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The Negotiable Instruments Act 1881 Multiple Choice Questions And Answers

Question 1. The Negotiable Instruments Act came into force on the _________

1. 1.1.1881
2. 1.2.1881
3. 1.3.1882
4. 1.12.1981

Answer: 3. 1.3.1882

Question 2. The Negotiable Instruments Act, of 1881 extends to the _________

1. The whole of India excluding the State of Jammu
2. The whole of India excluding State of Jammu and Kashmir
3. Whole of India
4. The whole of India excluding the State of Goa?

Answer: 3. Whole of India

Question 3. The Negotiable Instruments Act, of 1881 relates to the law relating to _______

1. Promissory notes
2. Bills of exchange
3. Cheques
4. All of above

Answer: 4. All of the above

Question 4. It was inserted into the Negotiable Instruments Act, of 1881, by amendment of the Act, in the year

1. 1888
2. 1988
3. 1998
4. None of the above

Answer: 2. 1988

Question 5. It contains sections

1. 138 to 142
2. 136 to 1 42
3. 112 to 124
4. None of the above.

Answer: 4. None of the above.

Question 6. With effect from which date, the term of imprisonment under Section 138 was increased to two years from one year?

1. From 6-2-2002
2. From 6-2-2003
3. From 1-4-1989
4. None of the above

Answer: 2. From 6-2-2003

Question 7. The term ‘Negotiable instrument’ is defined in the Negotiable Instruments Act, of 1881, under section

1. 12
2. 13
3. 13A
4. 13B

Answer: 2. 13

Question 8. Section 13 of ‘Negotiable Instruments Act, 188T mentions which kind of instrument

1. Bill of exchange
2. Promissory note
3. Cheque
4. All of the above.

Answer: 4. All of the above.

Question 9. The term ‘negotiation’ in section 14 of the Negotiable Instruments Act, of 1881 refers to

1. The transfer of a bill of exchange, promissory note or cheque to any person, to constitute the person the holder thereof
2. The payment by a bank on a negotiable instrument after due verification of the instrument
3. The bargaining between the parties to a negotiable instrument
4. All of the above

Answer: 1. The transfer of a bill of exchange, promissory note or cheque to any person, to constitute the person the holder thereof

Question 10. Cheque is a

1. Promissory note
2. Bill of exchange
3. Both (1) and (2) above
4. None of the above.

Answer: 2. Bill of exchange

Question 11. If an instrument may be construed either as a promissory note or bill of exchange, it is

1. A valid instruments
2. An ambiguous instrument
3. A returnable instrument
4. None of the above.

Answer: 2. An ambiguous instrument

Question 12. Which of the following can be considered as characteristics of Negotiable Instruments?

1. The holder of the instruments is presumed to be the owner.
2. They are not freely transferable.
3. They are transferable subject to restriction.
4. Both (2) or (3)

Answer: 1. The holder of the instruments is presumed to be the owner.

Question 13. If in an instrument the amount undertaken or ordered to be paid is stated differently in figures and in words

1. The instrument is void due to uncertainty
2. The amount stated in the figure shall be the amount undertaken or ordered to be paid
3. The amount stated in words shall be the amount undertaken or ordered to be paid
4. None of the above.

Answer: 3. The amount stated in words shall be the amount undertaken or ordered to be paid

Question 14. Which of the following can be considered as characteristics of Negotiable Instruments?

1. The holder in due course is entitled to sue on the instrument in his name.
2. The instrument is transferable till maturity and in the case of cheques, it becomes stale.
3. Both (1) and (2).
4. None of the above

Answer: 3. Both (1) and (2).

Question 15. Under Section 16 of the Negotiable Instrument Act, ‘indorsement in blank’ of an instrument means

1. Where the indorser does not write anything on the instrument
2. Where the indorser signs his name only on the instrument
3. Where the indorser writes the name of the person who is directed to pay
4. None of the above

Answer: 2. Where the indorser signs his name only on the instrument

Question 16. Which of the following can NOT be considered as characteristics of Negotiable Instruments?

1. The holder of the instrument is not presumed to be the owner.
2. They are conditionally transferable
3. A holder in due course is entitled to sue on the instrument in his name.
4. Both (1) and (2)

Answer: 4. Both (1) and (2)

Question 17. ‘At sight’ under Section 21 of the Negotiable Instrument Act, of 1881, means

1. On presentation
2. On-demand
3. On coming into vision
4. None of the above.

Answer: 2. On demand

Question 18. Which of the following can NOT be considered as characteristics of Negotiable Instruments? 

1. A holder does not get the instrument free from all defects of the title of any previous holder.
2. The instruments are transferable till maturity
3. They are freely transferable.
4. All of above

Answer: 1. A holder does not get the instrument free from all defects of the title of any previous holder.

Question 19. The undertaking contained in a promissory note, to pay a certain sum of money is

1. Conditional
2. Unconditional
3. Maybe conditional or unconditional depending upon the circumstances
4. None of the above.

Answer: 2. Unconditional

Question 20. A negotiable instrument is freely transferable.

1. No
2. Yes
3. Partly yes
4. None of the above

Answer: 2. Yes

Question 21. A bill of exchange contains an

1. Unconditional undertaking
2. Unconditional order
3. Conditional undertaking
4. Conditional order.

Answer: 2. Unconditional order

Question 22. A promissory note or bill exchange which is not expressed to be payable on demand, at sight or on presentment is at maturity

1. On the 30^th day after the day on which it was expressed to be payable
2. On the 3^rd day after the day on which it is expressed to be payable
3. On the 5^th day after the day on which it is expressed to be payable
4. On the 4^th day after the day on which it is expressed to be payable.

Answer: 2. On the 3^rd day after the day on which it is expressed to be payable

Question 23. Which of the following is a valid promissory note

• “I promise to pay B or order ₹ 500″
• “ Mr. B. I owe your ₹ 500.00″
• “I promise to pay B ₹ 500.00 when he is twenty-one years old
• “I promise to pay B ₹ 500 and all other sums which shall be due to him”
• “I acknowledge myself to be indebted to B in 1,000 to be paid on demand for value received.

1. 1, 2 and 5
2. 1, 3 and 5 only
3. 1 and 5 only
4. All of the above statements are valid.

