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BUSINESS LAW-17PBA05

AVS AND SAKTHIKAILASH


EDUCATIONAL
INSTITUTIONS

DEPARTMENT OF MANAGEMENT
AND RESEARCH

PAPER CODE: BUSINESS LAW

PAPRE NAME: 17PBA05

SEMESTER:I

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BUSINESS LAW-17PBA05

Question Paper Pattern

Time: 3 Hrs Max. Marks: 75

Section – A

Answer all the questions 5X3=15 Marks

1. (a) or (b) From Unit - I

2. (a) or (b) From Unit - II

3. (a) or (b) From Unit - III

4. (a) or (b) From Unit - IV

5. (a) or (b) From Unit - V

Section - B

Answer all the questions 5X10=50 Marks

6. (a) or (b) From Unit - I

7. (a) or (b) From Unit - II

8. (a) or (b) From Unit - III

9. (a) or (b) From Unit - IV

10. (a) or (b) From Unit – V

Section – C

11. Case study (Compulsory) 1X10=10 Marks

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BUSINESS LAW

UNIT I:
The Contract Act, 1871

Nature and Classification of Contracts - Essential Elements of a Valid Contract


Offer and Acceptance - Consideration - Valid Consideration - Capacities of Parties -
Provisions Relating to Free Consent, Valid Agreements - Performance of Contract –
Discharge of Contract – Various Modes of Discharge of Contract - Remedies for Breach
of Contract.
UNIT II:

Sales of Goods Act, 1930


Contract for Sale of Goods - Meaning - Sale of Goods and Agreement to Sell -
Essentials of a Contract of Sale - Formalities of a Contract of Ale - Sale and Hire
Agreements - Provisions Relating to Conditions and Warranties - Provisions Relating to
Transfer of Property or Ownership - Provisions Relating to Performance of Contract of
Sale - Rights of Unpaid Seller - Remedial Measures - Provisions Relating to Auction Sale
UNIT III:
The Companies Act, 1956
Indian Companies Act 1956 – Definitions – Kinds of companies – Formation –
Memorandum of Association – Articles of Association – Prospectus – Statement in Lieu
of Prospectus – Misstatements in Prospectus – Shares – Debentures – Shareholder’s
Rights – Company Management – Meetings and Resolutions – Winding-up - Modes of
Winding-up.
UNIT IV:
Intellectual Property Legislations: Meaning and Scope of Intellectual Properties –
Patent Act of 1970 : Objectives – Definitions – Inventions – Patentee – True and First
Inventor – Procedure for Grant of Process and Product Patents, WTO Rules to Patents,
Rights of Patentee, Infringement and Remedies.
UNIT V:
The Information Technology Act, 2000
Digital Signature - Electronic Governance - Electronic Records – Certifying

authorities.

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TEXT BOOK:

Business Law, Kapoor N.D., Sultan Chand and Sons.

REFERENCE BOOKS:

1. Legal Aspects of Business, Akhileshwar Pathak, Tata McGraw-Hill.

2. Government and Business, Amarchand D., Tata McGraw-Hill.

3. Consumer Protection Law : Provisions and Procedure, R.N.P. Chaudhary, Deep


and Deep Publications.

4. The Law of Intellectual Property Rights, Shiv Sahai Singh, Deep and Deep
Publications.

5. Business Law, Aswathappa. K and Ramachandra, Himalaya Publishing House.

6. Business Law, Nabhi, Indian Law House.

7. Business Law, P.C. Tulsian, Tata McGraw-Hill.

8. Corporate Laws, Bare Acts, Taxman Publications.

9. Business Law, P.S. Saravanavel and S. Sumathi, Himalaya Publishing House.

10. Business Law Including Company Law, Gulshan S.S. and Kapoor G.K., New
Age International.

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Unit 1

Contract – Definition
A contract is an agreement made between two or more parties which are
enforceable by law.
Pollock’s Definition
“Every agreement and promise enforceable at law is a contract”.

Contract = Agreement + Enforceability at law

Elements of Contract
a) Agreement
b) Enforceability by law

Agreement: Every promise and every set of promises forming consideration


for each other. When a proposal is accepted it becomes a promise.

AGREEMENT = OFFER + ACCEPTANCE

Classification of contracts.
Contracts are classified according to
a) Validity
b) Formation
c) Performance
a) Classification According to Validity
When all the essential elements of a contract is present, it is a valid
contract. If one or more of these elements are missing it is either
voidable, void or illegal contract.
1) Voidable Contract
When the essential element of a contract ‘free consent’ is missing, The
contract is a voidable contract. Voidable contracts are enforceable by law

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at the option of the party whose consent is not free. The party to the
contract whose consent is not free may either cancel it or continue it.
Eg. A promises B to sell his car for Rs.20000. A’s consent is obtained by
threat. As the free consent is missing it is a voidable contract.

2) Void Contract
Void agreements are not enforceable by law. It does not create any legal
obligation on the parties. It is void ab initio, which means it is void from
the very beginning.
Eg. Agreement with a minor, agreement without consideration.

3) Void Contract.
A contract which is not enforceable by law is void contract. A contract
may be valid at the time of entering into contract, subsequently it
becomes void.
Eg. A contract to import goods will become void when the war breaks
out between the countries.

4) Illegal Agreements
Illegal agreements are opposed to public policy or criminal in nature or
immoral. All illegal agreements are void as between the immediate
parties but is has same as effect collateral transaction.
All illegal agreements are void but all void agreements are not illegal.
Eg. A borrows money from B to import prohibited goods from the alien
country. The two contract i.e the contract to borrow money and the
contract to buy goods from alien country are void and illegal.

5) Unforceable Contract
Unforceable contract is the one which is not enforceable in the court of
law due to technical defects like absence of wriiten agreement,
registration etc.

B)CLASSIFICATIN ACCORDING TO FORMATION


A contract may be a) made in writing or by words spoken b) inferred
from the conduct of the parties.
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1) Express Contract
Under express contract, the terms of a contract are expressly agreed
either by words spoken or by written.
2) Implied Contract
The contract is inferred from the act or conduct of the parties. The
proposal or acceptance is not made or given either by words spoken or
written.
Eg. Gets into a public bus.

3) Quasi Contract
Quasi contract is created by law. It is not a contract at all. According to
quasi contract a person shall not be allowed to enjoy at the expense of
another person. He is obliged to pay the price for the thing enjoyed by
him.
Eg. C a tradesman, leaves goods at T’s house by mistake. T treats the
goods as his own. T is bound to pay for the goods.

C) CLASSIFICATION ACCORDING TO THE PERFORMANCE


Contract is classified based on its performance
a) Executed Contract
b) Executory Contract
c) Unilateral Contract
d) Bilateral Contract
a) Executed Contract
An executed contract is a one in which both the parties to the contract
have performed their obligations.
Eg. A agrees to paint a picture for B for Rs. 100. When A paints the
picture and B pays the price, i.e., when both the parties performed their
obligations, the contract is said to be executed contract.

b) Executory contract
An executory contract is one in which both the parties to the contract
have to perform their obligations.
Eg. A agrees to engage B as his servant in the next month.
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c) Unilateral contract or one sided contract or Executed


consideration
Under unilateral contract, one party has to fulfill his obligation at the
formation of the contract, the other party having fulfilled their obligation
before the contract comes into existence.
Eg. A permits a railway coolie to carry his luggage and place it in a
carriage. A contract comes into existence as soon as the luggage is placed
in the carriage. But that time the coolie has already performed his
obligation. Now A has to pay the reasonable charge to the coolie.

d) Bilateral Contract
It is similar to executory contract in which the obligation of both the
parties yet to be performed.
CLASSIFICATION OF CONTRACTS IN ENGLISH LAW
In English law, contracts are classified into
1) Formal contracts and
2) Simple contracts

1) Formal Contracts
Formal Contracts includes
a) Contracts of record
b) Contracts under seal

Contracts of Record
A contract of record is either a judgment of a court or a recognizance. A
judgment is an obligation imposed by the court upon one or more
persons.
Recognisance is a written acknowledgment of a debt due to the
Crown.
Eg. When a person is arrested, he may be released either on a promise to
appear in a court or subject to a penalty if he failed to appear in a court.
Obligation to appear in the court is recognizance.

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c) Contracts under seal


The form by which the contract is formulated is the deciding factor of
contract under seal. It is in writing, signed, sealed and delivered to the
parties.
Eg. Contracts made without consideration
Contracts made by corporation

2) Simple Contracts
These contracts are not made under seal. It may be in writing or by words
of mouth. For all simple contracts consideration is must.

Essential elements of a valid contract.


1) Offer and Acceptance
There must be two parties. One party has to offer something and another
has to accept it. The offer must be definite and unconditional. When the
offer is accepted it must be communicated.
2) Intention to create legal relationship
When the two parties enter into an agreement, they should have an idea
of creating legal relationship. Agreement of a social or domestic nature
will not create legal relationship.
Case Law. BALFOUR V BALFOUR
A husband promised to pay s30 for household allowance. When he
failed to pay, his wife cannot file a case against him. Because the
agreement is of domestic nature.

3) Lawful Consideration
Consideration is important for a valid contract. Consideration means
advantage or benefit moving from one party to the other. Both the parties
give something and get something in return. It may be in cash or kind.

4) Capacity of parties – Competency


The parties to the agreement must be capable of entering into a valid
contract. The following persons are having the capacity to enter into a
contract.
a) A person attains the age of majority.
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b) Sound mind person


c) Not disqualified by the law

5) Free and Genuine Consent


The consent of the parties should be free. It should not be obtained by
fraud, coercion, undue influence.

6) Lawful Object
The object of the agreement must be lawful. It should not be illegal,
immoral and opposed to public policy.

7) Agreement not declared void


The agreement must be certain and definite. It should not be vague.

Eg. Vague Agreement: Agreement to sell a hundred tons of oils. The


above agreement is vague because it does not mention the quality, price
etc.
The terms of agreement should be capable of performance.
Eg. A agrees to put life into B’s dead wife. It is impossible.

8) Legal Formalities
A contract must be oral or written. In order to enforce an agreement
legally, it should be in writing, stamped and registered.

What is Offer ? Explain its kinds.


Offer is a proposal made by one party to another. Eg. A Says to B, “Will
you buy a house for Rs. 5 lakhs ?”

OFFEROR – A person making the offer


OFFEREE – A person accepting the offer.
Kinds of offer
a) Specific Offer : It is made to definite person. Eg. Offer made by ‘A’
to ‘B’
b) General offer: Offer which is made world at a large. Eg. News paper
advertisement.
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Explain legal rules related with offer.


1) Offer is to be accepted and create legal relationship
A social or domestic offer will not create legal relationship
Eg. ‘A’ invites ‘B’ to have a cup of tea.

2) Offer must be certain and definite


An offer which is vague and uncertain cannot create contractual
relationship.
Eg. ‘A’ says to ‘B’ “I will sell a house”. The above offer is uncertain
because it does not include the price, locality etc.

3) An offer is different from announcement and an invitation.


An invitation to offer something and an announcement to offer something
is not an offer.
Case Law: Re Ficus
A father wrote to his would-be son-in-law that his daughter have a share
of what he left. It is a treatment of intention.
Quotation, Catalogue, advertisement and display of goods are not offer.
Display of goods is an invitation by the shop keeper to make an offer to
buy the goods.

4) Offer must be Communicated


The offeror has to communicate the offer to the offeree in order to accept
it.
5) Offer must be made with a view in the assent
An offer to do something is made to obtain acceptance of an offeree.

6) Offer should not contain a term the non-complience which may be


assumed to amount to acceptance.
When an acceptance for an offer is communicated within a stipulated
time period, it should not be considered that it has been accepted.

7) A statement of price is not an offer


The following example will explain the above statement.
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A: “Will you sell me a pen”?


B: “Lowest price of the pen is Rs.100”
C: “I agree to buy”
The above example is not a completed offer. Because the 1 st statement
has enquired the willingness to sell and the 2 nd statement specified the
price and the seller has quoted the price only, not his willingness to sell.
So it cannot be an offer.

What is Acceptance?
Acceptance is the willingness of the offeree. When he has accepted he is
bound to the terms of the offer.

What are its kinds.


a) Express
When an acceptance is communicated by words spoken or written it is
called Express acceptance.
b) Implied
It is known through the activities of a person.

Explain the legal rules to acceptance.


1.An acceptance must be absolute and unqualified.
Eg. A offers B to sell the car Rs. 50,000. B replied that he is ready to buy
it for Rs.30,000. It is not qualified acceptance.

2.It must be communicated


When an offer is accepted by the offeree, he has to intimate his
acceptance.

3) It must be according to the mode prescribed.


When the mode is prescribed, the acceptance is sent through the
prescribed mode. When the prescribed mode is not followed and there is
no acceptance from the offeror, it is assumed that he has accepted the
unprescribed mode and it is a valid acceptance.

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Eg. Prescribed mode mentioned by A is telephone. But ‘B’ has sent his
acceptance by post. It is a valid acceptance unless ‘A’ has rejected the
mode followed by ‘B’.

4) It should be given within a reasonable time.


If any time limit is specified, in order to make the acceptance valid, it
should given within that time.

5) It cannot precede an offer


Acceptance must be followed by an offer.
Eg. When the shares are allotted to a person without his applicatioin, it is
invalid.

6) Intention to fulfill the terms of offer.


When an offer is accepted, the acceptor shows his willingness to follow,
the terms of an offer.

7) Acceptance to be given to the person who has given the offer.


Acceptance must be given to the person who makes an offer.

8) Silence is not an acceptance.


When an offeree fails to answer, the offeror cannot assume that the offer
has been accepted.

Eg. A wrote to B, “I offer you a car for Rs.10,000. If I do not chear from
you within 7 days, I shall thay you have accepted”.

When does an offer comes to an end?


1) By notice
An offeror can revocate an offer at any time before it is acceptability
another person.
2) By lapse of time.
If time period is mentioned in the offer, it is revocated after the expiry of
a reasonable time.
3) Non fulfillment of a consideration
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The offer is mentioned when the offeree fails to fulfill the condition
before he is going to give acceptance.
Eg. ‘A’ agrees to sell the goods to ‘B’ ready to pay certain price before a
certain date.
4) By death or insanity of the offeror.
When an offeree accepts the offer without the knowledge of an offeror’s
death, the acceptance is valid.

5) Counter Offer
Counter offer mean acceptance of an offer with some modificatioin. In
such case the previous offer will terminate.

6) Acceptance is not according to the prescribed mode.


When an offeree has followed an unprescribed mode, the acceptance is
invalid. But the offeror keeps silence regarding the unprescribed mode,
the acceptanceis valid one.

7) Change of Law
An offer comes to an end if the law is changed and the offer and
acceptance will become invalid.
What is the meaning of Acceptance? Explain its kinds.
Acceptance is the willingness of the offeree. When he has accepted he is
bound to the terms of the offer.

Kinds of Acceptance
a) Express
When an acceptance is communicated by words spoken or written it is
called Express acceptance.
b) Implied
It is known through the activities of a person.

Who can accept?


A person to whom an offer is made can accept it.
But, when an offer is made to world at large, any person can accept it.

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Legal rules to Acceptance


1) It must be absolute and unqualified
An acceptance must be absolute and unqualified
Eg. A offers B to sell the car for Rs.50,000. B replied that he is ready to
buy it for Rs.30,000. It is not qualified acceptance.

2) It must be communicated
When an offer is accepted by the offeree, he has to intimate his
acceptance.

3) It must be according to the mode prescribed


When the mode is prescribed, the acceptance is sent through the
prescribed mode. When the prescribed mode is not followed and there is
not acceptance from the offeror, it is assumed that he has accepted the
unprescribed mode and it is valid acceptance.

Eg. Prescribed mode mentioned by A is telephone. But, ‘B’ has sent his
acceptance by post. It is a valid acceptance unless, ‘A’ has rejected the
mode followed by ‘B’.

4) It should be given within a reasonable time


If any time limit is specified., in order to make the acceptance valid, it
should given within that time.

5) It cannot precede an offer


Acceptance must be followed by an offer.
Eg. When the shares are allotted to a person without his application,
it is invalid.

6) Intention to fulfill the terms of offer


When an offer is accepted, the acceptor shows his willingness t follow
the terms of an offer.
7) Acceptance to be given to the person who has given the offer
Acceptance must be given to the person who makes an offer.

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8) Silence is not an acceptance


When an offeree fails to answer, the offeror cannot assume that the offer
has been accepted.

Eg. A wrote to B, ‘ I offer you a car for Rs.10,000. If I do not chear from
you within 7 days, I shall assume that you have accepted”.

Communication of offer
An offer, acceptance and revocation must be communicated by words
spoken written or by conduct.

Offer
Communication of an offer is complete when it comes to the knowledge
of the person to whom it is made.

Acceptance
As for as offeror is considered, communication of acceptance is
completed when it is transmitted to another person.
As for as acceptor is considered, communication of acceptance is
completed when it comes to the knowledge of the proposer.

Eg. B accepts A’s proposal. The letter reaches A on 1st July. For A it is
completed when the letter is posted i.e. 30th June.

When does an offer comes to an end?


1) By notice
An offeror can revocate an offer at mny time before it is acceptedby another
person.

2) By lapse of time
If time period is mentioned in the offer, it is revocated after the expiry of a
reasonable.
3) By death or insanity of the offeror
When an offeree accepts the offer without the knowledge of an offeror’s
death, the acceptance is valid.
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4) Counter offer
Counter offer mean acceptance of an offer with some modification. In such
case the previous offer will terminate.
5) Acceptance is not according to the prescribed mode
When an offeree has followed an unprescribed mode, the acceptance is
invalid. But the offeror keeps silence regarding the unprescribed mode, the
acceptance is valid one.

6) Non fulfillment of a condition


The offer is terminated when the offeree fails to fulfill the condition before
he is going certain date.

Eg. A agrees to sell the goods to B, if B ready to pay certain price before a
certain date.

7) Change of Law
An offer comes to an end if the law is changed and the offer and acceptance
will become invalid.

Consideration
What is meant by Consideration? Define the term consideration.
It is one of the essential elements of a valid contract. Consideration means
‘something’. The parties to the contract is giving something and getting
something in return.

Eg. A agrees to buy a car from B for Rs.1,00,000. Car is the consideration to
A and money is consideration to B.

Pollock Definition
“Consideration is the price for which the promise of the other is bought and
the promise thus given for value is enforceable”.

Valid consideration
1) It must move at the desire of the promisor

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The consideration must be given at the desire or request of the promisor. If it


is given at the request of the 3rd party, the consideration is bad.

Eg. A saves ‘B’s goods from fire without the request of ‘B’. A cannot
demand consideration for his service.

2) It may move from the promise or any other person.


Under the Indian Law, consideration may move from the promise or any
other person i.e. even a stranger. But the stranger to will be able to sue only
if he is a party to the contract.

Eg. An old lady, by a gift deed, transferred her property to her daughter ‘P’
with an agreement that ‘P’ has to give an agreed amount annually to her aunt
‘D’. Later ‘P’ refused to the amount as no consideration is received from her
aunt ‘D’. D can file a suit because the consideration is already from an old
lady to ‘P’.

3) It may be an Act, Abstinence or Forbearance or a return promise


Consideration need not be in the form of money. Doing of something is also
a consideration Eg. Selling.

The consideration may be in a negative form.i.e. not doing something.

4) It may be past, present or future.


Past consideration means consideration given in the present for the past
performance.

Eg. A agrees to pay Rs. 1000 after 1 month for the service rendered by ‘B’.
B recovered the amount after 1 month. It is past condieration.
When the consideration is given simultaneously with promise, it is
called present consideration.
Eg. Selling of goods and receiving the amount on the same date.

When the consideration is passed before the contract or promise, it is


called future consideration.
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Eg. Paying of the price before the delivery of goods.

5) It need not be adequate.


It means ‘something in return’ need not be equal in value to “something
given”.

6) It may be real.
The consideration must be real has some value in the eyes of the law.
In the following cases, the consideration is not real.
a) Physical Impossibility
‘A’ promises ‘B’ to put life into B’s dead wife.

b) Legal impossibility.
‘A’ borrowed Rs.100 from ‘B’. ‘C’ who is ‘B’ servant agree to discharge
‘A’ from the debt, if he ready to pay Rs.10. It is an illegal impossibility.
c) Uncertain consideration
‘A’ agrees to do some service to ‘B’ for the reasonable remuneration.

7) It must not be illegal, immoral or opposed to public policy.


The consideration given for unlawful agreement is invalid.

capacities of the parties to made contract

The parties to the contract must be competent persons to enter into a valid
contract.

