special act

8/10/2019 Special Act

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YASH CLASSES( M:9825048601) Page 1

(SPECIAL ACT)

INDIAN CONTRACT ACT

1. What do you meant by Bailment Explain theessential elements of a Bailment.

Meaning of Bailment : [Section 148]

The word Bailment is derived from a French word bailing which means to deliver.

According to section 148 a bailment is the delivery of goods by one person

to another for some purpose upon a contact that they shall, when the purpose is

accomplished, be returned or Otherwise dispose of according to the directions of the

person delivery them.

Explanation :

If a person already in possession of the goods of another contracts to hold them as

a bailee, he thereby becomes the bailee and the owner becomes the bailor of such

goods, although they may not have been delivered by way of bailment.

Essential Elements of a Bailment :

(a)

Agreement :

There must be an agreement between the bailor and the bailee.This agreement may be either express or implied.

However, a bailment may be implied by law also.

=>For example, bailment between a finder of goods and owner of goods.

(b)Delivery of Goods:

There must be delivery of goods.

It means that possession of the goods must be transferred.

In this connection the following points may be noted.

(1)The delivery must be voluntary;

For examplethe delivery of jewellery by its owner to a thief whoshows a revolver does not create a bailment because the delivery is not voluntary.

(2) Delivery may be actual or conctructive:

Actual Delivery:

A delivery is said to be actual where the goods are physically handed over by one

person to

another.

For exampledelivery of a car for repair to a workshop dealer.


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Constructive Delivery: [Section 149]

A delivery is said to be constructive where it is made by doing anything which

ahs the effect of putting goods in the possession of the intended bailee or of any

person authories to hold them on his behalf.

For example, delivery of the key of a car to workshop dealer for the repair of car.

(c) Purpose:

The delivery of goods must be for some intended purpose.

For example, wrong delivery of goods to Jaipur Golden Roadways instead of

Patel Roadways, does not create any bailment.

(d) Return of Specific Goods:

The goods which from the subject matter of a bailment must be returned to the

bailor or otherwise disposed of according to the directions of the bailor, after the

accomplishment of purpose or after the expiry of period of the bailment.

It may be noted that the same goods (which were delivered by bailor to bailee)

must be returned in their original form or desired from (if any required by the

bailor).

Example:Delivery of old gold jewellery to a banker for safe custody creates a bailment

because same old gold jewellery in its original form is to be returned.

2. Essential elements of a contract of pledge.It is a bailment of goods as security for a payment of a debt or performance of a

promise.

The person who makes such bailement is called a pledger or pawnor and the bailee

is called as a pledge or pawnee. [Section 172 of Indian contract Act, 1892].For a valid pledge there should be delivery of the goods and for the purpose that

they serve as

security for the payment of debt etc.

(1). Delivery of goods:

Since pledge is bailment, the delivery of the goods from the pawnor to the pawnee

is must.

Mere agreement to transfer possession in future is not enough.

Delivery of goods may be actual or constructive.

Handing over the key of a godown containing goods or the documents of title

representing certain goods amounts to delivery of goods.

(2). Purpose of pledge is security for payment of debt:

The purpose in case of pledge is that the goods bailed should serve as security

for the payment of a debt, or performance of a promise. The pawnee becomes secured

creditor in respect of such goods.

3. Kinds of Bailment.


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Right to claim compensation for any loss caused by the unauthorized mixing of

goods bailed with his own goods [Section 155-156]

Right to demand return of goods as soon as the time for which they were bailed has

expired or the purpose for which they were bailed has been accomplished. [Section

160]

Right to claim any natural accretion the goods bailed [Section 163]He can avoid the contract, in case the bailee does any inconsistent act with the

contract of

bailment.

In case of gratuitous bailment, he can demand the goods back any time even before

the expire of the term of bailment.

He has a right to bring a suit against any wrong doer who deprives the bailee of the

use or

possession of the good bailed.

Duties of Bailor :

His duties are,

He should disclose known fault about the goods to the bailee.

If he does not make such disclosure, he is responsible for any damage caused to the

bailee

direction from such faults.

He should bear extraordinary expenses of bailment.

The ordinary and reasonable expenses are to be borne by the bailee.

He should indemnify the bailee for necessary expenses incurred in case of

gratuitous bailment.

He should receive back the goods when the bailee returns them after the expiry of

the term of the bailment or when the purpose of bailment is over.If he refuses to accept the goods bailed, them he has to compensate the bailee for

necessary

expenses of custody.

5. State briefly the right and obligations of a

bailee

Section 148 of the Indian Contract Act defines bailment as the delivery of goods

by one person to another for some purpose upon a contract that they shall, when the

purpose is accomplished, be returned or otherwise dispose of according to the directions of

the person delivering them.

The person delivering the goods is called the bailor.

The person to whom they are delivered is called the bailee.

Duties of a Bailee :


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(1). The take reasonable care of the goods bailed:

In all cases of bailment the bailee is bound to take as much care of the goods

bailed to him as a man of ordinary prudence would under similar circumstances take of his

own goods of the same bulk, quality and value as the goods bailed. {Section151]

(2). Not to make unauthorized use of goods bailed : It is the duty of the bailee to use the goods strictly according to the terms of

bailment.

If the bailee makes any use of the goods conditions of bailment, he is liable to make

compensation to the goods from or during such use of them [Section 154].

This liability is absolute and will arise even if the bailee is not guilty of negligence

and the loss might have been caused by an accident.

(3) Not to mix goods bailed with his own goods:

The bailee should not mix the goods bailed with other goods of his own.

But if the bailee mixes his own goods with that of the bailor with the consent of the

bailor, then there is no breach of duty and the bailor and the bailee shall have an

interest in proportion to their respective share in the mixture thus produced.(155)

(4) Duty to return the goods: (160):

It is the duty of the bailee to return, or deliver according to the bailors directions

the goods bailed without demand as soon as the time for which they were bailed

has expired or the purpose for which they were bailed has been accomplished.

The bailee has no right to keep the goods and must return them without waiting for

demand.

(5) To return any accretion to the goods:(163)

In the absence of any agreement to the contrary the bailee must return to the

bailor natural during the period of bailment.

For Example:A leaves a cow in the custody of B to be taken care of, The cow has a calf, B isbound to deliver the calf as well as the cow to A.

(6). Not to set up any adverse title against the bailor:

A bailee must not set up a title adverse to that of the bailor.

The bailee is stopped from denying the right of the bailor to bail the goods and to

receive them back.

Right of a Bailee:

(1). To Enforce bailor duties:

The duties of the bailor are the rights of the bailee.

The bailee has the right:

To claim compensation for any loss arising from not disclosure of known

defects in the goods:

To claim indemnification for any loss or damages as result of defective title of

the bailor.

To claim indemnification for any loss or damages as a result of defective title of

the bailor.


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(2). To deliver goods to one of several joint owners:

If several joint owners of goods bail them, the bailee may deliver them back to or

according to the direction of one joint owner without the consent of all in the absence of

any agreement to the contrary.

(3). Delivery of goods to bailor without title:If the bailor has no title to the goods, and the bailee in good faith, elivers them back to

the bailor, the bailee is not responsible to the true owner in respect of such delivery.

(4). Right of action against third parties:

If a third person wrongfully deprives bailee of the use of possession of the goods bailed,

he ahs a right of action against such third parties in the same manner as the true owner has

against third persons.

(5). Right of lien:

The bailee has a right to claim his lawful charges and if they are not paid, the bailee is

given the right to retain the goods until the charges due in respect of those goods are paid.

This right is known as bailees right of lien.

This right is possessory right and can be exercised only when the bailee is in

possession of the goods of the bailor.

The bailee has the right to retain only those goods in respect of which he is to

receive remuneration i.e. the bailee cannot retain other goods belonging to the

bailor.

A bailee has only a right of particular lien over the goods.

6. Write a short note on Lien.The right to retain possession over the goods of another until the demands are satisfiedis called lien.

Lien may arise by contract or by operation of law.

Right of lien is of two kinds:

Particular lien and

General lien.

