register of SBOs in Form BEN-3 which shall be open for inspection during the
business hours on payment of such fee as may be prescribed by the company, but not
exceeding ₹ 50 for each inspection.
4.3 Application to the tribunal
→ Where the person fails to give the company information required by the notice in Form
BEN-4 within 30 days or, the information given is not satisfactory, the company shall apply
to the Tribunal within 15 days of the expiry of the period specified in the notice.
→ The Tribunal may, after giving an opportunity of being heard to the parties concerned, make
such order restricting the rights attached with the shares within 60 days of receipt of
application or such other period as may be prescribed.
→ Any person aggrieved with the order of the tribunal may make an application to the
Tribunal for relaxation or lifting of the restrictions within 1 year from the date of such order.
→ If no such application has been filed within 1 year, such shares shall be transferred,
without any restrictions, to the Investors Education and Protection Fund (IEPF).
4.4 Declaration by SBO
Every individual who becomes a SBO in the reporting company or whose significant beneficial
ownership undergoes any change, is required to file a declaration with the Reporting company in
Form BEN-1 within 30 days.
4.5 Non-applicability of Companies (Significant Beneficial Owners) Rules, 2018

the IEPF
Authority
its holding
Investment company and
Vehicles the details of
regulated by such holding
RBI, IRDAI or company are
PFRDA reported in
Where the Form BEN-2.
shares of the
Reporting
company are
Investment held by:
vehicles (eg. the CG, SG or
REITs, InVITs)* any local
regulated by authority
SEBI an entity/ body
corporate
controlled
wholly or partly
by the CG and/
or SG
*REIT – Real Estate Investment Trust *InVIT – Infrastructure Investment Trusts
4.6 Punishment for contravention
Reporting company fails to maintain

SBO fails to give required disclosure register of SBO/ file return of SBO
with ROC/ denies inspection
• Penalty – ₹50,000 Company

If the failure continues – Further • Penalty – ₹1L
penalty of ₹1,000 for each day • If the failure continues –Further
after the first day during which penalty of ₹500 for each day,
the failure continues. after first during which such
Subject to maximum of ₹2L failure continues
• Subject to maximum of ₹5L
Officer in default
• Penalty – ₹25,000
• If the failure continues –Further
penalty of ₹200 for each day,
after first during which such
failure continues

• Subject to maximum of ₹1L
Such contravention is compoundable.
Contravention with the intention commit fraud - liable u/s 447.
Section 90 shall not be applicable to a Government Company which has not committed a default in filing
its FS u/s 137 or Annual Return u/s 92.
POWER TO CLOSE REGISTER OF MEMBERS OR DEBENTURE HOLDERS OR OTHER SECURITY HOLDERS
Section 91 of the Companies Act, 2013 deals with the closing of register of members, debenture holders
and other security holders.
✓ The register of members, debenture holders and other security holders may be closed by the
company by giving minimum 7 days’ notice period or such lesser period as specified by SEBI to its
members.
✓ Company closing the register shall give a minimum 7 days’ previous notice by an advertisement at
least once in an English & Vernacular language in English & vernacular newspaper respectively
having wide circulation in place where registered office is situated. It shall also be published on the
website notified by the CG and website of the company, if any.
o Listed company or company intending to get its securities listed to follow manner of giving 7
days’ notice as may be specified by SEBI
o Requirement of advertisement shall not applicable to private company provided that the
notice has been served on all members not less than seven days prior to closure of the
register
✓ Maximum period for closing register:

• 30 days at a time and
• 45 days aggregate in a year.
✓ Punishment for contravention:

• Company and every officer in default – Penalty of ₹ 5,000/- per day subject to a maximum
of ₹ 1,00,000, during which the register is kept closed.
• The offence is compoundable u/s 441.

ANNUAL RETURN
6.1 Contents of Annual Return
Section 92 of the Companies Act, 2013 together with Rules 11 & 12 of Companies
(Management & Administration) Rules, 2014 provides the provisions with regard to Annual
Return.
Registered office, principal business activities, particulars of its holding, subsidiary

and associate companies
Its shares, debentures, and other securities and shareholding pattern
Members and debenture holders along with the changes therein since the close of
the previous F.Y.
Promoters, directors, KMP, along with the changes therein since the close of the
previous F.Y.
Meetings of the members, BOD
Remuneration of directors and KMP
Penalty or punishment on directors, officers and details of compounding
Matters relating to certification of compliances, disclosures
Details as may be prescribed in respect of shares held by or on behalf of FII
6.2 Maintenance of Annual Return
✓ Every company shall prepare an annual return in Form No. MGT-7.

o Except OPC and small company which shall file annual return from F.Y. 2020-2021
onwards in Form No.MGT-7A
✓ It shall be signed by –
o A director and the CS of the company, if any,
o In case of company has no CS, director, and a CS in practice,
o OPC and Small Company and private company (which is a start-up) – by the CS of the
company. If no CS, then director of the company.
✓ Central Government may prescribe abridged form of annual return for OPC, small company
and such other class(es) of companies as may be prescribed
✓ Certification by CS –

oIn case of a listed company or company having paid-up share capital of ₹ 10 crore or
more, or a turnover of ₹ 50 crore or more,
o Shall be certified by a CS in practice.
o Certificate shall be in Form MGT-8.
✓ Every company shall place a copy of the Annual Return on the website of the company, if any,
and the web-link of such annual return shall be disclosed in the Board’s report.
✓ Copy of the Annual Return shall be filed with the ROC
o within 60 days from the date on which AGM is held or
o where no AGM is held – within 60 days from the date on which AGM should have been
held, along with reasons for not holding the AGM.
CS in practice certifes otherwise

Company fails to file the Annual
than in accordance with this
Return
section
• Company and every officer in • Liable to penalty of ₹2L
default shall be liable
• Penalty of ₹10,000
• In case of continuing failure -
further penalty of Rs. 100/- for
every day during which the
failure continues
• Subject to a maximum of
• ₹2L - in case of company
• ₹50,000 - in case of officer in
default

PLACE OF KEEPING AND INSPECTION OF REGISTERS, RETURNS, ETC.
7.1 Place of keeping registers and returns
Section 94 of the Companies Act, 2013 provides the provisions with regard to place of keeping the
registers and returns of a company and their inspection.
Registered office
Place of keeping
registers and returns
Can also be kept at
[Sec. 94(1)]
any other place in
Approval by Special
India in which more
Resolution
than 1/10th of the
total members reside
7.2 Inspection of registers and returns [r.w. Rule 14]
✓ The registers and returns shall be open for inspection during business hours, at such
reasonable time, on every working day as decided by the BOD,
→ By any member, debenture holder, other security holder or beneficial owner
without the payment of fee, and
→ By any other person on payment of fees as prescribed by the BOD but not exceeding
₹ 50/- for each inspection.
✓ Any member, debenture holder, other security holder or beneficial owner can
→ take extracts during business hours without payment of fee, and
→ also get copies on payment of fee not exceeding ₹ 10/- for each page.
✓ Copies/ entries/ return shall be supplied within 7 days of deposit of fee.
✓ Following particulars of the register/index/return in respect of the members of a company

shall not be made available for any inspection under S. 94(2) or for taking extracts or copies
under S.94(3) :
i. address or registered address (in case of a body corporate);
ii. e-mail ID
iii. Unique Identification Number
iv. PAN Number
7.3 Preservation of register of members etc. and annual return [Rule 15]

Preservation of register of members along with index
• Preserved permanently.
• Kept in the custody of Company Preservation of register of members secretary or
any other person authorised by the BOD for such purpose.
Preservation of register of debenture holders/ other security holders
• Preserved for a period of 8 years from date of redemption of debentures or
securities
• Kept in the custody of CS of the company or any other person authorised by the
BOD for such purpose.
Preservation of documents filled with ROC
• Preserved for 8 years from the date of filing with the ROC.
Preservation of foreign register
• Preserved permanently unless discontinued and all entries are transferred to any
other foreign register or to the principal register.
• Foreign register of debenture holders and other security holders shall be
preserved for 8 years from the date of redemption of such denture or securities.
7.4 Penalty for refusing inspection or making any extract or copy required
✓ Company and every officer of the company in default shall be liable to a penalty of ₹
1,000/- for every day subject to a maximum of ₹ 1,00,000/- during which the default
continues.
✓ The CG may also direct an immediate inspection of the document or direct that required
extract be forthwith allowed to be taken by the person requiring it.
REGISTERS, ETC. TO BE EVIDENCE
Section 95 of the Companies Act, 2013 provides that the registers, indices, and copies of annual return shall
be a prima facie evidence of any matter directed or authorised to be inserted therein.
TYPES OF MEETINGS IN A COMPANY

Types of
meetings in a
company
General meeting
(Meeting of
Board meeting Class meeting
company's
shareholders)
Meeting of a
Extra ordinary Meeting of Board special class of
Annual general
general meeting of Directors of the persons, like,
meeting (AGM)
(EGM) company creditors,
preference
shareholders, etc.
Mandatory yearly A meeting of the

gathering of a shareholders to
company's discuss an urgent
interested matter which
shareholders cannot be
postponed till the
next AGM
NOTICE OF A MEETING
10.1 Notice of general meeting
Section 101 of the Companies Act, 2013 together with Rule 18 of the Companies (Management &
Administration) Rules, 2014 lays down the rules regulating the notice to be sent calling a meeting.
To properly call a meeting, a notice –
Of at least 21 clear days (14 days for Section 8 company),

before the meeting,
21 clear days means that
date on which notice is
→ Should be given to:
served, and date of meeting
• All the members,
are excluded for sending the
• Legal representative of any deceased member,
notice.
• The assignee of any insolvent member,
• The auditors, and Company cannot reduce this
• The directors, requirement through its AOA.
→ In writing / electronic mode / other prescribed mode.

The notice shall be placed simultaneously on the website of the company, if any, and on any website
notified by the CG.

Note:
In case of Specified IFSC Public Company - Section 101 shall apply in case of a Specified IFSC public
company, unless otherwise specified in the articles of the company. [Notification No. GSR 8 (E), dated
4th January, 2017.]
In case of section 8 company, in clause (1) of Sub-section (1) of Section 101 for the words "21 days",
the words "14 days" shall be substituted. This exception shall be applicable to a section 8 company
which has not committed a default in filing its financial statements under section 137 or annual return
under section 92 with the Registrar. [Notification No. GSR 466 (E), 5-6-2015 as amended by Notification
No. GSR 584 (E), dated 13th June, 2017.
10.1.1 Electronic mode [Rule 18]
Where a notice for the GM is sent by post, it shall be deemed to be served at the expiration
of 48 hours after the letter containing the same is posted. [Rule 35(6) of the Companies
(Incorporation) Rules, 2014]
→ Any communication sent by a company through its authorised and secured computer
programme
→ which is capable of producing confirmation and keeping record of such communication
addressed to the email address provided by such member who is entitled to receive such
communication.
→ A notice may be sent through e-mail as a –
(a) Text, or
(b) As an attachment to e-mail, or
(c) As a notification providing electronic link, or
(d) URL for accessing such notice.
10.1.2 Accidental omission to give notice [Sec. 101(4)]

Any accidental omission to give notice to or the non-receipt of such notice by, any member or
other person who is entitled to such notice for any meeting shall not invalidate the
proceedings of the meeting.
It is the duty of the company to prove that the omission was not deliberate.
10.2 Meetings held at shorter notice
A GM may be called at a shorter notice if consent in writing/ by electronic mode is given by:
(1) In case of AGM: not less than 95% of the members entitled to vote thereat.
(2) In case of other GM: by members of the company having

• Company having share capital – majority number of members entitled to vote and
who represent not less than 95% of paid-up share capital members entitled to
vote in that meeting.
• Company not having share capital – not less than 95% of total voting power
exercisable at that meeting.
10.3 Contents of the notice
• Day, date, hour of meeting,

• Place of meeting,
• Statement of business to be transacted at a meeting.
10.4 Authority to call a GM
✓ A GM has to be called by the Board of Directors (BOD).

✓ An individual director cannot call a GM.
✓ A notice of the GM given without sanction of the BOD is invalid. However, the same can
be ratified by the BOD.
EXPALNATORY STATEMENT TO BE ANNEXED TO NOTICE
Section 102 of the Companies Act, 2013 provides the provisions relating to explanatory statement to be
attached to a notice of a general meeting where any special business is to be transacted.
Where any special business is to be transacted at the company’s general meeting, then an
“explanatory statement” should be annexed to the notice calling such GM.
11.1 Content of the explanatory statement
1) The nature of interest in respect of each items to be transacted of

• Every director and the manager if any
• Every other KMP, and
• Relatives of above persons.
2) Any other information / facts that may enable the members to understand the meaning,
scope, and implications of the items of business and to take decision thereon.
3) If the special business relates to or affects any other company, then the extend of
shareholding in that other company of every promoter, director, manager and every other
KMP shall be disclosed, if the extend of shareholding is 2% or more of the paid-up capital of
that other company.
4) In case any business refers to any document to be considered at the meeting, then time
and place where such document can be inspected.
11.2 Types of business transacted at GM

Types of
business
transacted at
the GM
Ordinary Special
business business
Consideration All business

Appointment Appointment
of FS, Declaration of to be
of directors in & fixing of
Auditor's any dividend transacted at
the place of remuneration
report and the GM
those retiring of the
Board's except those
report auditors stated as
ordinary
business is
"Special
business"
11.3 Contravention of these provisions
1) If as a result of non-disclosure or insufficient disclosure in explanatory statement, any

benefit accrues to a promoter, director, manager, other KMP, or their relatives,
→ Such person shall hold such benefit in trust for the company, and
→ Shall be liable to compensate the company to the extent of the benefit received by
him.
2) If any default is made in complying with the provisions of this section, every promoter,
director, manager, or other KMP of the company who is in default shall be liable to a penalty
of
→ ₹ 50,000/- or
→ 5 times the benefit accruing to the promoter, director, manager, or other KMP or any of
his relatives
Whichever is higher.
QUORUM FOR MEETINGS
Section 103 of the Companies Act, 2013 provides the quorum for the meetings of the company.
Quorum = The minimum number of members who must be present in order to constitute a valid meeting.
12.1 Quorum for the meeting

Public
Company If the number of
members is not more
than 1000
= 5 members personally
present.
Private
If the number of
members is more than
Company
1000 but upto 5000 2 members personally
present.
present.
If the number of
members exceed 5000
present.
Note: The AOA may provide for a larger number to be the quorum for meetings of the company.
12.2 Who shall be considered as quorum?
a) Proxies 
b) Authorised representative of company ✓
c) Joint holders Counted as 1
d) Person in dual capacity Counted more than 1
12.3 Adjourned meeting due to want of Quorum
✓ If the quorum is not present within half -an-hour from the time appointed for the meeting
of the company –
a) The meeting shall stand adjourned to the same day in the next week at the same time
and place, or to such other date, time and place as the BOD may determine, or
b) If the meeting was called by requisitionists u/s 100, the meeting shall stand cancelled.
✓ In case of an adjourned meeting/ change of day, time or place of meeting , company shall give
not less than 3 days’ notice to the members –
• Either individually, or
• By publishing an advertisement in the newspapers (English & vernacular) having wide
circulation at the place where the registered office is situated.
✓ If quorum is not present in adjourned meeting also within half-an-hour, members present
shall form the quorum.
Note:

The following points have been prescribed by Secretarial Standard – 2:
1. One person can be an authorised representative of more than one body corporate. In such a
case, he is treated as more than one Member present in person for the purpose of Quorum.
However, to constitute a meeting, at least two individuals shall be present in person. Thus, in
case of a public company having not more than one thousand members with a Quorum
requirement of five members, an authorised representative of five bodies corporate cannot
form a Quorum by himself but can do so if at least one more member is personally present.
2. Quorum shall be present not only at the time of commencement of the Meeting but also
while transacting business
3. Members who have voted by Remote e-voting have the right to attend the General Meeting
and accordingly their presence shall be counted for the purpose of Quorum.
4. A Member who is not entitled to vote on any particular item of business being a related party,
if present, shall be counted for the purpose of Quorum.
5. The stipulation regarding the presence of a Quorum does not apply with respect to items of
business transacted through postal ballot.
CHAIRMAN OF MEETINGS
Section 104 of the Companies Act, 2013 provides the provisions relating to election of chairman
of the company and his powers.
The members personally present shall elect among themselves a person to be the
Chairman of the Company
by show of hands Unless AOA provides otherwise
If a poll is demanded on the election of Chairman