Answer: 3. 1 and 5 only

Question 24. ‘Promissory Note’ is defined under

1. Section 2 of the NI Act
2. Section 3 of Nl Act
3. Section 4 of the NI Act
4. Section 5 of the NI Act

Answer: 3. Section 4 of the NI Act

Question 25. A ‘bill of exchange’ is defined under

1. Section 4 of Nl Act
2. Section 5 of Nl Act
3. Section 6 of Nl Act
4. Section 2 of Nl Act

Answer: 2. Section 5 of Nl Act

Question 26. The undertaking contained in a promissory note, to pay a certain sum of money is

1. Conditional
2. Unconditional
3. Either (1) or (2), depending upon the circumstances
4. None of the above

Answer: 2. Unconditional

Question 27. A promissory note or bill of exchange which is not expressed to be payable on demand, at sight or on presentment is at maturity

1. On the 30^th day after the day on which it is expressed to be payable
2. On the 6^th day after the day on which it is expressed to be payable
3. On the 15^th day after the day on which it is expressed to be payable.
4. On 3^rd day after the day on which it is expressed to be payable.

Answer: 4. On 3^rd day after the day on which it is expressed to be payable.

Question 28. In a promissory note the amount of money payable

1. Is usually uncertain
2. Must be certain
3. May be certain or uncertain
4. Both (1) and (3) above are true

Answer: 2. Must be certain

Question 29. An authority to draw a bill of exchange

1. Itself imports an authority to endorse
2. Does not itself import an authority to endorse
3. Sometimes an authority endorse
4. None of the above

Answer: 2. Does not itself import an authority to endorse

Question 30. In a promissory note, the promise to pay

1. Must be express
2. May be implied also
3. May be implied or express
4. Both (2) and (3)

Answer: 1. Must be express

Question 31. ‘Cheque’ is defined under

1. Section 2 of Nl Act
2. Section 4 of Nl Act
3. Section 5 of the NI Act
4. Section 6 of the NI Act

Answer: 4. Section 6 of the NI Act

Question 32. Promise to pay in a Promissory Note must be in respect of

1. Money consideration only
2. Other than money
3. Both money and some other consideration
4. None of the above.

Answer: 1. Money consideration only

Question 33. In a negotiable instrument, where the amount is stated differently in words and figures

1. The amount stated in the figures shall be the amount undertaken
2. The amount stated in words shall be the amount undertaken
3. A larger amount shall be the amount undertaken
4. The instrument is void due to uncertainty

Answer: 2. Amount stated in words shall be the amount undertaken

Question 34. The term “a cheque in the electronic form’’ is defined in the Negotiable Instruments Act, of 1881 under

1. Section 6(a)
2. Section 6(2)(a)
3. Explanation 1 of Section 6
4. Section 6A.

Answer: 3. Explanation 1 of Section 6

Question 35. A cheque is a

1. Promissory note
2. Bill of exchange
3. Both (1) and (2) above
4. None of the above.

Answer: 2. Bill of exchange

Question 36. If a minor draws indorse, delivers or negotiates an instrument, such instrument binds

1. All parties to the instrument including the minor
2. Only the minor and not other parties to the instrument
3. All parties to the instrument except the minor
4. None of the above.

Answer: 3. All parties to the instrument except the minor

Question 37. Dishonour by non-acceptance takes place

1. When the bill is properly presented for acceptance, except where presentment is excused, but the drawee makes the default in accepting it
2. When the bill is properly presented for acceptance, except where presentment is excused, but the drawee makes the default in paying it
3. When the bill is properly presented for payment, except where presentment is excused, but the drawee fails to accept it
4. None of the above

Answer: 1. When the bill is properly presented for acceptance, except where presentment is excused, but the drawee makes the default in accepting it

Question 38. An authority to draw bills of exchange.

1. Itself imports an authority to endorse
2. Does not itself import an authority to endorse
3. Sometimes an authority endorse
4. None of the above.

Answer: 2. Does not itself import an authority to endorse

Question 39. Where a cheque is crossed generally the banker on whom it is drawn

1. Shall not pay it otherwise than to a banker
2. Shall not pay it otherwise than to the holder
3. Shall not pay it to a banker
4. None of the above.

Answer: 1. Shall not pay it otherwise than to a banker

Question 40. The term ‘legal representative’ in Section 29 of the Negotiable Instruments Act, 1881

1. Does not include executors or administrators (Rama v. Pravin, air 1926 mad 389)
2. Includes executors or administrators (k. Subbanna v.k. Subbarayudu, air 1926 mad 390)
3. Includes executors but does not include administrators (p. Nayar v.t. Ramann, an air 1929 mad 389).
4. Includes only administrators but does not include executors (p.k. Pati v. Damodar Sahu, AIR 1 953 Ori 179).

Answer: 2. Includes executors or administrator (k. Subbanna v.k. Subbarayudu, air 1926 mad 390)

Question 41. Under the Negotiable Instrument Act, of 1881, an instrument writing containing an unconditional order 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 is a

1. Promissory Note
2. Bill of Exchange
3. Currency Note
4. Truncated Cheque.

Answer: 1. Promissory Note

Question 42. Can a drawer escape from his liability?

1. No, a drawer can never escape from his liability
2. Yes, a drawer can limit or exclude his liability by inserting in the bill an express stipulation to that effect.
3. In certain cases, although he can escape from his liability but always he cannot escape
4. None of the above.

Answer: 2. Yes, a drawer can limit or exclude his liability by inserting in the bill an express stipulation to that effect.

Question 43. If the words “not negotiable” are used with a special crossing in a cheque, the cheque is

1. Not transferable
2. Transferable
3. Negotiable under certain circumstances
4. None of the above.

Answer: 2. Transferable

Question 44. Crossing or a cheque affects the

1. Negotiability of the cheque
2. Mode of payment on the cheque
3. Both (1) and (2)
4. None of the above.

Answer: 2. Mode of payment on the cheque

Question 45. Who among the following cannot cross a cheque?

1. Drawer
2. Holder
3. Banker
4. All of the above

Answer: 3. Banker

Question 46. A bill is drawn payable to ‘A’ or order. ‘A’ indorses it to ‘B’ the indorsement not containing the words “or order” or any equivalent words. Can ‘B’ negotiate the instrument?

1. Yes
2. No
3. Not always
4. None of the above.

Answer: 1. Yes

Question 47. Where an indorser of an instrument excludes his liability and afterwards becomes the holder of the instrument, who is liable to him?

1. No one is liable to him
2. All intermediate indorsers are liable to him
3. Only the immediate prior indorser is liable to him
4. None of the above.