Particular lien:

Particular lien is the right to retain possession over goods in connection with which the

debt or claim arose.

It is generally available to finder of goods, agents, Pawnee(bailor) etc..

General lien:

General lien is the right to retain possession over the goods belonging to another for a

general balance of account.


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7. Discuss the rights and obligations of the finder

of goods.The term finder of goods means a person who has found some goods belonging to

another.When a person comes across some article he is under no duty to pick them up, but if he

picks them up, he becomes a finder of goods and is subject to the same responsibility as a

bailee.

Liabilities or obligation of a finder of goods:(1) He must take reasonable care of the goods.

By reasonable care we mean that much care as a man of ordinary prudence

(care)would take of his own goods under similar circumstances.

If he takes that much care, the finder shall not be responsible for any loss, destruction

or deterioration of the thing found.

(2) He must not use the goods for his own purpose.

(3) He must not mix them with his own goods.

(4) He must make appropriate efforts to find the true owner of the goods.

Rights of the finder of the goods:(1)Right of lien

The finder can retain the goods against the true until he receives compensation for

trouble and expenses incurred by him in preserving the goods and finding out the

owner.

This right is known as the finders lien on the goods.

But the finder cannot file a suit against the true owner for recovery of suchexpenses.

(2) Right of sale:

Section 160 permits the finder to sell the goods in the following cases:

if the owner cannot be found after reasonable search

or

if found, the owner refuses to pay the lawful charges to the finder ,or

if the thing is in danger of perishing or losing the greater part of their value or

if the lawful charges of the finder amount to two-thirds of their value

8.What is meant by pledge? State the rights of

a Pawnee.Meaning of pledge:

A pledge or a pawn is a bailment of goods as a security of same debt or engagement.


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Security 172 of contract Act says that the bailment of goods as security for payment

of a debt or performance of a promise is called pledge.

The bailor is called the pawnee

Pawnees rights:

(1) Pawnees rights of retainer:*Sec.173+The pawnee may retain the goods pledged not only for payment of the debt or the

performance of the promise but also for the recovery of the interest on the debt and all

necessary expenses incurred by him in relation to the possession or for the preservation of

the goods pledged.

(2) Rights of retention in regard to subsequent advances: [Sec.174}

Subject to a contract to the contrary, the pawnee would not be entitled to retain the

goods subsequent advances made by the pawnee, provided this has not been expressly

surrendered by a contract.

3) Right to Extraordinary expenses incurred: [Sect 175}

The pawnee is entitled to receive from the pawnor extraordinary expenses incurred by

him for the preservation of the goods pledged by the has no right to loan.

Right where pawner makes default: [Sec.176]

If the pawnor makes default in the payment of debt, or the performance of the

promise, in respect of which the goods were pledged, the pawnee may bring a suit against

the pawnor upon the debt or the promise, and retain the goods pledged as a collateral

security, or he may sell the thing pledged on giving the pawnor reasonable notice of the

sale.

9. Rights of a Pawnor.Duties of a pawnee are basically the rights of a pawnor.

(1) Right to Redeem:[Sec.177]

If a time is stipulated (fixed)for the payment of the debt, or performance of the

promise, for which the pledge is made, and the pawnor makes default in payment of the

debt or performance of the promise at the stipulated time, he may redeem the goods

pledged at any subsequent time before the actual sale of them, but he must, in that case,

pay in addition any expenses which have arisen from his default.

(2) Surplus on sale:[Sec.176}Pawnee received a sum in excess by the sale of pledged goods, pawnor has a right to

receive the surplus.

(3) Preservation and maintenance:

Pawnee as a bailee should not be negligent in taking due care of the goods pledged and

pawnor can enforce the right.

(4) Pawnor as a debtor has all the rights available to a debtor for his protection even

under other statues i.e. money lender Act. Etc.


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AGENCY CONTRACT

(1). PERSONAL LIABILITY OF AN AGENT:General Rule [Section 230]

In the absence of any contract to that effect, an agent cannot personally enforce

contract entered into by him on behalf of his principal, nor is he personally bound by them.

When the Agent becomes Personally Liable

The circumstances under which an agent becomes personally liable are shown below in Fig:

In case of foreign Principal [Section 230] :

In case of Undisclosed Principal [Section 230]:

In case of Incompetent Principal [Section 230] :In case of Principal not in Existence :

In case of acts not Ratified [Section 235]

In case of acts in his Own Name :

In case of Express Agreement :

In case of Custom or Usage of Trade

Let us discuss them one by one.

(a). In case of foreign Principal [Section 230] :

Where the contract is made by an agent for the sale or purchase of goods for a

merchant residing abroad, in the absence of any contract to the contrary, it is presumed

that the agent is personally liable for such contracts.

(b). In case of Undisclosed Principal [Section 230]:

Where the contract is made by an agent for an undisclosed principal, in the absence of

any contract to the contrary, it is presumed that the agent is personally liable.

(c). In case of Incompetent Principal [Section 230] :

Where a contract is made by an agent for a person who cannot be sued, (e.g. minor,

lunatic, foreign ambassador), in the absence of any contract to the contrary, it is presumed

that the agent is personally liable.

(d). In case of Principal not in Existence :

Where a contract is made by the promoter for a company not yet incorporated, the

promoters are personally liable.

(e). In case of acts not Ratified [Section 235] :

A person untruly representing himself to be the authorized agent of another, and

thereby inducing a third person to deal with him as such agent, is liable , if his alleged


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employer does not ratify his acts, to make compensation to the other in respect of any

loss or damage which he has incurred by so dealing.

(f). In case of acts in his Own Name :

Where a contract is made by an agent without disclosing that he is contracting as an

agent, the agent is personally liable.Example :X took a loan from Y by executing a hundi in Ys favour. X did not sign the hundi as

agent of the firm nor did he disclose to Y the name of his principal. The agent was held

personally liable.

[Trilok Chand v. Rameshwar Lal]

(g) In case of Express Agreement :Where a contract made by an agent specifically provides

for the

personal liability of the agent, the agent will be personally liable.

(h) In case of Custom or Usage of Trade: Where there is a custom or usage of trade making

the

agent personally liable, in the absence of any contract to the contrary, the agent is

personally

liable.

Example :X, a share broker purchased 100 shares @ Rs. 100 per share and sold the same

shares @ Rs. 90 per share on behalf of Y who refused to give the difference. X is personally

liable because. It is a custom that a share broker is personally liable for the contracts

entered into by him.

(2). TERMINATION OF AGENCY

Meaning Of Termination Of Agency

Termination of agency implies the end of the relationship of principal and agent.

Modes of Termination of Agency

(I). Termination of Agency by act of the Parties

By Mutual Agreement: An agency is terminated if the principal and agent mutuallyagree to do so.

By Revocation of Authority by the Principal : An agency is terminated if the

principal revokes the authority of his agent. It may be noted that the principal may

revoke the authority of his agent at any before the authority has been exercised so

as to bind the principal.

By Renunciation of Agency by the Agent : The agency is terminated if the agent

himself


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(e)

On Destruction of the Subject-matter :An agency is automatically terminated when

the subject matter of the contract ceases to exist.

(f) On Dissolution of Company :An agency is automatically terminated when the principal

or agent is a company and the company is dissolved.

(g)

On Principal becoming an Alien Enemy: An agency is automatically terminated when

the principal and agent are citizen of two different countries and a war breaks out

between these two countries.

3. Agency by Ratification [Section 196]

Agency by ratification is said to arise when a person, on whose behalf the acts are done

without his knowledge or authority, expressly or impliedly accepts such acts.

Meaning of Ratification :

Ratification means the act of affirmation by the person on whose behalf

the act has been done.

Effect of Ratification [Section 196]:

The effect of ratification is to make the agents unauthorized acts as authorized

acts as if they had been performed with the principals authority. It may also be noted

that ratification is equal to prior authority. This means that the ratification relates back

to the date when the act was done by the agent and not to the date when the principal

ratified the act. Hence, the agency is deemed to have come into existence from the time

when the agent first acted and not from the time when the principal ratified the act.