The Chairman elected by show of hands shall continue until Such other elected person shall be the
some other person is elected as Chairman as a result of poll. Chairman for the rest of the meeting.
Powers of the Chairman

Manages the meetings and Has the authority to decide Right to cast
Executes the
ensures that decorum is all questions which amy arise casting vote if
minutes of the
maintained at all times till the at a meeting and which empowered by the
meeting.
conclusion of the meeting. require decision at the time. AOA.
Casting vote = In the event of the equality of vote on a particular business being transacted at the
meeting, the Chairman of the meeting shall have a right to cast a second vote. If there is no provision
for a casing vote in the AOA, an ordinary resolution on which there is equality of votes is deemed to be
dropped.
PROXIES

14.1 Meaning of Proxy
Section 105 of the Companies Act, 2013 deals with the appointment of proxy of a member of the
company.
Any member of a company who is entitled to attend and vote at a meeting of the company shall be
entitled to appoint another person as a proxy to attend and vote at the meeting on his behalf.
14.2 Applicability
• Company having a share capital, or

• If the company has no share capital, the AOA of the company provides for appointment of proxy.
14.3 Who can be appointed as proxy
→ Generally – Non-member / member of the company

→ Section 8 companies – Only member of such company.
14.4 Role of Proxy
✓ Proxy shall not have the right to speak at such meeting,

✓ Proxy shall not be entitled to vote except on a poll.
✓ A person can act as proxy of more than one member provided it is not more than-
o 50 members and
o Members holding in aggregate not more than 10% of total share capital of the company
carrying voting rights.
o A person who is holding more than 10% of share capital carrying voting rights may appoint a
single person as proxy and such person shall not act as a proxy for any other person or
shareholder.
14.5 Procedure to appoint Proxy
• In every notice calling a meeting of a company, there shall appear

In a listed company, the
with reasonable prominence a statement that a member entitled
notice of the meeting shall
to attend, and vote is entitled to appoint a proxy, or, where that
clearly state that the
is allowed, one or more proxies to attend and vote instead of himself,
members who have cast
and that proxy need not be a member.
their vote by remote e-voting
prior to the meeting may
• Instrument for appointment of proxy – Form MGT-11
also attend the meeting but
• It shall be signed by the appointer or his attorney duly authorised in shall not be entitled to cast
writing. their vote again [Rule 20].
If the appointer is a body corporate – the instrument should be under

its seal or signed by an officer or an attorney duly authorised by the
body corporate.

• A proxy shall be received 48 hours before the meeting (even if articles provide for a longer
period).
14.6 Inspection of Proxy
✓ Every member entitled to vote at a meeting of the company, or on any resolution to be moved
thereat, shall be entitled to inspect the proxies.
✓ Time for inspection – during the period beginning 24 hours before the commencement of
meeting and ending with the conclusion of the meeting, at any time during the business
hours.
At least 3 days prior notice in writing of the intention so to inspect should be given to the company.
14.7 Penalty for default
* Officer shall not be liable by reason only of issue to member at his request in writing of a form of
appointment naming the proxy, or of a list of persons willing to act as proxies, if the form or list is
available on request in writing to every member entitled to vote at the meeting by proxy
If the notice does not • Every officer of the company in default

state the proxy may be shall be punishable
appointed • penalty of Rs. 5,000/-.
If an invitaton to
appoint as proxy any
• every officer of the company who issues
specified person is sent
invitation as aforesaid or authorises or
to any member of the
permits their issue shall be liable to
company entitled to
penalty of ₹50,000
attend and vote thereat
by proxy*
RESTRICTION ON VOTING RIGHTS
Section 106 of the Companies Act, 2013 overrules the whole of the Act and provides for
restriction on voting rights of a member.

15.1 Grounds on which voting right may be restricted.
AOA may provide that no member shall exercise any voting right in respect of any share
registered in his name
→ On which any amount is due from him on calls or

→ On which any other sum payable to the company, or
→ In regard to which the company has exercised the right of lien.
Voting right shall not be restricted on any other grounds.
Also, such a member cannot sign a requisition for an EGM.
15.2 Member entitled to more than one vote
On a poll taken at a meeting, a member entitled to more than one vote, or his proxy, where allowed,
other another person entitled to vote for him, as the case may be, need not, if he votes
→ Use all his votes or

→ Cast in the same way all the votes he uses [Sec. 106(3)]
15.3 Vote of joint holders
• Joint shareholders must vote in consensus unless the AOA provide otherwise.
• The voting in case of joint holders is done in the order of seniority, which is determined on
the basis of the order in which their names appear in the register of members. Joint holders
have a right to instruct the company as to the order in which their name appears in the register.
15.4 Vote of Directors, who are also shareholders
• Directors, who are also shareholders of the company stand in a fiduciary relationship with
the company in their capacity as directors.
• However, the director should vote as a common shareholder and need not be influenced
by the fact of his being a director.
VOTING BY SHOW OF HANDS
Section 107 of the Companies Act, 2013 deals with the provisions relating to voting by show of
hands in a meeting of the company.
✓ Unless the voting is demanded by way of poll or by electronic means, the voting should be
done by way of hands in the first instance.
✓ The declaration by the Chairman of the meeting in the minutes books shall be conclusive
evidence that the resolution is passed.
✓ Even an insolvent shareholder can vote at the meeting by show of hands provided:
o He has no longer any beneficial interest in the shares and

o The dividends are payable only to his trustee in bankruptcy.
VOTING THROUGH ELECTRONIC MEANS
17.1 Companies to provide facility to vote by electronic means
Section 108 of the Companies Act, 2013, together with Rule 20 of the Companies (Management
& Administration) Rules, 2014 provides the procedure for electronic voting.
(i) Every listed company,

(ii) Every company having not less than 1,000 members.
Exception: A Nidhi Company or an enterprise or institutional investor referred to in Chapter XB and XC

of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.
17.2 Procedure to vote through electronic means
17.2.1 Notice of Meeting
The notice of the meeting shall be sent to all the members, directors, and auditors of the company
Through electronic means, By The notice shall also be hosted on the website
By registered post
namely, registered e-mail ID courier of the company, if any, and of the agency
or speed post, or
of the recipient, or service. forthwith after it is sent to the members.
The notice of the meeting shall clearly state that

the company is facility to vote by electronic means or ballot paper the members who have cast their
providing facility to shall also be made available at the meeting for those votes through remot e-voting may
vote by electronic members whose are attending the eeting and not also attend the meeting but shall
means already cast their vote by remote e-voting not be entitled to vote again
The notice shall provide the following details
The process and manner Time schedule for The process and manner for generating
of voting by electronic casting votes by Login ID details or receiving the password and for
means remote e-voting casting of vote in a secure manner
Public notice by way of an advertisemnet to be published,
immediately on completion of dispatch of notices, but atleast once in a vernacular newspaper and english
atleast 21 days before the date of GM newspaper having wide circulation

17.2.2 Remote e-voting
→ The time for remote e-voting shall remain open for not less than 3 days and shall close
at 5.00 p.m. on the date preceding the date of GM.
→ Members having physical shares or dematerialised shares may opt for e-voting.
→ Once a member casts the vote, he shall not be allowed to change it subsequently or cast
the vote again.
→ At the end of remote e-voting the facility shall forthwith be blocked.
Sending of Notice of Meeting through Electronic Mode:
As per Rule 18 of the Companies (Management & Administration) Rules, 2014 , sending of notices through
electronic mode has been statutorily recognized. Accordingly, it is permitted for a company to give
notice through electronic mode.
The expression ‘‘electronic mode’’ shall mean any communication sent by a company through its
authorized and secured computer programme which is capable of producing confirmation and
keeping record of such communication addressed to the person entitled to receive such
communication at the last electronic mail address provided by the member.
◼ A notice may be sent through e-mail as a–
 Text; or
 As an attachment to e-mail; or
 As a notification providing electronic link; or
 Uniform Resource Locator for accessing such notice.
◼ Rule 18(3)
 The e-mail shall be addressed to the person entitled to receive such e-mail as per the records of
the company as provided by the depository.
It is to be noted that the company shall provide an advanceopportunity at least once in a
financial year, to the member to registerhis e-mail address and the changes therein and such
request may be made by only those members who have not got their e-mail ID recorded or to
update a fresh e-mail ID and not from the members whose e-mail ids are already registered.
a. The subject line in e-mail shall state the name of the company, noticeof the type of meeting,
place and the date on which the meeting is scheduled.
b. If notice is sent in the form of a non-editable attachment to e-mail, such attachment shall be
in the Portable Document Format or in a non-editable format together with a ‘link or
instructions’ for recipient for downloading relevant version of the software.
c. The company’s obligation shall be satisfied when it transmits the e-mail and the company shall
not be held responsible for a failure in transmission beyond its control.
d. If a member entitled to receive notice fails to provide or update relevant e-mail address to the
company, or to the depository participant as the case may be, the company shall not be in
default for not delivering notice via e-mail.
e. The company may send e-mail through in-house facility or its registrar and transfer agent or

authorise any third-party agency providing bulk e-mail facility.
f. The notice shall be placed simultaneously on the website of the Company, if any, and on the
website as may be notified by Central Government.
17.2.3 Appointment and function of scrutinizer

The BOD shall appoint one or more scrutinizer who may be CA/ CS/ CWA in practice, or an
advocate or any other person who is not in employment of the company. His function is to count
the votes in a fair manner and prepare its report.
Scrutiniser shall maintain a register either manually or electronically to record the assent or
dissent received with details of member. Register and all other papers shall remain in the safe
custody of the scrutiniser until minutes are prepared.
17.2.4 Counting of votes

• The chairman shall at the GM, allow the voting, with the help of the scrutinizer, by using
ballot paper or by using an e-voting system for all those members who are present at the
meeting and have not cast their votes by availing the remote e-voting facility.
• The scrutinizer shall after conclusion of voting at the GM –
o First count the votes cast at the meeting,
o Thereafter, unblock the votes cast through remote e-voting in the presence of at
least 2 witnesses not in employment of the company and
o Make a consolidated report, within 3 days of conclusion of meeting, of the total
votes cast in favour or against, to the chairman or the person authorised by him.
• The chairman or other person authorised by him shall declare the result of the voting
forthwith.
17.2.5 Results and date of resolution

✓ The results declared along with the report of the scrutiniser shall be placed on the
website of the company, if any, and on the website of the agency and the website of
recognised stock exchange in case of listed shares, immediately after the result is
declared by the Chairman.
✓ If required number of votes are received, the resolution shall be deemed to be passed on
the date of the relevant general meeting.
Note:
Procedural aspect of Voting by E mode are covered in Rule 20. Rule 20(20) defines certain
terms as under :
‘cut-off date' means a date not earlier than seven days before the date of general meeting
for determining the eligibility to vote by electronic means or in the general meeting.
[Explanation II (ii) to Rule 20(2)]
✓ ‘cyber security’ means protecting information, equipment, devices, computer, computer

resource, communication device and information stored therein from unauthorised
access, use, disclosures, disruption, modification or destruction;

✓ 'electronic voting system' means a secured system based process of display of electronic
ballots, recording of votes of the members and the number of votes polled in favour or
against, in such a manner that the entire voting exercised by way of electronic means
gets registered and counted in an electronic registry in a centralised server with
adequate cyber security. [Explanation II(iv) to Rule 20(2)]
remote e-voting' means the facility of casting votes by a member using an electronic
voting system from a place other than venue of general meeting. [Explanation II(v) to
Rule 20(2)]
✓ ‘secured system’ means computer hardware, software, and procedure that - (a) are
reasonably secure from unauthorised access and misuse; (b) provide a reasonable level
of reliability and correct operation; (c) are reasonably suited to performing the intended
functions; and (d) adhere to generally accepted security procedures; [Explanation II (vi)
to Rule 20(2)]
✓ 'voting by electronic mean' includes "remote e-voting and voting" at the general meeting
through an electronic voting system which may be the same as used for remote e-voting.
[Explanation II (vii) to Rule 20(2)
DEMAND FOR POLL
18.1 Who can demand for poll
Section 109 of the Companies Act, 2013 provides the provisions for demand for voting through
poll.
Company having share capital -

members present in person or proxy
and
• having less than 1/10th of the total
voting power or
•holding shares on which a sum of not Company not having
less than Rs. 5,00,000 or such higher share capital - any
amount prescribed has been paid-up. member or members
Chairman of the present in person or
meeting proxy, where allowed,
and having not less
than 1/10th of the
total voting power.
Who can
demand
for poll

The demand for poll may be withdrawn by the persons who made the demand, at any time.
18.2 Time for demanding for a poll
1) Before declaration of result of voting by show of hands, or

2) On declaration of such result.
18.3 When to take the poll
→ Poll demanded for adjournment of the meeting/ appointment of Chairman of the

meeting – immediately
→ Poll demanded on any other question – taken at such time as Chairman may direct, but
not later than 48 hours from the time of demand.
18.4 Procedure for conducting the poll
3) Scrutinizers shall arrange

2) Scruitnizers are
1) Chairman appoints for polling papers and
provided wth register of
scrutinizer for observing deistrbute them to members
members, specimen
the poll process and to and proxies present at the
signature of members and
report thereon. meeting. The polling paper
register of proxies.
shall be in Form MGT-12.
4) The scrutinixers shall 6) Scrutinizers shall open

5) Scrutinizers shall lock
keep a record of poling the polling box in the
and seal empty polling
papers received in presence of 2 persons as
box in the presene of
response to poll by witnesses after the voting
members and proxies.
initialling it. process is over.
8) In case of poll conductd

9) The scrutinizers report
7) The scruitinizers shall through electronic mode u/s
shall be in Form MGT-13
count the votes cast on 108, the company shall
and shall state the total
poll and prepare a report provide all necessary support
votes cast, valid votes,
thereon addressed to the to the scrutinizers to conduct
votes in favour and
Chairman. the voting and counting of
against the resolution
results thereof.
10) The scrutinizers report 11) The Chairman shall

shall be submitted to the declare the result of
Chairman within 7 days voting on poll which shall
from the date the poll is be deemed to be the
taken and he shall counter decision of the meeting
sign the same. on the resolution.