Answer: 2. All intermediate indorsers are liable to him

Question 48. Can the legal representative of a deceased person negotiate a promissory note, bill of exchange or cheque payable to order by delivery only which was endorsed by the deceased but not delivered by him?

1. Yes, the legal representative can negotiate the instrument by delivery only
2. No, the legal representative can not negotiate an instrument by delivery only. He must re-indorse and deliver the instrument for negotiating it
3. An instrument indorsed by a deceased person has no legal validity and is void
4. None of the above

Answer: 2. No, the legal representative can not negotiate an instrument by delivery only. He must re-indorse and deliver the instrument for negotiating it

Question 49. Can the holder of a negotiable instrument indorsed in blank convert the indorsement into an indorsement in full?

1. No, such a conversion is not possible under the Negotiable Instruments Act, of 1881
2. Yes, the holder can, without singing his name, and by writing above the indorser’s signature a direction to pay to any other person as indorsee, convert the indorsement in blank into an indorsement in full (section 49)
3. Yes the holders can by signing their name and by writing above the indorser’s signature a direction to pay to any other person as indorsee, convert the indorsement in blank to an indorsement in full (section 49)
4. None of the above.

Answer: 2. Yes, the holder can, without singing his name, and by writing above the indorser’s signature a direction to pay to any other person as indorsee, convert the indorsement in blank into an indorsement in full (section 49)

Question 50. The endorsement of a negotiable instrument followed by delivery

1. Transfers to the indorsee the property in the bill provided the indorsement must be an indorsement in full
2. Do not transfer the property in the bill to anyone
3. Transfers to the indorsee the property in full ________?
4. None of the above

Answer: 3. Transfers to the indorsee the property in full ________?

Question 51. A negotiable instrument may be transferred by __________

1. Negotiation
2. Assignment
3. Negotiation or assignment
4. Delivery

Answer: 3. Negotiation or assignment

Question 52. _________ is the transfer of an instrument a note, bill or cheque from one person to another in such a manner as to convey title and to constitute the transferee the holder thereof.

1. Negotiation
2. Assignment
3. Delivery
4. Sale

Answer: 2. Assignment

Question 53. In case of assignment, there is a transfer of ownership through a _______ document.

1. Written
2. Registered
3. Written and registered
4. Stamped

Answer: 3. Written and registered

Question 54. When presentment for payment is to be made under Section 65 of the Act?

1. Presentment for payment can be made at any reasonable time.
2. Presentment for payment must be made during the usual hours of business and, if at a banker’s within the banking house.
3. There is no such stipulation on the time for presentment.
4. None of the above.

Answer: 2. Presentment for payment must be made during the usual hours of business and, if at a banker’s within the banking house.

Question 55. In determining the reasonable time for payment of a negotiable instrument

1. Public holidays are included
2. Public holidays are excluded
3. Only the holidays observed by the banks are excluded
4. None of the above.

Answer: 2. Public holidays are excluded

Question 56. The question of the reasonableness of the time for presenting a bill of exchange for payment is a

1. Question of law
2. Question of fact
3. A mixed question of law and fact
4. None of the above.

Answer: 3. Mixed question of law and fact

Question 57. When the acceptor of an Instrument is also a drawer, notice of dishonour is

1. Necessary [section 98a]
2. Not necessary [section 98 (c)]
3. Not always necessary but under certain circumstances mentioned in section 98a, of the act, it is a must
4. None of the above.

Answer: 2. Not necessary [section 98 (c)]

Question 58. Under Section 97, of the Negotiable Instruments Act, when the party to whom notice of dishonour is dispatched is dead, but the party dispatching the notice is ignorant of his death, the notice is

1. Sufficient
2. Not Sufficient
3. Null and void and has no effect
4. None of the above.

Answer: 1. Sufficient

Question 59. As per the provision of Section 93, when a cheque is dishonoured by non-acceptance or non-payment of the holder

1. May or may not give notice to the parties whom the holder seeks to make liable thereon
2. Must give notice to the parties whom the holder seeks to make
3. Must give notice to the parties whom the holder such to make liable, but after noting
4. Must not give any notice to anyone.

Answer: 2. Must be given notice to the parties whom the holder seeks to make

Question 60. A note under Section 99 of the Negotiable Instruments Act, should contain among other things

1. Place of the notary
2. Charges of notary
3. Both (1) and (2)
4. None of the above.

Answer: 2. Charges of notary

Question 61. A notice of protest under Section 1 02 of the Negotiable Instruments Act, 1881

1. May be given by the notary public who makes the protest
2. Must always be given by the notary public who makes the protest.
3. Must be given by the holder
4. None of the above.

Answer: 1. May be given by the notary public who makes the protest

Question 62. A protest must contain

1. The name of the person for whom the instrument has been protested
2. The name of the person against whom the instrument has been protested
3. The instrument itself or its literal transcript
4. All of the above.

Answer: 4. All of the above.

Question 63. A protest is made by

1. By drawer
2. The indorser
3. A notary
4. None of the above.

Answer: 3. A notary

Question 64. Under Section 118 of the Negotiable Instruments Act, of 1881, it is presumed, until the contrary is proved, that every transfer of a negotiable instrument was made

1. After its maturity
2. Before is maturity
3. At its maturity
4. None of the above.

Answer: 2. Before is maturity

Question 65. To whom of the following, payment of the amount due on a promissory note, bill of exchange or cheque must be made to discharge the maker or acceptor

1. Holder of the instrument
2. Indorser of the instrument
3. Indorsee of the instrument
4. None of the above.

Answer: 1. Holder of the instrument

Question 66. Under Section 118 of the Negotiable Instruments Act, the onus of proving the absence of consideration in the execution of a negotiable instrument is on the

1. Indorser (zohra jan v. Rajan bibi, 28 ic 402)
2. Executant (zohra jan v. Rajan bibi, 28 ic 402)
3. Drawee (r.s. Rajeswara sethupathi v. Chidambaram chattier, air 1938 pc 123)
4. None of the above.

Answer: 2. Executant (Zohra Jan v. Rajan Bibi, 28 ic 402)

Question 67. What is the presumption under Section 137 of the Negotiable Instruments Act, of 1881?

1. A negotiable instrument drawn in a foreign country is genuine
2. The law of any foreign country regarding promissory notes, bills of exchange and cheques is the same as that of India
3. Both (1) and (2)
4. None of the above.