Example : X the managing director of a company, without prior authority from the

company accepted an offer made by Y on behalf of the company. Y later on revoked the

offer but the company ratified Xs acceptance. It was held that Y is bound by

ratification because ratification related back to the time of Xs acceptance. *Bolton Partner

v. Lambert].

Mode of Ratifiacation [Section 197] :

Ratification may be express or maybe implied by the conduct of the person on

whose behalf the acts are done.

Example :A, without authority, buys goods for B Afterwards B sells them to C on his

own account; Bs conduct implies a ratification of the purchases made for him by A.

Example : A, without Bs authority, lends Bs money to C. Afterwards B accepts

interest on the money from C. Bs conduct implies a ratification of the loan.

Essentials of a Valid Ratification [Section 198 to 200] :(1)Full Knowledge [Section 198]:


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No valid ratification can be made by a person whose knowledge of the facts of

the case is materially defective.

Example : X instructed Y to arrange a house on a reasonable rent in Bombay. Y lets out

his own house at a rent which is much higher than the prevailing rentals in that area. X

started living in the house. Later on X came to know that the house belonged to Y. Xs

ratification is not binding upon himself. [Damodharan Das v. Sheoram Dass].

(ii) Whole Transaction [Section 199]:

The ratification must be made for the whole transaction and not for a part of

transaction. When person ratifies a part of the unauthorized transaction, it is

treated as the ratification of whole transaction.

Example : X, without Ys authority bys 100 bales of cotton. Y wants to ratify this

transaction to the extent of 60 bales and reject the rest. Y cannot do so. If he does so, it will be

treated as the ratification of whole transaction of 100 bales.

(iii) No Damage to Third Party [Section 200]:

An act which has the effect of subjecting a third person to damages or of

terminating any right or interest of a third person, cannot be ratified.

Example :X holds a flat on a lease from Y. The lease is terminable on 3 months notice. Z,

without Ys authority given notice of termination of lease to X. Y cannot ratify the notice

given by Z so as to binding on X.

(iv) Act on Behalf of Another Person: The acts done by an agent on behalf of another

person can only be ratified. Thus, the acts done by the agent in his own name cannot be

ratified.

Example :X, without Ys authority or knowledge buys 100 bales of cotton on behalf of Yand buys 50 bales of cotton in his personal name from Z on different dates. Subsequently,

the prices of cotton go up. Y wants to ratify the purchase of 150 bales of cotton. He can

ratify only the purchase of 100 bales made on his behalf and not the purchase of 50 bales.

(v) Existence of Principal: The principal must be in existence at the time when the act is

done in his name.

Example :The promoters of a company enter into contract for a company before its

incorporation. The company after incorporation, cannot ratify such contracts because

the company was not in existence at the time when the contract was entered into [Kelner

v. Baxter].

(vi) Contractual Capacity: The principal must have contractual capacity both at the time

of conract and at the time of ratification.

Example : A minor on attaining majority cannot ratify the contracts made on his behalf

during his minority.


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(vii) Within Reasonable Time: The ratification must be done within a reasonable time,

otherwise it will not be binding.

Example : X without authority from Y insured his goods against fire. After the policy was

taken, the goods were destroyed by fire subsequent to the fire, Y ratified Xs act of insuring

the goods and accepted the insurance policy. It was held that the ratification made by Y

was not valid because Xs act should have been ratified before the loss of goods. [Groverand Grover Ltd v. Mathews].

(viii) Lawful acts :Only those acts which are lawful can be ratified.

Example : X forget Ys signature on a cheque and withdraw Rs. 1,000 from Ys bank

account. Subsequently, Y ratifies the act of withdrawing money. Such ratification is not

valid because forgery is an offence.

(ix) Acts within Principals Power : Only those acts which are within the principals

power can be ratified. Thus, an act, which is beyond the competence of a principal, cannot

be ratified.

Example :A director of a non-trading and-banking company borrowed Rs 1,00,000 on

behalf of the company. The company cannot ratify such act of director because it is

ultra-vires the Company (i.e. beyond the power of the company).


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COMPANY LAW 1956

Que.1. Define Company. State the characteristicsof a company.

DEFINATION OF COMPANY:

A voluntary association of persons.

A voluntary association of persons formed for same common purpose, with

capital devisable into parts, known as Shares, with limited liability. It is creation

of law and sometimes known as a artificial person with perpetual succession and

common seal. In exists only in the eyes of the law.

CHARACTERISTICS OF A COMPANY:

(1). Separate Legal Entity:

A company is regarded as on entity separate from its members. In other words it has an

independent existence.

Any of its members can enter into contract with it in the same manner as any other

individual can and he cannot be held liable for the cast of the company even if he holds

virtually the entire share capital.

CASE: In the case of Salomon V/s Salomon & Co. Ltd.

Salomon virtually held all the shares of the company and also became its secured creditors.

Held, the company was in the eyes of law a separate person independent from S and was not his

agent, S though virtually the holder of all the shares in the company was also secured creditors

and was entitled to repayment in priority to the unsecured creditors.

(2). Limited Liability:

A Company may be (I) a company limited by shares.

(II) a company limited by guarantee.


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In a company limited by shares the liability of members is limited to unpaid value of the

shares.

In a limited by guarantee, the liability of members is limited to such amount as the

members may undertake a contribute to the assets of the company in the event of its

being wound up.(3). Perpetual Succession and a Common Seal:

A company has a perpetual succession and a common seal. Members may come and go

but the company can go on forever (until dissolved). It continues to exist even if all its

human members are dead. It is not in any manner affected by insolvency, mental

disorder or retirement of any of its members. Since a company has no physical

existence, it must act through its agents and all such contracts entered into by its agents

must be under the seal of the company.

(4). Transferability of Shares:

The shares of a company are freely transferable except in the case of a private limited

company. In other words every shareholder is free to transfer his shares according to his

wish. This feature of the company provides liquidity to the investor.

(5). Separate Property:

A Company, as already observed, is a legal person distinct from its members. It is,

therefore, capable of owing, enjoying and disposing of property in its own name. Thecompany is the real person in which all its property is vested and by which it is

controlled managed and disposed of.

"No member can claim himself to be owner of the company's property during its existence or on its

winding up."

QUE.2. Distinction between a private company and

public company:POINTS PRIVATE COMPANY PUBLIC COMPANY

1. minimum Members Minimum Members are Tow. Minimum members are Seven.

2. Maximum Members Can't give more than 50 Members Unlimited


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3. Members of Directors A Private Company must have at

least Two directors.

A Public Company must have at le

Three directors.

4. Restriction on Appointment of

Directors

There is no need to file the directors

consent m writing to act as such and

his consent to take up qualificationshares.

It has to file.

S. Restriction on invitation to

subscribe for shares.

It can not invite public to subscribe

to its shares capital.

A public company invites the Gene

public to subscribe for the shares.

6. Special Privileges A Privet company enjoys some

special privileges.

A public company enjoys no such

privileges.

7. Transfer of shares Articles must provide for restrictions

on transfer of shares.

Shares of the public company free

from such restrictions.

8. Managerial remuneration It can pay any remuneration to

management.

Managerial remuneration should n

exceed 11 % of the net profit of th

company.

9. Private Word It must add the words 'Private'

before the word limited at the end of

its name.

Not required

10. Statutory report It does not require to hold statutory

meting and to file a statutory report

It has to hold statutory meeting an

to file a statutory.

QUE.3. State the importance of a prospectus.

Discuss the consequences of mis-statement in a

prospectus?

ANS.:Prospectus means any document described or issued as a prospectus which has the object of

inviting deposits from or inviting offers from the public for the subscription or purchase of shares in, or

debentures of a company. The importance of a prospectus is as follows:


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(a). Importance of the company issuing it:In order to finance its business, the company needs

money. To collect money from the general public the company invites public participation in its share

capital by issuing prospectus.

(b). Importance for the prospective investors of the company:The prospectus of a company

holds out certain facts about the company to the general public On the basis of these facts investor triesto estimate the profitability of the investment in the future and the risk that investment will face. On the

faith of prospectus, a person is induced to purchase shares in the company.