According to Sec 11 the following persons are incompetent persons.

1) Minors
2) Unsound Mind Persons
3) Persons Disqualified by Any Law.

1) Minors
A minor is a person who has not completed 18 years of age.
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a) An agreement with or by minor is void.


Any agreement made by the minor is not valid and not enforceable by law.

b)He can be a promissory or beneficiary.


The minor can be a promise or beneficiary to a contract. The contract may
be enforced at his option, not at the option of the other party.
Eg. A minor has sold goods and he can file a suit for the recovery of
the price.

c)His agreement cannot be ratified by him on attaining the age of


majority.
Consideration which is given for previous contract, entered at the time of
minority, cannot be used for the fresh contract which is entered on attaining
majority. Fresh contract which is entered on majority must be supported by
fresh consideration.
Eg. A minor borrowed Rs.1000 from M and drawn a promissory note
in favour of M. After attaining the majority, he executes another promissory
note for the settlement of old debt. The second promissory note is void as
there is no consideration.
d) Benefit Under a void agreement.
When the minor received any benefit out of the void agreement, he cannot
be asked to pay for it.
Eg. Minor has obtained a loan on mortgaging his property. He is not
liable to pay the amount and the mortgaged property is also not liable to pay
the debt.

e) He can always plead minority.


When minor induced another party to enter into contract by fraud or
misrepresenting his age, the contract is void and he is protected by law.
Eg. By misrepresenting the age, the minor has borrowed money from
L. When the minor refused to pay the mount, ‘L’ has filed a suit. The court
observed that the contract is void and the minor need not pay the debt. The
law gives protection to the minor and it does not give them freedom to cheat
others.
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f) Contract entered by minor’s parent or guardian.


A contract entered by minor’s parent is enforced by law. The contract should
be entered by the parents within the scoped of the authority and for the
benefit of the minor.

g) Partnership contract
Minor cannot enter into contract of partnership. But he may be admitted for
the benefit of partnership firm. His admission should be done with the
consent of other partners.

h) He is liable for necessaries.


Minor is liable to pay the price for the necessaries supplied to him or the
service rendered to him.

i) He can be an agent
Minor can act as an agent. As he is acting on behalf of abother party, he does
not incur any personal liability.

j) Parents liability for the contract entered by the minor.


Parent is not liable for the contract entered by the minor even though it is
entered for the supply of necessaries.

k) A minor is liable in tort (Civil Wrong)


A minor is liable for civil mistakes.
Minor liability for necessaries.

A minor is liable to pay our of his property for necessaries supplied by him.

According to English Sale of Goods Act, necessaries means “Goods suitable


to condition of infant or other person and it is necessary at the time of sale
and at the time of delivery.
Necessity of goods depend on the position and finance status of the
minor.

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Services rendered to a minor is also considered as necessary and a


agent is liable to pay for it.
Eg. Service – Education, Legal Advise, Medical Advise etc.
A loan taken by the minor to obtain necessary is enforceable under
law and the lender can recover the money. The lender cannot make the
minor personally liable, but he can recover it from minor’s property.

Persons of Unsound mind.


An unsound mind person cannot enter into contract.

Sound mind person is a person who can understand the contents of the
contract and able to make rational judgment.

A person who is occasionally of unsound mind can enter into contract


when he is of sound mind.
Persons of unsound mind

The following persons are unsound mind persons.


1) Lunatics.
He is mentally deranged due to mental strain or other personal experience.
He can enter into contract during the period when he is of unsound mind.
2) Idiots.
He is the person who has totally lost his mental powers. Idiocy is permanent
and an agreement with an idiot is void.
3) Drunken.
A contract which is entered when he is drunken is void.
Other persons
Alien enemy
A contract entered with an alien enemy is invalid. A contract with an alien
friend is valid. But an alien friend cannot acquire property in an Indian ship.
He cannot appointed as a chief officer of such a ship.
During the war, an alien enemy cannot enter into a contract with an
Indian Subject. He cannot sue in an Indian court, but he can do so after
receiving license from the Central Government.

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Corporations
A corporation is an artificial person. Its contractual capacity is regulated by
the Memorandum of Association. If it exceeds it power, that contract is
invalid.

Insolvents.
When a debtor is declared as an insolvent, his official assignee can enter into
contract on behalf of an insolvent.

Convicts
A person who is judged as a convicted cannot enter into a contract.

What is free consent? Write the provisions relating to free consent?


In order to create a valid contract, the parties to the contract must agree
upon the same thing in the same and their consent is free and real.

Consent and free consent – Meaning.


The parties to the contract are said to consent when they agree upon the
same thing in the same sense.

Free consent
Consent is said to be free when it is not caused by
1) Coercion
2) Undue Influence
3) Fraud
4) Misrepresentation
5) Mistake
When there is no consent there is no contract.

Coercion.
When a person is compelled to enter into a contract under a threat, it
amounts to coercion. These kind of contract is voidable at the option of the
party whose consent was obtained by threat.
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Eg. A threatens to shoot B if he does not pay him Rs.10000.

Threat to commit suicide – Does it amount to coercion.


Yes, a threat to commit suicide amounts to coercion. The following case will
explain the point.

CHIKHAM AMIRAJU Vs SESHAMMA


In the above cases a person is threatening his wife and son to execute a deed
infavour of his brother. The wife and son has executed the deed infavour of
his brother. The contract is voidable at the option of the mother and son it is
enforceable by law.

Undue Influence.
When the contract is entered under the persuasion of another party, there is
undue influence. This happens when one party is in position to dominate the
another or uses his post to obtain an unfair advantage.

Eg. A spiritual guru induced his devotees to gift their properties in return of
a promise of salvation of the devotee.

Difference between Coercion and Undue Influence

COERCION UNDUE INFLUENCE


1. Consent is obtained by 1. Consent is obtained by a person
threatening to commit suicide from the another a he dominate him.
2. It involves use of physical 2. It involves use of mental
weapons Eg. Gun pressure.
3. It involves criminal Act. 3. It does not involves criminal Act.

Misrepresentation.
When one person made another to enter into contract by disclosing of false
statement or non-disclosure of materials facts, it amounts to
misrepresentation.

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When the misrepresentation comes to the notice of the other party, he


may either rescind the contract or accept the contract with the condition he
must be placed in the position in which he would have been if the
representation made had been true.

Fraud
False representation has been made knowingly, unknowingly or recklessly
with an intention to make the other party to enter into a contract.

A contract induced by fraud is voidable at the option of the party


whose consent is not free.

Mistake
It is an erroneous belief about something. It may be mistake of law or
a mistake of fact.

Mistake of Law
a) Mistake of Law of the country
A party cannot escape from the performance of contract by giving the reason
that he does not aware of law. A mistake of law is not excused and the
contract cannot be avoided.

b) Mistake of Law of foreign country


It is treated as mistake of fact and the agreement is void.

2) Mistake of Fact
Agreement is entered under a mistake as to a matter fact essential to the
agreement.
Prformance of Contract?
When the parties to the contracthave fulfilled their obligations within the
time and in the prescribed manner, the contract is said to be performed.

Classification According to performance


Contract is classified based on its performance.
a) Executed Contract
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b) Executory Contract
c) Unilateral Contract
d) Bilateral Contract
a) Executed Contract
An executed contract is a one in which both the parties to the contract have
performed their obligations.

Eg. A agrees to paint a picture for B for Rs.100. When A paints the picture
and B pays the price i.e. when both the parties performed their obligations.,
the contract is said to be executed contract.

b) Executory Contract
An executory contract is one in which both the parties to the contract have to
perform their obligations.

Eg. A agrees to engage B as his servant in the next month.

c) Unilateral Contract or one sided contract or executed


consideration
Under unilateral contract, one party has to fulfill his obligation at the
formation of the contract, the other party having fulfilled their obligation
before the contract comes into existence.
Eg. A permits a railway coolie to carry his luggage and place it in a
carriage. A contract comes into existence as soon as the luggage is placed in
the carriage. But that time the coolie has already performed his obligation.
Now A has to pay the reasonable change to the coolie.

d) Bilateral Contract
It is similar to execuroty contract in which the obligation of both the parties
yet to be performed.

Contracts which need not be performed


The following are the contracts which need not be performed:
1) Impossible Contracts
2) When the new contract is substituted for the old one
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3) When the time of contract is extended


4) When the person at whose option it is voidable, rescinds it
5) When the promise neglects to afford the promisor reasonable facilities
for the performance of the contract
Eg. Contract with A and B to paint A’s house. When A fails to show his
house, B cannot fulfill his obligation.

6) Illegal Contracts.

Who has to perform the contract?


1) Promisor himself
The contract which involve the exercise of personal skill of the person is to
perform by himself only.

Eg. Contract to paint a picture or sing a song.

2) Agent
Agent is a person who is the representative of the promisor. When the agent
is appointed, the contract can be performed by the agent.

3) Legal representative
A general rule is that the legal representatives of the deceased promisor has
to perform the contract. The above rule is not applicable to the contract
which involves use of personal skill of the person.

4) Third person
If the promise accepts the performance of the contract by the 3 rd party, the 3rd
party to the contract can perform it. Afterwards the promisee cannot demand
the promisor to perform it.

Who can demand Performance?


It is only the promise who can demand the promisor to perform the contract.
Eg. A promises B to pay Rs. 500 to C. A does not pay the amount to C. Only
B can demand A fulfill his promise. C cannot file a case against him.
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Death of promisee

In case of death of the promise, his legal representative can demand


performance.

Time and place performance.

1) When no application is to be made and no time is specified


When the promise has to be performed without the application of the
promise and no time is mentioned, the contract is to be performed within
reasonable time period.

2)When time is specified and no application is to be made


When a promise is to be performed on a certain day, it may be performed by
the promisor at nay time during the usual hours of business on such day.
Eg. A promises B to deliver the goods on 1 st January. A has deliver
the goods after usual hour. Hence A has not performed his promise.

3) Application for performance of on a certain day and place


When the promisor has to perform the promise after the application by the
promise, it is the duty of the promisor to apply for the performance of the
contract. Such application is to be made at a proper place and within the
usual hours of business.

4) Application by the promisor to the promise to appoint place.


When a promise is to be performed without application by the promise and
the place is not fixed, it is the duty of the promisor to apply to the promise to
appoint a reasonable place for the performance of the promise.

Eg. A agrees to deliver 100 bags of cotton to B. A must apply to B to


appoint a reasonable place for the purpose of delivery of goods.

5) Performance in manner or at any time prescribed by the promise


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When the mode and time of performance of contract is mentioned, it must be


followed by the promisor accordingly. If the promise keeps silence regarding
the unprescribed mode and time, it is assumed that he has agreed the
unprescribed mode.

Write about Discharge of Contract? Mention various modes of


Contract.
Discharge of contract means termination of contractual relationship between
the two parties. A contract is discharged when the rights and obligations
created by the contract come to an end.

Modes of discharging a contract

1) Discharge by performance.
The contract is discharged when the parties to the contract have fulfilled
their obligations within a reasonable time and in the prescribed manner.
When one party has fulfilled his obligation, he also discharged and he
can take action against another party who did not perform his obligation.

The performance of the contract may be:


a) Actual performance
b) Attempted performance
Actual performance means both the parties to the contract have fulfilled their
obligations within a reasonable time and according to the prescribed manner.
Attempted performance or tender means it is not actual performance
but it is only an offer to perform the obligation. Where the promisor offer to
perform his promise, but the promise refuses to accept performance, it is
equal to the actual performance. But it is not applied in case of tender of
money.

2) Discharge by agreement or consent


The contract is terminated when parties to the contract agreed to discharge it.
The consent of the parties to terminate the contract may be expressed or
implied.
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Eg. A sells goods to B on the condition that he should pay the price within 7
days from the date of delivery of goods.

3) Discharge of contract by implied consent


a) Novation
Novation takes place when
i) a new contract is substituted for an existing contract between the
same parties.
ii) A new contract is entered on the same terms of the old contract
between one of the parties and third party.
Eg. A borrowed Rs.10,000 from B. A has mortgaged his property for
Rs.5000 in the place of the debt of Rs.10,000.

A borrowed money from C. There is a contract between A and C. Further


C has borrowed money from B. A agreed to pay the debt to B. Hence the
contract between A and C is discharged and a new contract between A
and B is created.

b) Rescission
It takes place when all the terms of contract are cancelled. It may happen
i) by mutual consent of the parties
ii) One party may rescined the contract and not willing to claim any
compensation from the party who did not perform his promise.
Eg. Agreement between A and B to supply goods after 6 months. If the
goods go out of the fashion. A and B rescined the contract.
c) Alteration
When one or more terms of the contract is altered with the consent of the
parties to the contract, the old contract is discharged.

d) Permission
Remission means acceptance of the lesser of the promise made.

Eg. A borrowed Rs.5000 from B. B accepted Rs.3000 in satisfaction of the


full debt Rs.5000.

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e) Waiver
When the two parties agreed that they are not bound by the contract, it is
called waiver. It is a mutual abandonment of the rights by the parties.

f) Merger
Merger takes place when a party acquires a superior right in the place or
inferior right in the same contract.

Eg. A holds B’s property under lease. Afterwards the lessee buys the
property.

Discharge by impossibility of performance.

i) Known to the parties


This is known as absolute impossibility. The agreement is void ab initio i.e.
impossible to perform at the time of entering into contract.
Eg. A agrees to put life into the dead wife of B

ii) Unknown to the parties


At the time of entering into contract, the parties are ignorant of the
impossibility of performance. The agreement is void on the ground of
mutual mistake. When the promisor alone knows about the impossibility of
performance at the time of entering into contract, he has to compensate the
promise for nay loss suffered by the promise.

Eg. A agred to marry B, who has already married C, marrying two person is
forbidden by law. A cannot marry B and he ahs to compensate her.

c) Impossibility arising subsequent to the formation of contract


It is also called post contractual or supervening impossibility. When the act
becomes impossible or unlawful, the contract becomes void.

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In the following cases the performance of contract becomes impossible.


a) Destruction of the subject matter of the contract.
b) Death or incapacity for personal service. The performance of an act is
impossible due to the death of the party, if it involves use of personal
skill of the person.
c) Change of Law
d) Out break of war.
e)
Impossibility of performance – Not an Excuse.
According to law, impossibility of performance is not an excuse for
non performance. When a person agrees to do something, he must perform it
unless its performance becomes absolutely impossible.
In the following cases, a contract is not discharged on the ground of
supervening impossibility.

a) Difficulty of performance
A contract is not discharged because of the reason that it is difficult to
perform it due to delays.

Eg. A agreed to supply timber to B between July and September. But he


could not supply it within a reasonable time due to war.

b) Commercial impossibility
A contract is not discharged because of the reason like non availability of
raw materials or sudden depreciation of currency.

Eg. A agreed to send goods by ship to B. But due to the out break of war the
shipping charge has been increased. It is not a reason for discharge of
contract.

c) Impossibility due to failure of third person.


When the promisor depends on the 3 rd for the fulfillment of contract, the
contract cannot be discharged on the ground that the third party failed to
fulfill his duty.
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Eg. A, as wholesaler, entered into a contract to supply a certain type of cloth


to B. As the manufacturer failed to produce the cloth. A could not supply the
cloth. A is liable to B for damages.
d) Strikes, lockouts and civil disturbances
The above reason will not be considered for the discharge of contract.

e) Failure of one of the object


When a contract consists of several object, the failure of one of the object
will not discharge the contract.

4) Discharge by lapse of time


The contract must be performed within a reasonable time period. Otherwise
it will terminate.
Eg. When the good are sold on credit, the debt is to be paid within the
expiry of a fixed period of credit. When it s not paid before the expiry of the
fixed period of credit, the price is to be paid within 6 months. If the price is
not paid and the creditor does not file a case for the recovery of price within
3 years, the debt becomes time barred and irrevocable.

5)Discharge by operation of law.


a) By death
When the performance of the contract depends on the use of the personal
skill, the contract will terminate on the death of the promisor.
b)By insolvency
A person who is discharged as an insolvent discharged from the past debt.
c) By unauthorized alteration of terms of a written agreement.
When any material alteration is done without the consent of another, the
other party can void the contract.
When the alteration is not material one, it willnot affect the validity of
the contract.

5) Discharge by breach of contract.


It occurs when a party to the contract fails to fulfill his obligation and the
injured party can file a suit against the person.
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The breach of contract may be


a) Actual Breach
b) Anticipatory Breach
a) Actual Breach
It may take
i) At the time when the performance is due.
Actual breach of contract happens when one party fails to fulfill his
obligation at the time when the performance is due.
Eg. A fails to deliver the goods on 25 th July which he has agreed at the time
of formation of contract.

ii) During the performance of the contract.


Actual breach of the contract also happens when one party fails to perform
his obligation during the course of performance. It may be:
a) Express repudiation.
Where one party refuses to perform his obligation. It is known by his word
spoken or act.
Eg. Agreement between the railway authorities & A to supply 1000 chairs.
On supplying of 800 chairs, the railway authority informed A to stop supply
of chairs. Hence the contract is discharged.

b) Implied repudiation
The performance of the obligation is not possible due to impossibility
created by the act of a party to the contract.
Eg. A person who was engaged by the Japanese Government to act as a
fireman had to leave the job when war broke out between Japan and China.

2) Anticipatory Breach
The party to the contract declares his impossibility of performing his
obligation before the performance is due.

Eg. A has informed B that he could not supply the goods which he has
agreed to supply in the next month.

What are the remedies for Breach of Contract?


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When contract is broken, the injured party has the following remedies.

1) Rescission
When a contract is broken by one party, the other will rescined and refuse
further performance.
Eg. A has failed to supply goods on the agreed date. B need not pay the
price.

If a person rescinds the contract, he is entitled to receive


compensation for the damages suffered by him because of non-fulfillment of
the contract by the another party.
2) Damages
It is a monetary compensation allowed to an injured party by the court for
the loss suffered by him because of non fulfillment of contract by other
party.
The rules regarding damages are given below:
a) Damages arising naturally – Ordinary damages
These damages are naturally and directly arising in the usual course of
contract because of its non fulfillment.

Eg. A agreed to sell wheat per quintal for Rs.450. The price has been
increased to Rs.500. A refused to sell the goods B can claim the damages of
Rs.50 per quintal.
In a contract for the sale of goods, the damages for the breach of
contract are the difference between the contract price and the market price.
b) Special damages
Special damages are those which arise on account of the special or unusual
circumstances. It can be claimed if the special circumstances are bought to
the notice of the other party. The damages must be in contemplation of the
parties at the time when the contract is entered.
Eg. A tailor has delivered the sewing machine and some cloth to a
railway authority to be delivered a t a place where the festival was to be
held. He expected to earn an exceptional profit at the festival but he did not
bring this fact to the notice of the railway authority. The goods were

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delivered after the conclusion of the festival. Held, he could not recover the
loss of profit.

c) Vindictive or Exemplary damages.


Where the damages for the breach of contract is in the form of punishment.
Normally damages for breach of contract is given by way of monetary
compensation.

Eg. I) Breach of promise to marry


Dishonour of customer cheque though he has sufficient balance.

d) Nominal damages
When the injured party has not suffered any loss because of breach of
contract, he can recover nominal amount i.e. small amount as damages.

Eg. B who has been employed in the partnership firm is declined to continue
his employment on the death of two partners. Held, he is entitled to recover
nominal amount as he has not suffered any loss.
e) Damages for the loss of reputation
In case of breach of contract, damages for loss of reputation is not
recoverable. Exception to the above rule is dishonoring of customer’s
cheque wrongly by the bank. If the customer is trader, he will be awarded
larger amount of damages though the amount of cheque is nominal. Others
can recover only small amount as damages.

f) Damages for inconvenience and discomfort.


Damages can be recovered for physical inconvenience and damaged caused
to the party because of breach of contract.
Eg. H his wife and children have transported to a wrong place and they have
to walk several miles to home. Held H can recover damages for the
inconvenience.

g) Mitigation of damages.
The injured party has to take all reasonable steps to avaid the loss caused by
the breach of contract. He cannot claim compensation from the other party
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when the loss is not due to breach of contract, but due to the negligence of
the injured person.
Eg. A agreed to deliver 500 bales of cotton to B on a fixed date. A
does not know about B’s mode of conducting business. A failed to deliver
the goods on a fixed date and B was forced to close his mill. Held, A is not
responsible for the loss suffered by B.

h) Difficulty of assessment
When it is difficult to estimate the damages, it cannot be given as reason for
non payment of damages. The court may estimate the loss.