POSTAL BALLOT
19.1 Items of business that can be transacted by postal ballot
Section 110 of the Companies Act, 2013 r.w. Rule 22 of Companies (Management &
Administration) Rules, 2014 covers the provisions relating to passing of resolution by postal
ballot
✓ Items of business as CG may declare that can be transacted only by postal ballot.
✓ Any other item of business other than –
o Ordinary business and
o Any business in respect of which directors or auditors have a right to be heard at
the meeting.
giving loans,
extending Alteration of Alteration of AOA to
objects clause insert or remove
guarantee, provisionswhich are
providing of the MOA required to be
security in included in order to
excess of limits constitute a private
u/s 186 company
Sale of whole or
substantially Change
inregistered
whole of
office to outside
undertaking of
a company Items that can be the local limits
of any city,
transacted only by village or town
voting through a
postal ballot
change in
election of a [Rule 20] objects for
director which money
was raised
through
prospectus
variation in issue of shares

Buy back of
rights attached with differential
shares to a class of
voting rights
shares,
debentures,
other securities

These items may be transacted at a GM by a company which is required to provide the facility to members to
vote by electronic means u/s 108.
OPC and other companies having members up to 200 are not required to transact any business
through postal ballot.
19.2 Procedure for conducting postal ballot
3) Publish an advertisement (English and

Vernacular language)
1) Send a notice 2) Notice shall be •statement that voting is by postal ballot
to shareholders sent - which includes e-voting
along with draft
resolution •by registered •date of completion of dispatch of notices
requesting them post/ eed post •date of commencement of voting
to send their •through •date of end of voting
assent or dissent registered e-mail •statement that postall ballot received after
in writing on a ID 30 days shall not be valid
postal ballot •through courier •statement that members who have not
within 30 days service received postal ballot papers may apply to
from the date of the company and get duplicates thereof
dispatch of notice
•contact details of person responsible to
address grievances.
5) BOD shall 4) Notice also to be placed on the

6) Postal ballot received
appoint scrutinizer website of the company after notice
from the members shall be
who is not an is sent to members and shall remain
kept in the custody of
employee of the there until last date of receipt of
scrutinizer
company postal ballots from members
7) Scrutinizer shall 8) Scrutinizer shall maintain a register to 9) The results shall be

submit the report record the assent or dissent received . published by plcaing it
within 7 days of Scrutinizer shall return the ballot papers along with the
last date of receipt and related papers to the Chairman after scrutinizers report on the
of postal ballots minutes have been approved website of the company
19.3 Counting at the time of postal ballot
A member who is voting by way of postal ballot has votes in proportion to his share in the paid-up share
capital of the company and he need not use all his votes in the same way. Therefore, 4 types of ballots
may be received from the shareholders:
(i) Ballots which contain assents,

(ii) Ballots which contain dissents,
(iii) Ballots wherein the members have voted partially assenting and partially dissenting or not
using all his votes in any particular way, and

(iv) Invalid ballots (due to absence/ mismatch of signature, overwriting, etc)
CIRCULATION OF MEMBERS’ RESOLUTION
Section 111 of the Companies Act, 2013 gives the right to propose resolutions for consideration
at the general meetings.
20.1 Prerequisites of a valid requisition
• The number of members required to make a valid requisition under this section is the
same as required to requisition a general meeting u/s 100.
• The requisition must be made in writing.
• It should be signed –
o In case of company having share capital – by such number of members who hold, not
less than 1/10th of such paid up share capital of the company having right to vote.
o In case of company not having share capital – by such number of members who have
not less than 1/10th of the total voting power of all the members having right to vote.
• Time for requisition – the requisition shall be deposited at the registered office of the
company
o Requisition requiring notice of a resolution - not less than 6 weeks before the meeting.
o Other requisitions – not less than 2 weeks before the meeting.
• A reasonable sum must be deposited to meet the company’s expenses in giving effect to
proposing the resolution.
20.2 Notice to members
On receipt of a valid requisition u/s 111, the company shall give a notice to the members of any
resolution to be moved and circulate to members any statement with respect to the matters referred
to in proposed resolution/ business to be dealt with at the meeting.
The company is not duty bound to circulate the notice when the prerequisites are not complied with.
The company shall not be bound to circulate any statement if the CG, on an application received
either on behalf of the company or of any person who claims to be aggrieved, declares that the rights
conferred are being abused to secure needless publicity for defamatory matter.
The company and every officer in default shall be liable to a penalty of ₹ 25,000/-.

REPRESENTATION OF THE PRSEIDENT & GOVERNORS IN THE MEETING OF COMPANIES TO WHICH
THEY ARE MEMBER
President of India or the Governor of a State if he is a member of a company, may appoint his
Section 112 of the Companies Act, 2013 provides for the representation of president & governors
in companies in which they are member.
representative at any meeting.
Such Representative shall have all rights and powers of a member.
REPRESENTATION OF CORPORATIONS MEETING OF COMPANIES AND CREDITORS
Any Body Corporates who are members/creditor of a company may appoint their representative
at any meeting by resolution of its directors or other governing body. Such Representative shall have
all rights
and Section 113 of the Companies Act, 2013 provides for the representation of corporations meeting
powers of of companies and creditors.
member.
Such representative shall be
appointed by resolution of the board of directors or of the governing body of such corporation.
ORDINARY AND SPECIAL RESOLUTIONS
Section 114 of the Companies Act, 2013 defines an Ordinary and Special resolution.

Special
resolution
Ordinary [Sec.
resolution Intention to propose the
114(2)]
[Sec. resolution as a special
114(1)] resolution has been duly
Notice has been duly given specified in the notice
Passed if the votes cast in

favour of the resolution, Notice has been duly given
including the casting vote
of the Chairman, if any,
exceeds the votes cast
Passed if the votes cast in
against the resolution by favour of the resolution,
members so entitled and including the casting vote of
voting. the Chairman, if any, are not
less than 3 times the votes
cast against the resolution by
members so entitled and
voting.
23.1 Difference between Motion and Resolution.
Motion Resolution
Oral opinion or recommendation/ Actual votes in favour and against are cast
proposals of resolution to be passed. to adopt a motion.
No need of quorum Quorum is mandatory
No types 2 types, Ordinary and special resolution
Eg: fixing a date of adjournment of GM Eg: Appointing Auditor/Director: OR

required
23.2 Moving two or more resolutions together
✓ Generally, resolutions are moved separately.

✓ However, there is nothing illegal if the Chairman of the meeting desires that two or
more resolutions can be moved together, unless any member requires each resolution
to be put to vote separately or unless a poll is demanded in respect of any.
✓ The only case where resolutions are to be moved separately is with regard to appointment
of directors in a GM.

RESOLUTIONS REQUIRING SPECIAL NOTICE
24.1 Situations where special notice is required
Section 115 of the Companies Act, 2013 r.w. Rule 23 of Companies (Management &
Administration) Rules, 2014 deals with resolutions requiring special notice.
a) Resolution for appointment of auditors other than retiring auditor at an AGM.

b) Resolution at an AGM to provide that a retiring auditor shall not be re-appointed.
c) Resolution to move a director before the expiry of his period of office.
d) Resolution to appoint another director in the place of the removed director.
Further, the AOA may provide for additional matters which may require special notice.
24.2 Special notice
1) Special notice to be given to the company shall be signed, either individually or collectively by
such number of members
→ holding not less than 1% of the total voting power or
→ holding shares on which an aggregate sum of not less than ₹5,00,000/- has been paid
up.
2) Special notice shall be sent by the members to the company
→ not earlier than 3 months but

→ at least 14 clear days before the date of meeting at which resolution is to be moved
3) The company shall immediately after receipt of notice, give its members notice of resolution
at least 7 days before the meeting.
4) Where company is unable to give such notice of special resolution, it shall publish the
notice in the newspaper (English & vernacular) at least 7 clear days before the meeting and
also be posted on the website, if any, of the company.
RESOLUTIONS PASSED AT ADJOURNED MEETING
Section 116 of the Companies Act, 2013 provides the provisions relating to resolutions passed at adjourned
meeting.
Where a resolution is passed at an adjourned meeting, the resolution shall be treated as passed on
the day it was actually passed and not on any earlier date.

RESOLUTIONS AND AGREEMENTS TO BE FILED
Section 117 of the Companies Act, 2013 provides the provisions relating to filing of resolutions and
agreements.
A copy of every resolution and an agreement in respect of matters specified therein together with an
explanatory statement shall be filed in Form MGT-14 with the ROC within 30 days of its passing and
the ROC shall register the same.
Any resolution/agreement that causes alteration of AOA shall be annexed to every copy of AOA.
26.1 Resolutions and agreements to be filed with the ROC
Any
Unanimous resolution of
Any other
resolutions, BOD or
resolution
but which, if agreement Resolution
Resolution as may be
Special was not so executed of any class Resolution
for winding prescribed
Resolution agreed, relating to of share- u/s 179(3)*
up and placed
would have appointment holders
in public
required SR /
domain
to be passed reappointme
nt of MD
*Provided no person shall be entitled under section 399 to inspect or obtain copies of such resolutions.
Provided further that nothing shall apply in respect of a resolution passed to grant loans, or give
guarantee or provide security in respect of loans under section 179(3)(f) in the ordinary course of its
business by ,—
(a) a banking company;
(b) any class of NBFC registered under Chapter IIIB of the Reserve Bank of India Act, 1934, as may be
prescribed in consultation with the RBI;
(c) any class of HFC registered under the National Housing Bank Act, 1987, as may be prescribed in
consultation with the NHB;
26.2 Penalty for failure to file the resolution and agreement
• Company • Penalty of ₹10,000

• Continuing failure = further penalty
of ₹100 for each day after the first

during which the failure continues,
subject to maximum of ₹2,00,000
• Officer of the • Penalty of ₹10,000

company in default • Continuing failure = further penalty
(including of ₹100 for each day after the first
liquidator of the during which the failure continues,
company) subject to maximum of ₹50,000
MINUTES
→ Every company shall prepare, sign, and keep minutes of every general meeting, Board meeting or
of every committee of the Board,
Section 118 of the Companies Act, 2013 provides the provisions relating to preparation and
maintenance of minutes of the meeting.
→ within 30 days of the conclusion of every such meeting, or passing of resolution by postal ballot
→ in books kept for that purpose with their pages consecutively numbered.
27.1 Content of the minutes
• Fair and correct summary of proceedings that took place at the concerned meeting.
• All appointments made at any of the meetings aforesaid.
• In case of Board meeting or meeting of committee of Board:
o The name of directors’ present
o For each resolution passed, names of directors dissenting from or not concurring
with the resolution.
• Following matters shall not be included: Any matter, which in the opinion of the
Chairman of the meeting –
o Is or could be defamatory to any person,
o Is irrelevant or immaterial to the proceedings,
o Is detrimental to the interests of the company.
• The matters to be included or excluded shall be at the absolute discretion of the
Chairman of the meeting.
27.2 Penalty for contravention
1) Default in complying with this section –

✓ Company shall be liable to a penalty of ₹ 25,000/-
✓ Every officer in default shall be liable to a penalty of ₹ 5,000/-.
2) Any person found guilty of tampering with minutes –

✓ Punishable with imprisonment for a term which may extend to 2 years and
✓ Fine which shall not be less than ₹ 25,000/- but which may extend to ₹ 1,00,000/-.

27.3 Procedure for maintenance of minutes [Rule 25]
Distinct Minute book for each type of meeting
Time limit for entry within 30 days of conclusion of the meeting

Resolution passed by a brief report of the postal ballot conducted including the resolution
postal ballot proposed shall be entered
•within 30 days from the date of passing of resolution
Initialling or signing on every page

•last page shall be dated and signed by:
•Board meeting/ Committee meeting - by the chairman of said meeting/ next succeeding meeting
•General meeting - chairman of said meeting within 30 days or in the event of death/ inability of said
chairman, by a duly authorised director
•Resolution passed by postal ballot - by the chairman of the BOD within 30 days or in the event of
death/ inability of said chairman, by a duly authorised director
Preservation of
minutes of GM shall be kept at the registered office of the company
•preserved permanently
•shall be kept in the custody of CS or any director duly authorised by the BOD
Preservation of
minutes of meetings shall be preserved permanently
of Board/ committee
•shall be kept in the custody of CS or any director duly authorised by the BOD
•shall be kept at the registered office or such other place as BOD may decide
This section shall not apply to Section 8 company except that minutes may be recorded within 30 days
in case of companies where AOA provide for confirmation of minutes by circulation.
INSPECTION OF MINUTE-BOOKS OF GENERAL MEETING
Section 119 of the Companies Act, 2013 provides the provisions relating to inspection of minutes book of
general meeting.
28.1 Time for inspection
The minute books of general meeting shall be open for inspection
→ During business hours

→ By any member, without charge
→ Subject to such reasonable restrictions as specified in the AOA or as imposed in the GM.
At least 2 hours in each business day shall be allowed for inspection.
A copy of the minutes referred shall be liable to be furnished to the member, within 7 days after
the request was made in that behalf to the company, and on payment of such fees as prescribed.

28.2 Consequence of contravention
✓ Contravention: refusing right of inspection to a member or non-furnishing of copy of

minutes within the time specified.
✓ Penalty to company – ₹ 25,000/-
✓ Penalty to every officer in default – ₹ 5,000/- for each such refusal or default.
✓ Also, Tribunal may, by an order direct an immediate inspection of the minute books or
direct that copy required shall forthwith be sent to the person requiring it.
MAINTENANCE AND INSPECTION OF DOCUMENTS IN ELECTRONIC FORM
Section 120 of the Companies Act, 2013 provides the provisions relating to maintenance and
inspection of documents, record, register or minute in electronic form.
Provisions prescribed in Rules 27, 28 and 29 of the Companies (Management and Administration)
Rules, 2014 are relevant in this respect. Rule 30 states the penalty in case of contravention
Companies which may maintain records in electronic form:
Rule 27 of the Companies (Management and Administration) Rules, 2014 states as under:
1. Every listed company or a company having at least 1000 shareholders, debenture-holders and
other security holders, may maintain its records, as required to be maintained under the Act
or rules made thereunder, in electronic form.
2. The records in electronic form shall be maintained in such manner as the Board of directors
may think fit:
Provided that -
(a) the records are maintained in the same formats and in accordance with all other
requirements as provided in the Act or the rules made thereunder;
(b) the information as required under the provisions of the Act or the rules made thereunder
should be adequately recorded for future reference;
(c) the records must be capable of being readable, retrievable and reproducible in printed form;
(d) the records are capable of being dated and signed digitally whereverit is required under
the provisions of the Act or the rules made thereunder;
(e) the records, once dated and signed digitally, shall not be capable of being edited or altered;
(f) the records shall be capable of being updated, according to the provisions of the Act or the
rules made thereunder, and the date of updating shall be capable of being recorded on every
updating.
Who is responsible for the maintenance and security of electronic records:

Rule 28 sets out that the Managing Director, Company Secretary or any other director or
officer of the company as the Board may decide shall be responsiblefor the maintenance
and security of electronic records.
The person who is responsible for the maintenance and security of electronic records
shall-
(a) provide adequate protection against unauthorized access, alteration or tampering of
records;
(b) ensure against loss of the records as a result of damage to, or failure of the media on which
the records are maintained;
(c) ensure that the signatory of electronic records does not repudiate the signed record as not
genuine;
(d) ensure that computer systems, software and hardware are adequately secured and
validated to ensure their accuracy, reliability and consistent intended performance;
(e) ensure that the computer systems can discern invalid and altered records;
(f) ensure that records are accurate, accessible, and capable of being reproduced for
reference later;
(g) ensure that the records are at all times capable of being retrieved to a readable and
printable form
(h) ensure that records are kept in a non-rewritable and non-erasable format like
pdf. version or some other version which cannot be altered or tampered;
(i) ensure that at least one backup, taken at a periodicity of not exceeding
oneday, are kept of the updated records kept in electronic form, every backup
is authenticated and dated and such backups shall be securely kept at such
places as may be decided by the Board;
(j) limit the access to the records to the managing director, company secretary
or any other director or officer or persons performing work of the company
as may be authorized by the Board in this behalf;
(k) ensure that any reproduction of non-electronic original records in electronic
form is complete, authentic, true and legible when retrieved;
(l) arrange and index the records in a way that permits easy location, access and
retrieval of any particular record; and
(m) take necessary steps to ensure security, integrity and confidentiality of records.
Inspection and copies of records maintained in electronic form:
Rule 29 states that the records maintained in electronic form shall be made available for
inspection by the company in electronic form. Copies of the records maintained in electronic
form, containing a clear reproduction of the whole or part thereof, shall be provided on
payment of not exceeding 10 per page.