Answer: 2. The law of any foreign country regarding promissory notes, bills of exchange and cheques is the same as that of India

Question 68. The presumption as to the date of a negotiable instrument under Section 118 is that every negotiable instrument bearing a date was made or drawn

1. Before that date
2. On such date
3. Maybe on or before that date
4. None of the above.

Answer: 2. On such a date

Question 69. As per Section 147 of the Negotiable Instruments Act, of 1881, every offence punishable under the Act, are

1. Compoundable
2. Un-compoundable
3. Cognizable
4. Both (2) and (3) above.

Answer: 3. Cognizable

Question 70. Under the provisions of Section 143 of the Negotiable Instruments Act, of 1881, all of the offences under the Act are to be tried by

1. Any judicial magistrate
2. Judicial magistrate of the first class or by metropolitan magistrate
3. Only a district judge
4. None of the above.

Answer: 2. Judicial magistrate of the first class or by metropolitan magistrate

Question 71. For what term of imprisonment an offender under Section 138 of the Negotiable Instruments Act, can be punished?

1. For a term which may extend to two years
2. For a term which may extend to one year
3. For a term not exceeding three years
4. None of the above.

Answer: 1. For a term which may extend to two years

Question 72. Section 138 of the Negotiable Instruments Act, 1881,

1. Partially excludes
2. Includes
3. Sometime includes
4. None of the above.

Answer: 1. Partially excludes

Question 73. To attract the provisions of Section 138 of the Negotiable Instruments Act, of 1881, a cheque has to be presented to the bank

1. Within six months
2. Within six months from the date on which it is drawn or within the period of its validity, whichever is earlier
3. Within 15 days from the date on which it is drawn
4. None of the above.

Answer: 2. Within six months from the date on which it is drawn or within the period of its validity, whichever is earlier

Question 74. Cognizance of an offence under Section 138 can be taken by a court only on an

1. Police report (section 142)
2. Complaint (Section 142)
3. Application to the District Judge (Section 142)
4. None of the above.

Answer: 2. Complaint (Section 142)

Question 75. Who should make a complaint to a court to take cognizance of an offence under Section 138?

1. The payer or as the case may be, the holder in due course of the cheque
2. Any person who is affected can make a complaint
3. The payee with the written permission of the drawee
4. None of the above.

Answer: 1. The payer or as the case may be, the holder in due course of the cheque

Question 76. A complaint against an offence under Section 138 of the Negotiable Instrument Act, 1881

1. Must be in writing (section 142)
2. May be oral or in writing (section 142)
3. Must be in writing containing a declaration by the drawee that he consents to such filing of the complaint (section 142)
4. None of the above

Answer: 1. Must be in writing (section 142)

Question 77. In the trial of an offence under Section 138 of the Negotiable Instruments Act, the provisions of Sections 262 to 265 of the Code of Criminal Procedure

1. Shall apply (section 143)
2. Shall not apply (section 143)
3. Sometimes shall apply (section 143)
4. None of the above.

Answer: 1. Shall apply (section 143)

Question 78. Under Section 143 of the Negotiable Instruments Act, an endeavour shall be made to conclude that trial within _________ months from the date of filing of the complaint.

1. 9
2. 3
3. 6
4. 12

Answer: 3. 6

Question 79. Can a ‘notice in writing envisaged in Section 138 of the Negotiable Instruments Act, 1881, be sent by telegraph?

1. No (vraju v. P. Subbarama naidu, air 1931 mad 301)
2. Yes [m. V. Muthuramlingam v. D. Narayanswamy, (1 995) 3 comp cas 77 mad]
3. Yes [a.b. Steels v. Krishna finance, (1996) 86 comp cas 295 (mad)].
4. None of the above.

Answer: 2. Yes [m. V. Muthuramlingam v. D. Narayanswamy, (1 995) 3 comp cas 77 mad]

Question 80. The provision of Section 147 of the Negotiable Instruments Act, 1881, that every offence punishable under this Act shall be compoundable was inserted by the

1. Amending Act of 1988
2. Amending act of1980
3. Amending Act of 2002
4. None of the above

Answer: 3. Amending Act of 2002

Question 81. The liability under Section 138 of the Negotiable Instruments Act, of 1881 is

1. Strict liability
2. Vicarious liability
3. Both (1) and (2)
4. None of the above.

Answer: 1. Strict liability

Question 82. A Magistrate issuing a summons to an accused or a witness can send it

1. By speed post
2. By courier services
3. By a courier service as approved by a court of session
4. Both (1) and (3).

Answer: 4. Both (1) and (3).

Question 83. Under Section 143 of the Nl Act, the trial shall be liable to conclude after the filing of a complaint within ________ period.

1. 2 months
2. 4 months
3. 6 months
4. 8 months.

Answer: 3. 6 months

Question 84. Offences under the Negotiable Instruments Act, are triable by

1. Session Judge
2. Judicial Magistrate 1st Class
3. Judicial Magistrate 2nd Class
4. High Court

Answer: 2. Judicial Magistrate 1st Class

Question 85. Which of the following is not a Negotiable Instrument

1. Bill of Exchange
2. Cheque
3. Bond
4. None of the above.

Answer: 3. Bond

Question 86. To rebut the presumption under Section 138 of the Nl Act, Accused.

1. Must prove the absence of consideration by direct evidence
2. Must prove absence of consideration beyond reasonable doubt and give evidence in defence
3. Both (1) and (2)
4. May rebut the principle of preponderance of probability.

Answer: 4. May rebut the principle of preponderance of probability.

The Negotiable Instruments Act 1881 Objective Questions And Answers

Question 1. State whether the following statement is correct or incorrect: A cheque marked “Not negotiable” is not transferable.

Answer:

incorrect: A cheque marked “not negotiable” is a transferable instrument. The inclusion of the words ‘not negotiable’ however makes a significant difference in the transferability of the cheques. The holder of such a cheque cannot acquire a title better than that of the transferor.

Question 2. State whether the following statement is correct or incorrect: A promissory note duly executed in favour of a minor is valid.

Answer:

Correct: As a minor’s agreement is void, he cannot bind himself by becoming a party to a negotiable instrument. But he may draw, endorse, deliver and negotiate such instruments to bind all parties except himself.