Eg. A an artist agreed to attend a show in a theatre. B has advertised the


artist participation in the Newspaper. But A has failed to attend the show.
Held, B can claim damages through it it difficult to estimate the loss.

i) Cost of decree
The injured party can claim the damages as well as the cost spent by him to
file a suit.

j) Damages agreed upon in advance


The injured party can claim the damage which has been agreed in advance at
the time of information of contract.

Eg. A agreed to pay the compensation of Es.1000 if he fails to perform his


obligation, B can recover the damages not exceeding Rs.1000.

3) Quantum Meruit
Quantum Meruit means ‘as much as earned’. It arises where a contract,
which partly performed by the party has been discharged by the another
party. The person who has partly performed his promise, has the right to
receive remuneration for the act done by him.

Eg. A has been appointed as an M.D. After rendering service for three
months, it was found that the directors do not have the authority to appoint

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the M.D A has the right o receive remuneration for 3 months under quantum
meruit.

4) Specific Performance
For some cases awarding of damages is not a correct remedy. In these
situations, the court may direct the party to fulfill his obligation at the suit of
the party who is nit in breach.

Eg. A agreed to marry B. But after sometime he refuses to marry her. Held,
A must marry B.

5) Injuction
The court by issuing an order can restrict the person from doing something
which he has agreed not do so.

Eg. N, a film actress, agreed to act exclusively for W for one year. During
the year she agreed to act some other person’s film. Held, W could be
restrained by injuction from doing so.

IMPORTANT QUESTIONS :

1. Write A brief note on offer and acceptance (November 2017)


2. Define Contract. (April 2017)
3. Define contract and describe the essential of a valid contract(November 2017)
4. Discuss the Remedies for the breach of Contract(November 2017)
5. What are the remedies for breach of Contract? (November 2016)

UNIT II

SALE OF GOODS

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Contracts for the sale of goods are subject to the general legal
principles applicable to all contracts, such as offer and its acceptance, the
capacity of the parties, free and real consent, consideration, and legality of
the object. The general provisions of the Indian Contract Act continue to
apply to contracts for the sale of goods in so far as they are not inconsistent
with the express provisions of the Sale of Goods.

FORMATION OF CONTRACT OF SALE


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. There may
be a contract of sale between one part-owner and another. A contract of sale
may be absolute or conditional.
The term ‘contract of sale’ is a generic term and includes both a sale
and an agreement to sell.

Sale and agreement to sell. 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’.
But where the transfer of the property in the goods is to take place at a
future time or subject to some conditions thereafter to be fulfilled, the
contract is called an ‘agreement to sell’. An agreement to sell becomes a sale
when the time elapses or the conditions, subject to which the property in the
goods is to be transferred are fulfilled.

Essentials of a contract of sale. The following essential elements are


necessary for a contract of sale:
1. Two parties. There must be two distinct parties. i.e., a buyer and a
seller, to effect a contract of sale and they must be competent to
contract. ‘Buyer’ means a person who buys or agrees to buy goods.
‘Seller’ means a person who sells or agrees to sell goods. These two
terms are complimentary.
2. Goods. There must be some goods the property in which is or is to be
transferred from the seller to the buyer. The goods which from the
subject-matter of the contract of sale must be movable. Transfer of
immovable property is not regulated by the Sale of Goods Act.
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3. Price. The consideration for the contract of sale, called price, must be
money. When goods are exchanged for goods, it is not a sale but a
barter. There is, however, nothing to prevent the consideration from
being partly in money and partly in goods.
4. Transfer of general property. There must be a transfer of general
property as distinguished from special property in goods from the
seller to the buyer.
5. Essential elements of a valid contract. All the essential elements of a
valid contract must be present in the contract of sale.

Formalities of a contract of sale.


Contracts of sale how made. No particular form is necessary to
constitute a contract of sale. It is, like any other contract, made by the
ordinary method of offer (to buy or sell goods) by one party and its
acceptance (to sell or buy goods respectively) by the other party. It may be
made in writing or by word of mouth, or partly in writing and partly by word
of mouth. It may also be implied from the conduct of the parties, or from the
course of dealing between the parties.
The contract of sale may provide for the immediate delivery of the
goods, or immediate payment of the price or both, or for the delivery or
payment by instalments or that the delivery or payment or both shall be
postponed.

Sale and hire-purchase agreement.


A hire-purchase agreement is a contract whereby the owner of the
goods lets them on hire to another person called hirer or hire purchase on
payment of rent to be paid in instalemts and upon an agreement that when a
certain number of such instalments is paid, the property in the goods will
pass to the hirer. The hirer may return the goods at any time without any
obligations to pay the balance rent. A hire-purchase agreement is not a
contract of sale but only a bailment and the property in the goods remains in
the owner during the continuance of the bailment. In other words, it is a
bailment plus on agreement to sell.
Sale and Agreement to Sell

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According to Sec.4(3) of the Sale of goods Act, when the property in


the goods is transferred to the buyer immediately on the making of the
contract, then it is called a ‘sale’. On the other hand, when the property in
the goods is to be transferred on some future date or on the fulfillment of
certain conditions, then it is called an ‘agreement to sell’.
Eg. 1. A sells all the wheat lying in the godown to B. It is a contract of
sale, though goods have not yet been delivered.
2. A sells a television set to B on hire purchase basis on the condition
that the property in goods shall pass on the paymenet of last installment.
Hence, though the goods have been delivered, yet it is not a contract of sale
but is only an agreement to sell.
Nature of the contract.
A sale is an executed contract, while an agreement to sell is an
executory contract. In the case of a sale there is a contract coupled with
conveyance of the property in the goods. In the case of an agreement to sell,
there is only a contract, pure and simple. The moment property in the goods
is transferred to the buyer, an agreement to sell fructifies itself into a sale.
Transfer of property.
In a sale, the property in the goods passes from seller to buyer
immediately when the contract is made. In other words, the moment the
contract of sale is made, the seller ceases to be the owner of the goods.
Payment of price and delivery of goods are no conditions for transferring the
property in the goods.
Eg. A buys a wrist-watch from B on 5th December and the price to be paid
after a week. It is a contract of sale. A becomes the owner of the watch
though the price is yet to be paid.
In an agreement to sell, the property in the goods does not pass
immediately, but it is to pass on some future date or on the fulfillment of
some condition. Thus the seller continuous to be the owner of goods until
that date or till the fulfillment of those conditions.
If in the above example, A agrees to buy the wrist –watch from B, on
the condition that if it is approved by A’s father, then it is an agreement to
sell. The property in good will pass from B to A only when A’s father
approves the watch.
Creation of right.
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A sale creates a jus in rem(right against the whole world), since the
buyer becomes the absolute owner of the goods and can use the same in any
manner he likes. An agreement to sell creates only a jus in personam(right
against an individual). As such, the buyer’s rights are only personal. He can
sue the seller for damages for breach but not for the recovery of the goods by
specific performance.
Risk of loss.
In a sale the risk of loss is that of the buyer. In a contract of sale
because ownership passes immediately to the buyer,the risk also passes. The
rule is risk follows ownership. So whosoever is the owner of the goods shall
bear the risk. Thus, in a contract of sale, if the goods are destroyed the loss
falls on the buyer even though the goods are in the possession of the seller.
Eg. A buys a radio set from B and agrees to take the delivery on the
following day. As a result of fire in the shop that radio set is also destroyed.
Here A shall be liable to pay the price because he will have to bear this loss
since the ownership had already passed to him.
In an agreement to sell, on the other hand, where the ownership in
goods has not yet passed but is yet to pass from seller to buyer. If the goods
are destroyed such loss will have to be borne by the seller, even though he
goods may be in the possession of the buyer.
Consequences of the breach.
Breach by the buyer – in case of sale if the buyer refuses to accept the
goods or to pay for them, the seller can sue for the price, even though the
goods are still in his possession. But in an agreement to sell, if there is a
breach by the buyer, then the seller can only sue for damages and not for the
price, even though the goods are in the possession of the buyer.
Right to re-sell.
In a contract of sale because the property in goods is with the buyer, a
seller who is in possession of goods, cannot resell such goods. If the seller
re-sells, then the original buyer has not only a personal remedy against the
seller for damages but he can also recover the goods from the third person.
The right to recover the goods from the third person is lost if the
subsequent buyer had bought the goods in good faith without notice of the
previous sale.

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In an agreement to sell, the property in the goods remains with the


seller, therefore, he can dispose them of in any manner he likes. The buyer’s
only remedy against the seller is to sue him for damages, he cannot recover
the goods from the subsequent buyer.
Insolvency of the buyer. In the case of a sale, if the buyer becomes an
insolvent without paying for the goods, ownership having passed to him, the
seller has to deliver the goods to the Official Receiver or Assignee. In that
event, the seller becomes entitled only to a rateable dividend towards the
price of the goods.
In the case of an agreement to sell, however, property not having
passed to the buyer, the seller can refuse to deliver the goods to the Receiver
of the insolvent unless the price is paid by him.
Insolvency of the seller. In the case of a sale, if the seller is adjudged an
insolvent after the payment o the price by the buyer, the buyer will be
entitled to claim the identical goods from the Official Receiver.
Under these circumstances, in the case of an agreement to sell, the
buyer cannot claim the identical goods since property has not passed to him,
but is only entitled to rateable dividend for the price paid.
THE PRICE
Sec.2(10) defines price as “money consideration for a sale of goods”. Money
means legal tender money in circulation. Old and rate coins are not included
in the definition of the term money.
Ascertainment of Price
1. The price in a contract of sale may be fixed by the contract or may be
left to be fixed in a manner thereby agreed or may be determined by
the course of dealing between the parties(Sec9(1).
2. Where the price is not determined in accordance with the foregoing
provisions, the buyer shall pay the seller a reasonable price. What is a
reasonable rice is a question of fact depending on the circumstances of
each particular case.(Sec.9(2)
3. Where there is an agreement to sell goods on the terms that the price
is to be fixed by the valuation of a third party and such third party
cannot or does not make such valuation, the agreement is thereby
avoided (Sec.10(1))

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4. Where such third party is prevented from making the valuation by the
fault of the seller or buyer, the property not in fault may maintain a
suit for damages against the party in fault. (Sec.10(2))
Eg. A agree to sell ten casks of oil to B at a price to be fixed by C. In case
C refuses to fix the price, the contract between A and B will be void. If,
however, C is willing to fix up the price but is prevented either by A or B
from doing so, the aggrieved party will be entitled to sue the defaulting
party for damages.

Provisions relating to conditions and warranties


Provisions relating to performance of contract of sale
Rights of unpaid seller and Remedial measures
Provisions relating to auction sale

IMPORTANT QUESTIONS:

1. What is Void agreement. (April 2017)


2. Write short notes on Simple Contract. (November 2017)
3. How is a contract of sale made? State brief the necessary
formalities of the contract of sale(November 2017)
4. Briefly Explain the term Meetings and Resolutions(November
2017)
5. Explain the Provisions Relating to Auction Sale,GSt. (November
2016)

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UNIT III
What is meant by company.Define.
A company, in common parlance, means a group of persons associated
together for the attainment of a common end, social or economic. It
represents different kinds of associations, both business and otherwise.
Generally, the term company shall mostly be concerned with registered or
incorporated companies.
The term registered company means a company incorporated under
the companies Act 1956 or some earlier Companies Act. Companies
incorporated under the companies Act, 1956 are mostly business companies
but they may also be formed for promoting art, charity, research, religion,
commerce, or any other useful purpose.
Definition
Lindley defines a company as “an association of many persons who
contribute money or money’s worth to a common stock and employ it in
some common trade or business and who share the profit or loss arising
therefrom. The common stock so contributed is denoted in money and is the
capital of the company. The persons who contribute it, or to whom it
belongs are members. The proportion of capital to which each member is
entitled is his share. Shares are always transferable although the right to
transfer them is often more or less restricted.”

Explain about the kinds of companies.


I. Classification on the Basis of Incorporation
1.Statutory Companies:
These are the companies which are created by a special Act of the
Legislature. Eg: the Reserve Bank of India, the State Bank of India, the Life
Insurance Corporation, the Industrial Finance Corporation, the Unit Trust of
India. These are mostly concerned with Public utilities.Eg: Railways,
Tramways, Gas And Electricity Companies and enterprises of national
importance, the provisions of the companies Act, 1956 apply to them, if
they are not inconsistent with the provisions of the special Acts under which
they are formed.

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2. Registered Companies: These are the companies which are formed and
registered under the companies Act 1956, or were registered under any of
the earlier companies Acts. These are by far the most commonly found
companies.

II.CLASSIFICATION ON THE BASIS OF LIABILITY


On the basis of liability companies may be classified into:
1. Companies with limited liability. These may be classified into:
(a) Companies limited by shares, or
(b) Companies limited by guarantee, or
2. Companies with unlimited liability
1. Companies with limited liability
(1) Companies limited by shares.
Where the liability of the members of a company is limited to the amount
unpaid on the shares, such a company is known as a company limited by
shares. The liability can be enforced during the existence of the company
as also during the winding up of the company. If the shares are fully
paid, the liability of the members holding such shares is nil.
Companies limited by shares are the most common. It is in the light of
this type of company (public company) that the term’company’ was
defined earlier. A company limited by shares may be a public company
or a private company.
(2) Companies limited by guarantee.
Where the liability of the members of a company is limited to a fixed
amount which the members undertake to contribute to the assets of the
company in the event of its being wound up, the company is called a
company limited by guarantee. It has a legal personality distinct from its
members. The liability of its members is limited. The Articles of such a
company must state the number of members with which the company is
to be registered.
Companies limited by guarantee are not formed for the purpose of
profit but for the promotion of art, science, culture, charity, sports,
commerce or for some similar purpose. They may or may not have a
share capital.

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2. Unlimited companies
Sec.12 specifically provides that any 7 or more persons (2 or more in
case of a private company) may form an incorporated company, with or
without limited liability. A company without limited liability is known as
an unlimited company. In case of such a company, every member is
liable for the debts of the company, as in an ordinary partnership, in
proportion to his interest in the company.
An unlimited company may or may not have a share capital. If it has a
share capital, it may be a public company or a private company.

III. CLASSIFICATION ON THE BASIS OF NUMBER OF MEMBERS .


From the point of view of the general public and on the basis of number
of members, a company may be-
1. a private company, or
2. a public company.
1. Private company
A private company is normally what the Americans call a ‘close
corporation’. According to Sec3(1) (iii), a ‘private company’ means a
company which has a minimum paid-up capital of Rs. 1,00,000 or such
higher paid –up capital as may be prescribed by its capital.
(a) restricts the right to transfer its shares, if any. This restriction is meant
to preserve the private character of the company:
(b) limits the number of its member to 50 not including its employee-
members (present or past)
(c ) prohibits any invitation to the public to subscribe for any shares in, or
debentures of, the company.
(d) Prohibits any invitation or acceptance of deposits from persons other
than its members, directors or their relatives.
Every private company existing on the commencement of the Companies
(Amendment) Act, 2000 with a paid-up capital of less than Rs.1,00,000
shall, with in a period of two years from such commencement, enhance its
paid-up capital to Rs.1,00,000.
It may be noted that the number of debenture-holder in a private company
may exceed 50 as there is no restriction on their number in the definition.

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The only restriction is that a private company cannot issue debentures to the
public at large. Joint holders of shares are treated as a single member.

2. Public Company. A public company means a company which


(a) has a minimum paid up capital of Rs. 5 lakh or such high paid
up capital, as may be prescribed:
(b) is a private company which is a subsidiary of a company which
is not a private company.
Every public company, existing on the commencement of the
Companies (Amendment) Act, 2000, with a paid-up of less than
Rs,5,00,000 shall, within a period of two years from such
commencement, enhance its paid-up capital to Rs.5,00,000.

Distinction between a public company and a private company


1. Minimum capital. A private company must have a minimum
paid-up capital of Rs.1,00,000 whereas a public limited
company must have a minimum paid up capital of Rs.5,00,000.
2. Minimum number. The minimum number of persons required
to form a public company is 7. It is 2 in case of a private
company.
3. Maximum number. There is no restriction on maximum number
of members in a public company, whereas the maximum
number cannot exceed 50 in a private company.
4. Number of directors. A public company must have at least 3
directors whereas a private company must have at least 2
directors.
5. Restriction on appointment of directors. In the case of a public
company, the directors must file with the Registrar a consent to
act as director or sign an undertaking for their qualification
shares. The directors of a private company need not do so.
6. Restriction on invitation to subscribe for shares. A public
company invites the general public to subscribe for the shares
in, or the debentures of, the company. A private company by its
Articles prohibits any such invitation to the public.

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7. Transferability of shares/debentures. In a public company, the


shares and debentures are freely transferable. In a private
company the right to transfer shares and debentures is restricted
by the Articles.
8. Special privileges. A private company enjoys some special
privileges. A public company enjoys no such privileges.
9. Quorum. If the Articles of a company do not provide for a
larger quorum, 5 members personally present in the case of a
public company are quorum for a meeting of the company. It is
2 in the case of a private company.
10. Managerial remuneration. Total managerial remuneration in a
public company cannot exceed 11 per cent of the net profits. No
such restriction applies to a private company.

Special privileges of a private company


1. Number of members. A private company may have only 2
members.
2. Allotment before minimum subscription. A private company
can allot shares before the minimum subscription is subscribed
for or paid.
3. Prospectus or statement in lieu of prospectus. A private
company may allot shares without issuing a prospectus or
delivering to the Registrar a statement in lieu of prospectus.
4. Issue of new shares. When a public company issues new shares,
after the expiry of 2 years from its formation or at any time
after the expiry of 1 year from the date of first allotment of
shares, whichever is earlier, a private company has first to offer
these to the existing equity shareholders pro rata. However, the
members in a general meeting may, by a special resolution,
decide otherwise. There is no such provision in case of private
companies.
5. Kinds of companies. A private company may issue share capital
of any kind, and with such voting rights, as it may think fit.
6. Commencement of business. A private company can commence
business immediately on incorporation.
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7. Index of members. A private company need not keep an index


of members.
8. Statutory meeting and statutory report. A private company need
not hold statutory meeting or file with the Registrar the
statutory report.
9. Demand for poll. Even one member having the right to vote and
present in person or by proxy(if not more than 7 such members
are personally present) may demand a poll. If the number of
members present is more than 7, two members present in
person or by proxy may demand a poll.
10.Managerial remuneration. The rule of overall maximum
managerial remuneration does not apply to a private company
which is not a subsidiary of a public company, the overall
managerial remuneration must not exceed 11 per cent of the net
profits.
11.Number of directors. A private company need not have more
than 2 directors.
12.Rules regarding directors. The rules regarding directors of a
private company are less stringent. For example, it is not
necessary for a private company to file with the Registrar the
consent of a director to act as such; the company may provide
additional grounds for disqualification of directors and their
vacation of office ; a director can vote on a contract in which he
is interested.
When does a private company become a public company?
1. Conversion by default. Where a default is made by a private
company in complying with the essential requirements of a private
company(viz., restriction on transfer of shares, limitation of the
number of members to 50 and prohibition of invitation to the public to
buy shares or debentures), the company ceases to enjoy the privileges
and exemptions conferred on a private company.In such a case, the
provisions of the Companies Act apply to it as if it were not a private
company. NCLT may relieve the company from the consequences as
aforesaid, if it is of opinion that the non-compliance was accidental or
due to inadvertence or other sufficient cause. It may also grant relief if
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on some grounds it is just and equitable. It may, however, impose


such terms and conditions as seem to it just and expedient.
2. Conversion by choice or volition. If a private company so alters its
Articles that they do not contain the provision which make it a private
company, it shall cease to be a private company as on the date of the
alteration. It shall then file with the Registrar, within 30 days, either a
prospectus or a statement in lieu of prospectus. When this is done, the
company becomes a public company.

A private company which becomes a public company shall also-


1. file a copy of the resolution altering the Articles, within 30 days of
passing thereof, with the Registrar.

2.take steps to raise its membership to at least 7 if it is below that number on


the date of conversion, and also increase the number of its directors to more
than 2 if it is below that number.

3.alter the regulations contained in the Articles which are inconsistent with
those of a public company.

Conversion of a public company into a private company


A private company may be converted into a private company by passing a
special resolution. The special resolution should be to change the Articles of
the company so as to include the conditions as prescribed in Se.3(1)(iii)
which make a company a private company. An alteration made in the
Articles which has the effect of converting a public company into a private
company, shall have effect only when such alteration has been approved by
the Central Government. Where the alteration has been approved by the
Central Government a printed copy of the Articles as altered shall be filed by
the company with the Registrar within 1 month of the date of receipt of
approval.