MEETINGS
General
Meetings
Annual General Extra ordinary general

Meetings (AGM) meetings (EGM)
Section 100 read with

Section 96 - 99, 121 Rule 17 & Explanation
u/r 18(3).
30.1 Annual general meeting (AGM)
Section 96 of the Companies Act, 2013 provides the provisions relating to conducting Annual
general meeting of a company.
30.1.1 Holding of AGM

→ AGM should be held once every year.
→ First AGM should be held within 9 months of incorporation.
→ Subsequent AGM should be held within 6 months from the closing of the FY.
→ The gap between two AGMs should not exceed 15 months.
30.1.2 Extension of validity period of AGM

✓ If a company is unable to hold an AGM within the prescribed time, the ROC may, for special
reasons, extend the time within which AGM shall be held.
✓ Such extension cannot be for a period exceeding 3 months.
✓ However, ROC cannot grant extension for holding the first AGM.
30.1.3 Time and place for holding AGM

✓ Time – during business hours (i.e., between 9.00 a.m. and 6.00 p.m.)
✓ Day – any day that is not a national holiday.
✓ Place – registered office or any other place within the same city, town, or village.
✓ AGM of unlisted company may be held at any place if consent is given in writing or by
electronic mode by all the members in advance.
30.2 Power of Tribunal to call AGM
Section 97 of the Companies Act, 2013 deals with the power of Tribunal to call AGM in certain
circumstances.
→ If the company defaults in holding the AGM u/s 96,

→ the Tribunal may, on an application of any member of the company,

→ call, or direct the calling of an AGM and
→ give such ancillary or consequential directions (including the direction that one member
of the company present in person or proxy shall be deemed to constitute a quorum).
30.3 Power of Tribunal to call meetings of members, etc
Section 98 of the Companies Act, 2013 deals with the power of Tribunal to call the meeting of
members etc. in certain circumstances.
If it is impracticale to call an EGM, the Tribunal may,
→ Either suo moto, or

→ On an application of any director or member of the company entitled to vote at the
meeting,
order a meeting of the company to be called, held and conducted in the manner as Tribunal thinks fit,
and give ancilliary or consequential directions.
30.4 Punishment for default in complying with Section 96 to 98
Section 99 of the Companies Act, 2013 provides the punishment for contravention of the provisions of
sections 96 to 98, i.e., default in holding a meeting as AGM or on directions issued by the Tribunal.
Company and every officer in default shall be punishable with
• Fine which may extend to ₹ 1,00,000/-

• In case of continuing default, with further fine which may extend to ₹5,000/- for every day
during which the default continues.
30.5 Report on AGM
Section 121 of the Companies Act, 2013 r.w. Rule 31 of the Companies (Management &
Administration) Rules, 2014 provides the provisions relating to preparation of report on AGM
and penalty for contravention.
→ Every listed public company shall prepare a report on each AGM

→ including the confirmation to the effect that the meeting was convened held and conducted
as per the provisons of the Act and Rules.
→ A copy shall be filed with the ROC in Form MGT-15 within 30 days of conclusion of AGM along
with prescribed fee.
→ This report shall be in addition to the minutes of GM.
→ The report shall be signed and dated
o by the Chairman of the meeting or

o in case of his inability to sign, by any two directors one of whom shall be MD and the CS
of the company.
30.5.1 Content of the Report on AGM
Date, day, hour, venue of the AGM

Confirmation w.r.t. appointment of Chairman of the meeting
Number of members attending the meeting
Confirmation of quorum
Confirmation w.r.t. compliance with Act, Rules & standards
Business transacted at the meeting and report thereof
Particulars of adjournment, postponement & change of venue
Any other relevant points
30.5.2 Penalty for default
Company Officer in default
Penalty ₹ 1,00,000/- Not less than ₹25,000/-
Continuing failure - ₹ 500/- for each day after ₹ 500/- for each day after
further penalty the first during which failure the first during which
continues failure continues
Maximum ₹ 5,00,000/- ₹ 1,00,000/-
6 30.6 Extra-ordinary general meetings (EGM)
Section 100 of the Companies Act, 2013 r.w. Rule 17 of the Companies (Management & Administration)
Rules, 2014 provides the provisions relating to extra ordinary general meetings.
30.6.1 Who can call an EGM?

1) The Board – the BOD may, whenever it deems fit, call an EGM of the company.
2) The board on requisition of –

a. In case of company having share capital – such number of members who hold at
least 1/10th of the paid up capital having voting right.
b. In case of company not having share capital – such number of members who hold
at least 1/10th of total voting power of all members having voting right.

Within 21 days of receipt of a valid requisition, the BOD shall proceed to call a meeting on
a day not later than 45 days from the date of receipt of such requisition.
3) By requisitionists –
The BOD does not proceed
to call a meeting within 21 The requisitionists
days of receipt of a valid themselves may call and hold
requisition on a day not later the meeting within 3 months
than 45 days from the date from the date of requistion
of receipt of requisition
30.6.2 Place of holding EGM
a) Generally for all companies covered → any place within India

under the Act
b) Wholly owned subsidiary of a company → In/Outside India

incorporated outside India
APPLICABILTY OF THIS CHAPTER TO ONE PERSON COMPANY
Section 122 of the Companies Act, 2013 deals with the applicability of provisions of this chapter
(i.e., Chapter VII) to OPC.
Provisions of section 98 Not applicable to OPC

(i.e., power of Tribunal to
call EGM)
Provisions of section Not applicable to OPC

100 to 111 (i.e., relating
to EGM, meetings, and
voting)
Business required to In case of OPC, it shall be sufficient if the resolution is

be transacted at GM communicated by the member to the company and
entered in the minute book maintained u/s 118 and
signed and dated by such member. Such date shall be
deemed to be the date of meeting.
Business required to In case of an OPC where there is only one director on the
be transacted at Board Board, it shall be sufficient if the resolution by such
Meeting director is entered in the minute book maintained u/s
118 and signed and dated by such director. Such date
shall be deemed to be the date of board meeting.

Penalty
If any default is made in compliance with any of the provisions of this rule, the company and every
officer or such other person who is in default shall be punishable with fine which may extend to five
thousand rupees and where the contravention is a continuing one, with a further fine which may
extend to five hundred rupees for every day after the first during which such contravention continues.
[Rule 30]

OVERVIEW
Management & Administartion

[Chapter VII - Section 88-122]
Requisites of
Registers Annual Return Meetings convening a Resolutions
meeting
Register of Annual general Quorum for Ordinary and

Annual Return meetings Special
Members meeting
[Section 92] [Section 103] Resolutions
[Section 114]
Chairman of
Declaration in Power of meetings
Place of Resolution
respect of Tribunal to call
keeping and [Section 104] requiring
beneficial AGM
inspection of special notice
interest in any
registers, [Section 97]
share Proxies [Section 115]
returns, etc.
[Section 89] Power of [Section 105]
[Section 94]
Tribunal to call Resolutions
meetings of passed at
Register of SBO members, etc Restriction on adjourned
in a company Registers, etc. [Section 98] voting rights meeting
[Section 90] to be evidence [Section 106] [Section 116]
[Section 95]
Punishment Voting by
for default in Resolutions
Power to close showing of and
complying with hands [Section
register of agreements to
members or Section 96 to 107]
98 [Section 99] be filed
debenture
holders or [Section 117]
Voting through
other security electronic
holders Extra-ordinary Maintenance
means [Section
Meeting of Minutes,
[Section 91] 108]
[Section 100] inspection
Demand for [Section
Notice of poll [Section 118,119,120]
meeting 109]
[Section 101]
Postal ballot
Explanatory [Section 110]
statement to
be annexed to
Notice Circulation of
members'
[Section 102] resolution[Secti
on 111]
Report of AGM
[Section 121] Representation
s [Section 112,
113]

CORPORATE SOCIAL RESPONSIBILITY (CSR)
Sec 135 of Companies Act, 2013 lays down provisions requiring corporates to mandatorily spend a
prescribed % of their profits on certain specified areas of social upliftment in discharge of their social
responsibilities.
9.1 Constitution of CSR Committee [Section 135 (1) r.w. Companies (CSR) Rules, 2014]
Every company having –

1.Net worth as defined in
(1) Net worth of ₹ 500 crore or more, or Sec 2(57) will be taken.
(2) Turnover of ₹ 1000 crore or more, or 2. Net profit shall not
(3) A net profit of ₹ 5 crore or more include such sums as may be
during the immediately preceding F.Y. shall constitute a CSR prescribed*, and shall be
Committee. [Sec. 135 (1)] calculated as per Sec 198.
Every company including its holding or subsidiary, and a foreign

company# having its branch office or project office in India, which fulfils the above criteria shall comply
with the provisions of Section 135 of the Act.
#
Net worth, turnover or net profit of a foreign company shall be computed in accordance with balance
sheet and Profit and loss account prepared in accordance with the provisions Sec 381(1)(a) and Sec 198
of Act.
*Net profit means the net profit of company as per its financial statement prepared in accordance with the
applicable provisions of the Act, but shall not include the following, namely: -
(i) any profit arising from any overseas branch(es) of the company, whether operated as a
separate company or otherwise; and
(ii) any dividend received from other companies in India, which are covered under and complying
with the provisions of section 135.
Note: Schedule VII of the Act provides for the list of activities which may be included by Companies in their
CSR policies.
9.2 Amount of contribution toward CSR [Sec 135(5)]

Amount not
spent - To give
Minimum Excess amount
reasons in
contribution spent: Set off
Preference Board's Report
every year = for such
to local area and transfer
2% of average number of
and areas unspent amount
net profit of succeeding F.Ys
around where to Fund specified
immediately and in such
it operates in Schedule VII
preceding 3 manner, as may
(within period of
F.Ys1. be prescribed3
6 months of the
expiry of F.Y.)2
1. Where company has not completed period of 3 F.Y.s since its incorporation, net profits during
such immediately preceding financial years shall be considered
2. If unspent amount relates to any ongoing project refer Sec 135(6)
3. To immediate succeeding 3 financial years subject to conditions that –
(i) excess amount available for set off shall not include surplus arising out of CSR activities,
(j) Board shall pass a resolution to that effect.
Ongoing Project means a multi-year project undertaken by Company in fulfilment of its

CSR obligation having timelines not exceeding 3 years excluding financial year in which it
was commenced and shall include such project that was initially not approved as a multi-
year project but whose duration has been extended beyond one year by the board based
on reasonable justification.
9.3 Unspent amount related to ongoing project [Sec 136(6)]
✓ Shall be transferred within a period of thirty days from end of F.Y. to a special account
✓ This account is to be opened by company in that behalf for that F.Y. in any scheduled bank
to be called Unspent Corporate Social Responsibility Account
✓ Such amount shall be spent by company within a period of 3 F.Ys from date of such
transfer
✓ In case of failure to spend, company shall transfer same to a Fund specified in Schedule VII,
within period of 30 days from date of completion of 3rd F.Y.
9.4 Default in compliance of Sec 135(5) and 135(6)
Penalty
Company • Twice the amount required to be transferred to Fund
specified in Schedule VII or Unspent Corporate Social
Responsibility Account, or
• ₹1 crore

whichever is less
Every officer • One-tenth of the amount required to be transferred to
in default Fund specified in Schedule VII or Unspent Corporate Social
Responsibility Account, or
• ₹ 2 lakh
whichever is less
9.5 Other provisions of Section 135 & Rules
→ CG may give general / special directions to a company or class of companies to ensure

compliance of provisions of this section
→ Where amount to be spent on CSR by company does not exceed ₹50L, it is not required to
constitute CSR Committee
o Board of Directors of such company shall discharge functions of CSR Committee.
→ A company having any amount in its Unspent Corporate Social Responsibility Account as per
section 135(6) shall constitute a CSR Committee and comply with the provisions contained in
Sec 135(2) to Sec 135(6)
9.6 Composition of CSR Committee
CSR Committee
Company not
Private company
Consists of 3 or required to appoint
having only two Foreign company
more directors an independent
directors
director
At least one of CSR Committee

CSR committe shall CSR Committee
which shall be an shall constitute
consist of 2 or shall comprise of at
independent with two such
more directors least 2 persons
director directors
One shall be person

specified u/s 380
and another person
nominated by the
foreign company
9.7 Duties of CSR Committee
✓ Formulate and recommend to the BOD, a

CSR policy which shall indicate the activities to be undertaken by the company,
✓ Recommend the amount of expenditure to be incurred on the activities, and
✓ Monitor the CSR policy of the company from time to time.
9.8 Duties of the Board in relation to CSR

✓ BOD, after taking into account recommendations of CSR Committee, approve CSR Policy for the
company and disclose contents of such Policy in its report and company’s website, if any.
o Rule 8 – Board report shall include annual report on CSR containing particulars
specified in Annexure I or Annexure II
o Rule 9 – BOD shall mandatorily disclose composition of CSR Committee, CSR Policy
and Projects approved by it on company website, if any, for public access.
✓ BOD shall ensure that activities as are included in CSR Policy of the company are
undertaken by the company
9.9 Meaning CSR Policy and Annual Action Plan
Rule 2 defines CSR policy as a statement containing approach and direction given by Board, after
recommendations of its CSR Committee, and includes guiding principles for
- Selection, Implementation and Monitoring of activities as well as formulation of the annual

action plan.
Rule 5(2): CSR Committee shall formulate and recommend to the Board, an annual action plan in
pursuance of its CSR policy.
Contents of Annual Action Plan

(a) list of CSR projects that are approved to be undertaken in areas or subjects
specified in Schedule VII
(b) manner of execution
(c) modalities of utilisation of funds and implementation schedules
(d) monitoring and reporting mechanism
(e) details of need and impact assessment, if any.
9.10 Impact Assessment – Requirements [Rule 8]
For CSR projects having

Every company having outlays of ₹1 crore or
average CSR obligation Shall undertake impact more, and which have
of ₹10 crore or more in assessment, through an been completed not less
3 immediately preceding independent agency than 1 year before
financial years undertaking impact
study.
→ Impact assessment reports shall be placed before Board and shall be annexed to the annual
report on CSR.
→ Impact assessment expenditure may be booked towards CSR, but it shall not exceed 2% of
total CSR expenditure for that F.Y. or ₹50 lakh, whichever is higher.
9.11 Meaning of Corporate Social Responsibility (CSR)

Rule 2 of the Companies (CSR Policy) Rules, 2014 defines Corporate Social Responsibility (CSR) which
means the activities undertaken by Company in pursuance of its statutory obligation laid down
in section 135 of the Act in accordance with the provisions contained in these rules, but shall not
include the following –
Activities undertaken in normal course of business of the company#
Activity undertaken by company outside India

except for training of Indian sports personnel representing
any State / UT at national level or India at international level
Contribution of any amount directly or indirectly to any political party

under section 182
Activities benefitting employees of company

as defined in Sec 2(k) of the Code on Wages, 2019
Activities supported by companies on sponsorship basis

for deriving marketing benefits for its products or services;
Activities carried out for fulfilment of any other statutory obligations

under any law in force in India
# Company engaged in research and development (R&D) activity of new vaccine, drugs and medical
devices in their normal course of business may undertake R &D activity of new vaccine, drugs and
medical devices related to COVID-19 for financial years 2020-21, 2021-22, 2022-23 subject to -
(a) such activities shall be carried out in collaboration with any of the organisations mentioned
in item (ix) of Schedule VII to the Act;
(b) details of such activity shall be disclosed separately in the Annual report on CSR included in
the Board’s Report;

9.12 CSR Implementation (Rule 4)
Sec 8 company or a registered trust any entity established under Act of

or a registered society, established Parliament or State legislature; or
by Central or State Government; or
Sec 8 company, or a Sec 8 company, or a

registered public trust or a registered public trust or a
registered society, registered registered society, registered
under sec 12A and approved Company can under sec 12A and approved
under sec 80G or exempted do CSR under sec 80G or exempted
under sec 10(23C) of Income activities under sec 10(23C) of Income
Tax Act, established by either by Tax Act, 1961, and having
company, either singly or itself, or established track record of at
along with any other company through least 3 years in undertaking
similar activities.
→ Every entity, who intends to undertake any CSR activity, shall register itself with Central
Government by filing form CSR-1 with Registrar, with effect from 1st April 2021
o Form CSR-1 shall be signed and submitted electronically and shall be verified digitally by
a CA / CS / Cost Accountant in practice.
o Upon submission, a unique CSR Registration Number shall be generated by system
automatically.
→ Company may engage international organisations for designing, monitoring and

evaluation of CSR projects as per its CSR policy as well as for capacity building of their own
personnel for CSR.
→ Company may collaborate with other companies for undertaking CSR activities in such
manner that CSR committees of respective companies can report separately on such projects
in accordance with these rules.
9.13 CSR Expenditure [Rule 7]
Administrative • Shall not exceed 5% of total CSR expenditure for F.Y.

overheads
Surplus arising • Shall not form part of business profit of
out of CSR • Shall be
activities - Ploughed back into same project or
- Transferred to Unspent CSR Account
- Transferred to Fund specified in Schedule VII
within 6 months of expiry of F.Y.
Capital Asset for • CSR amount may be spent for creation/ acquisition of a
CSR capital asset
• Capital asset to be held by –
(a) Sec 8 company or a Registered Public Trust or
Registered Society; or