Question 3. State, giving reasons, whether the following statements are correct or incorrect

1. In a Promissory Note, the promise to pay must be conditional.
2. A Bill of Exchange may not be in writing.

Answer:

1. Incorrect: The promise to pay must be definite but unconditional.
   • Exception: A promise to pay is not conditional as it depends upon or even what is certain to happen but the time of its occurrence may be uncertain.
2. Incorrect: The Bill of Exchange is an instrument in writing containing or unconditional order signed by the maker directing a certain person to pay a certain sum of money only to the order of a certain person or to the bearer of the instrument.

The Negotiable Instruments Act 1881 Descriptive Questions And Answers

Question 1. State the circumstances based on which a banker can dishonour a cheque under the provisions of the Negotiable Instruments Act, of 1881.

Answer:

Cases in which a banker is justified or bound to dishonour cheques :

1. If a cheque is not dated’ or Griffth vs Delton (1940)].
2. If the banker gets notice about the insolvency or lunacy of a customer.
3. If it contains a material alteration, that is an irregular signature or endorsement.
4. A banker is justified in refusing payment of a post-dated cheque presented for payment before its extensible date [Morley is Culverwell 7M and V/ 174,178].
5. If the instrument is incomplete and not free from reasonable doubt.
6. If notice in respect of closure of the account is served by either party on the other.
7. If it is stated, that is if it has not been presented within a reasonable period.
8. If the customer has credit with one branch of a bank and he draws a cheque from another branch of the same bank.in which either he has an account or his account is overdrawn [WoodLand vs. Fear (1857)].
9. By notice of loss of cheque, a banker should not pay a cheque after receiving from the holder notice of its loss. 10 If the customer countermands the payment of cheque, the banker’s duty ceases for payment.
10. If the authority of the banker to honour a cheque of his customer is determined by the notice of the latter’s death. Any payment made before. the receipt of the notice of death is valid.
11. If the garnishee or other legal order from the court attaching or otherwise dealing with the money in the hand of the banker is served on the banker [Rogers V. Whitely (1892)]

Question 2. Explain the terms ‘Acceptance for Honour1 and ‘Drawee in case of need’ as used in the Negotiable Instrument Act, 1881.

Answer:

Acceptance For Honour: The person who accepts the bill for the honour of any other person is called an “acceptance for honour”.

• The bill must have been noted for non-acceptance. The acceptance is given for the honour of any party already liable under the bill, by any person who is already not liable under the bill, with the consent of the holder of the bill. The acceptance must be in writing on the bill.
• He is liable to pay the amount of the bill if the drawee does not pay on maturity.

Drawee in case of Need: As per Sec.7 of the Negotiable Instrument Act, 1881, the name of any person may be given in a bill as ‘drawee in case of need’.

• His liabilities arising on the bill are not accepted by the drawee of the bill.
• The bill is riot dishonoured until it has been dishonoured by drawee in case of need.

Question 3. What is meant by ‘Sans Recourse Endorsement’ of a bill of exchange? How does it differ from ‘Sans Frais Endorsement’?

Answer:

Meaning of Sans Recourse Endorsement:

Sans Recourse Endorsement is the situation in which an endorser may by express words in the endorsement exclude his liability thereon.

• That is in the event of dishonour, he cannot be liable.
• Where the endorser who excludes his liability, later becomes the holder of the N/l, all intermediate endorsers are liable to him.

The endorser signs the endorsement putting his signature along with the words “SANS RECOURSE” ” for Example.

• Pay D or order without recourse to me
• Pay D or order sans recourse
• Pay D or order at his own risk

In Sans Frais Endorsement an endorser does not want the endorsee or any subsequent holder of the instrument to incur any expense on his account on the instrument, it is called endorsement ‘Sans Frais’, i.e. without expense.

• The main difference between the Sans Recourse Endorsement and Sans Frais Endorsement is that in Sans Recourse Endorsement endorser excludes his liability thereon i.e. he is not liable for dishonour of the bill.
• Whereas in Sans Frais recourse endorser does not want the endorsee or any other subsequent holder of the instrument to incur any expense on his account on the instrument.

Question 4. Explain the concept and different forms of Restrictive and Qualified endorsement.

Answer:

Different forms of Restrictive and Qualified endorsement

Restrictive endorsement prohibits further negotiation. So that the amount of such instrument is payable to only that person in which favour of such bill has been endorsed.

So that restrictive endorsement restricts the other person from becoming a payee of the bill.

Types of Conditional Endorsements:

1. Sans Recourse: Endorser relieves himself from the liability to all subsequent endorsees.
2. Facultative: The Endorser waives any of his rights.
3. Contingent: The Endorser makes his liability dependent upon the happening of some event.

Question 5. A drawer of a cheque after having issued the cheque, informs the drawee not to present the cheque as well as inform the bank to stop the payment. Decide whether it constitutes an offence against the drawer under the Negotiable Instruments Act 1 881.

Answer:

As per the provision of Sec. 139 of the N. I. Act, 1 331, it shall be presumed, unless the contrary is proved that the holder of a cheque received the cheque of the nature referred to in Sec. 138 for the discharge in whole or in part or any debt or other liability.

• Once a cheque is issued by the drawer, he is bound by it to discharge merely because he issued a notice for stoppage of payment.
• It will not preclude an action under sec 138. Hence, the drawer of the cheque will be liable for offence u/s 1 38 for the dishonour of the cheque.

Leading Cases: Modi Cements Ltd. Vs Kuchil Kumar Nandi.

Question 6. Bholenath drew a cheque in favour of Surendar. After having issued the cheque, Bholenath requested Surendar not to present the cheque for payment and gave a stop payment request to the bank in respect of the cheque issued to Surendar. Decide, under the provisions of The Negotiable Instruments Act, of 1881 whether the said acts of Bholenath constitute an offence.

Answer:

Dishonour of cheque: The facts of the case are somewhat similar to Modi Cements Ltd vs. Kuchil Kumar Nandi. In this case, the Supreme Court held that once a cheque is issued by the drawer, a presumption.

• Section 139 of the Act, follows and merely because the drawer issues a notice thereafter to the drawer or the bank for stoppage of payment, it will not preclude action under Section 138.
• This Section is a penal provision in the sense that once a cheque is drawn on an account kept by the drawer with his banker for payment of any amount of money to some other person from out of that account for the discharge of in whole or in part of any debt or other liability.
• The cheque is returned by the bank unpaid due to insufficiency of the amount to honour cheques or the amount exceeding the arrangement made with the bank. These types of persons are deemed to have committed an offence.

Given this Supreme Court decision, the finance company may be said to have committed an offence under Sec.138 of the Negotiable Instruments Act, of 1881.