IV. CLASSIFICATION ON THE BASIS OF CONTROL


On the basis of control, companies may be classified into:
1. Holding companies, and

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2. Subsidiary companies
1. Holding company. A company is known as the holding company of
another company if it has control over that other company. According
to Sec, 4(4), a company is “deemed to be the holding company of
another if, but only if, that other is its subsidiary.”
2. Subsidiary company. A company is known as a subsidiary of another
company when control is exercised by the latter (called holding
company) over the former called a subsidiary company. According to
Sec. 4(1), a company (say, company S0 is deemed to be a subsidiary
of another company (say, company H) in the following 3 cases.
(1) Company controlling composition of Board of directors. Where a
company (Company H) controls the composition of Board of
directors of another company (Company S), the latter (Company S)
becomes the subsidiary of the former (Company H). For this purpose
the composition of Company S’s Board of directors is deemed to be
controlled by Company H if company H can appoint or remove all or
a majority of directors of Company S.

(2) Holding of majority of shares. Where a company holds more than


half in nominal value of equity share capital of another company
(Company S), the latter (Company S) becomes the subsidiary of the
former (Company H).

(3) Subsidiary of another subsidiary. Where a company (Company S)


is subsidiary of another company (say Company H), which is itself
subsidiary of the controlling company (Company H), the former
(Company S) becomes the subsidiary of the controlling company
(Company H)

V. CLASSIFICATION ON THE BASIS OF OWNERSHIP


1. Government company, or
2. Non – Government company. (It is controlled and operated by
private capital)
Government company

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A government company means any company in which not less than


51 percent of the paid-up share capital is held by
(a) the Central Government, or
(b) any State Government or Governments, or
(c ) partly by the Central Government and partly by one or more State
Governments. For eg, State Trading Corporation of India Ltd, and
Minerals and Metals Trading Corporation of India Ltd, are Government
companies. The subsidiary of a Government company is also a
Government company.
Foreign company
It means any company incorporated outside India which has an
established place of business in India (Sec.591 (1). Eg. Representatives
of a foreign company frequently come and stay in a hotel in India for
purchasing raw material, machinery, cotton etc., the foreign company has
a place of business in India.
Where a minimum of 50 percent of the paid up share capital (whether
equity or preference or partly equity and partly preference) of a foreign
company is held by one or more citizens of India or/and by one or more
bodies corporate incorporated in India, whether singly or jointly, such
company shall comply with such provisions as may be prescribed as if it
were an Indian company.

ONE MAN COMPANY


This is a company (usually private) in which one man holds
practically the whole of the share capital of the company, and in order to
meet the statutory requirements of minimum number of members, some
dummy members who are mostly his relations or friends, hold just 1 or 2
shares each. The dummy members are usually nominee of the principal
shareholders who is the virtual owner of the business and who carries it
on with limited liability.

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Explain about the formation of the company.


Before a company is formed, certain preliminary steps are necessary. Eg.,
whether it should be a private company or a public company. What its
capital should be, and whether it is worthwhile forming a new company or
taking over the business of an already established concern. All these steps
are taken by certain persons known as “promoters”.
INCORPORATION OF COMPANY
Mode of forming incorporated company
Any 7 or more persons (2 or more in case of a private company) associated
for any lawful purpose may form an incorporated company, with or without
limited liability. They shall subscribe their names to a Memorandum of
Association and also company so formed may be:
1. a company limited by shares, or
2. a company limited by guarantee, or
3. an unlimited company.
Documents to be filed with the Registrar
Before a company is registered, it is desirable to ascertain from the
Registrar of Companies ( for the State in which the registered office of the
company is to be situate) if the proposed name of the company is approved.
Then the following documents duly stamped together with the necessary
fees are to be filed with the Registrar.
1. The Memorandum of Association duly signed by the subscribers.
2. The Articles of Association, if any, signed by the subscribers to the
Memorandum of Association. A Public company limited by shares
need not have its own Articles of Association. It may instead adopt
Table A in Schedule I to the Act.
3. The agreement, if any, which the company propose to enter into with
any individual for appointment as its managing or whole-time director
or manager.
4. A list of the directors who have agreed to become the first directors of
the company (this applies to a public company limited by shares) and
their written consent to act as directors and take up qualification
shares.
5. A declaration stating that all the requirements of the Companies Act
and other formalities relating to registration have been complied with.
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Such declaration shall be signed by any of the following persons:


Viz.,
(a) an Advocate of the Supreme Court or of a High Court ; or
(b) an attorney or a pleader entitled to appear before a High Court; or
(c) a secretary or a chartered accountant in whole-time practice in India,
who is engaged in the formation of the company; or
(d) a person named in the Articles as a director, manager or secretary of
the company
Then within 30 days of the date of incorporation of the company a notice
of the situation of the registered office of the company shall be given to
the Registrar who shall record the same.

CERTIFICATE OF INCORPORATION
When the requisite documents are filed with the Registrar, the
Registrar shall satisfy himself that the statutory requirements regarding
registration have been duly complied with. In exercising this duty, the
Registrar is not required to carry out any investigation. If the Registrar is
satisfied as to the compliance of statutory requirements, he retains and
registers the Memorandum, the Articles and other documents filed with
him and issues a ‘ certificate of incorporation’, i.e., of the formation of
the company
By issuing certificate of incorporation the Registrar certifies under his
hand that the company is incorporated and in the case of a limited company,
that the company is limited.

Effects of Incorporation
When a company is registered and a certificate of incorporation is issued by
the Registrar, three important consequences follow:
1. The company becomes a distinct legal entity. Its life commences from
the date mentioned in the certificate of incorporation.
2. The company acquires a perpetual succession. The members may
come and go, but it goes on for ever, unless it is wound up.
3. The company’s property is not the property of the shareholders. The
shareholders have a right to share in the profits of the company when

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realized and divided. Likewise, any liability of the company is not the
liability of the individual shareholders.
A private limited company can commence business immediately after its
incorporation. A public company has to obtain certificate to commence
business before it can commence business.

PROMOTOR
Who is a promoter?
A promoter is a person who does the necessary preliminary work
incidental to the formation of a company. The first persons who control a
company’s affairs are its promoters. It is they who conceive the idea of
forming the company, with reference to a given object and then to set it
going. It is they who take the necessary steps to incorporate the company,
provide it with share and loan capital and acquire the business or property
which it is to manage. When these things have been done, they hand over
the control of the company to its directors, who are often the promoters
themselves, under a different name.
What is memorandum of association?
A fundamental document. The Memorandum of Association is a
document of great importance in relation to the proposed company. It
contains the fundamental conditions upon which alone the company is
allowed to be incorporated. It is the charter of the company and defines
its raison d’etre(i.e., reason for existence). It lays down the area of
operation of the company. It also regulates the external affairs of the
company in relation to outsiders. Its purpose is to enable shareholders
and those who deal with the company to know what its permitted range
of enterprise is. It not only shows the object of the formation of a
company but also the utmost possible scope of it, as it were, the area
beyond which the actions of the company cannot go; inside that area the
shareholders may make such regulations for their own governance as
they think fir.

Printing and signing of Memorandum


Memorandum of Association of a company shall be

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(a) printed,
(b) divided into paragraphs numbered consecutively, and
(c) signed by 7 (2 in case of a private company) subscribers.
Contents of Memorandum
The Memorandum of every company shall contain the following clauses
(described as conditions of the company’s incorporation)
1. The name of the company, with ‘Limited’ as the last word of the name
in the case of a public limited company and with ‘Private Limited’ as
the last words of the name in the case of a private limited company.
2. The State in which the registered office of the company is to be
situate.
3. The objects of the company which shall be classified as-
(a) the main objects of the company to be pursued by the company on its
incorporation and objects incidental or ancillary to the attainment of
the main objects; and
(b) other objects of the company not included in (a)
4. In the case of companies (other than trading corporations) with objects
not confined to one State, the States to whose territories the objects
extend.
5. Limited liability. The Memorandum of a company limited by shares
or by guarantee shall also state that the liability of its members is
limited.
6. Share capital. In the case of a company having a share capital, the
amount of share capital with which the company is to be registered
and the division thereof into shares of a fixed amount. In such a
company each subscriber shall take at least one share and shall write
opposite his name the number of shares he takes. The Memorandum
of a company limited by guarantee shall also state that each member
undertakes to contribute a certain sum to the assets of the company, if
need be, in the event of its being wound up.

ALTERATION OF MEMORANDUM

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Alteration of conditions

1. Change of name. A company may change its name by a special


resolution and with the approval of the Central Government signified
in writing. But a change of name which merely involves the deletion
or addition of the word ’Private’ on the conversion of a public
company into a private company or vice versa does not require the
approval of the Central Government.
By ordinary resolution. Some times , a company is registered by a name
which, in the opinion of the Central Government, is identical with, or too
merely resembles, the name of an existing company. In such a case, the
company-
may change its name, by ordinary resolution and with the previous
approval of the Central Government.

Fresh certificate of incorporation. Where a company change its name,


the registrar shall enter the new on the Register in the place of the former
name. It shall also issue to the company a fresh certificate of
incorporation.

2. Change of registered office


(a) Change of registered office from one place to another within a state.
A company can change the place of its registered office from one
place to another within a state. The company has to make an
application to the Regional Director for confirmation. This
confirmation shall be communicated to the company within 4 weeks.
The company shall then file with the Registrar a certified copy of the
confirmation by the Regional Director, within 2 months from the date
of confirmation., together with a printed copy of the Memorandum of
Association as altered. The Registrar shall register the same within
one month from the date of filing of such document.
(b) Change of registered office from one state to another. A company
may, by special resolution, change the place of its registered office
from one State to another for certain purposes referred to in Sec.

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3. Alteration of objects. The power of alteration of objects is subject to


two limits, namely-
1. Substantive or physical limit, and
2. procedural limit.
Substantive limit. The objects of a company may be altered by special
resolution so as to enable the company-
(a) To carry on its business more economically or more efficiently. The
alteration must however leave the business of the company
substantially what it was before the alteration. This clause
contemplates only such change in the mode of conducting business as
will enable it to be carried on more economically or more efficiently.
(b) To attain its main purpose by new or improved means. The emphasis
here is on attaining the company’s main purpose. The word ‘purpose’
is more restricted than ‘objects’ and consequently the alteration must
be one to carry out the main purpose of the company rather than one
of the objects of the company, although that object may be described
in the Memorandum as a main objects.
(c) To enlarge or change the local area of its operations. An alteration of
this nature may necessitate an alteration in the name of the company.
(d) To carry on some business which may conveniently or
advantageously be combined with the objects specified in the
Memorandum. A company may be allowed to carry on some business
which is a departure from the business already carried on provided
such business is one which can conveniently or advantageously be
combined with the existing business of the company and is not
destructive of or inconsistent with the existing business.
(e) To restrict or abandon any of the objects specified in the
Memorandum
(f) To sell or dispose of the whole, or any part, of the undertaking, or of
any of the undertakings, of the company; or
(g) To amalgamate with any other company or body of persons.

4. Change in liability clause


A company limited by shares or guarantee cannot change its Memorandum
so as to impose any additional liability on the members or to compel them to
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buy additional shares of the company unless all the members agree in
writing to such change either before or after the change.

5. Change in capital clause. The power of alteration shall be exercised


by the company in general meeting and shall not require to be
confirmed by the Tribunal. Ordinary resolution for such a purpose is
enough. A cancellation of shares in pursuance of Sec.94, however
shall not be deemed to be a reduction of share capital within the
meaning of the Companies Act, 1956.
The company shall give notice of the alteration of capital to the
Registrar within 30 days after doing so.
Explain about the articles of association.

The Articles of Association or just Articles are the rules, regulations and
bye-laws for the internal management of the affairs of a company. They
are framed with the object of carrying out the aims and objects as set out
in the Memorandum of Association.
The Articles are next in importance to the Memorandum of
Association which contains the fundamental conditions upon which alone
a company is allowed to be incorporated.
Write about the its contents.
1. Share capital, rights of shareholders, variation of these rights,
payments of commissions, share certificates.
2. Lien on shares
3. Calls on shares
4. Transfer of shares
5. Transmission of shares
6. Forfeiture of shares
7. Conversion of shares into stock
8. Share warrants
9. Alteration of capital
10.General meetings and proceedings threat.
11.Voting rights of members, voting and poll, proxies.

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12.Directors, their appointment, remuneration, qualification, powers and


proceedings of Board of directors.
13.Manager
14.Secretary
15.Dividends and reserves
16.Accounts, audit and borrowing powers
17.Capitalisation of profits
18.Winding up.
Form and signature of Articles
The Articles shall be
(a) printed,
(b) divided into paragraphs, and
(c) signed by each subscriber of the Memorandum (who shall add his
address, description and occupation, if any in the presence of at least 1
witness who will attest the signature and likewise add his address,
description and occupation, if any.
ALTERATION OF ARTICLES
Companies have been given very wide powers to alter their Articles. The
right to alter the Articles is so important that a company cannot in any
manner, either by express provision in the Articles or by an independent
contract, deprive itself of the power to alter its Articles.
Procedure of alteration. A company may, by passing a special resolution,
alter its Articles any time. Again any Articles may be adopted which could
have been lawfully included originally. A copy of every special resolution
altering the Articles shall be filed with the Registrar within 30 days of its
passing and attached to every copy of the Articles issued thereafter. Any
alteration so made in the Articles shall be as valid as if originally contained
in the Articles.

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Distinguish the term Memorandum and articles of


association.
Memorandum Articles
1. It is the charter of the company 1. They are the regulations for the
indicating the nature of its business, internal management of the
its nationality, and its capital. It also company and are subsidiary to the
defines the company’s relationship Memorandum.
with outside world.
2. It defines the scope of the 2. They are the rules for carrying
activities of the company, or the out the objects of the company as
area beyond which actions of the set out in the Memorandum.
company cannot go.
3. It being the charter of the 3. They are subordinate to the
company, is the supreme document. Memorandum. If there is a conflict
between the Articles and the
Memorandum, the latter prevails.
4. Every company must have its 4. A company limited by shares
own Memorandum. need not have Articles of its own. In
such a case, Table A applies.
5. There are strict restrictions on its 5. They can be altered by a special
alteration. Some of the conditions of resolution, to any extent, provide
incorporation contained in it cannot they do not conflict with the
be altered except with the sanction Memorandum and the Companies
of the National Company Law Act.
Tribunal
6. Any act of the company which is 6. Any act of the company which is
ultra vires the Memorandum is ultra vires the Articles (but is intra
wholly void and cannot be ratified vires the Memorandum) can be
even by the whole body of confirmed by the shareholders.
shareholders.

What is prospectus. Define.


In order to finance the company activities, a company needs capital
which is raised by a public company by the issue of a prospectus inviting

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deposits or offers for shares and debentures from the public. A private
company is prohibited from making any invitation to the public to
subscribe for any shares in, or debentures of, the company. Hence it need
not issue a prospectus.

Definition
Sec 2 (36) defines a prospectus as ‘ any document described or issued as
a prospectus and includes any notice, circular, advertisement or other
document inviting deposits from the public or inviting offers from the
public for the subscription or purchase of any shares in, or debentures of,
a body corporate. ‘ In simple words, any document inviting deposits from
the public or inviting offers from the public for the subscription of shares
or debentures of a company is a prospectus.

Prospectus to be in writing. A prospectus must be in writing. An oral


invitation to subscribe for shares in, or debentures of, a company, or
deposits is not a prospectus. Likewise, an advertisement in television or a
film is not treated to be a prospectus.

Invitation to Public. A document is not a prospectus unless it is an


invitation to the public to subscribe for shares in, or debentures of, a
company. But, if the document satisfies the condition of invitation to the
public, it is a prospectus even though it is issued to a defined class of the
public.

Offer to the public. i.e., public issue. Whether shares have been ‘offered
to the public’ is a matter of fact and will depend on the circumstances of
a particular case.

Write about the contents of Prospectus


Prospectus is the window through which an investor can look into the
soundness of a company’s venture. This is done through prospectus which
must secure the fullest disclosure of all material and essential particulars and
lay the same in full view of all intending purchasers of shares.
Matters to be stated and reports to be set out in prospectus
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Sec,56 lays down that every prospectus issued (a) by or on behalf of a


company, or (b) by or on behalf of any person engaged or interested in the
formation of a company, shall
1. state the matters specified in Part 1 of Schedule II, and
2. set out the reports specified in Part II of Schedule II.

Part I of Schedule II
1. General Information. (a) Name and address of registered office of the
company, (b) Consent of the Central Government for the present issue
and declaration of the Central Government about non-responsibility for
financial soundness or correctness of statements.(c) Names of Regional
Stock Exchange and other stock exchanges where application is made for
listing of present issue,(d) Provisions relating to punishment for fictitious
applications.(e) Declaration about refund of the issue if minimum
subscription of 90 per cent is not received within 90 days from closure of
the issue.(f) Declaration about the issue of allotment/refund within a
period of 10 weeks.(g) Date of opening of the issue. Date of closing of
the issue. Date of earliest closing of the issue.(h) Name and address of
auditors and lead managers.(i) Name and address of trustee under
debenture trust deed (in case of debenture issue). (f) Raising from
CRISIL (Credit Rating Information Services of India Limited) or any
rating agency obtained for the proposed debenture/preference share issue.
If no rating has been obtained, this fact should be stated. (k)
Underwriting of the issue (Names and addresses of the underwriters and
the amount underwritten by them)

II. Capital structure of the company. (a) Authorised, issued, subscribed and
paid-up capital. (b0 Size of present issue giving separately reservation for
preferential allotment to promoters and others. (c) Paid-up capital:
(i) after the present issue,
(ii) after conversation of debentures (if applicable)
III. Terms of the present issue. (a) Terms of payments. (b) Rights of the
instruments holders, (c) How to apply-availability of forms, prospectus and

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mode of payment. (d) Any special tax benefits for company and its
shareholders.
IV. Particulars of the issue. (a) Objects, (b) Project cost, (c) Means of
financing (including contribution of promoters).
V. Company, management and project. (a) History and main objects and
present business of the company. (b) Subsidiary (ies) of the company, if any.
(c) Promoters and their background. (d) Names, addresses and occupations
of manager, managing director and other directors including nominee
directors, whole-time directors (giving their directorship in other
companies). (e) Location of project. (f0 Plant, and machinery, technology
process, etc. (g) Collaboration agreements, (h) Infrastructure facilities for
raw material, water, electricity, etc. (i) Schedule of implementation of the
project and progress so far. (f) Nature of product, approach to marketing and
export possibilities, (k) Future prospects – expected capacity utilization
during the first 3 years from the date of commencement of production, and
the expected year when the company would be able to earn cash profits and
net profits. Stock market data for share/debentures of the company (high/low
price in each of the last 3 years and monthly high/low during the last 6
months (where applicable).

VI. Particulars in regard to the company and other listed companies


under the same management which made any capital issue during the last
3 years : (a) Name of the Company, (b) Year of the issue, (c) Type of the
issue (Public/Rights/Composite), (d) Amount of issue, (e) Date of closure of
issue, (f) Date of completion of delivery of share/debenture certificates, (g)
Date of completion of the project, where object of the issue was financing of
the project, (h) Rate of dividend paid.

VII. Outstanding litigation pertaining to – (a) Matters likely to affect


operation and finance of the company including disputed tax liabilities of
any nature, and criminal prosecution launched against the company and the
directors, (b) Particulars of default, if any, in meeting statutory dues,
institutional dues, and dues towards debenture-holders, fixed depositors, (c)
any material developments after the date of the latest balance sheet and their
likely impact.
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VIII. Management perception of risk factors (eg., sensitivity to foreign


exchange rate fluctuations, difficult in availability of raw material or in
marketing of products, cost/time over-run etc.,)

Part II of Schedule II
A. General information
1. Consent of Directors, Auditors, Solicitors / Advocates, Managers to Issue.
Registrar of issue, Bankers to the company. Bankers to the issue and
Experts.
2. Experts; opinion obtained, if any.
3. Change, if any, in directors and auditors during the last 3 years, and
reasons thereof.
4. Authority for the issue and details of resolution passed for the issue.
5. Procedure and time schedule for allotment and issue of certificates.
6. Names and addresses of the company Secretary, Legal Adviser, Lead
Managers, Co-managers, Auditors, Bankers to the company,

B. Financial information
1. Report by the auditors. A report by the auditors of the company with
respect to (a) its profits and losses (distinguishing items of non recurring
nature) and assets and liabilities ; and (b) the rates of dividends paid by the
company during the preceding 5 financial years.
2. Reports by the accountants. (1) A report by the accountants (who shall be
qualified under the Act for appointment as auditor of a company and who
shall be named in the prospectus) on the profits or losses of the business for
the preceding 5 financial years, and on the assets and liabilities of the
business on a date which shall not be more than 120 days before the date of
the issue of the prospectus. This report is required to be given if the proceeds
of the issue of the shares or debentures are to be applied directly in the
purchase of any business.