As the general public golden rule public is induced to purchase shares on the faith of a

prospectus, it should not state anything as a fact which is actually not so, and no fact should be omitted.

This is known as the golden rule for framing prospectuses. If there is an omission on the part of those

issuing prospectus to include material facts or if whatever has been stated is not true, the prospectus

will be said to be containing mis-statements.

CONSEQUENCES OF MIS-STATEMENTS IN PROSPECTUS:

Where a prospectus is issued by or behalf a company and it contains mis-statements, the

subscriber to the share acquires certain rights-

(I). Against the company and

(2). Against the directors, promoters and experts etc.

(1) RIGHTS AGAINST THE COMPANY:

A shareholder who has purchased shares in the company on the faith of a prospectus containing

mis-statements has the following rights against company:

1.

Rights to Cancel the Contract:He can cancel the contract to purchase shares with

the company. He will, therefore, surrender the shares to the company and the

company will return his money along with the interest thereon.

But these rights can be exercised only if the following conditions are fulfilled:

(a). There must be omission or misrepresentation of facts in the prospectus.

(b). The shareholder was induced to purchase shares on the faith of the contents of the

prospectus. @ He must have purchased shares from the company and not in the open market.

(d). The shareholder should cancel his contract with company soon he comes to know about the

mis-statement. It must take place within a reasonable time.


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2.Claim for damages: He can sue the company for claiming damages if the misstatements

amount to fraud.

The right to claim damages can be exercised even if the company has gone into liquidation.

(2). Rights against Directors etc.:

Those who authorize the issue of a prospectus are also liable if it contains mis-statements.

These persons include the directors, the promoters, experts, etc. The liability of these persons is as

follows:

1. Liability for omission of material facts (Sec. 56).

2. Liability for Mis-Statement.

3. Liability for general law for fraud

4. Criminal liability.

(1). Liability for Omission:

If any shareholder suffers any loss because the prospectus does not contain all the particulars

required by the Companies Act, 1956, under Sec. 56(1), all those persons who authorized the issue of

prospectus shall be liable to pay damages to each subscriber at this instance.

But a person can escape liability if he can prove that:

(a) He was ignorant of the omission; or

(b) The non-disclosure arose from an honest mistake of fact on his part

(2). Liability for Mis-statements:

Every director, promoter or any other person who authorize the issue of prospectus containing

mis-statements is liable to compensate the subscribers for any loss sustained by them by reason of any

untrue statement contained in the prospectus.

(3).Liability under General Law for Fraud:

Any person who has been induced to invest money by a fraudulent statement in the prospectus

can recover damages for loss sustained by him as a result of fraud from persons issuing the prospectus.


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But the investor has to prove that there was a fraudulent mis-statement.

(4). Criminal Liability:

Where a prospectus contains untrue statement, every person authorizing its issue shall be liable

for imprisonment up to 2 years of fine up to Rs.50O0 or with both.

A person can put forward the following defenses in order to avoid his liability:

(a). That the statement was immaterial; or

(b). That he had reasonable grounds to believe in to be true till the time of

issue of prospectus.

QUE.2. Write short notes on:

(1). Minimum Subscription.

(2). Statement in lieu of prospectus.

Ans. (1) Minimum subscription

Minimum subscription implied the minimum amount which, in the opinion of the Board of

Directors, must be raised by the issued of the share capital to provide far the following matters:

The purchase price of any property purchased m to he purchased which is to be paid out

of the proceeds of the issue.

Any preliminary expenses or any underwriting commission payable.

The repayment of any money borrowed for above two purposes.

Working capital of the company.

Any other expenditure.

The amount of minimum subscription excludes payment otherwise in cash. The word minimum appliedto the nominal amount or face value of share applied for and not to the amount payable as application

money.

The importance of minimum subscription is clear from the following facts:


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(a) Every company is required to state the amount of minimum subscription in the prospectus issued by

it.

(b) No company shall proceed to allot share unless the amount states in the prospectus has been

subscribed for.

(c) Where a company fails to receive minimum subscription within 120 days of the issue of prospectus,

the company must return the money to the application within the next 10 days.

(2). Statement in lieu of prospectus:

As per Sec 2 (3b) of companies act Private Company need not issue a prospectus because it

cannot make any offer to general public to purchase company's share.

Therefore it has to file a statement in lieu of prospectus, with the register of the companies at

least 3 days before allotment of shares is made.

The rules relating to such statement are contained in Sec. 70 of the Act. It requires this

statement to be signed by every person named therein as a director or proposed director. Further, it

must contain all the information required to be disclosed by Schedule III of the Act. The information

required under the Schedule is more or less similar to that required for a Prospectus. Similarly, if theStatement contains any untrue statement or omission of facts, the liability of persons authorizing its

delivery to Registrar is the same as in case of a prospectus. i.e. they have civil liability for compensating

those who suffer any loss on account of mis-statements in it and they have criminal liability, i.e. they are

liable for imprisonment of 2 years or fine up to Rs.5, 000 or both unless the person liable puts forward

some defence.

If a company proceeds a allot shares without fitting Statement in lieu of Prospectus, if required,

at least 3 days before allotment of shares, the defaulting officers and the company shall be liable to a

fine extending to Rs.1,000 [Sec. 70 (4)].

The provisions of Sec. 70 are not applicable to a private company.

QUE. 3. Define a 'Memorandum of Association


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Explain the clauses of Memorandum.

ANS.Memorandum of association is an important document of a company. According to CompaniesAct, 1956, Memorandum means the Memorandum of Association of a Company as originally framed or

as altered from time to time in pursuance of any previous Companies Lam or of this Act Sec 2 (28) The

definition is neither elaborate nor exhaustive and fails to bring out the true nature and contents of a

Memorandum of Association :

In simple words, Memorandum of Association is the constitution of a company and contains the

fundamental conditions upon which alone the company is allowed to be formed. It defines the

relationship of the company with the outside world. It states the objects of the company which it will

strive to attain after incorporation and defines as well as confines the scope of the activities of the

company. The purpose of Memorandum of Association is:

1. To point out to the prospective shareholder the risk following their

Investment, and

2. To point out to the outsiders dealing with the company whether their

Contractual relationship with the company shall be within its objects or beyond its

powers, i.e. ultra virus. An act ultra virus the company is null and void and does not bind

a company.

Clauses of the Memorandum of Association (Sec. 13)

The Memorandum of Association of a company, generally, has the following clauses:

1. Name Clause.

2. Registered Office Clause.

3. Objects Clause.

4. Liability Clause

5. Capital Clause

6. Association or Subscription Clause.

(1). Name Clause:

The name cause states the name of the company. A company is a legal entity and, therefore must have


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an name to establish its identity.

A Company can choose and adopt any name subject to the following restrictions:

(a). A Company can not adopt a name which is undesirable in the opinion of the Central

Government. A name which is too identical with or too closely resembles the name of an

existing company may be deemed to be undesirable by the Central Government (Sec. 20). The

phrase too closely resembles means that the two are one and the same.

(b). The name of a company should not contain those words and pictures the use of which has

been prohibited under the Emblems and Names (Prevention of Improper Use) Act, 1950, e.g.

U.N.O., W.H.O. pictorial representation of Mahatma Gandhi, Prime Minister of India, etc.

The last word of the name of a company must end with the word Limited in case of a

public company and with the words Private Limited in the case of a private company. The

Central Government may, however, allow a company drop these words from its name in case it

has been formed for the promotion of art, science or culture, etc. and it has prohibited the

distribution of the profits among its members (Sec. 25).

Publication of Name (Sec 147)

Every company must

(a). paint or affix the name and address of its registered office, and keep the same painted or

affixed, on the outside of every office or place in which its business is carried on, in a

conspicuous position, in letters easily legible :

(b). have its name engraved in legible characters on its seal; and

(c). Have its name and the address of registered office mentioned in legible characters on all

business letters, bill heads, notice and other official publication, bills of exchange, invoices, etc.