Question 7. What are the circumstances under which a bill of exchange can be dishonoured by non-acceptance? Also, explain the consequences if a cheque gets dishonoured for insufficiency of funds in the account.

Answer:

Dishonour by non-acceptance (Section 91, the Negotiable Instrument Act, 1881):

A bill may be dishonoured either by non-acceptance or by non-payment. A dishonoured by non-acceptance may take place in any of the following circumstances:

1. When the drawee either does not accept the bill within forty-eight hours of presentment or refuses to accept it;
2. When one of several drawees, not being partners, makes a default in acceptance;
3. When the drawee gives a qualified acceptance;
4. When presentment for acceptance is excused and the bill remains unaccepted; and

When the drawee is incompetent to contract

• An instrument is dishonoured by non-payment when the party primarily liable i.e. the acceptor of a bill, the maker of a note or the drawee of a cheque, makes default payment.
• An instrument is also dishonoured for non-payment when presentment for payment is excused and the instrument, when overdue, remains unpaid, under Section 76 of the Act.

Dishonour of cheque for insufficiency, etc. of funds in the account: Where any cheque drawn by a person on an account maintained by him with a banker for payment is dishonoured due to insufficiency of funds.

He shall be punished with imprisonment for a term which may extend to one year or with a fine which may be extended to twice the amount of the cheque or with both [Section 138 of the Negotiable Instrument Act, 1881]

Provided that nothing in this section shall apply unless:

1. Such cheques should have been presented to the bank within 3 months of the date of drawn or within the period of its validity, whichever is earlier.
2. The payee or holder in due course of such cheque had made a demand in writing for the payment of the said amount of money from the drawer 30 days after the receipt of information by him from the bank regarding the return of the cheque unpaid; and
3. The drawer of the cheque had failed to pay the money to the payee or holder in due course of the cheque within 15 days of the written demand for payment.

Question 8. Explain the concept of ‘Noting’, ‘Protest’ and ‘Protest for better security’ as per the Negotiable Instruments Act, 1881.

Answer:

Noting: As per Sec. 99 of the Negotiable Instruments Act, 1881, when a promissory note or bill of exchange has been dishonoured by nonacceptance or non-payment the holder may cause such dishonour to be noted by a notary public upon the instrument, or a paper attached thereto, or partly upon each.

• Such note must be made within a reasonable time after dishonour and must specify the date of dishonour, and the reason.
• If any is assigned for such dishonour; or if the instrument has not been expressly dishonoured, the reason why the holder treats it as dishonoured, and the notary’s charges.

Protest: As per Sec. 100 of the Negotiable Instrument Act, 1881, when a promissory note or bill of exchange has been dishonoured by nonacceptance or non-payment the holder may within a reasonable time, cause such dishonour to be noted and certified by a notary public Such certificate is called a protest.

Protest for better Security: When the acceptor of a bill of exchange has become insolvent, or his credit has been publicly impeached, before the maturity of the bill, the holder may within a reasonable time.

Cause a notary public to demand better security of the acceptor, and on its being refused may, within a reasonable time cause such facts to be noted and certified as aforesaid. Such a certificate is called a protest for better security.

Question 9. A Bill of Exchange was made without mentioning any time for payment. The holder added the words “on demand” on the face of the instrument. Does this amount to any material alteration? Explain.

Answer:

As per the provisions of the Negotiable Instruments Act, of 1881, material alteration means the alterations in the material part of the instrument resulting in the alteration in the basic parts of the nature and legal effects of the instruments and the liabilities of the parties.

• A bill of Exchange was made without mentioning any time for payment. The holder added the words “on demand” on the face of the instrument. As per the provisions, of the Negotiable Instruments Act, of 1881.
• This is not a material alteration as a bill of exchange where no date of payment is specified will be treated as payable on demand. Hence, adding the words “on demand” does not alter the business effect of the instrument.

Question 10. Examine the following cases for their validity. State your answer with reasons.

1. A bill of exchange is drawn, mentioning expressly as ‘payable on demand’. The bill will be at maturity for payment on 04-01-2021 if presented on 01-01-2021.
2. A holder gives notice of dishonour of a bill to all the parties except the acceptor. The drawer claims that he is discharged from his liability as the holder fails to give notice of dishonour of the bill to all the parties thereto.

Answer:

1. Payable on demand means, it should be payable whenever the holder chooses to present it to the drawee. This statement is not valid as no days of grace are allowed in the case of bills payable on demand.
2. As per section 93 of the Negotiable Instruments Act, 1881, notice of dishonour must be given by the holder to all parties other than the maker or the acceptor or the drawee whom the holder seeks to make, liable.
   • Accordingly, a notice of dishonour to the acceptor of a bill is not necessary. Therefore, the claim of Drawer that he is discharged from his liability on account of the holder’s failure to give notice to all the parties thereto, is invalid.

Question 11. A’ issued a cheque for ₹ 5,000/- to ‘B’, but ‘B’ did not present the cheque for payment within a reasonable period. The Bank fails. However, when the cheque was to be presented to the bank, there were sufficient funds to make payment of the cheque. Now, ‘B’ demands payment from ‘A’. Decide the liability of ‘A’ under the Negotiable Instruments Act, of 1881.

Answer:

Provision:

According to Sec. 84 of the Negotiable Instruments Act, 1881, where a cheque is not presented for payment within a reasonable time of its issue and the drawer suffers actual damage through the delay because of the failure of the bank, he is discharged to the extent of such damage.

• If at any time the bank fails, the drawer had the full amount of the cheque with the banker for the payment of the cheque; he will be discharged in full.
• In knowing what is a reasonable time regard shall be paid to the nature of the instrument the usage of trade and banker and the facts of the particular case.
• Thus by using the above provision to the given problem, the payee has not presented the cheque to the drawer’s bank within a reasonable time.

When the drawer has funds to clear the cheque and the drawer has suffered actual damage, then the drawer is discharged from liability.

Present case:

As per the provisions mentioned above since B has not presented the cheque on time (when he had funds to clear the cheque) A stands discharged. Thus, B cannot demand payment from A. A is not liable.

Question 12. S by inducing T obtains a Bill of Exchange from him fraudulently in his (S) favour. Later, he enters into a commercial deal and endorses the bill to U towards consideration to him (U) for the deal. U takes the bill as a Holder-in-due-course. U subsequently endorses the bill to S for value, as consideration to S for some other deal. On maturity, the bill is dishonoured. S sues T for the recovery of the money. The provisions of the Negotiable Instruments Act, 1881 decide whether S will succeed in the case or not.