(2)A similar report on the accounts of a body corporate, by an accountant


(who shall be named in the prospectus) if he proceeds of the issue are to
be applied in the purchase of shares of the body corporate so that body
corporate becomes a subsidiary of the acquiring company.

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(3) Principal terms of loans and assets charged as security.

C. Statutory and other information


1. Minimum subscription.
2. Expenses of the issue giving separately fees payable to : (a) Advisers,
(b) Registrars to the issue. (c) Managers to the issue. (d) Trustees for the
debenture-holders.
3. Underwriting commission and brokerage.
4. Previous issue for cash.
5. Previous public or rights issue, if any (during last 5 years);
(a) Date of Allotment: Closing Date:
Date of Refunds: Date of listing on the stock exchange.
(b)If the issue is at premium or discount, the amount thereof.
(a) Premium, if any, on each share which had been issued within the 2
years preceding the date of the prospectus.
6. Commission or brokerage on previous issue.
7. Issue of shares otherwise than for cash.
8. Debentures and redeemable preference shares and other instrument
issued by the company outstanding as on the date of prospectus.
9. Option to subscribe.
10.Details of purchase of property: If the company proposes to acquire a
business which has been carried on for less than 3 years, the length of
time during which the business has been carried on.
11.Details of directors, proposed directors, whole-time directors, their
remuneration, appointment and remuneration of managing directors,
interests of directors, their borrowing powers and qualification shares.
12.Rights of members regarding voting, dividend, lien on shares and the
process for modification of such rights and forfeiture of shares.
13.Restrictions, if any, on transfer and transmission of shares/debentures.
14.Revaluation of assets, if any (during last 5 years)
15.Material contacts and inspection of documents.
Define shares.
Definition

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A share is the interest of a shareholder in a company. The capital of a


company is divided into certain indivisible units of a fixed amount. These
units are called shares. ’Share’ means share in the share capital of a
company. It includes stock except where a distinction between stock and
share is expressed or implied. A share has also been defined as ‘an interest
having a money value and made up of diverse rights specified under the
Articles of Association’. It carries with it certain rights and liabilities while
the company is a going concern or while the company is being wound up. In
this sense it may be defined as a ‘bundle of rights and obligations.’
A share is evidenced by a share certificate. A share certificate is issued
by a company under its common seal. It specifies the shares held by a
member and is prima facie evidence of the title of the member to the shares.

Explain the types of shares.


Under the Companies Act, 1956, a company can issue two types of shares,
viz.,
1. preference shares, and
2. equity shares.

1. Preference shares (Sec.85(1)). Preference shares, with reference to


any company limited by shares, are those which have 2
characteristics:
(a) They have a preferential right to be paid dividend during the lifetime
of the company; and
(b) They have a preferential right to the return of capital when the
company goes into liquidation.
2. Equity shares (Sec.85(2)). Equity shares, with reference to any
company limited by shares, are those which are not preference shares.

Sweat equity shares. The expression “sweat equity shares” means equity
shares issued at a discount or for consideration other than cash for
providing know-how or making available rights in the nature of
intellectual property rights or value additions, by whatever name called.

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All limitations, restrictions and provisions relating to equity shares


shall be applicable to sweat equity shares also.

Kinds of preference shares


Preference shares are of the following kinds, viz.,
1. Cumulative preference shares. These are the shares on which
dividend goes on accumulating till it is fully paid off. The arrears of
any year’s dividend are carried forward as a charge upon the
subsequent year’s profits. The company is bound to pay dividend only
if it has sufficient profits available for distribution. If it goes into
liquidation, arrears of dividends are payable-
(1) if the Articles contain express provision to this effect, or
(2) the Articles, upon their true construction, give the preference
shareholders a clear right to the dividend.
2. Non-cumulative preference shares. These are the shares on which
the dividend does not go on accumulating. If there are no profits or
there are inadequate profits in any year, these shares get no dividend
or get a partial dividend. They cannot calm arrears of dividends of any
year/years out of the profits of the subsequent years.
3. Participating preference shares. These shares are not only entitled
to a fixed rate of dividend but also to a share in the surplus profits
which remain after the claims of the equity shareholders (up to a limit
say 15 per cent) have been met. The surplus profits are distributed in a
certain agreed ratio between the holders of the participating
preference shares and the holders of equity shares.
4. Non-participating preference shares. These shares are entitled to
only a fixed rate of dividend. The holders of these shares do not share
in the surplus profits which go to the equity shareholders.
5. Convertible preference shares. These are the shares which entitle
their holder to convert them into equity shares within a certain period.
6. Non-convertible preference shares. These are the shares which do
not confer on their holder a right of conversion into equity shares.
7. Redeemable preference shares. A company limited by shares may,
if so authorized by its Articles, issue preference shares which are to be
redeemed.
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Define debenture.
The most usual form of borrowing by a company is by the issue of
debentures. According to Sec. 2 (12), ‘debenture’ includes debenture stock,
bonds and any other securities of a company, whether constituting a charge
on the assets of the company or not. Sec,2 however, does not explain as to
what a debenture really is. In short, it means a document which either creates
a debt or acknowledges it.
Debentures are commonly issued in a manner similar to the issue of shares
through a prospectus. The amount might be payable by instalments on
application, allotment and calls. But usually the amount is payable in one
lump sum.
Characteristic features of a debenture. In the light of this definition, the
characteristic features of a debenture are as follows;
1. I is issued by a company and is usually in the form of a
certificate which is an acknowledgment of indebtedness.
2. It is issued under the company’s seal. It need not, however, be
necessarily under the company’s seal.
3. It is one of a series issued to a number of lenders. But a single
debenture is also not common. Thus a mortgage of a company’s
property to a single individual as security for a loan is a
debenture within the definition given earlier.
4. It usually specifies a particular period or date as the date of
repayment. It also provides for the payment of a specified
principal and interest at the specified date. But a company is not
debarred from issuing perpetual or irredeemable debentures.
5. It generally creates a charge on the undertaking of the company
or some parts of its property; but there may be debentures
without any such charge.
6. A debenture-holder does not have any right to vote in the
company meetings.
Nature of debenture. The debentures of a company are a movable property,
transferable in the manner provided by the Articles.

Whate are the kinds of debentures

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Debentures may be of the following kinds:


1. Bearer debentures. These debentures, also known as unregistered
debentures, are payable to its bearer. These are regarded as negotiable
instruments and are transferable by delivery, and a bona fide
transferee for value is not affected by the defect in the title of the prior
holder.
2. Registered debentures. These are debentures which are payable to
the registered holders. A holder is one whose name appears both on
the debenture certificate and in the company’s register of debentures.
The registered holder of the debentures can transfer them like shares,
but a transfer to be complete has to be registered with the company. It
should further be noted that these debentures are transferable in the
manner specified in the conditions endorsed thereon. Registered
debentures are not negotiable instruments.
3. Secured debentures. Debentures which create some charge on the
property of the company are known as secured debentures. The
charges may be a fixed charge or a floating charge.
4. Unsecured or naked debentures. Debentures which do not create
any charge on the assets of the company are known as unsecured or
naked debentures. The holders of these debentures like ordinary
unsecured creditors may sue the company for recovery of the debt.
5. Redeemable debentures. Debentures are usually issued on the
conditions that they shall be redeemed debentures. They may be re-
issued after redemption in accordance with the provisions of Sec.(2)
6. Irredeemable or perpetual debentures. When debentures are
irredeemable, they are called perpetual debentures. A debenture will
be treated as irredeemable where either there is no period fixed for
repayment of the principal amount or repayment of it is made
conditional on the happening of an event which may not happen for an
indefinite period or may happen only in certain specified and
contingent events, e.g., the winding up of the company. They are not
invalid because of the condition that they are made irredeemable or
redeemable only on the happening of some contingency, or on the
expiration of a period, however long, say, 100 years after the issue of
debentures.
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7. Convertible debentures. These debentures give an option to the


holders to convert them into preference or equity shares at stated rates
of exchange, after a certain period. If the holders exercise the right of
conversion, they cease to be lenders to the company and become
members instead.
The convertible debentures may be fully convertible (FCD) or
partly convertible (PCD).
8. Non convertible debentures. These debentures do not give any
option to their holders to convert them into preference or equity
shares. They are to be fully paid as and when they mature.

Explain about share holders rights.


Voting Rights (Secs.87 and 88)
Equity shareholders’ rights (Sec.87(1). An equity shareholder of a
company limited by shares has a right to vote on every resolution placed
before it. His voting right on a poll is proportion to his share of the paid-
up equity capital of the company. The right of vote is an individual right
in respect of which a member has the right to say:
“Whether I vote with the majority or with the minority, you shall
record my vote; that is, a right of property belonging to my interest in the
company and if you will not, I shall institute legal proceedings to compel
you.”

Preference shareholders’ rights (Sec.87(2). A preference shareholder has


a right to vote on those resolutions which directly affect his rights. Any
resolution for winding up the company or for the repayment or reduction
of its share capital is deemed directly to affect the rights of the preference
shareholders.
But holders of cumulative preference shares have a further right to
vote on all resolutions of the company at any meeting if their dividends
have remained unpaid for an aggregate period of not less than 2 years
preceding the date of commencement of the meeting. In the case of non
cumulative preference shares, they have a right to vote on all resolutions
of the company at any meeting if their dividends have remained unpaid

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for 2 financial years immediately preceding the meeting or for any 3


years during a period of 6 years ending with the financial year preceding
the meeting. The voting right of the preference shareholders on a poll
shall be in the same proportion which the capital paid up in respect of the
preference shares bears to the total paid-up equity capital of the company.
The above rules do not apply to a private company which is not a
subsidiary of a public company.

What is the meaning of director?


A company in the eyes of law is an artificial person. It has no physical
existence. It has neither soul nor a body of its own. As such, it cannot act
in its own person.
The directors are the brain of a company. They occupy a pivotal
position in the structure of the company. They are in fact the mainspring
of the company.
Definition (Sec.2(13)
‘Director’ includes any person occupying the position of director, by
whatever name called. The important factor to determine whether a
person is or is not a director is to refer to the nature of the office and its
duties. It does not matter by what name he is called. If he performs the
functions of a director,, he would be termed a director in the eyes of law
even though he may be named differently. A director may, therefore, be
defined as a person having control over the direction, conduct,
management or superintendence of the affairs of a company.

Only individuals can be directors. (Sec.253). No body corporate,


association or firm can be appointed director of a company. Only an
individual can be so appointed.

Number of directors
Every public company (other than a deemed public company) shall
have at least 3 directors and every other company (eg., private company,
a deemed public company) at least 2 directors.

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How the directors are appointed?


1.First directors (Sec254 and Clause 64 of Table A).
(a) The Articles of a company usually name the first directors by their
respective names or prescribe the method of appointing them.
( b)If the first directors are not named in the Articles, the number of directors
and the names of the directors shall be determined in writing by the
subscribers of the Memorandum or a majority of them
(C)If the first directors are not appointed in the above manner, the
subscribers of the Memorandum who are individuals become directors of the
company. They shall hold office until directors are duly appointed in the first
annual general meeting.

1. Appointment of directors by the company.(Sec.255 to 257), (263


and 264) Directors must be appointed by shareholders in general
meeting. In the case of public company or a private company which is
a subsidiary of a public company, at least 2/3rds of the total number of
directors shall be liable to retire by rotation. Such directors are called
rotational directors and shall be appointed by the shareholders in
general meeting.
Ascertainment of directors retiring by rotation and filling of
vacancies.(Sec.256).(1) At the annual general meeting of a public
company or a private company which is a subsidiary of a public
company, 1/3rd (or the number nearest to 1/3rd of the rotational
directors shall retire from office.
( 2)The directors to retire by rotation at every annual general meeting
shall be those who have been longest in the office since their last
appointment.
(1) At the annual general meeting at which a director retires by rotation,
the company may fill up the vacancy (thus created) by appointing the
retiring director or some other person.
(2) If the place of the retiring director is not filled up, the meeting may
resolve not to fill the vacancy. If there is no such resolution, the
meeting shall stand adjourned till the same day in the next week. If at
the adjourned meeting also, the place of retiring director is not filled
up, nor is there a resolution not to fill the vacancy, the retiring
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director shall be deemed to have been re-appointed at the adjourned


meeting.
2. Appointment of directors by directors (Secs.260, 262 and 313).
The directors of a company may appoint directors-
(1) As additional directors (Sec.260) Any additional directors appointed
by the directors shall hold office only up to the date of the next annual
general meeting of the company. The number of directors and
additional directors must not exceed the maximum strength fixed for
the Board by the Articles.
If the annual general meeting of a company is not held or
cannot be held, the additional director shall vacate his office on
the day on which the annual general meeting should have been
held.
(2) In a casual vacancy (Sec.262) In the case of a public company, or a
private company which is a subsidiary of a public company, if the
office of any director appointed by the company in general meeting is
vacated before his term of office expires in the normal course, the
resulting casual vacancy may be filled by the Board of directors at a
meeting of the Board. A vacancy caused by the retirement of a
director by rotation is not a casual vacancy; such a vacancy has to be
filled by the annual general meeting.
(3) As alternate director (Sec.313). An alternate director can be
appointed by the Board if it is so authorized by (i) Articles of the
company, or (ii) a resolution passed by the company in the general
meeting.
He shall act for a director, called ‘the original director’ during
his absence for a period of at least 3 months from the date in
which Board meetings are ordinarily held.
(4) Appointment of directors by third parties. The Articles under
certain circumstances give power to the debenture-holders or other
creditors, e.g., a banking company or financial corporation, who have
advanced loans to the company to appoint their nominees to the
Board. The number of directors so appointed shall not exceed 1/3 rd of
the total number of directors, and they are not liable to retire by
rotation.
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(5) Appointment by proportional representation (Sec. 265). The


Articles of a company may provide for the appointment of not less
than 2/3rds of the total number of directors of a public company or of
a private company which is a subsidiary of a public company
according to the principle of proportional representation. The
proportional representation may be by a single transferable vote or by
a system of cumulative voting or otherwise. The appointment shall be
made once in 3 years and interim casual vacancies shall be filled in
the manner as provided in the Articles.
(6) Appointment of directors by the Central Government (Sec.408).
Sec.408 empowers the Central Government to appoint such number
of directors on the Board of a company as the Tribunal may, by order
in writing, specify as necessary to effectively safeguard the interests
of the company or its shareholders or the public interest. The
appointment will be for a period not exceeding 3 years on any one
occasion. The purpose of the appointment is to prevent the affairs of
the company from being conducted either in the manner-
(a) which is oppressive to any members of the company; or
(b) which is prejudicial to the interests of the company or to public
interest.

What are the qualifications of directos?


A director must be
(a) be an individual
(b) be competent to contract, and
© hold a share qualification, if so required by the Articles.
The following persons are disqualified for appointment as directors of a
company:
(a) A person of unsound mind.
(b) An undischarged insolvent.
(c) A person who has applied to be adjudicated as an insolvent and
his application is pending.
(d ) A person who has been convicted by a Tribunal of any offence
involving moral turpitude (say conviction under the Foreign Exchange
Regulation) Act.1973 and sentenced in respect thereof to imprisonment for
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not less than 6 months, and a period of 5 years has not elapsed from the date
of expiry of the sentence.

(e ) A person whose calls in respect of shares of the company held for more
than 6 months have been in arrear.
(f ) A person who is disqualified for appointment as director by an order of
the Tribunal under Sec. 203 (which deals with power of the Tribunal to
restrain fraudulent persons from managing companies) on the ground of
fraud or misfeasance in relation to the company.
(g) A person who is already a director of a public company which –
(i) has not filed the annual accounts and annual returns for any three
continuous financial years commencing on and after the first day of April,
1999; or
(ii) has failed to repay its deposit or interest thereon on due date redeem its
debentures on the date or pay dividend and such failure continues for one
year or more.
The disqualification mentioned in Clause (d) and (e) may be removed by
the Central Government by notification in the Official Gazette.
A private company which is not a subsidiary of a public company may, by
its Articles, provide that a person shall be disqualified for appointment as a
director on any additional grounds.
How the dorectors are removed?
Directors may be removed by-
1. Shareholders (Sec.284). The shareholders may remove a
director before the expiry of his period of office by passing an
ordinary resolution. This does not, however,
(a) apply to the case of a director appointed by the Central
Government under Sec.408.
(b) authorize, in the case of a private company, removal of a
director holding office for life on April 1, 1952.
(c) Apply to the case of a company which has adopted the system
of electing 2/3rds of its directors by the principle of
proportional representation.

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2. Central Government (Secs.388-B to 388-E). The Central


Government may, in certain circumstances, remove managerial
personnel from office on the recommendation of the Tribunal.
3. Removal by Tribunal.(Sec.402). Where, on an application to
the Tribunal for prevention of oppression or mis-management,
the Tribunal finds that the relief ought to be granted, it may
terminate, set aside or modify any agreement between the
company and the managing director or any other director or the
manager. When the appointment of a managerial personnel is
so terminated or set aside, he cannot sue the company for
damages or compensation for the loss of office, nor can he be
appointed, except with the leave of the Tribunal, in any
managerial capacity in the company for a period of 5 years
from the date of the order.

Explain the meetings of the directors.


Directors of a company exercise most of their powers at the meetings of
the Board. The Companies Act contains the following provisions relating to
Board meetings.
1.Number of meetings – once in every 3 months (Sec.285). In the case of
every company (whether public or private) a meeting of its Board of
directors shall be held at least once in every 3 months and at least 4 such
meetings shall be held in every year.
2. Notice of meetings (Sec.286). Notice of every meeting of the Board of
directors of a company shall be given in writing to every director for the
time being in India, and at his usual address in India.
3. Quorum for meetings (Sec.287) The quorum for a meeting of the Board
shall be 1/3rd of its strength (any fraction contained in that 1/3 rd being
rounded off as one0, or 2 directors, whichever is higher.

Explain about the powers of the director.


General powers of the Board (Sec.291) The Board of directors of a
company is entitled to exercise all such powers and to do all such acts and

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things as the company is authorized to exercise and do. This means the
powers of the Board of directors are co-extensive with those of the company.
This proposition is, however, subject to two conditions:
First, the Board shall not do any act which is to be done by the company in
general meeting.
Second, the Board shall exercise its powers subject to the provisions
contained in the Companies Act, or in the Memorandum or the Articles of
the company or in any regulations made by the company in general meeting.
But no regulation made by the company in general meeting shall invalidate
any prior act of the Board which would have been valid if that regulation
had not been made.
Powers to be exercised at Board meetings (Sec,292). The Board of
directors of a company shall exercise the following powers on behalf of the
by means of resolutions passed at the meetings of the Board, viz., the power
to-
(a) make calls on shareholders in respect of money unpaid on
their shares;
(b) issue debentures;
(c) borrow moneys otherwise than on debentures (say through
public deposits);
(d) invest the funds of the company; and
(e) make loans.
Powers to be exercised with the approval of company in general meeting
(Sec.293). The Board of directors of a public company, or of a private
company which is a subsidiary of a public company, shall exercise the
following powers only with the consent of the company in general meeting;
(a) To sell, lease or otherwise dispose of (say under amalgamation
scheme) the whole, or substantially the whole, of the undertaking
of the company.
(b) To remit or give time for repayment of any debt due to the
company by a director except in the case of renewal or continuance
of an advance made by a banking company to its director in the
ordinary course of business.