(2) Registered officer or Domicile Clause (Sec. 146):

The registered office clause states the name of the state in which the registered office of the

company shall be situated. Every company is required to have a registered office from the date on which

it begins to carry on its business, or within 30 days of the date on which it is entitled to commence


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business whichever is earlier. All communications and notice in respect of a company are to be

addressed to its registered office. The situation of registered office determines the domicile of the

company and the authorities having jurisdiction over it.

(3). Objects Clause (Seal3):

The objects clause of a company reveals the objects for which it has been formed. It states :-

(a). In the case of a company in existence on 15th October. 1965, the objects the company; (b). In the

case of a company formed after 15TH

October, 1965

The main objects of the company and objects incidental to the attainment of main

objects:

The other objects of the company not included in (i) above; and

(c) in the case of non-trading companies with objects not confined to one State, the States to whoseterritories the objects extend.

A company can undertake those activities only which are directed towards the attainment of its

objects. Any act which is not within the objects of the company is beyond its power.

Thus, the objects clause defines defines and confines the mope of activities of the company

both affirmatively and negatively. A0irn^veiy is states what can be done by the company and negatively

it states that other sets cannot be done by it as they are ineffectively being ultra vires.

(4). Liability Clause (Sec.13)

The liability clause describes the nature of the liability of members of a company. It states that

the liability of members is limited by shares or by guarantee. The Memorandum of Association of a

company limited by guarantee also states that each members undertakes to contribute to the assets of

the company on its winding up while he is a member or within one year after he ceases to be so such

amount as may be required not exceeding a special amount for payment of debts and liabilities of the

company, costs, charges and expenses of winding up and for the adjustment of the rights of the

contributories among themselves.

(5). Capital Clause (Sea 13)

The Memorandum of Association of a company states under capital clause the amount of share


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capital with which the company is to be registered and the division thereof into shares of fixed amount.

(6). Association Clause:

This clause states that the persons subscribing their signatures to the Memorandum of

Association are desirous of forming themselves into an association in pursuance of the Memorandum. IT

shall be signed by at least 7 persons in case of a private company. Each subscriber shall state his full

name, address occupation and shall sign in the presence of a witness who will attest the signatures and

give similar particulars about himself. A subscriber can not be a witness. Every subscriber is required to

take at least one share in the company and he shall write opposite his name the number of shares he

takes. It may be noted that a subscriber must be competent to contract, that is, he should be a minor or

a person of unsound mind, etc.

Alteration in name clause and object clause:

(1). If a company desires to change it's name, it can pass a special resolution to that effect

and make the change with the approval of the central government

(2). If a name resembling that of some other or an undesirable one is to be changed the

company can do so by passing an ordinary resolution and obtain written permission of

the central government. The name must be changed in three months after passing of

the order by the central government.

(3). If there is a conversion of private company into public company or vice versa,

permission to add or delete private is not needed from the central government.

(4) After 30 days of the passing of resolution to change the name, it must be registered with

the registrar.

(5) The company registrar writes the new name in and deletes the old from his books. He

issues a certificate of establishment in the new name.

(6) The company must put the new name of memorandum and articles of association. The

copies of changed documents must be submitted to the registrar for alteration in three

month.

(7) The change in the name of changed documents must be submitted to the registrar for

alteration in three month.

[2] Change in object clause :

The provisions for these are made in section 17. The object clause can be changed only


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with following circumstances in view :

(1) To run business more effectively or efficiently.

(2) To carry out the main objective or new or improved equipment.

(3) To change or expand local area of operation.

(4) To make limited or abandon any objects stated in memorandum.

(5) To join conveniently and advantageously some other business with the existing one of

the company.

(6) To enable the company to sell of its whole business or a part thereof.

(7) To amalgamate company with some other organization.

The object clause cannot be changed to pursue as business totally different from or

inconsistent with the basic objects in the memorandum is to this extent an unchangeable

document.

The following procedure should be followed to change the object clause :

(1) A special resolution must passed in the general meeting.

(2) A copy of the special resolution must be sent to company registrar in 30 days of its

passing.

QUE.4 Meaning and privileges of privatecompany.

Definition of Private Company

In terms of section 3(1) of the Companies Act, in case of private company its articles of

Association Companies Act, in case of private company its articles of Association.

(a) restricts the right of the members to transfer shares.

(b) limits the number of members to 50 excluding past or present employees of the company who

are the members of the company.

(c) Prohibits any invitation to the public to subscribe for its shares or debentures.

(1) Restriction on transfer of shares:

The company law has not put prohibition of transfer of shares on private company but


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restriction is put. The members of private company cannot transfer their shares to a third

person. But subject to the articles they can transfer the shares internally.

(2) Limitation on number of members:

As per the company law private company has minimum two and maximum 50 members.

Par or present employees of the company who are the members of the company are not

included in this number of 50 members. Shares held jointly are not considered to be held by

each separate individual member.

(3) Prohibition on invitation of shares:

The private limited in not required to register its name and get certificate of existence. There is

no need to give advertisement. Private company cannot invite public to purchase shares or

debentures.

The private company has to prepare the articles on the basis of above three conditions and

compulsorily register the same.

Privileges and Advantages of a Private Company

Under the Companies Act of 1956, certain special rights resulting into advantages are conferred

on private companies. They can be described as under :

(1) Exception from prospectus

A private company need not publish a prospectus or file a statement in lieu of it.

(2) Exception regarding right issues

When new shares are to be allotted, the provision of offering them to the existing shareholders

does not apply to private company.

(3) No need of commencement

A private company can start business after getting the certificate of incorporation. It is not

required to obtain a certificate for the commencement of business.

(4) No need of Minimum Subscription

A private company can proceed to allot shares even without obtaining minimum subscription.

(5) Voting rights of the shares

A private company can issue shares with voting rights attached to them as it deems fit.


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(6) Exception from members index

A private company is not under the obligation of maintaining an index of its members.

(7) Exception from statutory

It is not necessary for a private company to call the first meeting and file its report.

(8) Less number of Directors

There should be minimum of two directors in a private company.

(9) Quorum of only two member

A quorum of two members is considered adequate for the lawful proceeding of the meeting of a

private company.

(10) Managerial remuneration

The independent private companies are free from the restrictions regarding managerial

remuneration.

Restrictions on a Private Companies

(1) Articles of association is compulsory

It is compulsory for a private company to frame and get registered articles of associationrestricting the number of members, transfer of shares and inviting public to buy its shares.

(2) Private word is compulsory

A private company must write the word private after its name.

(3) Maximum limit of 50 member

The maximum number of members of a private company is fifty.

(4) Restriction on transfer of shares

There is a restriction on the transfer of shares of private company as well as its debentures.

(5) Cannot issue share warrants

There is a restriction on issue of share warrants by a private company.

(6) Firm can not be a Director


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Only living persons can be directors of a private company.

(7) Copies of account should be send to Debenture holders

Before twentyone days of the annual general meeting the members and debentures holders

must be given copies of annual accounts and Auditors report on them.

(8) Restriction regarding proxy

The members of a private company can appoint only one proxy. If there is provision in articles

more than one proxies can be appointed.

QUE.5 Difference between Memorandum and

Articles

POINT OF DISTINCTION MEMORANDUM ARTICLES

1. The kind of document Memorandum of

association is the basic

document of the company

Articles of association is the

secondary document of the

company.

2. What details ? Memorandum fixes the

conditions of the company.

Under the articles, the rules

of administration to attain

objects of company are

fixed.

3. Preparation Memorandum of both a

private and a public

company must be

registered. But a company

limited by shares can adopt

table A.

Articles ought to be

prepared separately by a

company.

4. Relation The Memorandum decides

the relation of the company

with outsiders and public.

Articles will show how the

company will function. It

shows the internal matters

of the company.

5. Changes Memorandum can be

changed by a special

resolution or by obtaining

permission of the court.

Articles can be changed by

a special resolution.


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6. Order The details in

memorandum must be

stated according to the

provisions of the

companies Act.

There are no specific

provisions about the order

in which the details of the

articles are stated.