Answer:

Provision:

The problem stated in the question is based on the provisions of the Negotiable Instrument Act, of 1881 as contained in Sec. 53. The section provides once a negotiable instrument passes through the hands of a holder in due courses.

• It gets cleared of its defects provided the holder was himself not a party to the fraud or illegality which affected the instrument at some stage of its journey.
• Thus any defect in the title to the transferor will not affect the rights of the holder in due course even if he knew about the prior defect provided he is himself not a party to the fraud. (Sec. 53).
• Thus applying the above provisions it is quite clear that S who originally induced T in obtaining the bill of exchange in question fraudulently, cannot succeed in the case. The reason is obvious as S himself was a party to the fraud.

Question 13. ‘P’, a major and ‘Q’, a minor executed a promissory note in favour of ‘FT. Examine the provisions of the Negotiable Instruments Act, of 1881, the validity of the promissory note and whether it is binding on ‘P’ and ‘Q’.

Answer:

Provision:

Minor being a party to a negotiable instrument: Every person who is competent to enter into a contract has the right to incur liability by making, drawing, endorsing, accepting, delivering and negotiating the negotiable instruments (Sec. 26).

An agreement with a minor is void, so he cannot bind himself by becoming a party to a negotiable instrument. But the instrument can be drawn or endorsed as to bind all other parties.

Present Case:

• ‘P’, a major and ‘Q’, a minor executed a promissory note in favour of ‘R’. Examine the provisions of the Negotiable Instruments Act, of 1881, the validity of the promissory note and whether it is binding on ‘P’ and Question
• Thus, by viewing Sec. 26, the promissory note executed by P and Q is valid even though a minor is a party to it. Q being a minor is not liable, but his immunity from liability does not absolve the other joint promisor, namely P from liability.

Question 14. Mr A is the payee of an order cheque Mr B steals the cheque forges Mr. A’s signature and endorses the cheque in his favour. Mr. B. then further endorses the cheque to Mr. C, who takes the cheque in good faith and for valuable consideration. Examine the validity of the cheque as per the provisions of the Negotiable Instruments Act, 1881 and also state whether Mr C can claim the privileges of a Holder-in-Due course.

Answer:

Provisions: A forged Nl is a nullity. Forgery confers no title. A holder of a forged instrument acquires no title. Thus in case of forged endorsement, the person claiming under forged endorsement even if he is a holder in due course cannot acquire the rights of the holder in due course.

Present Case: Therefore, Mr. C acquires no title on the cheque.

Question 15. Discuss with reasons, in the following given conditions. whether ‘M’ can be called a “holder” under the Negotiable Instruments Act, 1881:

1. ‘M’, the payee of the cheque, who is prohibited by a court order from receiving the amount of the cheque.
2. ‘M’ the agent of ‘Q’, is entrusted with an instrument without endorsement by ‘Q’ who is the payee.

Answer:

Person to be called as a holder: As per section 8 of the Negotiable Instruments Act, 1881, holder1 of a Negotiable Instrument means any person entitled in his name to the possession of it and to receive or recover the amount due thereon from the parties thereto.

On applying the above provision in the given cases

1. ‘M’ is not a ‘holder’ because to be called as a ‘holder’ he must be entitled not only to the possession of the instrument but also to receive the amount mentioned therein.
2. No, ‘M’ is not a holder. While the agent may receive payment of the amount mentioned in the cheque, he cannot be called the holder thereof because he has no right to sue on the instrument in his name.

Question 16. ‘F’ by inducing ‘G’ to obtain a Bill of Exchange from him fraudulently in his (F) favour. Later, he enters into a commercial deal with ‘H’ and endorses the Bill to him (H) towards consideration for the deal. ‘H’ takes the bill as a holder-in-due-course. ‘H’ subsequently endorses the bill to ‘F for value as consideration to ‘F for some other deal. Oh, maturity the bill is dishonoured. ‘F sues ‘G’ for the recovery of the money. About the provisions of the Negotiable Instruments Act, 1 881, explain whether ‘F will ‘ succeed in this case.

Answer:

The problem stated in the question is based on the provisions of the Negotiable Instrument Act, 1881 as contained in Sec. 53.

The section provides once a negotiable instrument passes through the hands of a holder in due course, it gets cleared of its defects provided the holder was himself not a party to the fraud or illegality which affected the instrument in some stage of its journey.

• Thus any defect in the title to the transferor will not affect the rights of the holder in due course even if he knew about the prior defect provided he is himself not a party to the fraud. (Sec. 53)
• Thus, applying the above provisions it is quite clear that F who originally induced G to obtain the bill of exchange in question fraudulently, cannot succeed in the case. The reason is obvious as F himself was a party to the fraud.

Question 17. ‘E’ is the holder of a bill of exchange made payable to the order of ‘F. The bill of exchange contains the following endorsements in blank:

1. First endorsement ‘F,
2. Second endorsement ‘G’,
3. The third endorsement ‘H’ and
4. Fourth endorsement ‘I’
5. ‘E’ strikes out, without I’s consent, the endorsements

by ‘G’ and ‘H’. Decide with reasons whether ‘E’ is entitled to recover anything from T under the provisions of the Negotiable Instruments Act, of 1881.

Answer:

Provisions:

The question asked above is based on the provision of Sec. 40 of the Negotiable Instruments Act, of 1881.

Accordingly, where the holder of a Negotiable Instrument without the consent of the endorser destroys or impairs the endorser’s remedy against a prior party the endorser is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity.

Present Case:

‘E’ is the holder of a bill of exchange made payable to the order of ‘F. The bill of exchange contains the following endorsements in blank:

1. First endorsement – ‘F’
2. Second endorsement – ‘G’
3. Third endorsement – ‘H’
4. Fourth endorsement – ‘I’
5. ‘E’ strikes out, without I’s consent, the endorsement by ‘G’ and ‘H’.

Thus if the endorsements of ‘H’ and ‘G’ are struck out without the consent of T, ‘E’ will not be entitled to recover anything from T, the reason being that as between ‘H’ and ‘I’ ‘H’ is the principal debtor and T is the surety.

• If ‘H’ is released by the holder under Sec. 39 of the Act, T being surety will be discharged. In this given problem, the rule may be stated thus that when the holder.
• Without the consent of the endorser impairs the endorser’s remedy against a prior party, the endorser is discharged from liability to the holder.