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(c) To invest (excluding trust securities) the amount of compensation


received by the company in respect of the compulsory acquisition
of any undertaking or property of the company.
(d) To borrow moneys where the moneys to be borrowed (together
with the moneys already borrowed by the company) are more than
the paid –up capital of the company and its free reserves (that is to
say reserves not set apart for any specific purpose, e.g., balance in
the share premium account, general reserve, profit and loss
account, capital redemption account). The amount of temporary
loans raised from banks in the ordinary course of business is
excluded.
The expression ‘temporary loans’ does not include loans raised
for the purpose of financing expenditure of a capital nature.
(e) To contribute to charitable and other funds not directly relating
to the business of the company or the welfare of its employees,
amounts exceeding in any financial year Rs. 50,000 or 5 per cent
of the average net profits of the three preceding financial years,
whichever is greater. The Board may contribute up to Rs. 50,000
even if the company is incurring a loss.
Every resolution passed by the company in general meeting to
borrow moneys shall specify the total amount up to which
moneys may be borrowed by the Board of directors. Likewise
every resolution passed by the company in general meeting to
contribute to charitable and other funds shall specify the total
amount which may be contributed to charitable and other funds
in any financial year.
Explain the duties of directos.
The statutory duties of directors have been discussed at appropriate places.
Again, there are certain duties of a general nature of the following type:
1. Fiduciary duties, and
2. Duties of care, skill and diligence.
1. Fiduciary duties. As fiduciaries, the directors must –
(a) exercise their powers honestly and bona fide for the benefit of the
company as a whole ; and

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(b) not place themselves in a position in which there is a conflicts


between their duties to the company and their personal interests.
They must not make any secret profit out of their position. If they do,
they have to account for it to the company.
Fiduciary duties owed to the company. The fiduciary duties of directors
are owed to the company and not to the individual shareholders.
2. Duties of care, skill and diligence. Directors should carry out their
duties with reasonable care and exercise such degree of skill and
diligence as is reasonably expected of persons of their knowledge and
status. He is not bound to bring any special qualifications to his office.
Standard of care. The standard of care, skill and diligence depends upon
the nature of the company’s business and circumstances of the case.
There are various standards of the care depending upon.
(a) the type and nature of work;
(b) division of powers between directors and other officers.
(c) General usages and customs in that type of business; and
(d) Whether directors work gratuitously or remuneratively.
Other duties of directors. The other duties of a director are-
1. to attend Board meetings.
2. not to delegate his functions except to the extent authorized by the Act
or the constitution of the company, and
3. to disclose his interest.
These duties have been discussed at appropriate places.
Explain the liabilities of the directors.
The liabilities of directors may be discussed under the following four
heads :
1. Liability to third parties. This may arise-
(1) Under the Act. Liability of directors to third parties may arise in
connection with the issue of a prospectus which does not contain the
particulars required by the Companies Act, or which contains
material misrepresentations.
Directors may also incur personal liability-
(a) on their failure to repay application money if minimum subscription
has not been subscribed.(Sec.69)

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(b) on an irregular allotment of shares to an allottee (and likewise to the


company) if loss or damage is sustained.
(c) On their failure to repay application money if the application for the
securities to be debt in on a recognized stock exchange is not made or
is refused.(Sec.73)
(d) On failure by the company to pay a bill of exchange, hundi,
promissory note, cheque or order for money or goods wherein the
name of the company is not mentioned in legible characters.
(Sec.147).
2. Independently of the Act. Directors, as agents of a company, are not
personally liable on contracts entered into as agents on behalf of the
company.
But there are a number of exceptions to this rule. If a director
fails to exclude personal liability, for instance, by signing a
negotiable instrument without mentioning the company’s name
and the fact that he is signing on company’s behalf, he is
personally liable to the holder of such instrument. He is also
personally liable if he acts in his own name.
3. Liability to the company. The liability of directors towards the
company may arise from-
(1) ultra vires acts. Directors are personally liable to the company in
respect of ultra vires acts and it is not necessary to prove fraud in
such cases, e.g., when they pay dividends out of capital or when they
dissipate the funds of the company in ultra vires transactions. They
are liable jointly and severally and, inter se, they have a right to
rateable contribution.
(2) Negligence. A director may incur liability for the negligence in the
exercise of his duties. There is no statutory definition of negligence,
and as such each case has to be decided after due consideration of the
particular facts thereof. The question to be answered in each case is:
“has the director exercised the necessary care and shown the
necessary diligence in the discharge of his duties?’. If he has not, he
is liable. If he has, there can be no question of liability. It is essential
in an action for negligence tha the company suffers some damage, as

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negligence without damage or damage without negligence is not


actionable,
(3) Breach of trust. Directors of a company, being in a fiduciary
position, hold the position of trustees as regards its money and
property which comes into their hands and of the powers entrusted to
them by the Articles. They must discharge their duties as such
trustees in the best interest of the company. They are liable to the
company for any loss resulting from breach of trust.
Directors are also accountable to the company for any secret
profits they might have made in transactions on behalf of the
company.
(4) Misfeasance. Directors are liable to the company for misfeasance
which means ‘wilful misconduct’ of directors for which they may be
sued in a Law Court. In case of misfeasance proceedings the directors
may apply for relief under Sec.633.
3. Liability for breach of statutory duties. There are numerous
statutory duties of directors which they must carry out. Most of these
duties relate to maintenance of proper accounts, filing of returns or
observance of certain statutory formalities. If they fall to perform these
duties, they render themselves liable to penalties.

4. Liability for acts of his co-directors. A director is not liable for the
acts of his co-directors provided he has no knowledge and he is not a
party. His co-directors are not his servants or agents who can by their
acts impose liability on him.
Explain the term meetings and resolutions.
The meetings of a company may be classified as follows:
1. General meetings which include-
(1) Statutory meeting,
(2) Annual general meetings and,
(3) Extraordinary meetings.
These meetings are called general meetings of a company as these are
meetings of all the members of the company.

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2. Class meetings of shareholders of different classes of shares where a


company has more than one class of shares.
II. Meetings of creditors and debenture-holders
(a) during the lifetime of the company, and
(b) at the time of winding up of the company,
III. Meetings of directors.

I. GENERAL MEETINGS OF SHAREHOLDERS


1. STATUTORY MEETING (Sec.165)
Every company limited by share and every company limited by
guarantee and having a share capital shall, within a period of not less
than one month nor more than six months from the date at which the
company is entitled to commence business, hold a general meeting of
the members of the company. This meeting is called the ‘statutory
meeting’. This is the first meeting of the shareholders of a public
company and is held only once in the lifetime of a company.
Statutory Report. The Board of directors shall, at least 21
days before the day on which the meeting is to be held,
forward a report, called the ‘statutory report’, to every
member of the company.
Contents of the statutory report. The statutory report of a
company contains all the necessary information relating to the
formational aspect of the company. It sets out the following
information.
(a) Total shares allotted- the total number of shares allotted,
distinguishing shares allotted as fully or partly paid-up
otherwise than in cash and stating in the case of shares partly
paid-up, the extent to which they are so paid-up, and in either
case, the consideration for which they have been allotted.
(b) Cash received- the total amount of cash received by the
company in respect of all shares allotted, distinguished as
aforesaid.

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(c) Abstract of receipts and payments- an abstract of the


receipt and of the payments made up to a date within 7 days
of the report.
(d) Directors and auditors – the names, addresses and
occupations of the directors, auditors, and manager and
secretary, and the changes which have occurred in such
names, addresses and occupations since the date of the
incorporation of the company.
(e) Contracts- the particulars of any contract which is to be
submitted to the meeting for its approval or modification.
(f) Underwriting contract- the extent to which any
underwriting contract has not been carried out and the reasons
thereof.
(g) Arrears of calls- the arrears due on calls from every director
and from the manager.
(h) Commission and brokerage- the particulars of any
commission or brokerage in connection with the issue or sale
of shares and debentures to any director or to the manager.
Certification of report. The statutory report shall be certified as
correct by not less than 2 directors of the company. One of these
directors shall be a managing director, if there is one. After the
statutory report has been certified, the auditors of the company
shall also certify it as correct as regards its first 3 contents.

A copy of the report to be sent to the Registrar. The Board shall


deliver a copy of the certified statutory report to the Registrar for
registration forthwith, after copies thereof have been sent to the
members of the company.

2. ANNUAL GENERAL MEETING (Secs.166 and 167)


Every company shall in each year hold in addition to any other meetings a
general meeting as its annual general meeting and shall specify the meeting
as such in the notice calling it. There shall not be an interval of more than 15
months between one annual general meeting of the company and the next. A
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company may hold its first annual general meeting within a period of 18
months from the date of its incorporation. In that event it is not necessary for
the company to hold any annual general meeting in the year of its
incorporation in the next year.
The Registrar may, for any special reason, extend the time for holding any
annual general meeting by a period not exceeding 3 months. But no
extension of time is granted for holding the first annual general meeting.
There should be at least one annual general meeting per year and as many
meetings as there are years.
Time and place of meeting. Every annual general meeting shall be called
during business hours on a day that is not a public holiday. It shall be held
either at the registered office of the company or at some other place within
the city, town or village in which the registered office of the company is
situate.
21 days’ notice. A general meeting of a company may be called by giving
not less than 21 days’ notice in writing. It may be called with a shorter
notice if it is agreed to by all the members entitled to vote in the meeting.

Consequences of failure to hold annual general meeting. If a company


falls to hold an annual general meeting-
(1) any member can apply, under Sec.167, to the Company Law
Board for calling the meeting.
(2) The company and every officer who is in default shall be
punishable with fine.
Importance of annual general meeting. It is only at the annual general
meeting of a company that the shareholders can exercise any control over
the affairs of the company. They can confront the directors their elected
representatives, at least once in a year. They also get an opportunity to
discuss the affairs and review the working of the company. They can also
take the necessary steps for the protection of their interests. They can also
take up any other business relating to the affairs of the company for
discussion. Appointment of auditors is also made at the annual general
meeting. Annual accounts are presented for the consideration of
shareholders and dividends are declared in the annual general meeting.

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3. EXTRAORDINARY GENERAL MEETING (Sec.169)


A statutory meeting and an annual general meeting are ordinary meetings.
Any meeting other than these meetings is called an extraordinary general
meeting. It is called for transacting some urgent or special business which
cannot be postponed till the next annual general meeting.

REQUISITES OF A VALID MEETING


A meeting can validly transact any business if the following requirements
are satisfied.
1. Proper authority
The proper authority to convene a general meeting (whether statutory,
annual general or extraordinary) of a company is the Board of directors. The
Board should pass a resolution to call the general meeting.
If some defect in the appointment or qualification of the directors present
at the Board meeting comes to light after the Board has acted bona fide, such
a defect is not necessary fatal to the validity of these resolution to call the
meeting.

2.Notice of meeting.
A proper notice of the meeting should be given to the members and all
others who are entitled to attend the meeting.
Length of notice (Sec.171). A general meeting of a company may be called
by giving not less that 21 days’ notice in writing to the members. The use of
the word ‘may’ in Sec.171 does not mean that the notice can be dispensed
with.
A general meeting may be called by giving a notice of less than 21 days if
it is so agreed-
(1) In the case of an annual general meeting, by all the members entitled to
vote thereat. The members can voluntarily consent to a shorter notice either
before or after the meeting.
(2) (a) In the case of any other meeting (e.g., a statutory meeting or an
extraordinary general meeting) of a company having a share capital, by
members holding not less than 95 percent of the paid-up share capital as give
a right to vote, and

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(b) in a company not having share capital, by members having not less than
95 percent of the voting power exercisable at the meeting.
Notice to whom. Notice of every meeting of a company shall be given to-
(1) every member of the company entitled to vote;
(2) the persons on who, the shares of any deceased or insolvent
members may have devolved ; and
(3) the auditor or auditors of the company.
Contents of notice. Every notice of a company calling a meeting shall
specify the place and the day and hour of the meeting. It shall also contain a
statement of the business to be transacted at the meeting.
The notice of a general meeting must fairly and intelligently convey the
purpose for which the meeting is called to enable a person having the right
to attend reasonably to make up his mind whether to attend or not. It should
not be misleading or equivocal.
3. Quorum for meeting (Sec.174).
‘Quorum’ means the minimum number of members who must be present
in order to constitute a valid meeting and transact business thereat. The
quorum is generally fixed by the Articles.
5 members personally present in the case of a public company
(other than a deemed public company), and 2 in case of any other
company, shall be the quorum for a meeting of the company. If
minimum number of members are not present for the meeting the
Board of directors may adjourn the meeting to some other day.
4. Chairman of the meeting (Sec.175)
Presiding officer of the meeting. A chairman is necessary to conduct a
meeting. He is the presiding officer of the meeting. Unless, the Articles of a
company otherwise provide, the members personally present at the meeting
shall elect one of themselves to be the chairman of the meeting on a show of
hands. If a poll is demanded on the election of the chairman, it shall be taken
forthwith. In such a case, the chairman elected on a show hands shall
exercise all the powers of the chairman. If some other person is elected
chairman as a result of the poll, he shall be the chairman for the rest of the
meeting.
Conduct of the meeting. The way in which a meeting is to be conducted is
a matter for the chairman, with the assent of the persons properly present, to
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be determined in the light of the general law and the company’s Articles of
Association.
4. Minutes of the meeting (Sec.193 to 196)
Minutes are a record of what the company and directors do in meeting.
Minutes of proceedings of meetings (Sec.193). Every company shall
keep a record of all proceedings of every general meeting and of all
proceedings of every meeting of its Board of directors and of every
committee of the Board. This is done by making within 30 days of the
conclusion of every such meeting concerned, entries of the proceedings in
the books kept for that purpose. These records are known as minutes.
Minutes book. The book in which the record of the proceedings of a
meeting is kept is known as the minutes book. Separate minute books are
required to be kept for shareholders’ general meetings of the company and
directors’ meetings and usually there are also separable minutes books for
committee meetings of the Board of directors.
Numbering of pages. The pages of every minutes book shall be
consecutively numbered. In no case the attaching or pasting of papers of
proceedings of a meeting allowed in minutes book.
Signing of minutes. Each page of the minutes which records proceedings of
a Board meeting shall be initialed or signed by the chairman of the same
meeting or the next succeeding meeting. The last page of the record of
proceedings of each meeting in the minutes book shall be dated and signed.
This has to be done-
(a) in the case of a Board or a committee meeting, by the chairman of the
same or the next succeeding meeting, and
(b) in the case of a general meeting, by the chairman of the same meeting
within 30 days of the meeting, or in the event of the death or liability
of that chairman within 30 days of the meeting, by the director duly
signed by the Board for the purpose.
Fair and correct summary. The minutes of each meeting shall contain a
fair and correct summary of the proceedings at the meeting so that the
absentee shareholders may be in a position to form some reliable idea of
what transpired at these meetings.

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PROXIES (Sec.176)
A member entitled to attend and vote at a meeting any vote either in person
or by proxy. A proxy is an authority to represent and vote for another person
at a meeting. It is also an instrument appointing a person as proxy. The
person so appointed is also called proxy.
If the Articles do not otherwise provide-
(1) A proxy can vote only on a poll.
(2) A member of a private company cannot appoint more than one proxy
to attend on the same occasion.
(3) A member of a company not having a share capital cannot appoint a
proxy.
Proxy to be in writing. The instrument appointing a proxy shall be in
writing and signed by the appointer or his attorney duly authorized in
writing.

RESOLUTIONS
The question which generally come for consideration at the general meeting
of a company are presented in the form of proposals called motions. A
motion may be proposed by the chairman of the meeting by any other
member of the company. Before it is placed before the meeting by the
chairman for discussion, it must be seconded by someone. The motion, after
the close of discussion, is formally put to vote by a show of hands. It may
either be carried or rejected. If a sufficient number of members demand, the
motion may be put to poll. The final result is declared after the poll is taken.
If a motion is carried, it becomes a ‘resolution’.
KINDS OF RESOLUTIONS
There are three kinds of resolutions under the Companies Act.1956
1. Ordinary Resolution (Sec.189(1))
An ordinary resolution is a resolution passed at a general meeting of a
company by a simple majority of votes (i.e., votes cast in favour of the
resolution exceed votes cast against it) including the casting vote of the
chairman, if any. The votes may be cast by members in person or by proxy,
where proxies are allowed. The required notice of the meeting should have
been duly given. In ascertaining simple majority of the members, only the

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votes cast, including the casting vote of the chairman, if any, have to be
taken into account.
Unless the Companies Act or the Memorandum or the Articles expressly
require a special resolution requiring special notice, an ordinary resolution is
sufficient to carry out any matter.
When is an ordinary resolution required? Ordinary resolution is
necessary for the following among other purposes;
(a) Rectification of name or adoption of new name by a company
where it resembles the name of an existing company with the
previous approval of the Central Government (Sec.22(1)(a)).
(b) Issue of shares capital(Sec.79(2))
(c) Alteration of share capital (Sec.94(2))
(d) Re-issue of redeemed debentures (Sec.121)
(e) Adoption of statutory report (Sec.165)
(f) Passing of annual accounts and balance sheet, along with
reports of Board of directors and auditors (Sec.210)
(g) Appointment of auditors and fixation of their remuneration
(Sec.224(1))
(h) Appointment of first directors who are liable to retire by
rotation (Sec.255(1))
(i) Increase or redemption in the number of directors within the
limit fixed by the Articles (Sec.258)
(j) Appointment of managing/whole-time director (Sec.269)
(k) Removal of a director and appointment of a director in is place
(Sec.284(1))
(l) Approval of appointment of sole selling agents (Sec.294)
(m) Winding up a company voluntarily in certain events
(Sec.484(1)(a))
(n) Appointment and fixation of remuneration of liquidators in a
members’ voluntary winding up (Sec.490(1))
(o) Nomination of a liquidator in a creditors’ voluntary winding up
(Sec.502(1))
2. Special resolution (Sec.189(2))
A special resolution is one which satisfies the following conditions:

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(a) The intention to propose the resolution as a special resolution has


been duly specified in the notice calling the general meeting.
(b) The notice has been duly given of the general meeting.
© The votes cast in favour of the resolution by members entitled to vote
are not less than 3 times the number of votes cast against the resolution
by members so entitled and voting. The members may vote in person, or
where proxies are allowed, by proxies.
(d)An explanatory statement setting out all material facts concerning the
subject-matter of the special resolution including, in particular the nature
of the concern or interest of every director and the manager, if any, shall
be annexed to the notice of the meeting.
A copy of every special resolution together with the copy of the
explanatory statement shall, within 30 days of the passing of the
resolution, be filed with the Registrar.
The object of requiring a majority of 3/4th of the votes for a special
resolution is to protect the minority interests in important matters relating
to the company’s affairs.
When is a special resolution required? Special resolution is necessary
for the following among other purposes:
(a) Alteration of Memorandum for changing the place of registered
office from one State to another with the leave of the Company
Law Board (Sec.17(1) and (2)). Special resolution is also
required for changing the ‘objects clause’ of the Memorandum.
(b) Change of name of a company with the consent of the Central
Government (Sec.21)
(c) Omission or addition of the word ‘Private’ from, or to, the
name of a company.(Sec.21)
(d) Change of name of a charitable or other non-profit company by
omitting the word or words ‘Limited’ or ‘Private
Limited’(Sec.25(3))
(e) Alteration of the Articles of a company (Sec.31(1))
(f) Conversion of any portion of the uncalled capital into reserve
capital(Sec.99)
(g) Reduction of share capital (Sec.100(1))
(h) Variation of shareholders’ rights (Sec.106)
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(i) Removal of a company’s registered office outside the local


limits of any city, town or village(Sec.146(2))
(j) Keeping registers and returns at a place other than the
registered office (Sec.163(1))
(k) Payment of interest out of capital (Sec.208(2) and (3)
(l) Applying to the Central Government for appointing an
Inspector for investigating a company’s affairs in some cases
(Sec.237(a))
(m) Appointment of sole selling or buying agent in the case
of companies having paid-up share capital of Rs.50 lakhs or
more (Sec.294-AA(3)
(n) Fixing the remuneration of directors where the Articles require
such resolution (Sec.309(1))
(o) Allowing a director to hold an office of profit under a company
(Sec.314(1) and (1-B)
(p) Alteration of Memorandum to render the liability of directors
unlimited.(Sec. 323(1))
(q) Applying to the court to wind up a company (Sec.433(a))
(r) Authorising the liquidator of a company in voluntary winding
up when its affairs have been completely wound up.
(Sec.550(1)(b))
What is the meaning of winding up?
Winding up or liquidation of a company represents the last
stage in its life. It means a proceeding by which a company is
dissolved. The assets of the company are disposed of, the debts are
paid off out of the realized assets (or from contribution from its
members), and the surplus, if any, is then distributed among the
members in proportion to their holdings in the company. The two
terms ‘winding up’ and ‘liquidation’ are used interchangeably.

Explain about the modes of winding up.


There are three modes of winding up of a company, viz.,
1. Winding up by the court i.e., Compulsory winding up (Sec.433
to 484)

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2. Voluntary winding up (Sec. 484 to 521). This may be-


(a) members; voluntary winding up, or
(b) creditors’ voluntary winding up.
3. Winding up subject to Supervision of court.