(b) beneficiaries, in the form of self-help groups,
collectives, entities; or
(c) public authority
9.14 Activities specified under Schedule VII
Eradicating hunger, poverty and malnutrition, promoting health care and sanitation including
contribution to Swach Bharat Kosh
Promoting education, including special education and emplyoment enhancing vocation skills and
livelihood enhancement projects
Promoting gender equality, empowering women, setting up homes and hostels for women and
orphans, setting up old age homes, day care centres and other facilities for senior citizens and
measures for reducing inequalities faced by backward groups
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 including contribution to Clean Ganga Fund
Protection of national heritage, art & culture including restoration of buildings & sites of historical
importance and works of art; setting up public libraries; promotion and development of traditional
arts and handicrafts
Measures for the benefit of armed forces veterans, war widows and their dependents, Central
Armed Police Forces and Central Para Military Forces veterans, and their dependents
Training to promote rural sports, nationally recognised sports, paralympic sports and Olympic sports
Contribution to Prime Minister's National Relief fund, PM CARES Fund, any other fund set up by the
CG for socio economic development and relief and welfare of SC/ST/OBC, minorities and women.
Contributions to incubators or research development projects funded by CG, SG, or any agency or
PSU of CG/SG and contributions to public funded Universities, IITs, National Laboratories &
autonomus bodies under DAE; DBT; DST; DoP; AYUSH; MeitY and other research bodies
Rural development projects
Slum area development
Disiater management including relief, rehabilitation, and reconstruction activities

14.
MCA has made a clarification via circulars that following shall be eligible CSR activity -
1. Spending of CSR funds for carrying out awareness campaigns/ programmes

or public outreach campaigns on COVID-19 Vaccination programme
relating to promotion of health care, including preventive health care and
sanitization, promoting education, and, disaster management.
2. Setting up makeshift hospitals and temporary COVID Care facilities
relating to promotion of health care, including preventive health care, and,
disaster management.
3. Spending of CSR funds for ‘creating health infrastructure for COVID care’,
‘establishment of medical oxygen generation and storage plants’,
‘manufacturing and supply of Oxygen concentrators, ventilators,
cylinders and other medical equipment for countering COVID-19’ or
similar such activities are eligible CSR activities relating to promotion of health
care, including preventive health care, and, disaster management.
4. Reference is also drawn to item no. (ix) of Schedule VII which permits
contribution to specified research and development projects as well as
contribution to public funded universities and certain Organisations
engaged in conducting research in science, technology, engineering, and
medicine as eligible CSR activities
5. Companies including Government companies may undertake activities or
projects or programmes using CSR funds, directly by themselves or in
collaboration as shared responsibility with other companies, subject to
fulfillment of Companies (CSR Policy) Rules, 2014 and the guidelines issued by
Ministry from time to time
6. Spending of CSR funds of COVID- 19 vaccination for persons other than the
employees and their families, is an eligible CSR activity relating to promotion
of health care including preventive health care and disaster management.
7. Spending of CSR funds for activities related to Har Ghar Tiranga campaign,
such as mass scale production and supply of the National Flag, outreach and
amplification efforts and other related activities, are eligible CSR activities
pertaining to promotion of education relating to culture.

AUDIT AND AUDITORS
Learning Outcomes – F
• Understand the procedure for appointment of auditors, their removal, resignation, eligibility,
qualifications, disqualifications, and remuneration.
• Know the powers and duties of auditors.
• Know about auditing services and certain services which an auditor cannot render.
INTRODUCTION
Large business corporations are managed by the directors who represent the members who are the
real owners of the company through BOD. In the absence of any check the directors may mismanage
the finances of the organisation. Thus members appoint auditors to look into the true and fair view of
the financial affairs of the company.
The provisions relating to audit and auditors of companies have been dealt with under Chapter X of the
Companies Act, 2013 [Section 139 to 148] and the Companies (Audit and Auditors) Rules, 2014.
APPOINTMENT OF AUDITOR
Section 139 of the Companies Act, 2013 provides provisions for appointment of auditors.
2.1 Appointment of auditor [Sec. 139 (1)]
→ Every company shall appoint an individual or firm as an auditor of the company at the
first AGM.
→ Tenure: The auditor shall hold office from the conclusion of 1st AGM till the conclusion of its
6th AGM and thereafter till the conclusion of every 6th AGM.

2.1.1 Manner and procedure for selection and appointment of auditors
Competent authority to recommend appointment of

auditor
Company required Company not

to constitute an required to
Audit Committee u/s constitute an Audit
177 Committee u/s 177
Audit Committee Board of Directors
The committee shall

recommend the name BOD shall consider
of an individual or firm and recommend an
as auditor to the BOD individual or firm as
for consideration auditor to the
members in the AGM
for appointment.
BOD agrees with the
Y recommedation
N
BOD shall refer back the

BOD shall further
recommednation to the
recommend such
committee for
appointment to the
reconsideration citing
members in the
reasons for such
AGM
recommendation
If the committee does not reconsider If the BOD agrees with

its original recommendation, the the recommednation of
BOD shall record reasons for its the committe , it shall
disagreemnt and send its own place the matter for
recommendation for consideration consideration by
to the members in the AGM members in the AGM
2.1.2 Conditions for appointment and notice to the ROC [Rule 4]

Before the appointment of the auditor, the following shall be obtained:
✓ written consent of the auditor, and

✓ a certificate stating that –
a) the individual or the firm is eligible for appointment and is not disqualified for
appointment,
b) The proposed appointment is as per the term provided under the Act,
c) The proposed appointment is within the limits laid down by or under the
authority of the Act,

d) The list of proceedings against the auditor or audit firm or any partner of the
audit firm pending with respect to professional matters of conduct, as disclosed
in the certificate, is true and correct.
The certificate shall also indicate whether the auditor satisfies the criteria provided in
Section 141 of the Act.
The company shall inform the concerned auditor of his or its appointment and also file a notice (in
the form ADT-1) of such appointment with the ROC within 15 days of the meeting in which the auditor
is appointed.
2.2 Term of Auditor [Sec. 139 (2)]
As on the date of appointment no audit firm having a common partner or partners to the other audit
firm, whose tenure has expired in a company immediately preceding the F.Y., shall be appointed as
auditor of the same company for a period of 5 years.
Note: According to Rule 3 (3) of the NFRA Rules, every body corporate, other than a company as defined in
section 2(20) of the Act, formed in India, and governed under the NFRA Rules shall, within 15 days of
appointment of an auditor u/s 139 (1), inform the NFRA in Form NFRA-1, the particulars of the auditor
appointed by such body corporate.
Following companies shall not appoint or re-appoint

an individual as auditor for more than one term of 5 an audit firm as auditor for more than two terms of 5
consecutive years, and consecutive years.
Section 139 (2) and Rule 5 - Classes of companies (except OPC and small
companies)
all unlisted public
all private companies all companies having paid up share capital of
companies having
Listed having paid up share below above threshold limit, but having public
paid-up share capital
companies capital of Rs. 50 crores borrowings from financial institutions, banks
of Rs. 10 crores or
or more or public deposits of Rs. 50 crores or more.
more
Cooling period
An individual auditor who has completed his term shall An audit firm which has completed his term shall not be
not be eligible for re-appointment as auditor in the same eligible for re-appointment as auditor in the same
company for 5 years from the completion of his term company for 5 years from the completion of such term
2.3 Rotation of auditor [Sec. 139 (3) and (4)]

1) Members of a company may resolve to provide that –
a. In the audit firm appointed by them, the auditing partner and his team shall be
rotated at such intervals as may be resolved by members, or
b. The audit shall be conducted by more than one auditor.
2) For the purpose of rotation,

a. The period for which an individual or firm held the office as auditor before the
commencement of the Act shall be considered for calculating the period of 5/10
consecutive years as the case may be.
b. The incoming auditor or audit firm shall not be eligible if such auditor or audit firm is
associated with the outgoing auditor or audit firm under the same network of audit
firms.
c. A cool off period of 5 consecutive years shall be considered as fulfilling the
requirement of rotation.
d. If a partner, who is in charge of an audit firm and also certifies the FS of the company,
retires from the said firm, and joins another firm of chartered accountants, such
other firm shall also be ineligible to be appointed for 5 years.
3) Company which has appointed joint auditors – the company may follow the rotation of
auditors in such a manner that both or all of the joint auditors do not complete their term
in the same year.
2.4 First auditors [Sec. 139 (6), (7)]
Appointment of first
auditors
Tenure of first auditors =

until the conclusion of
first AGM
Government company & Companies

Company other than a
owned or controlled by CG/SG/CG
government company
and SG/ one or more SG
By the Comptroller and Auditor

By the BOD within 30 days of
General of India (CAG) within 60 days
registration
of registration
If the BOD fails - company may CAG fails - BOD shall appoint within
appoint within 90 days at an EGM next 30 days
If the BOD fails - company may

appoint within 60 days at an EGM.

Government company [Sec. 2 (45)] – a company in which not less than 51% of the paid up share capital is held
by the CG/any SG/partly by the CG and partly by one or more SG and includes a company which is a subsidiary
company of such a government company.
The first auditor shall hold office until the conclusion of the first AGM.
2.5 Subsequent auditors [Sec. 139 (1), (5)]
Appointment of subsequent
auditors
Government Company & Companies

Company other than
owned or controlled by CG/SG/CG and
government company
SG/ one or more SG
By the By the CAG within 180

company at days from the
the first AGM commencement of the F.Y.
Tenure = from the

conclusion of 1st AGM If the CAG fails = by the
till the conclusion of BOD within next 30 days
its 6th AGM and
thereafter till the
conclusion of every Tenure = till the conclusion
6th AGM. of the AGM
2.6 Filling up casual vacancy [Sec. 139 (8)]

By the BOD within 30
days
If the casual vacancy is

Company other than caused by resignation -
government appointemnt by the
Tenure of auditor company
appointed in a BOD shall be approved
casual vacancy = by the company at GM
until the conclusion convened within 3
of the next AGM months of
Filling of casual recommendation of
vacancy BOD
By the CAG within 30

days
Company where
auditor is appointed
by CAG If the CAG fails = by the
BOD within next 30
days

2.7 Re-appointment of retiring auditor [Sec. 139 (9), (10), (11)]
A retiring auditor shall be re-appointed at an AGM if-
a) He is not disqualified for re-appointment,

b) He has not given a notice in writing to the company of his unwillingness to be re-
appointed, and
c) A SR has not been passed at that meeting appointing some other auditor or providing
expressly that he shall not be re-appointed.
Where at any AGM, no auditor is appointed or re-appointed, the existing director shall
continue to be the auditor of the company.
NATIONAL FINANCIAL REPORTING AUTHORITY RULES, 2018
NFRA Rule 8 and Rule 9 are relevant for understanding of the students and included in CA Intermediate
Syllabus.
7 3.1 Monitoring and enforcing compliance with auditing standards (Rule 8)

- May review working papers and communications related to audit
- May evaluate sufficiency of quality control system of auditor &
manner of documentation of system by it
- May perform other testing as necessary
May require an auditor to report on its governance practices and

internal processes
May seek additional information or explanation in connection with

the conduct of an audit
Shall perform its monitoring and enforcement activities through its

officers or experts with experience
NFRA
Shall publish its findings relating to non-compliances on its website

unless it has reasons not to do so in the public interest and it
records the reasons in writing
Shall not publish proprietary or confidential information, unless it

has reasons to do so in the public interest and it records the
reasons in writing
May send a separate report containing proprietary or confidential

info to the CG for its information
Where any law or professional or other standard is violated by an

auditor, may decide on the further course of investigation or
enforcement action through its concerned Division

8 3.2 Overseeing the quality of service and suggesting measures for improvement (Rule 9)
On the basis of review, NFRA may direct an auditor to

take measures for improvement of audit quality and
specify a detailed plan with time-limits
Duty of auditor to make required improvements and

send a report to the NFRA explaining how it has
complied with the directions
NFRA shall monitor improvements made by auditor

and take such action as it deems fit
NFRA may refer cases with regard to overseeing the

quality of service of auditors to Quality Review Board
or call from any report from such Board
NFRA may take the assistance of experts for its

oversight and monitoring activities
FILLING OF RETURN WITH NFRA
Rule 5 requires every auditor of classes of companies and bodies corporate governed by the NFRA,
shall file a return with the Authority i.e. NFRA on or before 30th November every year in Form NFRA-2.
REMOVAL, RESIGNATION OF AUDITOR AND GIVING OF SPECIAL NOTICE
9 4.1 Removal of auditor before the expiry of his term [Section 140 (1)]
✓ The auditor may be removed from his office before the expiry of his term only by –
Section 140 of the Companies Act, 2013 provides for removal, resignation of auditor and giving of
special notice.
a) A special resolution of the company and

b) After obtaining the previous approval of the CG by making an application in Form ADT-
2 within 30 days of the resolution passed by the BOD.
✓ Within 60 days of receipt of appoval of the CG, the company shall hold the GM for passing
the SR.
✓ Before taking any action for the removal of auditor before the expiry of his term, the auditor
concerned shall be given an opportunity of being heard.

Note:
In case of a Specified IFSC public company5 and Specified IFSC private company , where,
within a period of sixty days from the date of submission of the application to the Central
Government under this sub-section, no decision is communicated by the Central Government
to the company, it would be deemed that the Central Government has approved the
application and the company shall appoint new auditor at a general meeting convened within
three months from the date of expiry of sixty days period
Steps for removal of auditor
A board meeting will be

Application to be
A special notice is held to decide about the
made to CG in form
received for removal removal and for authorising
ADT-2 within 30 days
of auditor the filing of application to
of Board meeting.
CG
Auditor shall be given

Approval of CG is Special notice is sent a reasonable
received for AGM opportunity of being
heard
Auditor removal can

Auditor will be
be done only through
removed
SR
10 4.2 Resignation by auditor [Section 140 (2) & (3)]
If the auditor has resigned from the company, he shall file a statement in Form ADT-3 with the
company and the ROC (also with CAG in case of government companies or companies controlled
by CG/SG), indicating the reasons and other facts about his resignation, within 30 days of
resignation.
If the auditor does not comply with these provisions, he shall be punishable with penalty of
→ ₹ 50,000/-, or
→ An amount equal to the remuneration of the auditor,
whichever is less.
→ In case of continuing failure, the auditor shall be punishable with a further penalty of ₹
500/- for each day during which the failure continues, subject to a maximum of ₹2,00,000.
4.3 Appointing auditor other than retiring auditor [Section 140 (4)]

If a retiring auditor has not completed a consective
tenure of 5 years of 10 years, as the case may be, a
special notice is required for passing a resolution in the
AGM appointing another person as auditor, or
providing expressly that a retiring auditor shall not be
re-appointed.
On receipt of such notice company shall forthwith send a

copy to the retiring auditor.
The retiring auditor may, upon receipt of such notice,

make a representation in writing to the company and
request its notification to the members of the company
The company shall, unless the reprentation is received by

it too late to do so , state the fact in any notice given to
the members, that representation has been made and
also send a copy of such representation to every member
to whom notice of meeting is sent. If the representation
is not sent because it was received too late, the auditor
may require that the represenation shall be read at the
meeting. Also if copy is not sent, a copy of represntation
shall be filed with the ROC.
The copy of representation may not be sent and the

represetation need not be read out at the meeting, if the
Tribunal is satisfied on an application either by the
company or any aggrieved person taht the rights
conferred by this subsection are being abused by the
auditor.
4.4 Auditor acts in a fraudulent manner or abetted or colluded in any fraud [Section
140 (5)]
The Tribunal either –
• Suo moto or
• On an application made to it by –
o The CG or
o Any other person,
if it is satisfied that the auditor has, directly or indirectly, acted in a fraudulent manner, or abetted or
colluded in any fraud by/ in relation to, the company or its directors or employees, it may by an order
direct the company to change its auditors.