7. Acts ultra vires The directors of the

company become

personally liable for acts

which are ultra vires the

provisions of the

memorandum.

Acts which are ultravires

the articles can later be

legalized by making

necessary changes in

articles.

Short Note : (3) Certificate of Incorporation

After filling all documents and payment of necessary fees, the registrar will examine them and satisfy

himself regarding the following.

(1) Whether the memorandum has been signed by requisite number of person.

(2) Whether company is proposed to be formed for lawful purpose.

(3) Whether memorandum and articles of association go against the provisions of the companies

Act.

(4) Whether the company can permitted to have the proposed name.

After satisfaction the registrar will register the memorandum articles and other documents and issue

under his hand a certificate called Certificate of Information. The certificate contains the name of the

company, date of issue, signature of registrar with seal.

(1) For the Incorporation of the company :

The memorandum is the basic document in private company and in a public company minimum

2 and 7 persons should sign respectively.

(2) Articles of Association :

It is a document relating to internal administration of the company. This is equally important

document. For the private company this document is compulsory. In public company it is not

compulsory but it can use Table A. those who have put signature on memorandum can put

signature on articles.

(3) Name and address of directors :


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A written document showing names, addresses of the directors along with their consent is

required to be submitted to the registrar.

(4) About shares of directors :

In the prescribed form the information is to be furnished with regard to the number of shares to

be purchased by the directors.

(5) Copies of Contract :

The Copies of the contract entered into with Managing Director, agent secretary and treasurer

should be submitted to the registrar.

(6) Certificate :

A certificate from the Advocate, Chartered Accountant, secretary or Managing Director is to be

obtained showing that there is compliance of provisions of law.

All the documents set out here in above are to be submitted to the registrar after

affixing appropriate stamp. The company registrar will verify the documents and will issue

incorporation certificates. The incorporation certificate under Section 35 is an evidence to show

that the laws are complied with the company is registered.

QUE.6 Short note

(1) Commencement Certificate of Business

After incorporation a private company can commence business immediately. A public company

shall have to comply with some formalities. A public company has a share capital.

(1) Companies intending to invite the general public for subscription of their share or

debentures will have to.

(a) appoint underwriters or brokers for the sale of their shares or debentures,

(b) make application to the stock Exchange for getting their shares or debentures

listed

(c) Issue prospectus to the general public.

(2) A copy of the prospectus is to be filed with the registrar.

(3) A statutory declaration duly verified by any one of the directors or secretary of the

company to the effect that the directors have taken up and paid for qualifications shares


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in cash an amount equal to the amount payable by other subscribers on application and

allotment.

(4) A statutory declaration to the effect that the shares payable in cash have been allotted

equally to the amount not less than the minimum subscription.

(5) A declaration to the effect that no money is liable to be refunded to applicants by

reason of failure to apply for, or to obtain permission for the shares or debentures to be

dealt on the stock exchange.

(6) A company must file a statement or declaration in lieu of prospectus as provided under

Section 149 (2) of the Act.

On being satisfied that three above conditions have been fulfilled, the registrar will grant a

certificate of commencement of business to the company.

(2) Short Note : Doctrine Of Ultra Vires

The doctrine of ultra vires states that any act which is beyond the powers of the company, i.e.

which is not stated in the objects clause of its Memorandum of Association or which is not incidental or

ancillary to the attainment of such objects, is wholly inoperative and void. Consequently, it does not

bind the company.

The objects clause of the Memorandum of Association of a company reveals the purposes for

which a company has been incorporated. The company can, therefore, undertake such activities which

are essential for the attainment. Everything else is beyond the powers of the company or is ultra vires.

Any person dealing with the company should ensure beforehand that the contractual relationship he

contemplates with the company is within its powers (i.e. intra vires) otherwise later on the Courts will

not enforce the rights and obligations arising out of such relationship.

The doctrine of ultra vires and its effects were brought out clearly in famous case Ashbury

Railway carriage and Iron Co. Ltd. v. Riche. The objects of the Company, in this case, were to make and

sell, to lend on hire, railway carriage and wagons, to carry on the business of mechanical engineers and

general conctractors etc. The company entered into contract with Riche to finance the constructive ofa

railway line in Belgium, which was ultra vires the company. The company repudiated the contract its

later on, sued the company for breach of contract and claimed damages. Held, the contract being ultravires, was null and void. It was not binding on the company and the question of awarding damages did

not arise.

Can a company ratify ultra vires transactions ?


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An act ultra vires the company, being null and void, is incapable of ratification even by the

unanimous consent of the shareholders. However, an act ultra vires the Articles can be ratified by the

company by altering its Articles in a manner so as to include the power of doing such act within it.

Similarly, an act which is ultra vires the directors but intra vires the company, can be ratified by the

majority of the shareholders by passing a resolution.

QUE.7 Discuss The Doctrine of Indoor

Management with Reference to the Case

of Royal British Bank V.Turquand.

The Memorandum and Articles of Association on registration with the Registrar, assume the

character of public document. Every person dealing with a company is deemed to have notice of

contents of these documents, and is presumed to have understood them properly. This is known

as the doctrine of Constructive Notice. If a person enters into a contract with a company, he

must ensure beforehand that such contract falls within the powers of the company otherwise he

cannot enforce it later on, it being ultra vires.

However, there is one limitation to the doctrine of constructive notice. The outsiders

dealing with the company are entitled to assume that as far as the internal proceedings of the

company are concerned they have been done regularly. But they need not enquire into

regularity of the internal proceedings. This is known as Doctrine of IndoorManagement as laid

down in Royal British Bank v. Turquant. In this case, the directors of the company hand issued abond to T. They had power under the Articles to issue such bonds provided they were

authorized by a resolution of the company. No such resolution was, however, passed in this

case. Held, T could recover the amount of the bond from the company on the ground that he

was entitled to assume that the resolution had been passed.

The rule is based upon obvious reasons of public convenience and justice as the internal

proceedings of a company are not open to public and it will not be possible for outsiders to

know them. Thus, they can presume that the company follows its internal rules and regulations

properly and they need not investigate in this regard.


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THE NEGOTIABLE INSTRUMENTS Act,

1881

1. Meaning and characteristics of negotiable

instrument.

Meaning of Negotiable Instrument [Section 13(1)]

Negotiable instrument means a promissory note, bill of exchange or cheque payable

either to order or to the bearer.

Payable to order or Bearer; It must be payable either to order or to bearer.

Freely Transferable An instrument payable to order is negotiable by endorsement and delivery

and an instrument payable to bearer is negotiable y more delivery.

Presumption as to older Every holder of a negotiable instrument is presumed to be a holder in due

course.

Title of Holder in due Course Free from all Defects A holder in due course (i.e., the person who

became the possessor of negotiable instrument before maturity, for valuable consideration and in

good faith) gets the instrument free from all defects in the title of the transferor.

Presumption as to Consideration Every negotiable instrument is presumed to have been made,

drawn, accepted, negotiated or transferred for consideration.

2. Presumptions of negotiable instruments.Until the contrary is proved the following presumptions shall be made:

Of consideration: That every negotiable instrument was made or drawn accepted, indorsed,

negotiated or transferred for consideration.

As to date: That every negotiable instrument bearing a date was made or drawn on such date.

As to time of acceptance: That every accepted bill of exchange was accepted within areasonable time after its date and before its maturity.

As to time of transfer: That every transfer of a negotiable instrument was made before its

maturity

As to time in indorsements: That the indorsements appering upon a negotiable instrument were

made in the order in which they appear thereon.

As to stamp: That a lost promissory note, bill of exchange or cheque was duly stamped.


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As to holder in due course: That the holder of a negotiable instrument is a holder in due course

expect where the instrument has been obtained from the maker or acceptor thereof by means

of an offence of fraud, or for unlawful consideration.

As to protest: In a suit upon an instrument which has been dishonour, unless and until such fact

is disproved.