WINDING UP BY THE COURT


Winding up of a company under the order of a court is also
known as compulsory winding up.
GROUNDS FOR COMPULSORY WINDING UP.
A company may be wound up by the Court in the following cases.
1. Special resolution of the company. Winding up order under
this head is not common because normally the members of a
company prefer to wind up the company voluntarily for in such a
case they shall have a vote in its winding up. Moreover, a
voluntary winding up is far cheaper and speedier than a winding up
by the court.
2. Default in delivering the statutory report to the Registrar or
in holding statutory meeting. A petition on this ground can be
made either by the Registrar or by a contributory. In the latter case
the petition for winding up can be filed only after the expiry of 14
days from the day on which the statutory meeting ought to have
been held.
The court may, instead of making a winding up order, direct
that the statutory report be delivered or that a statutory meeting be
held. The court may order the costs to be paid by any persons who
are responsible for the default.
3. Failure to commence, or suspension of, business. The court
exercises power in this case only if the company has no
intention of carrying on its business or if it is not possible for it
to carry on its business.
If a company has not begun to carry on business within a
year from its incorporation or suspends its business for a
whole year, the court will not wind it up if-
(a) there are reasonable prospects of the company starting
business within a reasonable time, and
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(b) there are good reasons for the delay, i.e., the suspension
of business is satisfactorily accounted for and appears to
be due to temporary causes.
4. Reduction in membership. If, at any time, the number of
members of a company is reduced in the case of a public
company, below 7 or in the case of a private company, below 2,
the company may be ordered to be wound up by the court. If
the company caries on business for more than 6 months while
the number is to reduced every member who is cognizant of the
fact that it is carrying on business with members fewer than the
statutory minimum, will be severally liable for the payment of
the whole of the debts of the company contracted after those 6
months.
5. Inability to pay its debts. A company may be wound up by
the court if it is unable to pay its debts. The test is whether the
company has reached a stage where it is commercially
insolvent-that is to say, that its existing and probable assets
would be insufficient to meet the existing liabilities.
‘Commercially insolvent’ means that the company is
unable to pay debts or liabilities as they arise in the
ordinary course of business.

POWERS OF COURT
Power of court to say or restrain proceedings against
company. At any time after the presentation of a winding of
petition and before a winding up order has been made, the
company, or any creditor or contributory may apply to the court for
a stay of, or restraint of, further proceedings in the court.
Powers of court on hearing petition.
On hearing a winding up petition, the court may-
(a) dismiss it, with or without costs ; or
(b) adjourn the hearing conditionally or unconditionally ; or
(c) make any interim order that it thinks fit ; or

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(d) make an order for winding up the company with or without


costs or any other order as it thinks fit.
CONSEQUENCES OF WINDING UP ORDER
Once the court makes an order for the winding up of a
company, its consequences date back to the commencement of
winding up. The other consequences of winding up by the court are
as follows:
1. Intimation to official Liquidator and Registrar. Where the
court makes an order for the winding up of a company, it shall
forthwith cause intimation to be sent to the official Liquidator
and the Registrar of the order of winding up.
2. Copy of winding up order to be filed with the Registrar. On
the making of the winding up order it, shall be the duty of the
petitioner and of the company to file with the Registrar within
30 days a certified copy of the order.
3. Order for winding up deemed to be notice of discharge. The
order for winding up shall be deemed to be notice of discharge
to the officers and employees of the company, except when the
business of the company is continued. Where a servant of the
company is on a contract of service for a fixed term and that
term has not expired on the date of the order of the winding up
of the company, the order operates as a wrongful discharge and
damages are allowed for breach of contract of service and the
servant is free from his agreement not to compete with the
company.
4. Suits stayed. When the winding up order has been made, no
suit or other legal proceeding shall be commenced against the
company except by leave of the court. Similarly pending suits
shall not be proceeded with except by leave of the court.
5. Powers of the court. Where the court is winding up the
company, shall have jurisdiction to entertain, or dispose of –
(a) any suit or proceeding by or against the company;
(b) any claim made by or against the company;
(c) any application made under Sec.391 for compromise with
creditors and/or members.
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(d) Any question of priorities or any other question whatsoever,


whether of law or fact, which may relate to or arise in course of
the winding up of the company.
6. Effect of winding up order. An order for winding up a
company shall operate in favour of all the creditors and of all
the contributories of the company as if it had been made on
their joint petition.
7. Official Liquidator to be liquidator. On a winding up order
being made in respect of a company, the official Liquidator
shall, by virtue of his office, become the liquidator of the
company.
PROCEDURE OF WINDING UP BY THE COURT
Official Liquidator. For the purpose of winding up of companies by the
Court-
(a) there shall be attached to each High Court an Official Liquidator
appointed by the Central Government. The official Liquidator shall
be a whole-time officer. If the central Government considers that
there will not be sufficient work for a whole-time officer, it may
appoint a part-time officer to act as official Liquidator.
(b) The official Receiver attached to a District Court for insolvency
purposes shall be the official Liquidator attached to the District
Court, if there is no Official Receiver attached to a District Court,
then, such person as the Central Government may, by notification in
the Official Gazette, appoint for the purpose, shall be the Official
Liquidator attached to the District Court.
The Central Government may also appoint one or more Deputy
or Assistant Official Liquidators to assist the Official
Liquidator in the discharge of his functions.
Liquidator. On a winding up order being made in respect of a company, the
official Liquidator shall, by virtue of his office, become the liquidator of the
company.
Duties of Liquidator
1.Proceedings in winding up. The liquidator shall conduct the proceedings
in winding up the company and performs duties imposed by the court. The
acts of the liquidator shall be valid notwithstanding any defect that may
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afterwards be discovered in his appointment or qualification. Acts done,


after his appointment has been shown to be invalid, shall not be deemed to
be validly done.
2. Report.1. The Official Liquidator shall as soon as practicable after receipt
of the statement of affairs of the company and not later than 6 months from
the date of the order of winding up, submit a preliminary report to the Court.
The report shall contain particulars-
(a) as to the amount of the capital issued, subscribed, and paid-up, and the
estimated amount of assets and liabilities.
(b) if the company has failed, as to the cause of the failure; and
© whether, in his opinion, further inquiry is desirable as to any matter
relating to the promotion, formation, or failure of the company, or the
conduct of business thereof.
2. Additional reports. The Official Liquidator may, if he thinks fit, make
further reports stating the manner in which the company was promoted or
formed. He may further state if any fraud has been committed by any person
in company’s promotion or formation, or since the formation thereof. He
may also state any other matters which it is desirable to bring to the notice of
the Court. If in any further report the official Liquidator states that a fraud
has been committed, the Court shall have the further powers provided in
Sec.478 as to the public examination of promoters and officers.
3. Custody of company’s property. Where a winding up order has been
made or where a provisional liquidator has been appointed, the liquidator /
provisional liquidator shall take into his custody all the property, effects and
actionable claims to which the company is entitled. So long as there is no
liquidator, all the property and effects of the company shall be deemed to be
in the custody of the Court.
4. Exercise and control of liquidator’s powers. The liquidator shall, in the
administration of the assets of the company and the distribution thereof
among creditors, have regard to any directions which may be given by
resolution of the creditors or contributories at any general meeting or by the
committee of inspection. Any directions by the creditors or contributories at
any general meeting shall override any directions given by the committee of
inspection.

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5. Meeting of creditors and contributories. The liquidator may summon


general meetings of the creditors or contributories whenever he thinks fit for
the purpose of ascertaining their wishes. He shall summon such meetings at
such times as the creditors or contributories may, by resolution direct, or
whenever requested in writing to do so by not less than 1/10 th in value of the
creditors or contributories, as the case may be.
6. Directions from the court. The liquidator may apply to the court for
directions in relation to any particular matter arising in winding-up. He shall
also use his own discretion in the administration of the assets of the
company and in the distribution thereof among the creditors.
7. Proper books. The liquidator shall keep proper books for making entries
or recording minutes of the proceedings at meetings and such other matters
as may be prescribed. Any creditor or contributory may, subject to the
control of the court, inspect any such books personally or by his agent.
8. Audit of accounts. The liquidator shall, at such times as may be
prescribed but at least twice each year during his tenure of office, present to
the Court an account of his receipts and payments as liquidator. The account
shall be in the prescribed form, shall be made in duplicate, and shall be duly
verified. The court shall cause the account to be audited. For the purpose of
the audit the liquidator shall furnish the court with such vouchers,
information and the books as the court may require. One copy of the
accounts shall be filed and kept by the court. The other copy of the account
shall be delivered to the Registrar for filing. Each copy shall be open to the
inspection of any creditor, contributory or person interested.
The liquidator shall cause the audited accounts or its summary to be
printed. He shall send a printed copy of the account or its summary by post
to every creditor and to every contributory. The court may dispense with
compliance with this provision.
9.Appointment of committee of inspection. The Court may at the time of
making an order for the winding up of a company, or at any time thereafter,
direct that there shall be appointed a committee of inspection to act with the
liquidator.
10. Pending liquidation. The liquidator shall, within 2 months of the expiry
of each year from the commencement of winding up, file a statement duly

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audited by a qualified auditor of the company, with respect to the


proceedings in, and position of the liquidation. The statement shall be filed-
(a) in the case of a winding up by the Court, and
(b) in the case of a voluntary winding up, with the Registrar.
When the statement is filed in Court, a copy shall simultaneously be filed
with the Registrar and shall be kept by him along with the other records of
the company.

What are thePowers of liquidator?

1. Powers exercisable with the sanction of the court. The


liquidator in a winding up by the Court shall have power,
with the sanction of the Court-
(1) To institute or defend suits and other legal proceeding,
civil or criminal, in the name and on behalf of the
company.
(2) To carry on the business of the company so far as may
be necessary for the beneficial winding up of the
company.
(3) To sell the immovable and movable property and its
actionable claims with power to transfer the whole or
sell the same in parcels.
(4) To raise money on the security of the company’s assets.
The assets include all contribution which the liquidator
is entitle to get from the members, past or present, as
well as all assets which have been misappropriated as
against creditors.
(5) To do all such other things as may be necessary for
winding up the affairs of the company and distributing
its assets.
2. Powers exercisable without the sanction of the court.
The liquidator in a winding up by the court shall have
power, without the sanction of the court-

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(1) to do all acts and to execute documents and deeds on


behalf of the company under its seal.
(2) To inspect the records and returns of the company or the
files of the company under its seal.
(3) To prove, rank and claim in the insolvency of any
contributory for any balance against his estate and to
receive dividends;
(4) To draw, accept, make and endorse any bill of exchange,
hundi or promissory note on behalf of the company in
the course of its business;
(5) To take out, in his official name, letters of
administration to any deceased contributory, and to do
any other act necessary for obtaining payment of any
money due from a contributory or his estate.
(6) Too appoint an agent to do any business which he is
unable to do himself.
3. Powers exercisable in case of onerous contracts. The
term ‘onerous’ means a right to property, e.g., a lease, in
which the obligations attaching to it exceed the
advantage to be derived from it. The liquidator may, with
the leave of the court, disclaim onerous contracts and
properties. This shall be done within 12 months after the
commencement of the winding up, unless the court
extend time.

VOLUNTARY WINDING UP
Voluntary winding up means winding up by the members or creditors of a
company without interference by the court. The object of a voluntary
winding up is that the company, i.e., the members as well as the creditors,
are left free to settle their affairs without going to the court. They may
however apply to the court for any directions, if and when necessary.

Circumstances in which a company may be wound up voluntarily. A


company may be wound up voluntarily-

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(1) By passing an ordinary resolution. When the period, if any, fixed


for the duration of a company by the Articles has expired, the
company in general meeting may pass an ordinary resolution for its
voluntary winding up. The company may also do so when the event,
if any, on the occurrence of which the Articles provide that the
company is to be dissolved, has occurred.
(2) By passing a special resolution. A company may at any time pass a
special resolution that it be wound up voluntarily. No reasons need be
given where the members pass a special resolution for the voluntary
winding up of the company. Even the Articles cannot prevent the
exercise of this statutory right.

TYPES OF VOLUNTARY WINDING UP


A voluntary winding up may be a
1. members’ voluntary winding up, or
2. creditors’ voluntary winding up.

1. MEMBERS VOLUNTARY WINDING UP


Declaration of solvency. In a voluntary winding up of a company if a
declaration of its solvency is made in accordance with the provisions of
Sec.488, it is a members’ voluntary winding up. The declaration shall be
made by a majority of the directors at a meeting of the Board that the
company has no debts or that it will be able to pay its debts in full within
3 years from the commencement of the winding up.
The declaration shall have effect only when it is –
(a) made within five weeks immediately before the date of the resolution,
and delivered to the Registrar for registration before that date ;and
(b) accompanied by a copy of the report of the auditors of the company
on (i) the profit and loss account of the company from the date of the
last profit and loss account to the latest practicable date immediately
before the declaration of solvency. (ii) the balance sheet of the
company, and (iii) a statement of the company’s assets and liabilities
as on the last mentioned date.
2. CREDITORS VOLUNTARY WINDING UP

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A voluntary winding up of a company in which a declaration of its


solvency is not made is referred to as a creditors’ voluntary winding
up.
DEFUNCT COMPANY
A company is a said to be ‘defunct’ when it is not carrying on
business or when it is not in operation. Sec. 560 deals with defunct
companies. If a company has ceased to carry on business, the
Registrar may strike it off the Register as defunct company in
accordance with Sec.560.

IMPORTANT QUESTIONS:

1. What is free consent (November 2017)


2. How do yo u differentiate between coercion and under influence ? (April 2017)
3. Explain the difference between the term memorandum and articles and
Association(November 2017)
4. Distinction between a Public company and private company. (November
2017)
5. What are the Modes of Winding Company .(November 2015)

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Unit – IV
1. What is meant by Intellectual Property? Explain the Scope of Intellectual
Properties.
Intellectual property is nothing but an outcome of creative functions of one’s own
wisdom, a characteristic feature of the mind. Property is derived from the term
‘Proprietary’. Meaning the right to hold, possess, use and enjoy a thing absolutely to
the exclusion of others as owner.
Intellectual property means intangible property produced by one’s own
intellectual ability or capacity. Intellectual property includes Patent Rights,
Copyrights, Trade marks and Design Rights.
Scope and Meaning.
Property or ownership is a bundle of rights enjoyed by a person exclusively and
absolutely over a movable or immovable, tangible or intangible property. A person’s
property is said to be all that is his in law. There are various theories as regards. The
definition of property.

(a) The Natural law theory states that property is derived from nature and is divided
among men by agreement. Messers Grotius, Pufendorf and Blacktone, the
eminent jurists belong to this school.
(b) The metaphysical theory as advocated by Kant and Hegal defines the essential
elements of leagal transaction of original acquisition are three, namely,
1. ‘Prehension’ an object that belongs to none
2. an act of the free will interdicting all others from using it as their; and
3. appropriation , a permanent acquisition
( c ) According to the positive theory of Mr. Spencer, property is the result of
individuals labour. No one has a moral over another’s property when he has not
acquired by his personal labour.
( d)According to Bentham, who follows the historical theory, property is the basis of
expectation of deriving certain advantages from a thing. Bentham opines that property is
nothing but conception of mind.
( e) The followers of sociological theory Prof. Duguit, Prof. Laksi, Mr. Kari Marx say
that property is a social fact. Social fact signifies the benefit offered by society in the
form of service, etc.
(f) How ever Prof. Salmond interpreted the term property in four ways:
1. In the widest sense, the term property includes rights of all types recognized under
law- right to land, life and liberty including conjugal relation.

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2. In the limited sense, rights signify Proprietary rights such as right of ownership of
land, chattel, copyright, patent, shares, etc. Life, liberty and Reputation are not
subject matters of property.
3. In the narrowest sense, only corporeal properties are considered as property. They
are land, building and chattel.
4. Proprietary rights in Rem are yet another category. The proprietary Rights
authorize a person to enjoy exclusive possession of the same right as owner and
absolute enjoyment of the same. This kind of property gives room for right in Rem
also.
Example. A free hold land, a patent right and a coy right.

2. Write the meaning and definition of patent.


What is a patent or hidden talent in a human being gets manifested in the form of a
tangible end product with unique features. The effort that is taken by an individual by
working on producing a thing by his creative skill, ability and experience must be
preserved, protected and patented. This is done with a view to safeguard the interest
of the original inventor of a product from being interfered by others. Hence, the
present patent act has been skillfully drafted to safeguard Indian drug, pharmaceutical
and chemical industries including Indian agriculture.
Patents are available in all fields of technology such as Biotechnology,
Biochemistry etc.
Definition A patent is a grant from Government which confers on the guarantee for a
stipulated duration of time, the exclusive privilege of making selling and using the
invention which has been done by him for which patent has been granted. Patent
rights are granted only when there is an invention of a product which should consist
five important features, namely novelty, vendability, utility, validity and credibility.
3. Write about the nature of a patent.
A patent is an industrial property in the sense it is produced for manufacturing
purposes or for domestic use. A patent granted under the act is subject to conditions
prescribed under section 47. According to the section, apatent granted on the patentee
confers upon him, exclusive right for himself, his agents, assignees and licensees to
make or produce, use, exercise, sell or distribute such article or substance in India
where the patent is for a method or process of manufacturing. The patent granted
under the act is said to be operative throughout India.
4. What can be patented?
Patent right is granted only to products or things that are invented. As invention
means creation any new useful

a. art, process, method or manner or manufacture.


b. Machine or apparatus or other article.
c. Substance produced or manufactured
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d. It also includes an improvement on an invention

It must be understood that the grant of patent could be made only to invention of a
product. Invention signifies combination of thought and creation. It involves a
spontaneous conception of a happy thought of some idea which is not previously in
existence. Invention involves (a) mental thinking focuses on an idea, (b) such material
thinking is streamlined through physical operation of converting the idea to an end
product. Mere discovery of an already existing principle is not an invention. It is not
an invention because what is covered is discovered.

4. What are not inventions for the purpose of the Act (Sec 3)
1. An invention which is frivolous or which claims anything obviously contrary to
well established natural laws.
2. An invention, primary or intended use of which would be contrary to law or
morality or injurious to the health of the public.
3. The mere discovery of a scientific principle or the formulation of an abstract
theory.
4. Mere discovery of any new property or new use for a known substance or the
mere use of a known, process machine or apparatus unless such known process
results in a new product or employs at least one new reactant.
5. A substance obtained by a mere admixture resulting only in the aggregation of the
properties of the components thereof or a process for producing such substances.
6. The mere arrangement or rearrangement or duplication of known devices, each
functioning independently of one another in a known way.
7. A method of process of testing applicable during the process of manufacture for
rendering the machine apparatus or other equipment more efficient or for the
improvement or restoration of the existing machine, apparatus or other equipment
or control of manufacture.
8. A method of agriculture or horticulture.
9. Any process for the medicinal, surgical, curative, prophylactic or other treatment
of human beings or any process for a similar treatment of animals or plants to
render them free of disease or to increase their economic value or that of their
products.
According to section 4, no patent shall be granted in respect of an invention relating
to atomic energy falling within subsection 1 of section 20 of the Atomic Energy Act
of 1962. It must be understood in brief that invention does not cover things that are
used contrary to law, mere discovery, aggregation of properties by mere mixture,
rearrangement or duplication, a method of agriculture or horticulture, process or
medical treatment of human beings, animals or plants and invention relating to atomic
energy.
Inventions are there for which only process is patentable.
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No patent shall be granted in respect of claims for the substances without


including methods or process of manufacture, that is to say, substance along with
process of manufacture shall be patentable. They are
1. Substances intended for use or capable of being used as food or as
medicine or drug, including all internal and external medicines substances
used in diagnosis, treatment or prevention of diseases, substances used for
public health such as insecticides, germicides, fungicides including
chemical substances used in medicine.
2. Substances prepared or produced by chemical process including alloys,
optical glass, semi conductors and inter-metallic compounds.
5. Write the procedures for obtaining patent rights.
The following are the steps that have to be complied with for obtaining a patent.
1. Filing an application for a patent duly accompanied by either a provisional
specification or complete specification.
2. Filing the complete specification if only a provisional specification has been filed.
3. Examination of application.
4. Acceptance of the application and advertisement of such acceptance in the official
gazette.
5. Opposition to the grant of patent.
6. Granting and sealing of patent.
7. Write the eligibility for applying for patent.
1. Filing an application : An application for a patent for an invention may be made

a. by any person claiming to be the true and first inventor of the invention.
b. By any person being the assignee of such invention
c. By the legal representatives of any deceased person who immediately before his
death was entitled to make such application. An application under subsection (1)
of section (6) may be made by any of the person mentioned above either alone or
jointly with another. An applicant need not be citizen of India. A joint stock
company or a firm or a corporation can apply for a patent only as an assignee of
the inventor because such entities cannot invent anything. Government can also
apply for patent as an assignee. Invention by an employee does not necessarily
belong to the employer unless there is a contract to that effect. Whenever an
employee invents a thing in the course of his employment, it is implied that the
invention belongs to the employer.
d. Subject to any special terms and conditions of service as applicable to
government employees, they are entitled to apply for a patent.
e. Defense employees are not eligible to apply for patents unless they obtain the
sanction from the department concerned in accordance with special regulations.
Without the permission of the railways, the employees working in research

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employment cannot apply for patent. The restrictions mentioned above are
imposed not under the Act but by the government under their service rules.
Filing an application.