In case of an application made by the CG, the order shall be made within 15 days of receipt of such
application, that the auditors shall not function as auditor and the CG may appoint any other person in
his place.
Such an auditor, whether individual or firm, against whom an order has been passed
→ shall not be eligible to be appointed as auditor of any company for 5 years from the date
of passing the order, and
→ shall also be liable for action u/s 447.
ELIGIBILITY, QUALIFICATIONS AND DISQUALIFICATIONS OF AUDITORS
5.1 Qualifications of an Auditor [Section 141 (1) & (2)]
Section 141 of the Companies Act, 2013 provides eligibility, qualifications, and disqualifications of
auditors.
Qualifications
of an auditor
A person shall be A firm (including LLP) where majority Only partners who are
eligible to be of partners practicig in India are Chartered Accountants
appointed only if qualified for being appointed may be shall be authorized to sign
he is a CA appointed by its firm name on behalf of the firm
5.2 Disqualifications of an Auditor [Section 141 (3)]
The following persons shall not be qualified for appointment as auditor of a company-
a) A body corporate other than LLP registered under the LLP Act, 2008,
b) An officer or employee of the company,
c) A person who is partner, or who is in employment, of an officer or employee of the company,

d) A person who, or his relative or partner –
i. Is holding any security of or interest in the company or its
subsidiary, or its holding or associate company or subsidiary of Relative may hold security or
such holding company, or interest in the company of face
ii. Is indebted to the company, or its holding or associate company value not exceeding ₹1,00,000. If
or subsidiary of such holding company, in excess of ₹5,00,000, relative acquires such security or
interest above the limit prescribed,
or
the auditor shall take corrective
iii. Has given guarantee or given any security in connection with actions to maintain the limits within
the indebtedness of any third person to the company, or its 60 days.
holding or associate company or subsidiary of such holding
company, in excess of ₹ 1,00,000.
e) A person or a firm who, directly or indirectly, has

business relationship with the company, or its holding or Business relationship = any
transaction entered into for a
associate company or subsidiary of such holding company or
commercial purpose except
associate company.
transactions which are:
f) A person whose relative is a director or is in employment of a) In nature of professional
the company as a director or KMP, services permitted to be
rendered by an auditor or
g) A person who is in full time employment elsewhere or a audit firm.
person or partner of a firm holding appointment as its auditor, if b) In the ordinary course of
such persons or partner is at the date of such appointment or business of the company at
arm’s length price.
reappointment holding appointment as auditor of more than
20 companies other than:
• OPC,
• Small companies and
• Private companies having paid up share capital less than ₹100
crores.
Before appointment of the
h) A person who has been convicted by a court of an offence auditor, company shall obtain a
involving fraud and a period of 10 years has not elapsed from certificate from him stating that
the date of such conviction, the appointment will not result in
an excess holding by the auditor
i) A person who directly or indirectly, renders any service referred concerned over the limit laid down
to in section 144 to the company or its holding or its subsidiary u/s 141(3)(g).
company.
5.3 Relative [Section 2 (77)]

Relative
Section 2 (77) and Rule 4 of

Companies (Specification of Any one who is related to another, if
Defenitions details)Rules, 2014
they are
one person is related
members of a they are
to the other in such
Hindu husband and
manner as may be
Undivided wife
prescribed
Family (HUF)
Father Mother Brother

Son Sister
including including Daughter's including
including Son's wife Daughter including
step step husband step
step son step sister
father mother brother
5.4 Vacation of office by an Auditor [Section 141 (4)]
If a person appointed as auditor of a company incurs any of the disqualifications specified in

section 141 (3), he shall be deemed to have vacated his office. Such vacation shall be deemed
to be a casual vacancy in the office of the auditor.
REMUNERATION OF AUDITORS
Section 142 of the Companies Act, 2013 provides for remuneration of auditors.
Fixed by the Remuneration Remuneration

company in the In case of first shall include shall not include
GM or in the auditor, expenses, if any, any payment for
manner remuneration incured by the any service
determined by may be fixed by auditorin rendered by him
the company in the BOD connection with at the request of
the GM the audit the company
POWERS AND DUTIES OF AUDITORS AND AUDITING STANDARDS

7.1 Powers of Auditors [Section 143 (1)]
Section 143 of the Companies Act, 2013 provides the powers and duties of the auditors and
compliance with the auditing standards.
7.2.1 Duties of Auditors
• at all times
Access to books of
• whether kept at the registered office or at any other
accounts and vouchers place.
Entitled to have • entitled to require from the officers of the company

necessary information such information and explanations as the auditor
and explanation may considr necessary.
Access to record of all • in so far as it relates to the consolidation of its FS

with that of its subsidiaries and associate
its subsidiaries companies.
7.2.2 To inquire into the following matters –
Matters of inquiry
Loans and Assets of the Loans and Shares

Transactions Personal
advances company as advances allotted for
of the expenses
made by the consists of shares, made by cash
company on company
represented debentures and the
the basis of other securities company
security merely by
book entries whether cash
whether has actually
where the they have been received
whether been
company being whether in respect of
properly charged
other than they have such allotment
secured and whether to
investment been and if not,
whether the they are revenue
company, shown as whether
terms are prejudicial account
whether they deposits position as
prejudicial to the have been sold a stated in the
to the interests a price less than account books
interests of of the that at which and BS is
the company they were correct regular
company or
purchased and not
its members
misleading

7.2.3 To make report to the members –
✓ The auditor shall make a report to the members of the company on the following:
o On accounts examined by him, and
o On every FS which are required by or under this Act to be laid before the company
in the GM.
✓ While preparing the report the auditor shall consider the provisions of the Act, the
accounting and auditing standards and matters which are required to be included in the
audit report.
✓ The auditor shall express an opinion, according to him and to the best of his knowledge,
whether the accounts/ FS give a true and fair view of the state of affairs as at the end of
the F.Y. and profit or loss and cash flow for the year and such matters as may be prescribed.
7.2.4 To report on the following matters –

•Whether he has sought and obtained all the information and explanation
1) Information and which to the best of his knowledge and belief were necessary for the
explanations audit and if not, the details thereof and the effect of such information on
the FS.
•Whether kept by the company, as appears from his examination.
2) Proper books of
account •whether proper returns adequate for audit have been received from the
branches not visted by him.
3) Report on the
accounts of the branch •whether it has been sent to him and
office audited by other •the manner in which he has dealt with it in preparing his report.
person
4) Company's BS and
•whether in agreement with the books of account and returns
P&L account
5) Accounting standards •whether FS comply with it.
6) Financial transactions
•the auditor's observations and comments on such matters which have an
or matters which have
adverse effect on the functioning of the company.
any adverse effect
•whether any director is disqualified from being appointed as director u/s
7) Director
164 (2).
8) Maintenance of
accounts and other •any qualification, reservation or adverse remark realting to them
matters
9) Internal Financial •whether company has adequate IFC with reference to FS in place and
controls (IFC) # operating effectiveness of such controls.
•whether company has disclosed the impact of pending litigations in its FS
10) Other matters as •whether adequate provisions has been made for material forseeable
prescribed* losses
•whether there has been any delay in transferring amounts to IEPF
Where any matter is answered in the negative or with a qualification, the auditor’s report shall state the reason
for the same.

# Does not apply to Private company which is OPC or Small company or has turnover < ₹50cr per latest audited
F.S. and aggregate borrowings at any point < ₹25cr AND has not committed default in filing F.S. u/s 137 or
Annual return u/s 92.
Amendment in ‘Other matters as prescribed’ – Following clauses were inserted by Companies (Audit
and Auditors) Amendment Rules. 2021:
→ Whether management has represented that, to best of its knowledge and belief, other than as
disclosed in notes to accounts,
i. no funds have been advanced/loaned/invested by company to or in any other person(s) or
entity(ies), including foreign entities (“Intermediaries”), with understanding, whether
recorded in writing or otherwise, that Intermediary shall, whether, directly or indirectly
lend/invest in other persons or entities identified in any manner by or on behalf of company
(“Ultimate Beneficiaries”) or provide any guarantee, security or like on behalf of Ultimate
Beneficiaries;
ii. no funds have been received by company from any person(s) or entity(ies), including foreign
entities (“Funding Parties”), with understanding, whether recorded in writing or otherwise,
that company shall, whether, directly or indirectly, lend/invest in other persons or entities
identified in any manner by or on behalf of Funding Party (“Ultimate Beneficiaries”) or provide
any guarantee, security or like on behalf of the Ultimate Beneficiaries; and
→ Based on such audit procedures that auditor has considered reasonable and appropriate in
circumstances, nothing has come to their notice that has caused them to believe that above
representations contain any material mis-statement.
→ Whether dividend declared or paid during the year by company is in compliance with section 123
of the Companies Act, 2013.
→ Whether company, in respect of financial years commencing on or after 1st April, 2022, 2023 has
used such accounting software for maintaining its books of account which has a feature of
recording audit trail (edit log) facility and same has been operated throughout the year for all
transactions recorded in software and audit trail feature has not been tampered with and audit
trail has been preserved by company as per the statutory requirements for record retention.
7.2.5 To comply with the auditing standards –
Every auditor shall comply with the auditing standards as prescribed by the CG upon
recommendation of the ICAI in consultation with and after examination of the recommendations
made by the NFRA. Until they are notified, standards of auditing specified by ICAI are deemed to
be the auditing standards.
7.2.6 To report the frauds [Sec. 143 (12)] –

If an auditor of a company, in the course of performance of his duties has reasons to believe that
an offence involving fraud is being or has been committed against the company by officers or
employees of the company, he shall immediately report the matter to the CG in such manner and
within such time as may be prescribed.

Reporting of frauds by
auditors [Sec. 143 (12) &
Rule 13]
Amount involved is Amount

Rs. 1 crore or above involved is
less than
Rs. 1 crore
Report the matter to the BOD or Audit Committe,
as the case may be, within 2 days of knowledge
of such fraud, seeking their reply within 45 days Auditor shall report
the matter
immediately to the
if no reply or observation BOD or Audit
on receipt of such reply or committee, as the
observations, the auditor is received within 45
days, auditor shall case may be,
shall forward his report and immediately but not
the reply or observations of forward his report to the
CG along with a note later than 2 days of
the BOD or Audit committee his knowledge of
to the CG within 15 days of containing details of his
report that was earlier fraud
receipt of such
reply/observations forwarded to the BOD or
Audit committee.
The report shall
specify:
The report shall be in Form ADT-4 and shall be sent to 1) nature of
the Secretary, MCA in a sealed cover by registered post fraud with
with Acknowlegement due or by speed post followed by description,
an email in confirmation of the same 2) Approximate
amount involved
The report shall be on the letter head of the auditor 3) Parties
containing postal address, email address, phone involved
number,and be signed by the auditor with his seal and
indicating his Membership No.
The Board’s report shall disclose:
• Nature of the fraud with description,

• Approximate amount involved,
• Parties involved, if remedial action not taken, and
• Remedial actions taken.
Penalty for non-compliance with Section 143 (12):
→ Auditor, cost accountant, or CS in practice shall be liable to penalty of ₹5,00,000 in case of

listed company and ₹1,00,000 in case of another company.

7.2 Audit of government companies
In case of a government company & Companies owned or controlled by

CG/SG/CG and SG/ one or more SG
shall direct such auditor the manner Thereupon, the auditor so
CAG shall appoint the auditor
in which the accounts of the appointed shall submit a copy
u/s 139 (5) and (7) and
company are required to be audited. of the audit report to the CAG
The audit report shall include, among other things -

The directions, if any, issued by Its impact on the accounts and
The action taken thereon
the CAG FS of the company
7.2.1 Supplementary audit-

The CAG shall within 60 days from the date of receipt of the audit report have a right to-
→ Conduct a supplementary audit of the FS by such person or persons as he may

authorize in this behalf, and
o for the purpose of such audit, require information or additional information to be
furnished to any person or persons, so authorized, on such matters, by such
persons, and in such form, as CAG may direct, and
→ Comment upon or supplement such audit report.
Every comment given by the CAG upon, or supplement to, the audit report shall be sent by the
company to every person entitled to copies of audited FS and also be placed before the AGM of
the company along with the audit report.
7.2.2 Test audit –

For government company and company controlled by SG/CG, the CAG may, if he considers
necessary, by an order, cause test audit to be conducted of the accounts of such company.

7.3 Audit of accounts of branch office of company [Sec. 143 (8)]
Who shall audit the accounts

of branch office
Branch office outside

Branch office in India
India
By the company's By the company's auditor

auditor OR OR
By any other person

qualified for By an accountant OR
appointment as an
auditor u/s 139
By any other person qualified to act as
auditor of the accounts of the branch in
accordance with the laws of that country
→ The branch auditor shall prepare a report on the accounts of the branch examined by him and
sent it to the auditor of the company who shall deal with it in his report in such manner as he
considers necessary.
→ Provisions regarding reporting of fraud by the auditor shall also extend to the branch auditor
to the extent that it relates to the concerned branch.
Note: The provisions of this section shall apply mutatis mutandis to a Cost Auditor and a Secretarial
Auditor during the performance of his duties u/s 148 and 204 respectively.
Section 144 of the Companies Act, 2013 provides for auditor not to render certain services.
AUDITOR NOT TO RENDER CERTAIN SERVICES

Accounting
and book
Any other kind keeping
of services as
sevices Internal audit
may be
prescribed
Design and
implementation
Management of any financial
services Prohibited information
systems
services
Rendering of
outsourced Actuarial
financial services
services
Investment Investment
banking advisory
services services
The auditor shall not, directly or indirectly, render these services to the company or its subsidiary or
holding company.
Meaning of the term ‘directly or indirectly’
In case of an auditor being individual In case auditor being Firm
Self Firm
Partners of the firm

Relatives
Other person connected or Parent of firm

associated with such individual
Subsidiary of firm
Entity in which such individual has
significant influence or control
Associate entity of firm
Entity whose name or trademark
or brand is used by such individual
Entity in which such firm has significant
influence
Entity in which any partner of the firm has

significant influence or control
Entity whose name or trademark or brand

is used by the firm or any of its partners

AUDITORS TO SIGN AUDIT REPORTS, ETC.
Section 145 of the Companies Act, 2013 provides for auditors to sign audit reports, etc.
✓ The person appointed as an auditor of the company shall sign the auditor’s report or sign or
certify any other document of the company.
✓ The qualifications, observations or comments on financial transactions or matters, which
have any adverse effect on the functioning of the company mentioned in the auditor’s report
shall be read before the company in GM and shall be open for inspection by any member.
AUDITORS TO ATTEND GENERAL MEETING
Section 146 of the Companies Act, 2013 provides for auditors to attend general meeting.
All notices of and other communications relating to, any GM shall be forwarded
to the auditor of the company.
The auditor shall unless otherwise exempted by the company, attend any
GM either by himself or through his authorized representatives, who shall
also be qualified to be an auditor.
The auditor shall have a right to be heard on any matter which concerns him as
the auditor.
PUNISHMENT FOR CONTRAVENTION
Section 147 of the Companies Act, 2013 provides for punishment for contravention.
Sl. Person Nature of Punishment

No. liable contravention

1. Company Contravention of Minimum fine = ₹25,000/-
[Sec. 147(1)] any provisions of Maximum fine = ₹5,00,000/-
sections 139 to
146
2. Officer of Contravention of • Fine not less than ₹10,000/- but
the any provisions of which may extend to ₹1,00,000/-
company in sections 139 to
default 146
[Sec. 147(1)]
3. Auditor Contravention of Minimum fine = ₹25,000/-.
[Sec. 147(2) provisions of Maximum fine = ₹5,00,000/- or 4 times
& (3)] section 139, 144 the remuneration of the auditor,
or 145 whichever is less.
Contravention of • Imprisonment which may extend

any provisions to 1 year AND
knowingly or • Fine not less than ₹50,000 but
wilfully with the which may extend to ₹25,00,000 or 8
intention to times the remuneration of the auditor,
deceive the whichever is less.
company or its • Also the auditor shall –
shareholders or i.Refund the remuneration received by
its creditors or tax him to the company, and
authorities ii.Pay for damages to the company,
statutory bodies, or authorities or to
members or creditors for the loss
arising out incorrect or misleading
statements of particulars made in his
audit report.
4. Audit firm The partner or The liability for such act shall be of the
[Sec. 147(5)] partners of the partner or partners concerned of the
audit firm has or audit firm and of the firm jointly and
have acted in a severally and shall also be liable u/s
fraudulent 447.
manner or
abetted or In case of criminal liability of an audit
colluded in any firm, liability other than fine shall be the
fraud by, or in liability of the concerned partner(s) who
relation to or by, acted fraudulently or abetted or
the company or colluded in any fraud.
its directors or
officers.