3. Discuss the meaning and elements promissory

notes.Meaning of Promissory Note [Section4]

According to Section 4 of the Negotiable Instruments Act, 1881, A promissory note is

an instrument in writing (not being a bank note or a currency note) containing an unconditional

undertaking, signed by the maker to pay a certain sum of money only to, or to the order of a

certain person or to the bearer of the instrument.

Essential Characteristics of a Promissory Note

The essential characteristics of a promissory note have been shown below in Fig.

(i) In writing: It must be in writing. In other words, an oral promise will not make a promissory note.

Example A promises to pay B a sum of Rs.500 on telephone. This promise will not make a promissory

note because it is not in writing.

(ii) Express promise to pay:There must be an express promise to pay and not mere acknowledgement

of indebtedness.

Example State with reasons whether each of the following instruments is Promissory Note or not:

(a) Mr. B, I owe you Rs.500.

(b) We have received the sum of Rs.500 in cash from Mr.B.

(c) We have received the sum of Rs.500 in cash from Mr.B. This amount will be repaid on

demand.

(d)

We promise to pay Mr.B a sum of Rs.500.

Solution: Cases (a) and (b), These instruments are not promissory notes because there is no expresspromise to pay. These instruments are merely acknowledgements of indebtedness.

Cases (c) and (d). These instruments are promissory notes because there is an express promise to pay.


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(iii) Definite and unconditional promise:The promise must be definite and unconditional. It may be

noted that a promise to pay is not conditional if it depends upon an event which is certain to happen but

the time of its occurrence may be uncertain.

Example State with reasons whether each of the following instruments is a Promissory Note or not:

(a)

I promise to pay B Rs. 500/- seven days my marriage with Madhuri or Sridevi.

(b)

I promise to pay B Rs. 500/- on Ds death provided D leaves me enough to pay that sum.

(c) I promise to pay Rs. 500/- on Ds death.

Solution:

Cases (a) and (b). These instruments are not promissory noted because the promise to pay is not

unconditional.

Case (c). This instrument is a promissory note because the promise to pay is unconditional as it is certain

that D will die.

(iv) Signed by the maker:It must be signed by the maker. The purpose of signature is to authenticate

the instrument. The signatures can be made on any part of the instrument.

(v) Promise to pay certain sum:The promise must be to pay a certain sum. The sum payable is also

certain in the following cases:

(a)

Where it is payable along with interest and either the amount of interest itself or the rate of

interest is given.(b)

Where it is payable at a specified rate of exchange.

Where it is payable by installments with a provision that a default being made in payment,

the unpaid balance shall become due [Section 5].

Example State with reasons whether each of the following instruments is a Promissory Note or

not:

(a)I promise to pay B Rs. 500/- and all other which shall be due to him.

(b)

I promise to pay B Rs. 500/- first deducting there out any money which he may owe me.

(c)

I promise to pay B Rs. 500/- along with interest thereone.

Solution:The aforesaid instruments are not promissory notes because the sum payable is not certain.

(vi) Promise to pay money only:The payment must be in money and money only.

Example: State with reason whether each of the following instruments is Promissory Note or note:

(a)

I promise to delivery to B 1000 kg of Oil.

(b)

I promise to pay B Rs. 500/- and delivery 1000 kg of Oil.


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Solution: The aforesaid instruments are not promissory notes because the payment is not in money and

money only.

(vii) Parties to a Promissory Note

There are two parties to a promissory note as under:

(a) The maker: The person who makes the promissory note is called the maker.

(b) The payee: The person to whom or to whose order the payment is to be made, is called the

payee.

Specimen of a Promissory Note

4. GIVE ESSENTIAL ELEMENTS BILL OF EXCHANGE.

Meaning of Bill of Exchange [Section ( 5)]

According to Section 5 of the Negotiable Instruments Act, 1881,A bill of exchange is

an instrument in writing containing an unconditional order signed by the maker directing a

certain person to pay a certain sum of money only to, or to the order of a certain person or

the bearer of the instruments.

Notes:

87, Engg. Enclave, Delhi-34

Jan. 17, 2008

Rs. 10,000/- only

Three months after I promise to pay or to his order the sum of Rupees

Ten Thousand, for value received.

To,

stamp


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A bill of exchange may be made payable to bearer on demand or after a definite period

of time.A bill of exchange cannot be made payable to bearer on demand because Section 31 of the

Reserve Bank of India Act prohibits the issue of such bills of exchange.

Essential Characteristics of Bill of Exchange

(i) In writing:It must be in writing.

(ii) Express order to pay:There must be an express order to pay and not a mere request to pay.

(iii) Definite and unconditional order:The order must be definite and unconditional.

(iv) Signed by the drawer:It must be signed by the drawer.

(v) Order to pay certain sum: The order must be to pay a certain sum.

(vi) Order to pay money only:The order must be to pay money only.

(vii) Certain three parties: The three parties (i.e. drawer, drawee and payee) must be certain

and must be mentioned in the instrument. It may be noted that the drawer and payee can be

the same person but the drawer and drawee cannot be the same person.

Parties to a Bill of ExchangeThere are three parties to a bill of exchange as under :

(a) Drawer: The person who draws a bill of exchange is called the drawer.

(b)Drawee:The person on whom the bill of exchange is drawn is called the drawee. He is

also called as an acceptor of the Bill.

(c) Payee: The person named in the instrument to whom or to whose order the money is

directed to be paid by the instrument, is called the payee.

Drawee / Acceptor Specimen of Bill of Exchange Drawer

5. Cheque [Section6]Meaning of A Cheque [Section 6]

A cheque is a bill of exchange, which is (a) drawn upon a specified banker, and (b)

payable on demand.

Rs. 10,000/- only Delhi Jan. 17, 2008

Three months after date pay to or order the sum of Rupees

Ten Thousand, for value received.

To87, Engg. Enclave, Pitampura

Delhi110 034

In case of need with

STAMP


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Parties to a Cheque

There are three parties to a cheque as under:

Drawer: The person who draws the cheque is called the drawer.

Banker: The bank on which the cheque is drawn is called the drawee.

Payee: The person in whose favour the cheque is drawn is called the payee. The payee

may be a third or the drawer himself.

6. Short Notes

1.

Inland and foreign Instruments.

2.

Accommodation bill.

3.

Ambiguous instrument.

4.

Inchoate instrument (sec.20).

5.

Fictitious bill.6.

Negotiation Back.

7.

Maturity and days of grace.

(1). Inland and foreign instruments

Inland instruments.

A promissory note, bill of exchange or cheque which is

Both drawn or made in India and made payable in India, or

Drawn upon any person resident in India, is deemed to be an inland instrument (Sec. 11). A

bill of exchange drawn upon a resident in India is an Inland bill irrespective of the place

where it was drawn.

Example of inland bill.

(a) A bill is drawn in Delhi on a merchant in Bombay and accepted payable in Calcutta or London.

(b) A bill is drawn in Delhi on a merchant in London and accepted payable in Calcutta.

(c)The above bills are indorsed in New York.

Foreign instruments.

An instrument, which is not an inland instrument, is deemed to be a foreign instrument (Sec.12).


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Foreign bills must be protested for dishonour if such protest is required by the law of the place

where they are drawn. But protest in case in inland bills is optional (Sec. 104).

(2). Accommodation bill

A bill may be

a genuine trade bill, or

an accommodation bill.

When a bill is drawn, accepted, or indorsed for consideration, it is called a genuine trade bill.

When it is drawn, accepted or indorsed without any consideration, it is called an accommodation

bill.

Example.

A is in need of Rs. 1,000. He approaches his friend B for borrowing the amount. B is not in a position

to lend, but he suggests that A might draw a bill on him which he would accept. If the credit of A is

good. He would get the bill discounted with his banker. On the due date A would pay Rs. 1,000 to B

who would meet the bill. This bill is an accommodation bill.

In this case, B is the accommodating party or accommodation party and A is the

accommodated party. The accommodating party signs the accommodation bill as drawer acceptor

or endorser without receiving value therefore and for the purpose of lending his name to some

other person.

He is liable on the bill to the holder, and it is immaterial whether when such holder took the bill,

he knew such party to be an accommodating party or not.