(a) Every application for a patent shall be for one invention only and shall be made in
the prescribed form and filed in the patent office.
(b) In the case of assignment along with the application, the assignment deed in
favour of the applicant authorizing him to apply for such patent has to be filed
with the application.
(c) The application shall contain a declaration to the office that the applicant is the
true inventor and in possession of the invention. If any other person other than the
inventor applies for a patent as a legal representative or an authorized
representative, he shall disclose the name of the owner claiming to be the first
inventor.
(d) Every such application shall be accompanied by provisional or a complete
specification.
Provisional specification. A provisional specification shall be in form 3 which
should contain (a) the title of invention (b) names, addresses and nationalities of the
applicants (c) description and nature of the invention preceded by a preamble ; and
(d) date and signature of the applicant.
The title of the invention given in the provisional specification should indicate the
art of the industry to which the invention relates. It should be brief, free from
ambiguity and must be precise. Nature of the invention, the use of it and the
advantages of it may be described succinctly. It is not necessary to reveal all the
secrets as regards the process of manufacture and the proportion of ingredients that go
to make up the product in the provisional specification. Every provisional application
must be followed up by a complete specification within a period of twelve months
which can be extended further by three months. Failure to file a complete
specification within the prescribed time limit may amount to abandonment of
application.
Complete specification. Complete specification should be drawn up in Form 3A
which should not vary in its nature from that of the provisional specification. The
complete specification should contain the correct title of invention, the name,
nationality and address of the applicant prescribed preamble to the description of the
invention and the manner in which it has to be preformed. Statement of facts fully
describing all the particulars including the proportion of the ingredients that constitute
the product of the invention, the method and process of operation to be undertaken for
the manufacture of the product which is known exclusively to the applicant which the
applicant seeks to be protected.
(e) Statement of claims and signature of the applicant. Necessary drawings
connected with the invention and statement of particulars with data disclosing
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measurements etc., may also be furnished along with the complete specification.
But it is necessary that all the statements given must contain the signature of the
applicant. It should be noted in respect of priority of claims, the date of claim
shall be calculated form the date of complete specification. However, if a
provisional specification has already been filed, the priority date will be the date
of filing the application with provisional specification.

8. Write rights of the Patentee and others.


A grant of patent to the patentee confers on him the exclusive right to manufacture,
make use or sell, distribute, assign license and otherwise dispose off the patented
product he has acquired under the Ptent Act.
(a) A patentee is vested with power to assign, grant licenses to make use, sell, or
distribute the articles invented.
(b) A patentee has right to surrender the article over which he has acquired the patent
right. But before surrendering his patent the inventor must give notice to the
controller in the prescribed form. The controller shall give notice about surrender to
the public by notification and after hearing the objections if any by opposite party
shall allow the inventor to surrender his invention.
© A patentee has got right to file a suit for infringement in respect of cases of
infringement of his right from the date of advertisement of acceptance of complete
specification, although the sealing has been granted subsequently.
(c) The original patentee who has effected improvement or modification of the
original by way of addition is entitled to apply for patent of addition relating to
his main invention.
(d) A patentee has a right to make convention application or basic application for the
protection of his patent right in the other conventional countries subject to the
treaty having been conducted by the two nations. However, under the 2002
amendemnt Act, an international application could be made by any country under
Intellectual Property rights Act.
(e) A patent holder has right to apply for duplicate patent if the original has been lost
or destroyed. The controller shall grant duplicate patent provided the loss or
destruction of the original is adequaltely explained.
(f) A patent holder has a right to apply for the issue of certified copies of the original
patent on payment of the prescribed fees in the prescribed form.
9. Explain the duties of the Patentee.
(a) It is the duty of the patent right holder to use the right as per the terms and
conditions contained in the grant. If the patent is not used and the granted
monopoly is abused, compulsory license may be granted to any person willing to
work on the patent. The controller has got authority even to revoke the grant of
patent on reasonable grounds after inquiry. (b) It is an implied duty on the part of
the patentee not to deprive the reasonable requirements pf the public the use of
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the patent at a reasonable cost in good shape. (c) A patentee has a duty not to
indulge in making baseless and unjustifiable threats of an action for infringement
against others. (d) Every patentee should submit periodical statements to the
controller regarding the manner with which the patent was manufactured, used
and distributed to the public.

10.Write about the infringements and remedies of patents.


Infringement of patent signifies the interference of another in the exclusive monopoly
right enjoyed by a person over the patent he has registered under the Act. Infringer is
a person who, without the express or implied consent of the inventor, user, licensee or
assignee of te patent right uses or makes or sells the patent to the people in the
market. In other words, an infringer is one who makes unauthorized use of the patent.
However, use of patent innocently for experiments imparting instruction, use of the
same in a foreign vessel for demonstration will not amount to infringement. If an
infringer has manufactured an article incorporating all the essential features of a
patent already registered under the Act, then it will amount to direct Infringement. On
the other hand, where a person uses the patent with all its essential features by
modifying the unessential features, then it will amount to indirect infringement.
Time of infringement may be during the manufacture or after the manufacture.
Infringement may relate to making a product like a patented product or using a
patented process. Acts of infringement may be by the following : making by exactly
copying a patented product, disposing of a duplicate product looking like a patented
one disposing or offering to dispose such product. Use of equivalents in the place of
chemical substances will also amount to infringement, if the chemical equivalents
were known. If they are not known the se of such chemical equivalents will not
amount to infringement. Arrangement of parts of the components or elements that got
to make a product exactly the same way as a patentee has selected will also amount to
infringement of patent right.
Remedies for infringement of patent rights.
The following actions may be taken for infringement of any patent rights.
(a) A suit can be filled in the District court of High court having jurisdiction
over the area of actual cause for legal actions. The defendant can defend
the suit by filing a counter claim with a prayer to revoke the patent
granted to the plaintiff.
(b) A suit may be filed by the aggrieved party for obtaining an injunction
order directing the defendant not to manufacture the good of the patentee.
(c) The court may also order the infringer to hand over the products to the
plaintiff and award liquidated damages for the loss incurred by the
plaintiff on account of the defendant’s infringement.

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(d) A criminal complaint may also be lodged for deceiving the public as well
as the original inventor of the patent leading to the prosecution of the
offender vis., the infringer.
(e) The limitation period is three years from the actual date of infringement
against the infringer. No notice need be given to the defendant before
filing a suit by the plaintiff.
(f) The right to file a suit for infringement primarily rest on the patentee but
depending upon the circumstances and situation such right can also be
exercised by the assignee, licensee, heirs, legal representatives and others
who have acquired interest in the patent lawfully.
(g) The suit for infringement may lie against manufacturers, importers,
dealers, agents, and sometimes even against the consumer for having
infringed the rights of the patentee.
(h) The infringer can put up the following defences such as 1. that there is no
infringement 2. that the aggrieved party has no no right to file a suit, 3.
that there is no substance in the allegation of infringement 4. that the
infringer is only a licensee or assignee 5. that the Act complained comes
within the scope of innocent infringement or after the expiry period of the
patent. 6. that there is no infringement at all as the patent is not at all an
invention mush less an object of creativity.
10. Write down the rules of the WTO related with Patent.
The main objective of the WTO is to settle the disputes prevalent among its member
nations. In 1994, all the member states have agreed to abide by the rules and
procedures as laid down by the WTO. On account of this understanding, the WTO
has constituted a Dispute settlement Body to hear the disputes among member states
and find out a settlement for the disputes. It is first left to the member states to consult
with each other and particularly with the respective government so that the
government may be use its good office for an amicable settlement within 60 days
Where consultation fails among member states, WTO may be approached by any
member state with a reques to constitute a special DSB i.e. Dispute settlement Board.
The panel shall be from well qualified members not belonging to any government
party. The DSB may either reject or approve the panel’s recommendation within 60
days unless any one of the parties prefers an appeal before the appellae body is
submitted to the DSB which will either adopt the findings of the appellate body or not
to adopt it by consensus by circulation of the report within 30 das.
The understanding among the member states of World Trade Organization is that
disputes pertaining to transaction of trade must be first through (ADR) i.e. alternate
dispute resolution by consultation mediation. It is only on failure of this negotiation,
they are referred to Dispute Settlement Body and thereafter to the Appellate body if
appeal has to be preferred.

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Important Questions :

1. Who has to perform Contract? (November 2016)


2. Write a note on Sale and Goods avt,1930. (November 2017)
3. Explain the provision relating to Performance of contract and sales.
(November 2017)
4. Enumerate various models of contract.(April 2017)
5. Define WTO Rules to patent. (November 2016)

UNIT V
Information Technology Act 2000.

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The modern age is the age of computers, new communication-systems and digital
technology. A revolution is occurring in the form of new technology. Business and
consumers are increasingly using computers to create, transmit and store information in
the electronic form instead of traditional paper documents.
Information stored in electronic form has many advantages. It is cheaper, easier to
store, retrieve and speedier to communicate. International trade through the medium of e-
commerce has been growing rapidly in the past few years and many countries have
switched over from traditional paper based commerce to e-commerce.
The United Nations Commission on International Trade Law (UNCITRAL)
adopted the Model Law on Electronic Commerce in 1996. This Model Law provides for
equal legal treatment of users of electronic communication and paper-based
communication. Pursuant to a recent declaration by member-countries, the World Trade
Organisation is likely to form a work programme to handle its work in this area including
the possible creation of multilateral trade deals through the medium of electronic
commerce.
The Information Technology Act, 2000 was passed by both the Houses of
Parliament, and it received the assent of the President on the 9 th June, 2000. It came into
force on 17th October, 2000.
The Act extends to the whole of India
Exceptions
The Act does not apply to –
(a) a negotiable instrument as defined in the Negotiable Instruments Act 1881;
(b) a power of attorney as defined in the Powers of Attorney Act, 1882;
(c) a trust as defined in the Indian Trusts Act, 1882
(d) a will as defined in the Indian Succession Act, 1925, including any other
testamentary disposition by whatever name called;
(e) any contract for the sale or conveyance of immovable property or any interest in
such property; and
(f) any such class of documents or transactions as may be notified by the Central
Government in the Official Gazette (Sec.1(4)).
Digital signature
DIGITAL SIGNATURE (Sec 2 (1)(p)). It means authentication of any electronic
record by a subscriber by means of an electronic method or procedure in accordance with
the provisions of Sec.3.
Authentication of electronic records. Authentication is a process used to confirm the
identity of a person or to prove the integrity of information. Message authentication
involves determining its source and verifying that it has not been modified or replaced in
transit. Subject to the provisions of Sec.3, any subscriber may authenticate an electronic
record by affixing his digital signature.

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The authentication shall be effected by the use of asymmetric crypto system and hash
function which envelop and transform the initial electronic record into another electronic
record.
Asymmetric crypto system. It means a system of secure key price consisting of private
key for creating a digital signature and a public key to verify the digital signature.
Electronic record. It means authentication of any electronic record by a subscriber by
means of an electronic method or procedure in accordance with the provisions of Sec.3 of
the Act.
Digital signature. It means data, record or data generated, image or sound stored, received
or sent in an electronic form or microfilm or computer generated micro-fich.
Hash function. It means an algorithm that maps or translates one set of bits into another
set in such a way that
(i) a message yields the same result every time the algorithm is executed by the
same message as input.
(ii) It is computationally infeasible for a message to be derived or reconstituted
from the result produced by the algorithm.
(iii) It is computationally infeasible to find two different messages that produce the
same hash result using the same algorithm.
Verification. Any person by the use of a public key of the subscriber can verify the
electronic record. The private key and the public key are unique to the subscriber and
constitute a functioning key pair.

ELECTRONIC GOVERANCE (Sec.4 to 10)

Legal recognition of electronic records. Where any law provides that information or
any other matter shall be in writing or in the typewritten or printed form, such
requirement shall be deemed to have been satisfied if such information or matter is –
(a) rendered or made available in an electronic form; and
(b) accessible so as to be usable for a subsequent reference.
Legal recognition of digital signatures (Sec.5). Where any law provides that information
or any other matter shall be authenticated by affixing the signature or any document shall
be signed or bear the signature of any person, such requirement shall be deemed to have
been satisfied. If such information or matter is authenticated by means of digital signature
affixed.

Electronic Records
Use of electronic records and digital signatures in Government and its agencies
(Sec.6).
Where any law provides for-
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1. the filling of any form, application or any other document with any office,
authority, body or agency owned or controlled by the appropriate Government in
a particular manner;
2. the issue or agent of any licence, permit, sanction or approval by whatever name
called in a particular manner.
3. the receipt or payment of money in a particular manner.
Such requirement shall be deemed to have been satisfied if such (a) filing, (b) issue (c)
grant, (d) receipt or payment is effected by means of electronic form as may be
prescribed by the appropriate Government.

The appropriate Government may, by rules, prescribe-


(i) the manner and format in which such electronic records shall be filed, created
or issued;
(ii) the manner or method of payment of any fee or charges for fixing, creation or
issue of any electronic record under clause (1)
Retention of electronic records. Where any law provides that documents, records or
information shall be retained for any specific period, then, that requirement shall be
deemed to have been satisfied if such documents, records or information are retained in
the electronic form, if-
(a) the information contained therein remains accessible so as to be usable for a
subsequent reference;
(b) the electronic record is retained in the format in which it was originally generated,
sent or received or in a format which can be demonstrated to represent accurately
the information originally generated, sent or received;
(c) the details which will facilitate the identification of the origin, destination, date
and time of dispatch or receipt of such electronic record are available in the
electronic record.
Publication of rules, regulations etc., in Electronic Gazette. Where any law provides that
any rule, regulation, order, bye-law, notification or any other matter shall be published in
the Official Gazette, then, such requirement shall be deemed to have been satisfied if
such rule, regulation, order, bye-law, notification or any other matter is published in the
Official Gazette or Electronic Gazette.
Electronic Gazette means the Official Gazette published in the electronic form (Sec.2(1)
(t)). Where any rule, regulation, order, bye-law, notification or any other matter is
published in the Official Gazette or Electronic Gazette, the date of publication shall be
deemed to be the date of the Gazette which was first published in any form.
Power to make rules by Central Government in respect of digital signature. The Central
Government may, for the purposes of this Act, by rules, prescribe-
(a) the type of digital signature:
(b) the manner and format in which the digital signature shall be affixed.
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(c) The manner or procedure which facilitates identification of the person


affixing the digital signature.
(d) Control processes and procedures to ensure adequate integrity, security
and confidentially of electronic records or payments ; and
(e) Any other matter which is necessary to give legal effect to digital
signatures.
ATTRIBUTION, ACKNOWLEDGEMENT AND DESPATCH OFF
ELECTRONIC RECORDS (Secs. 11 to 13)
Attribution of electronic records (Sec.11). An electronic record shall be attributed to the
originator, if it was sent by –
(a) the originator himself ;
(b) by a person who had the authority to act on behalf of the originator in respect of
that electronic record ; or
© by an information system programmed by or on behalf of the originator to operate
automatically.
Originator. It means a person who sends, generates, stores or transmits any electronic
message or causes any electronic message to be sent, generated, stored or transmitted to
any other person but does not include an intermediary.
Acknowledgement of receipt. No agreement. Where the originator has not agreed with
the addressee that the acknowledgement of receipt of electronic record be given in a
particular form or by a particular method, an acknowledgement may be given by –
(a) any communication by the addressee, automated or otherwise ; or
(b) any conduct of the addressee, sufficient to indicate to the originator that the
electronic record has been received.

Stipulation by the originator. Where the originator has stipulated that the electronic
record shall be binding only on receipt of an acknowledgement of such electronic record
by him, then, unless acknowledgement has been so received, the electronic record shall
be deemed to have been never sent by the originator.

No stipulation by the originator. Where the originator has not stipulated that the
electronic record shall be binding only on receipt of such acknowledgement, and the
acknowledgement has not been received by the originator within the time specified or
agreed or within a reasonable time, then, the originator may give notice to the addressee
stating that no acknowledgement has been received by him and specifying a reasonable
time by which the acknowledgement must be received by him. If no acknowledgement is
received within the aforesaid time limit, the originator may after giving notice to the
addressee, treat the electronic record as though it has never been sent.

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Time and place of dispatch and receipt of electronic record. Save as otherwise agreed to
between the originator and the addressee,
(1) the dispatch of an electronic record when it enters a computer resource outside
the control of the originator;
(2) the time of receipt of an electronic record shall be determined as follows, namely;
(a) if the addressee has designated a computer resource for the purpose of receiving
electronic records,-
(i) receipt occurs at time when the electronic record enters the designated
computer resource ; or
(ii) if the electronic record is sent to a computer resource of the addressee that is
not the designated computer resource, receipt occurs at the time when the
electronic record is retrieved by the addressee.
(b) if the addressee has not designated a computer resource along with specified
timings, if any, receipt occurs when the electronic record enters the computer
resource of the addressee.

An electronic record is deemed to be dispatched at the place where the originator has his
place of business, and is deemed to be received at the place where the addressee has his
place of business.
For the purposes of this section,-
(a) if the originator or the addressee has more than one place of business, the
principal place of business shall be the place of business;
(b) if the originator or the addressee does not have a place of business, his usual place
of residence shall be deemed to be the place of business ; and
(c) “usual place of residence”, in relation to a body corporate, means the place where
it is registered.

Certifying Authorities.
Appointment of controller and other officers (Sec.17).
Appointment The Central Government may, by notification in the Official Gazette,
appoint a Controller of Certifying Authorities for the purposes of this Act. It may also, by
the same or subsequent notification, appoint such number of Deputy Controllers and
Assistant Controllers as it deems fit.
The Controller shall discharge his functions under this Act subject to the general
control and directions of the Central Government. The Deputy Controller and Assistant
Controllers shall perform the functions assigned to them by the Controller under the
general superintendence and control of the Controller.
Qualifications, experience, etc. The qualifications, experiences and terms and
conditions of service of Controller, Deputy Controllers and Assistant Controllers shall be
such as may be prescribed by the Central Government.

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Head Office. The Head Office and Branch officers of the office of the Controller
shall be at such places as the Central Government may specify, and these may be
established at such places as the Central Government may think fit.

Seal. There shall be a seal of the Office of the Controller,


Functions of Controller (Sec.18). The controller may perform all or any of the following
functions, namely-
(a) exercising supervision over the activities of the Certifying Authorities;
(b) certifying public keys of the Certifying Authorities;
(c) laying down the standards to be maintained by the Certifying Authorities;
(d) specifying the qualifications and experiences which employees of the Certifying
Authority should possess;
(e) specifying the conditions subject to which the Certifying Authorities shall
conduct their business;
(f) specifying the contents of written printed or visual materials and advertisements
that may be distributed or used in respect of a Digital Signature Certificate and
the public key;
(g) specifying the form and content of a Digital Signature Certificate and the key;
(h) specifying the form and manner in which accounts shall be maintained by the
Certifying Authorities;
(i) specifying the terms and conditions subject to which auditors may be appointed
and the remuneration to be paid to them;
(j) facilitating the establishment of any electronic system by a Certifying Authority
either solely or jointly with other Certifying Authorities and regulation of such
systems;
(k) specifying the manner in which the Certifying Authorities shall conduct their
dealings with the subscribers;
(l) resolving any conflict of interests between the Certifying Authorities and the
subscribers;
(m) laying down the duties of the Certifying Authorities;
(n) maintaining a database containing the disclosure record of every Certifying

Authority containing such particulars as may be specified by regulations, which shall be


accessible to public.
Recognition of foreign Certifying Authorities. (Sec.19) Subject to such recognition and
restrictions as may be specified, by regulations, the Controller may, with the previous
approval of the Central Government, and by notification in the Official Gazette,

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recognize any foreign Certifying Authority as a Certifying Authority for the purpose of
this Act.
The Digital Signature Certificate issued by such Certifying Authority shall be
valid for the purposes of this Act.
Revocation of recognition. The Controller may, if he is satisfied that any
Certifying Authority has contravened any of the conditions and restrictions subject to
which it was granted recognition, he may, for reason to be recorded in writing, by
notification in the Official Gazette, revoke such recognition.

Important Questions :
1. What is mean by company ? (November 2017)
2. What is prospectus? (April 2017)
3. Briefly Explain the Capacities of the parties to made contract.
(November 2017)
4. Explain about the formation of the company. (November 2016)
5. Discuss Environment LAW (November 2017)

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