CG TO SPECIFY AUDIT OF ITEMS OF COST IN RESPECT OF CERTAIN COMPANIES
Section 148 of the Companies Act, 2013 provides the provisions for CG to specify the audit of items of
cost in respect of certain companies.
• The CG may, by order, in repsect of such class or classess of companies engaged in the
production of such goods or providing such services as may be prescribed, direct that
particulars relating to the utilisation of material or labour or to other cost items as may be
prescribed shall also be included in the books of account kept u/s 128 by that class of
companies.
• The CG may, by order, direct that the audit of cost records of class of companies, which are
covered above and which have a net worth or turnover of such amount as may be prescribed,
shall be conducted in the manner specified in the order.
• Cost Audit shall be conducted by a Cost Accountant who shall be appointed by the BOD on
such remuneration as may be determined by the members. It shall be in addition to audit
conducted under Sec 143.
Applicability for maintenance of Cost Records
Note:
Clause (b) of sub-section (1) of section 2 of the Cost and Works Accountants Act, 1959 defines “Cost
Accountant”. It means a Cost Accountant who holds a valid certificate of practice under sub-section (1)
of section 6 of the Cost and Works Accountants Act, 1959 and is in whole-time practice. Cost
Accountant includes a Firm of Cost Accountants and a LLP of cost accountants.
Applicable for a domestic or a foreign company engaged in production of goods or providing services
listed in table A (Regulated) or B (Non-regulated) of Rule 3, which have a overall turnover from all of its
products and services ≥ 35 crore (immediately preceding financial year).
Case Turnover (Figures in Crore) Applicability of

Cost Records
Table A Table B Table A+B Other Total
Products Products Products Products
1 10 10 20 10 30 No
2 10 10 20 20 40 Yes
3 0 10 10 30 40 Yes
4 10 0 10 30 40 Yes
5 20 20 40 0 40 Yes
6 0* 0* 0 40 40 No

Not engaged in the production of the goods or providing services, specified inthe Table A (6
Regulated Sectors) and/or Table B (33 Non-Regulated Sector)
Note:
Nothing contained in Rule 3 shall apply to a company which is classified as a micro enterprise or a
small enterprise including as per the turnover criteria under sub-section (9) of section 7 of the
Micro, Small and Medium Enterprises Development Act, 2006.
12.1 Manner of appointing Cost Auditor [Rule 14]
Companies required to Companies not required

constitute Audit to constitute Audit
Committee Committee
BOD shall appoint cost auditor on the

recommendation of Audit Committee The BOD shall
appoint the cost
auditor
Remuneration shall be recommended
by the Audit Committee
The remuneration
of such cost
Such remuneration as recommended by auditor shall be
the Audit Committee shall be ratified by the
considered and approved by the BOD shareholders
subsequently
This remuneration shall subsequently

be ratified by the shareholders
Form and manner of Cost Records [Rule 5]
Every company covered by rule 3 explained above under these rules including all units and branches
thereof, shall, in respect of each of its financial year maintain cost records in form CRA-1.
The cost records shall be maintained on regular basis in such manner as to facilitate calculation of per
unit cost of production or cost of operations, cost of sales and margin for each of its products and
activities for every financial year on monthly or quarterly or half-yearly or annual basis.
The cost records shall be maintained in such manner so as to enable the company to exercise, as far
as possible, control over the various operations and costs to achieve optimum economies in utilisation
of resources and these records shall also provide necessary data which is required to be furnished
under these rules.
12.2 Other conditions
✓ A person appointed as auditor of the company u/s 139 shall not be appointed as cost
auditor u/s 148.
✓ The cost auditor shall comply with the cost auditing standards.

✓ The qualifications, disqualifications, rights, duties and obligations applicable to a company
auditor shall apply to a cost auditor u/s 148.
12.3 Companies that require to constitute an audit committee

Section 177 of the Act, read with Companies (Meetings of Board and its Powers) Rules, 2014 provides
Audit Committee shall be constituted by Board of directors in case of;
i. Every listed public companies and

ii. Those public companies which having:
a. Paid up capital of ten crore rupees or more; or
b. Turnover of one hundred crore rupees or more; or
c. Aggregate, outstanding loans or borrowings or debentures or deposits exceeding fifty crore rupees
or more.
The paid up share capital or turnover or outstanding loans, or borrowings or debentures or deposits,
as the case may be, as existing on the date of last audited financial statements shall be taken into
account for the purposes of this rule.
It is also worth noting that where a company ceases to fulfil any of three conditions laid down above
for three consecutive years, it shall not be required to comply with the provisions pertaining to audit
committee until such time as it meets any of such conditions.
Applicability of Cost Audit
Note: The provisions of sub-section (12) of section 143 of the Act and the relevant rules made
thereunder shall apply mutatis mutandis to a cost auditor during performance of his functions under
section 148 of the Act and rule notified thereunder.
Applicability of Cost Audit
Insert Chart on page 10.55 of the new study material
Non applicability of Cost Audit
Further sub-rule 3 to rule 4 provides exception from cost audits. The requirement for cost audit shall
not apply to a company which is covered in rule 3, and
a. Whose revenue from exports, in foreign exchange, exceeds seventy five percent of its total revenue;
or
b. Which is operating from a special economic zone.
c. Which is engaged in generation of electricity for captive consumption through Captive Generating
PIant. For this purpose, the term “Captive Generating Plant” shall have the same meaning as assigned
in rule 3 of the Electricity Rules, 2005.

Example:
Case Turnover (Figures in Crore) Applicability of
Table A Table B Table A+B Other Total Cost Cost

Products Products Products Products Records Audit
1 10 10 20 10 30 No No
2 10 10 20 20 40 Yes No
3 20 20 40 0 40 Yes No
4 10 20 30 10 40 Yes No
5 10 20 30 20 50 Yes Yes, but

onlyfor
table A
6 0 20 20 20 40 Yes No
7 20 10 30 80 110 Yes Only Table A

Product
8 20 20 40 70 110 Yes Both Tables A
& B Products
9 10 10 20 80 100 Yes No
10 15 15 30 10 40 Yes No
11 20 20 40 8 48 Yes No
12.4 Manner and Procedure – Appointment, Removal and Resignation [Rule 6 of Companies
(Cost Records and Audit) Rules, 2014
The manner and procedure of selection of auditors by the members of the company at AGM has
been prescribed under the Rule 3 of the Companies (Audit and Auditors) Rules, 2014; tabled and
stated below.
Categories of Competent Responsibility of the competent authority
Companies authority
Audit Committee The competent authority shall take into
A company
which is consideration the qualifications and
required to experience of the individual or the firm
constitutean proposed to be considered for appointment
Audit as auditor and such qualifications and
Committee experience are commensurate with the size
under section and requirementsof the company
177

Board of Directors It shall have regard to any order or pending
A company
which is not proceeding relating to professional
required to matters of conduct against the proposed
constitutean auditor before the Institute of Chartered
Audit Accountants of India (ICAI) or any competent
Committee authority or any Court.
under section It may call for such other information from
177 the proposed auditor as it may deem fit.
Where competent authority is audit committee, the committee shall recommend the name of
an individual or a firm as auditor to the Board for consideration; the Board shall consider and
recommend an individual or a firm as auditor to the members in the AGM for appointment.
a. If the Board agrees with the recommendation of the Audit Committee - It shall further
recommend the appointment of an individual or a firm as auditor to the members in the
annual general meeting.
b. If the Board disagrees with the recommendation of the Audit Committee - It shall refer
back the recommendation to the committee for reconsideration citing reasons for such
disagreement.
Note:
Companies that require to constitute an audit committee
Section 177 of the Act, read with Companies (Meetings of Board and its Powers) Rules, 2014
provides Audit Committee shall be constituted by Board of directors in case of;
i. Every listed public companies and

ii. Those public companies which having:
a. Paid up capital of ten crore rupees or more; or
b. Turnover of one hundred crore rupees or more; or
c. Aggregate, outstanding loans or borrowings or debentures or deposits
exceeding fifty crore rupees or more.
The paid up share capital or turnover or outstanding loans, or borrowings or debentures or
deposits, as the case may be, as existing on the date of last audited financial statements shall be
taken into account for the purposes of this rule.
It is also worth noting that where a company ceases to fulfil any of three conditions laid down
above for three consecutive years, it shall not be required to comply with the provisions
pertaining to audit committee until such time as it meets any of such conditions.
→ Company and every officer in default shall be punishable in the manner as provided in
Section 147 (1),
→ Cost auditor in default shall be punishable in the manner as provided u/s 147 (2) & (3).

OVERVIEW
Appointment of auditors [Section 139]
NFRA Rule 8 & 9
Removal, resignation of auditor and giving of special notice

[Section 140]
[Chapter X - Section 139-148]
Eligibility, Qualifications and Disqualifications of auditor

[Section 141]
Audit and Auditors
Remuneration of Auditors [Section 142]
Powers and Duties of Auditors and Auditing standards

[Section 143]
CG to prescribe Accounting Standards [Secttion 144]
Auditors to sign audit reports etc. [Section 145]
Auditors to attend general meetings [Section 146]
Punishment for contravention [Section 147]
CG to specify items of cost in respect of certain companies

[Section 148]

CH 6 - THE NEGOTIABLE INSTRUMENTS ACT, 1881
• Understand the meaning, characteristics, and elements of different kinds of negotiable instruments.
• Know the parties to notes, bills and cheques, various ways of negotiation of the instruments and
their presentment.
• Know the concepts of noting and protest, and of dishonour of instrument.
INTRODUCTION
The main objective of the Negotiable Instruments Act, 1881 is to legalise the system by which
instruments contemplated by it could pass from hand to hand by negotiation like any other goods.
The Act was introduced on 1st March,1881. The Negotiable Instruments Act, 1881 applies to the
whole of India, but nothing herein contained affects the Reserve Bank of India Act, 1934, or affects any local
usage relating to any instrument in an oriental language.
The Act was amended several times. Recent three amendments made in this Act were the Negotiable
Instruments (Amendment and Miscellaneous Provisions) Act, 2002; the Negotiable Instruments
(Amendment) Act, 2015 and the Negotiable Instruments (Amendment) Act, 2018. Latter came into effect
from September 1, 2018.
MEANING OF NEGOTIABLE INSTRUMENTS
→ Negotiable Instruments is an instrument which is freely transferable from one person to

another by mere delivery or by indorsement and delivery.
→ The property in such an instrument passes to a bonafide transferee for value.
Types of Negotiable
Instrument [Sec. 13]
Bill of
Promissory note Cheque
exchange

2.1 Essential characteristics of Negotiable Instruments
Can be
Holders title transferred
is free from any number of
Freely defects times till its Must contain an
transferable satisfaction unconditional
from one promise or
person to order to pay
another money
The sum
payable, the
Should be time of
signed payment, the
payee, must be
certain
Characteristics Instrument
Necessarily in
of Negotiable should be
writing
Instruments delivered
PROMISSORY NOTE
Section 4 of the Negotiable Instruments Act, 1881 provides provisions relating to promissory
note.
3.1 Meaning of Promissory note
A promissory note is
→ an instrument in writing (not being a bank note or a currency note)

→ containing an unconditional undertaking signed by the maker,
→ to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer
of the instrument..
3.2 Parties to Promissory note
Parties to the promissory note
Maker/Drawer Payee/Drawee
Makes promise to pay. He is the Person to whom amount on the

debtor note is payable

3.3 Essential characteristics of a Promissory note
Promise should be
An express promise
In writing definite and
to pay
unconditional
Must be signed by Promise to pay Promise to pay a

the maker money only certain sum
Must be properly stamped

Maker and payee
and stamp must be duly
must be certain,
cancelled by maker's
definite and
signature or intials or
different persons
otherwise
Specimen of Promissory note
BILLS OF EXCHANGE
Section 5 of the Negotiable Instruments Act, 1881 provides provisions relating to bills of
exchange.
4.1 Meaning of Bill of Exchange
Bill of exchange is
→ an instrument in writing
→ containing an unconditional order,

→ signed by the maker,
→ directing a certain person to pay a certain sum of money
→ only to, or the order of, a certain person or the bearer of the instrument.
4.2 Parties to the Bill of Exchange
Parties to the Bill

of Exchange
Drawer Drawee Payee
Maker of bill Person directed by Person named in the instrument
of exchange the drawer to pay. to whom, or to whose order the
money is, by the instrument,
directed to be paid.
He is liable for
payment of the bill.
4.3 Essential characteristics of Bill of Exchange
(a) Must be in writing (b) Contain an express order to pay
(c) Order must be definite and (d) Drawer, drawee, and payee must
unconditional be certain.
(e) Drawer must sign the instrument (f) Sum must be certain
(g) Order must be to pay money only (h) It must be stamped
4.4 Process of Bill of Exchange
Mr. Sam
(drawer)
Drawer receivs Sold good to

payment and Mrs. Reeta
transaction is (Drawee) and
completed draws a BoE
On maturity The BoE is

drawer delivered to
presents the Reeta and is
instrument to accepted by
the drawee for her
payment unconditionally

Specimen of Bill of Exchange
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
Difference between Promissory Note and Bill of Exchange

Basis Promissory Note Bill of Exchange
1. Definition A promissory note is an Bill of exchange is an instrument
instrument in writing (not in writing containing an
being a bank note or a unconditional order, signed by
currency note) containing an the maker, directing a certain
unconditional undertaking person to pay a certain sum of
signed by the maker, to pay a money only to, or the order of, a
certain sum of money only to, certain person or the bearer of
or to the order of, a certain the instrument.
person, or to the bearer of the
instrument.
2. Nature of There is a promise to pay There is an order for making
instrument money payment.
3. Parties Only 2 parties – Maker and 3 parties – Drawer, drawee, and
Payee payee
4. Acceptance Does not require acceptance Needs to be accepted by the
drawee
5. Payable to Cannot be made payable to Can be drawn payable to the
bearer bearer bearer. However, it cannot be
payable to bearer on demand.

CHEQUE
Section 6 of the Negotiable Instruments Act, 1881 provides provisions relating to bills of exchange.
5.1 Meaning of cheque (a) Truncated cheque

It means the cheque whose electronic
A cheque is image has been created during the course
of clearing cycle, to substitute
→ a bill of exchange
→ drawn on a specified banker and the further physical movement.
→ not expressed to be payable otherwise
(b) Cheque in electronic form
than on demand and
The cheque is drawn and signed
→ it includes the electronic image of a
electronically by the use of digital signature.
truncated cheque and a cheque in the
electronic form.
5.2 Parties to cheque
Person who draws a The specific Person named in the

Drawee
Payee
Drawer
cheque (Debtor) bank on whom cheque to whom or to

His liability is primary cheque is whose order the money is
and unconditional drawn. directed to be paid.
Payee may be the drawer
himself or a third party.
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”.
5.3 Essential characteristics of a cheque
• Fulfills all the characteristics of a bill of exchange

• Must be drawn on a specified banker
• Payable on demand
Note: All cheques are bills but all bills are not cheques.

Specimen of Cheque
Date :....................
Pay ..............................................................................................................................................................
a sum of Rupees.................................................................................................. Rs.

A/c No. ………………………
ABC Bank
622, Vijay Nagar, Indore (M. P.)
Signature
01212 1125864 000053 38
ACCEPTOR AND ACCEPTOR FOR HONOR
Acceptor [Sec. 7] Acceptor for honour [Sec. 7]

• The drawee who has • An undertaking by a by a third party to accept and
signed his assent upon pay a bill of exchange that was dishonoured,
the bill and delivered it either by non-acceptance or by non-payment by
to the holder. the party on whom it was drawn.
• Also called 'acceptance supra protest'.
A person desiring to accept for honour must, on writing on the bill in his own hand, declare that
he accepts under protest the protested bill for the honour of the drawer or of a particular indorser in
whose names, or generally for honor.
7.1 Essentials of valid acceptance for honor
i. The holder must consent to acceptance for honor. The holder cannot be compelled to
assent to acceptance for honor.
ii. The bill must have been noted or protested for the non-acceptance or for better security.
iii. Acceptance for honor can be made by a person who is not already liable on the bill.
iv. It must be made by writing on the bill.
v. It must be for the whole amount due on the bill.
vi. Acceptance must be for the honor of any party already able on the bill.
vii. Acceptance for honor must be made before to bill is overdue.

viii. Stranger paying for honor must, before payment, declare before a Notary Public the party
for whose honor he pays, and the Notary Public must have recorded such a declaration.
HOLDER AND HOLDER IN DUE COURSE
Holder [Sec. 8] Holder in due course [Sec.