The rules regarding accommodation bills are as following:

The accommodated party cannot, after he has paid the amount of the bill, recover the amount

from any person who became a party to the bill for his accommodation (Exception 1 to Sec. 43).

Example.

A bill is drawn and accepted for the accommodation of B, the payee. B indorses the bill to C.

The bill is dishonored and B pays the amount of the bill. B cannot sue the drawer or the

acceptor to recover the amount.

An accommodation bill can even be negotiated after maturity provided the person to whom it is

negotiated takes it in good faith and for consideration (Sec. 59).

Non-presentment of an accommodation bill to the acceptor for payment does not discharge the

drawer.

When an accommodation bill is dishonored, failure to give notice of dishonour does not

discharge the prior parties from the liability.


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(3). Ambiguous(unclear) instrument

When an instrument owing to its faulty drafting may be interpreted either as a

promissory note or a bill of exchange. It is called an ambiguous instrument. Its holder

has to elect once for whether he wants to treat it as a promissory note or a bill of exchange

(Sec. 17). Once he does so, he must abide by his election.

Examples.

(a)

A bill is drawn by A, an agent acting within the scope of his authority upon his principal, P. The

holder may at his option, treat it as a note or bill because the drawer (A) and the drawee (P) are

the same person.

(b)

A draws a bill on B and negotiates it himself. B is a fictitious drawee. The holder may treat the

bill as a note made by A. If the amount undertaken or ordered to be paid is stated differently in

figures and in words, the amount stated in words is the amount undertaken or ordered to be

paid (Sec. 18).Example.

A bill is drawn Pay A or order the sum of one thousand rupees. In the margin, the amount

stated Rs. 100. This is a bill for Rs. 1,000.

(4). Inchoate instrument (Sec. 20)An inchoate instrument is an incomplete instrument in some respect. When a person

signs and delivery to another a blank or incomplete stamped paper, he authorizes the other

person to make or complete upon it a negotiable instrument for any amount not exceeding the

amount covered by the stamp. The person so signing is liable upon such instrument, in thecapacity in which he signed the same, to any holder in due course for such amount. But a

person other than a holder in due course cannot recover from the person delivering the

instrument anything in excess of the amount intended by him to be paid there under.

Example.

(a) A bill is drawn payable to or order. Any holder in due course may write his own name as

payee in the blank and sue upon the instrument.

(b)A owes B Rs. 1,000. He gives B a blank acceptance on a bill which is sufficiently stamped to

cover any amount upto Rs. 2,000. B indorses the bill to H, a holder in due course. H who

fills up the amount as Rs. 2,000 can recover the amount.

The principle behind an inchoate instrument is essentially one of estoppel. It enablepersons to lend their mercantile credit to others by signing their names on a blank

instrument which may subsequently be filled up as a negotiable instrument. By such

signature they bind themselves as drawer, acceptors or indorsers (Sec. 20).

The following points should be noted in connection with an inchoate instrument:

(1). The liability of the person who signs and delivery an inchoate stamped instrument arises

only when the blanks are filled in and the instrument is completed.


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(2). To make the signer liable on an inchoate instrument, it is necessary that the instrument

should be delivery to the transferee.

(3). If an inchoate instrument is completed and negotiated to a holder in due course, he can

claim payment of the full amount covered by the stamp even though the authority has

been exceeded, and even though the signer might have given secret instructions to the

holder that it should be filled in for a smaller amount.

(5). Fictitious BillWhen the name of the drawer or the payee or both is fictitious in a bill, the bill is

called a fictitious In a bill, the bill is called a fictitious bill. Where both the drawer and the

payee of a bill are fictitious persons, the acceptor is liable to a holder in due course, if the

holder in due course can show that the signature of the supposed drawer and that of the

first indorser (payee) are in the same handwriting (Sec. 42). If, however the holder knows or

has reason to holder in due course as he is not getting the bill in good faith and as such

cannot claim the money.

(6). Negotiation Back

Meaning: An instrument is said to be negotiated back to the holder when an endorser,

after he has negotiated an instrument, again becomes its holder before its maturity.

(a) Party who cannot be sued: The holder cannot enforce payment against an intermediate

party to whom he was previously liable. This rule is made to prevent multiplicity of

actions and it is an exception to the general rule that a holder in due course can sue all

prior parties.

(b)

Party who can be sued: The holder can enforce payment against an intermendiate partyto whom he was previously not liable.

Example - I The endorsement on a negotiable instrument are as under:

A B C D E F

The endorsement by F to B is a negotiation back. B cannot sue C,D E or F but can sue A because A is

prior to Bs original endorsement. If B is allowed to sue F then F could sue E who could sue D who could

sue C who could sue B and this will lead to multiplicity of legal actions. The law prohibits such

multiplicity of actions.

(7). Maturity and days of grace


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A promissory note or a bill of exchange may be payment(1)

on demand or

(2)

on a specified period.

(3)

After a specified period.

In case 91) the amount is payable on the instrument when the demand is made

In case (3) date of maturity has to be calculated.

Maturity The maturity of a promissory note or bill of exchange is the date on which it falls due

(Sec. 22 Para 1). Every instrument payable otherwise than on demand is entitled to three days of

grace (Sec. 22 Para) 2). These days of grace were originally allowed as a gratuitous favour to the

debtor. But now the custom of merchants has rendered this favour as a matter of legal right.

The instruments which are not entitled to days of grace are

(1)

a cheque (as it is intended for immediate payment)

(2)

a bill or not payable at sight or on presentment or on demand and

The instruments which are entitle to days of grace are---

(1)

a bill or note payable on a specified day

(2)

a bill or note payable after sight

(3)

a bill or note payable at a certain period after date and

(4)

a bill or note payable at a certain period after the happening of a certain event.

In case of bills or notes entitled to days of grace, the ascertainment of the date of maturity

becomes important. All these instruments must be presented for payable by installments, each

installment is payable three days after the day fixed for the payment of each installment.

Example(a)

A bill dated 1st

January 1991 is made payable four months after date. It falls due on 4th

May, 1991.

7. Difference between promissory note and Bill of

Exchange

Details of

Difference

Promissory Note Bill of Exchange

(1). Parties There are two parties in case of promissory

note:

Promisor or drawer

There are three parties in case of

a bill of exchange:

drawer


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Payee drawee

payee

(2). Condition of

payment

A promissory note contains an unconditional

promise to pay.

A Bill of exchange contains

An unconditional order to pay.

(3). Mode of

Responsibility

The responsibility of the drawer of promissory

note is unconditional and primary.

The responsibility of the drawer

of a bill of exchange is secondary

and conditional.

(4). Relationship The drawer and payee can not be the same

party in case of promissory note.

The drawer and payee might be

the same party in case of bill of

exchange.

(5). Need for notice Notice of dishonour of promissory note is not

needed

When bill of exchange is

dishonoured a notice must be

served on drawer.

(6). Need for

Acceptance

Since a promissory note is made by debtor it

need not be presented for accepatance.

In a bill of exchange drawer and

acceptor are different parties. So

it must be presented for

accepatance.

(7). Joint Bills Joint promissory notes cannot be made. Joint bill of exchange can be

made.

(8). Relation withpayee

The drawer of promissory note has a directrelation with payee.

In bill of exchange the drawer hasno direct relation with payee but

with acceptor.

(9). Registration and

objection

Dishonour of promissory note need not be

registered.

Dishonour of a bill of exchange

and objection in connection with

it are subject to provisions of law.

(10). Conditional Bill A conditional promissory note cannot be

drawn.

A conditional bill of exchange

cannot be drawn.

8. Difference between cheque and Bill of

Exchange.


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(5).Notice ofDishonour

No notice is needed in case of dishonour

of cheque.

The drawer of a bill of

exchange must be given a

notice of its dishonour.

(6).Discharge fromLiability.

If the holder of a cheque delays inpresenting it, the drawer is not discharged

from his liability.

If a bill of exchange is not dulypresented its drawer is

discharged from liability.

(7). Bearer Payment A cheque can be written as to make its

bearer the payee.

special act

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