9]
Holder of a promissory note, bill of

exchange or cheque means - Any person
any person who for consideration
entitled in his own name to the became the possesor of a

possession thereof, and promissory note, bill of exhange or
cheque or payee or indorsee
thereof,
to receive or recover the amount
due thereon from the parties
thereto. before the amount mentioned in it
became payable and
Where the note, bill or cheque is

lost or destroyed, its holder is the
without having sufficient cause to
person so entitled at the time of
such loss or destruction. believe that any defect existed in
the title of the person from whom
he derived his title.
Example: 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. As ‘A’ in this case prima facie became
a possessor of the bill for value and in good faith before the bill became payable, he can be considered as a
holder in due course. But where a signature on the negotiable instrument is forged, it becomes a nullity. The
holder of a forged instrument cannot enforce payment thereon.
8.1 Essentials to become holder in due course (HDC)
✓ The holder must have paid valuable consideration. When given as a gift or has been
inherited, the transferee cannot be a holder in due course.
✓ The holder must acquire the instrument before its maturity.
✓ The holder must have obtained the instrument in good faith.
✓ The instrument must be complete and regular on the face of it.

✓ He must have received the instrument as a holder.
CLASSIFICATION OF NEGOTIABLE INSTRUMENT
9.1 Different classifications of Negotiable Instruments
•Bearer Instrument: An instrument where the name of the payee is

blank or specified with the words "or bearer" or where the last
Bearer and indorsement is blank.
Order
Such instrument can be negotiated by mere delivery.
Instrument
•Order Instrument: It is an instrument which is payable to a person or
[Section 13]
his order or where the last indorsement is in full, such instrument can
be negotiated by indorsement and delivery.
Inland and
•Inland Instrument: A promissory note, BoE or cheque drawn or made
Foreign in India and made payable in, or drawn upon any person resident in
Instrument India shall be deemed to be an inland instrument.
[Section 11 •Foreign Instrument: Instrument which is not an inland instrument
& 12]
•Inchoate Instrument [Sec. 20]: It means an Instrument that is

incomplete in certain respects.
(i) The person gives a blank instrument with authority to the holder
to complete it with appropriate amount up to the stamp value of the
instrument.
(ii) Delivery of such a paper is essential by the signer to the
authority/holder.
(iii) The person signing and delivering the inchoate instrument is
Inchoate liable both to a holder and holder in due course. However, there is a
and difference in their respective rights.
Ambiguous (a) The holder of such an instrument cannot recover the amount in
Instruments excess of the amount intended to be paid by the signor.
(b) The holder in due course can, however, recover any amount on
such instrument provided it is covered by the stamp affixed on the
instrument.
•Ambiguous Instrument [Sec. 17]: An instrument which is vague and
cannot be clearly identified either as a bill of exchange, or as a
promissory note, is an Ambiguous instrument. In other words, such
an instrument may be construed either as promissory note, or as a
bill of exchange.
Examples of Inland Instruments

(i) A promissory note made in Kolkata and payable in Mumbai.
(ii) A bill drawn in Varanasi on a person resident in Jodhpur (although it is stated to be payable in
Singapore)
(iii) A, a resident of Agra, drew (i.e., made) a bill of exchange in Agra on B, a merchant in New York.
And B accepted the bill of exchange as payable in Delhi. It is an inland bill of exchange. In this
case, the bill of exchange was drawn in India and also payable in India.
(iv) A, resident of Mumbai, drew a bill of exchange in Mumbai on B, a merchant in Mathura. And B
accepted the bill of exchange as payable in London. It is also an inland bill of exchange. In this
case, the bill of exchange was drawn in India on a person resident in India. It is immaterial that
the amount is payable in London. An inland instrument remains inland even if it has been
endorsed in a foreign country.
(iv) If the bills of exchange mentioned in above two examples, are endorsed in France, they will
remain inland bills.
9.2 Maturity of negotiable instrument
9.2.1 Days of grace [Sec. 22]

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. Thus, 3 days are
allowed as days of grace.
NEGOTIATION (TRANSFER) OF NEGOTIABLE INSTRUMENTS
When a negotiable instrument is transferred to any person with a view to constitute the person
holder thereof, the instrument is deemed to have been negotiated [Section 14].
When an instrument is conditionally or for a special purpose only, the property in it does not pass to the
transferee, even though it is indorsed to him, unless the instrument is negotiated to a holder in due
course [Section 46].
Negotiation by delivery [Section 47]
Subject to the provisions of section 58 [Instrument obtained by unlawful means or for unlawful
consideration], 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 indorsement [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 indorsement and delivery thereof.

The contract on a NI until delivery remains incomplete and revocable. The delivery is essential not only
at the time of negotiation but also at the time of making or drawing of NI. [Section 57].
Modes of Negotiation
In case of NI payable to In case of NI

bearer payable to order
By delivery
Indorsement and
delivery
Actual
Exception: A NI delivered takes place when the

on condition that is not to instrument changes hand
take effect except in a physically
certain event is not
negotiable unless such
event happens Constructive
takes place when the

instrument is delivered to the
agent, clerk or servant of the
indorsee on his behalf
Delivery when effective between the parties
Negotiation of instruments between How delivery is to be made

the parties
As between parties standing in Delivery to be effectual must be made by
immediate relation 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 It may be shown that the instrument was
of the instrument other than a holder in delivered conditionally or for a special
due course purpose only, and not for the purpose of
transferring absolutely the property
therein.

DISHONOUR OF CHEQUES FOR INSUFFICIENCY OF FUNDS IN THE ACCOUNTS
10.1 Dishonored due to insufficiency of funds [Section 138]
Sections 138 to 142 of the Negotiable Instruments Act, 1881 provides for criminal penalties in the event of
dishonour of cheques for insufficiency of funds.
Where any cheque drawn by a person on an account

maintained by him with a banker,
A cheque given as a gift or
• for the payment of any amount of money donation, or as a security or in
discharge of a mere moral
• to another person from that account, obligation, or for an illegal
consideration, would be outside the
• for the discharge, in whole or in part, of any debt or purview of this section.
other liability,
• is returned by the bank unpaid,
• either because of –
o amount of money standing to the credit of that account is insufficient, 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 –

o imprisonment for a term which may extend to 2 years, or
o fine which may extend to twice the amount of the cheque, or
o both.
•Cheque must be presented within 3 months from the date on which it is

drawn or within the period of its validity, whichever is earlier.
•Payee/holder in due courses notifies in writing to the drawer within 30 days
of receipt of information by him from the bank regarding dishonour and
asks for payment.
Conditions for
•The drawer of such cheque fails to make the payment within 15 days of
levy of penalty receipt of such notice.

10.2 Presumption in favor of holder [Section 139]
When a cheque is dishonored, it shall be presumed, unless the contrary is proved, that the holder
of a cheque received the cheque of the nature referred to in section 138 for the discharge, in
whole or in part, or any debt or other liability.
The effect of this presumption is that the evidential burden rests on the accused.
10.3 Defense which may not be allowed in any prosecution under section 138 [Section 140]
It shall not be a defence in a prosecution of an offence under section 138 that the drawer had no
reason to believe when he issued the cheque that the cheque may be dishonored on
presentment for the reasons stated in that section.
PRESENTMENT OF INSTRUMENTS
11.1 Presentment for acceptance [Section 61]
A bill of exchange payable after sight must [if no time or place is specified therein for presentment]
be presented to the drawee thereof for acceptance [if he can, after reasonable search, be found] by
a person entitled to demand acceptance, within a reasonable time afterit is drawn, and in business
hours on a business day.
In default of such presentment, no party thereto is liable thereon to the person making such default.
If the drawee cannot, after reasonable search, be found, the bill is dishonoured.
If the bill is directed to the drawee at a particular place, it must be presented at that place,and
if at the due date for presentment he cannot, after reasonable search, be found there,the bill
is dishonoured.
Where authorised by agreement or usage, a presentment through the post office by means of
a registered letter is sufficient.
11.2 Presentment of promissory note for sight [Section 62]
A promissory note, payable at a certain period after sight, must be presented to the maker thereof
for sight (if he can after reasonable search be found) by a person entitled to demand payment, within
a reasonable time after it is made and in business hours on a business day.
In default of such presentment, no party thereto is liable thereon to the person making such default.
11.3 Drawee's time for deliberation [Section 63]
The holder must, if so required by the drawee of a bill of exchange presented to him for acceptance,
allow the drawee 48 hours (exclusive of public holidays) to consider whether hewill accept it.
11.4 Presentment for payment [Section 64]
Promissory notes, bill of exchange and cheques must be presented for payment to the
maker, acceptor or drawee thereof respectively, by or on behalf of the holder as
hereinafter provided.

In default of such presentment, the other parties thereto are not liable thereon to such
holder.
Where authorised by agreement or usage, a presentment through the post office by meansof a
registered letter is sufficient.
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.
Notwithstanding anything contained in section 6, where an electronic image of a truncated cheque is
presented for payment, the drawee bank is entitled to demand any further information regarding the
truncated cheque from the bank holding the truncated cheque incase of any reasonable suspicion
about the genuineness of the apparent tenor of instrument, and if the suspicion is that of any fraud,
forgery, tampering or destruction of the instrument, it is entitled to further demand the presentment
of the truncated cheque itselffor verification:
Provided that the truncated cheque so demanded by the drawee bank shall be retained by it, if the
payment is made accordingly.
Hours for presentment (Section 65)
Presentment for payment must be made during the usual hours of business, and, if at a bankers
within banking hours.
Presentment for payment of instrument payable after date or sight (Section 66)
A promissory note or bill of exchange, made payable at a specified period after date or sight thereof,
must be presented for payment at maturity.
Presentment for payment of promissory note payable by instalments(Section 67)
A promissory note payable by instalments must be presented for payment on the third dayafter
the date fixed for payment of each instalment; and non-payment on such presentmenthas the same
effect as non-payment of a note at maturity.
Presentment for payment of instrument payable at specified place and not elsewhere (Section
68)
A promissory note, bill of exchange or cheque made, drawn or accepted payable at a specified place
and not elsewhere must, in order to charge any party thereto, be presentedfor payment at that
place.
Instrument payable at specified place (Section 69)
A promissory note or bill of exchange made, drawn or accepted payable at a specified place must, in
order to charge the maker or drawer thereof, be presented for payment at that place.
Presentment where no exclusive place specified (Section 70)
A promissory note or bill of exchange, not made payable as mentioned in sections 68 and69,
must be presented for payment at the place of business (if any) or at the usual residence,of the
maker, drawee or acceptor thereof, as the case may be.
Presentment when maker, etc., has no known place of business or residence (Section 71)
If the maker, drawee or acceptor of a negotiable instrument has no known place of business or fixed

residence, and no place is specified in the instrument for presentment for acceptance or payment,
such presentment may be made to him in person wherever he canbe found.
Presentment of cheque to charge drawer (Section 72)
Subject to the provisions of section 84, a cheque must, in order to charge the drawer, be presented at
the bank upon which it is drawn before the relation between the drawer andhis banker has been
altered to the prejudice of the drawer.
Presentment of cheque to charge any other person (Section 73)
A cheque must, in order to charge any person except the drawer, be presented within a reasonable
time after delivery thereof by such person.
Presentment of instrument payable on demand (Section 74)
Subject to the provisions of section 31, a negotiable instrument payable on demand must be presented
for payment within a reasonable time after it is received by the holder.
Presentment by or to agent, representative of deceased, or assignee ofinsolvent (Section
75)
Presentment for acceptance or payment may be made to the duly authorised agent of the drawee,
maker or acceptor, as the case may be, or, where the drawee, maker or acceptor has died, to his
legal representative, or, where he has been declared an insolvent, to his assignee.
Excuse for delay in presentment for acceptance or payment (Section 75A)
Delay in presentment for acceptance or payment is excused if the delay is caused by circumstances
beyond the control of the holder, and not imputable to his default,misconduct or negligence.
When the cause of the delay ceases to operate, presentment must be made within a reasonable
time.
When presentment unnecessary (Section 76)
No presentment for payment is necessary, and the instrument is dishonoured at the due date
for presentment, in any of the following cases:
(a) (i) If the maker, drawee or acceptor intentionally prevents the presentment of the instrument,
or
if the instrument being payable at his place of business, he closes such place on a business day
during the usual business hours, or
(ii) if the instrument being payable at some other specified place, neither he norany person
authorised to pay it attends at such place during the usual business hours, or
(iii) 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 notwithstanding non-
presentment;
(c) as against any party if, after maturity, with knowledge that the instrument has notbeen
presented—

o he makes a part payment on account of the amount due on the instrument,
o or promises to pay the amount due thereon in whole or in part,
o or otherwise waives his right to take advantage of any default in presentmentfor 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 dishonoured, if the banker so negligently or improperly keeps, dealswith or
delivers back such bill as to cause loss to the holder, he must compensate the holder for such loss.
15. RULES OF COMPENSATION
Rules as to compensation (Section 117)
The compensation payable in case of dishonour of promissory note, bill of exchange or cheque,
by any party liable to the holder or any endorsee, shall be determined by the following rules:
(a) the holder is entitled to the amount due upon the instrument, together with the expenses
properly incurred in presenting, noting and protesting it;
(b) when the person charged resides at a place different from that at which the instrument was
payable, the holder is entitled to receive such sum at the current rateof exchange between the
two places;
(c) an endorser who, being liable, has paid the amount due on the same is entitled to the amount
so paid with interest at 18% per annum from the date of payment until tender or realisation
thereof, together with all expenses caused by the dishonour and payment;
(d) when the person charged and such endorser reside at different places, the endorseris entitled
to receive such sum at the current rate of exchange between the two places;
(e) the party entitled to compensation may draw a bill upon the party liable to compensate him,
payable at sight or on demand, for the amount due to him, together with all expenses
properly incurred by him. Such bill must be accompaniedby the instrument dishonoured and
the protest thereof (if any). If such bill is dishonoured, the party dishonouring the same is liable
to make compensation thereof in the same manner as in the case of the original bill.

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PAPER – 5

BUSINESS LAWS &

This book is designed for students pursuing CMA Intermediate

in June 24 or thereafter. Every effort has been made to avoid errors

discrepancy may be brought to our attention by emailing us at

support@indigolearn.com and we shall fix the same in the next

edition of the book.

responsible for any damage or loss of action to anyone, of any kind,

in any manner, therefrom.

No portion of this book may be duplicated or copied in any form or

by any means. A violation of this clause provides grounds for legal

All disputes are subject to Hyderabad jurisdiction only.

© All Rights Reserved

Chapter 1: The Indian Contract Act, 1872

Unit 1: Nature of Contracts 1

Unit 3: Other Essential Elements of a Contract 32

Unit 4: Performance of a Contract 59

Unit 5: Breach of Contract And Its Remedies 64

Unit 6: Contingent and Quasi Contracts 73

Unit 7: Contract of Indemnity And Guarantee 83

Unit 8: Bailment And Pledge 93

Unit 9: Agency 107

Chapter 2: The Sale of Goods Act, 1930

Unit 1: Formation of the Contract of Sale 122

Unit 2: Conditions & Warranties 136

Unit 3: Transfer Of Ownership And Delivery Of Goods 150

Unit 4: Unpaid Seller 168

Chapter 3: The Partnership Act, 1932

Unit 1: General Nature of Partnership 183

Unit 2: Relations of Partners 196

Unit 3: Registration And Dissolution Of A Firm 214

Chapter 4: The Limited Liability Partnership Act, 2008 226

Chapter 5: The Companies Act, 2013 253

Chapter 6: The Negotiable Instruments Act, 1881 502

• Agreement vs. Contract

• Essential elements of a contract.

• Offer and acceptance

• Rules of communication of offer and acceptance

• Modes of revocation of offer

25th April, 1872 1st Sept, 1872

Date of Assent Date of Effect

Preamble of the Act:

Definition as per Section 2(h):

Contract = Agreement + Enforceability by law

Definition as per Section 2(e):

Definition as per Section 2(b):

Agreement = Promise (Accepted proposal) + Consideration

Promise = Offer/Proposal + Acceptance

4. Difference between Agreement and Contract

Basis of Difference Agreement Contract

• Agreements to do an unlawful, immoral or illegal act, like smuggling or murdering a person,

5. Essentials of a Valid Contract

Definition as per Section 10:

General Essential Essentials as per Sec 10

Two Parties Agreement

Intention to create legal

Possibiltiy of performance Competency of parties

Cetrainty of meaning Lawful consideration

Formality in certain cases Legal object

Not expressely declared as void