Question 18. Mr. V draws a cheque of ₹ 11,000 and gives it to Mr. B as way of gift. State with reason whether:

1. Mr B is a holder in due course as per the Negotiable Instrument Act, of 1881.
2. Mr. B is entitled to receive the amount of ₹ 11,000 from the bank.

Answer:

Holder in due course:

In the words of Section 8 of the Negotiable Instruments Act, 1881, ‘Holder in due course’ means any person who for consideration became the possessor of the negotiable instrument, if payable to bearer, or the payee or indorsee thereof, if payable to order.

Before the amount mentioned in it becomes payable and without having sufficient cause to believe that defect existed in the title of the person from whom he delivered his title.

The Consideration to be fulfilled by the person named holder in due course are as follows:

1. He must be a holder
2. He must have become the holder of the instrument before its maturity.
3. The instrument must be received by the holder in good faith.
4. He must have become the holder for valuable consideration.
5. The instrument must be complete and regular on the face of it.

Present Case:

1. Mr B is not a holder in due course as he does not get the cheque for value and consideration.
2. Although not a holder in due course yet Mr. B is a holder. This title is good and bonafide. Thus, as a holder, he is entitled to receive ₹ 11,000 from the bank on whom the cheque is drawn.

Question 19. State the rules laid down by the Negotiable Instruments Act, 1881 for ascertaining the date of maturity of a bill of exchange.

Answer:

The rules laid down by the Negotiable Instruments Act, 1881 for ascertaining the date of maturity of a bill of exchange

The maturity of a bill of exchange or promissory note is the date on which it falls due. The question of maturity becomes important when a bill or note is payable a fixed period after sight.

• A note or bill not payable on demand, at sight or on presentment is at maturity on the third day after the day on which it is payable. Three days are allowed as days of grace (Sec. 22).
• In case of a note or bills payable on demand at sight on presentment, no. days of grace are allowed.

Calculation of maturity: In the cases where a bill is payable at a fixed period after sight, the time is to be calculated from the date of the acceptance if it is accepted and from the date of noting or protest if the bill is noted or protested for non-acceptance.

Instrument payable so many months after date or sight (Section 23): If the instrument is made payable at a stated number of months after date or after sight or after a certain event.

• It becomes payable three days after the corresponding date of the month.
• If the month in which the period would change has no corresponding day, the period shall be liable to change on the last day of such month. Three days of grace must be added to it.

An instrument payable after certain days (Section 24): In calculating the date at which promissory note or bill of exchange is made payable a certain number of days after sight or after a certain event is at maturity, the day of the date of presentment for acceptance or sight or of protest for nonacceptance or on which the event happens shall be excluded.

When the day of maturity is a holiday (Section 25): When the day on which a promissory note or bill of exchange is at maturity is a public holiday, the instrument will be deemed to be due on the next preceding business day. In case it is an emergency holiday, then on the next succeeding day, December 19, 2007.

Question 20. Mr Muralidharan drew a cheque payable to Mr Vyas or order. Mr Vyas lost the cheque and was not aware of the loss of the cheque. The person who found the cheque forged the signature of Mr Vyas and endorsed it to Mr Parshwanath as the consideration for goods bought by him from Mr Parshwanath. Mr. Parshwanath encashed the cheque, on the very same day from the drawee bank. Mr Vyas intimated to the drawee bank about the theft of the cheque after three days. Examine the liability of the drawee bank.

Answer:

Provision: As per Sec. 85 of the N.l. Act, 1881;

1. Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee is discharged by payment in due course.
2. Where a cheque is originally expressed to be payable to the bearer, the drawee is discharged by payment in due. course to the bearer thereof, notwithstanding any endorsement whether in full or in blank appearing thereon, and notwithstanding that any such endorsement purports to restrict or exclude further negotiation.

Present Case:

According to Sec. 85 of the Negotiable Instruments Act, 1881 the drawee banker is discharged when he pays a cheque payable to order when it is purported to be endorsed by or on behalf of the payee.

• Even though the endorsement of Mr. Vyas is forged, the banker is protected and he is discharged.
• The true owner, Mr. Vyas cannot recover the money from the drawee bank. So there is no liability of the drawee bank.

Question 21. Mr. S Venkatesh drew a cheque in favour of M who was sixteen years old. M settled his rental due by endorsing the cheque in favour of Mrs A the owner of the house in which he stayed. The cheque was dishonoured when Mrs A presented it for payment on grounds of inadequacy of funds. Advise Mrs A on how she can proceed to collect her dues.

Answer:

Provision:

As per Section 26 of the Negotiable Instruments Act, of 1881, Every person capable of contracting, according to the law to which he is subject, may bind himself and be bound by the making, drawing, acceptance, endorsement, delivery and negotiation of a promissory note, bill of exchange or cheque.

However, a minor may draw, endorse, deliver and negotiate such instruments to bind all parties except himself.

Present Case:

• Mr S Venkatesh draws a cheque in favour of M, a minor. M endorses the same in favour of Mrs A to settle his rental dues. The cheque was dishonoured when it was presented by Mrs A to the bank on the grounds of inadequacy of funds.
• A minor may draw, endorse, deliver and negotiate the instrument to bind all parties except himself. Therefore, M is not liable. Mrs. A can thus’, proceed against Mr. S Venkatesh to collect her dues.

Question 22. Ram purchases some goods on credit from Singh, payable within 3 months. After 2 months, Ram makes out a blank cheque in favour of Singh, signs and delivers it to Singh with a request to fill up the amount due, as Ram does not know the exact amount payable by him. Singh fills up fraudulently the amount larger than the amount payable by Ram and endorses the cheque to Chandra in full payment of Singh’s own due. Ram’s cheque is dishonoured. Referring to the provisions of the Negotiable Instruments Act, of 1881, discuss the rights of Singh and Chandra.

Answer:

Sec. 44 of the Negotiable Instruments Act,1881 is applicable in this case. According to Section 49 of this Act, Singh who is a party in immediate relation with the drawer of the cheque is entitled to recover from Ram.

• Only the exact amount due from Ram and not the amount entered in the cheque.
• However, the right of Chandra, who is a holder of value, is not adversely affected and he can claim the full amount of the cheque from Singh.

Question 23. ‘M’ draws a bill on ‘N’. ‘N’ accepts the bill without any ’consideration. The bill is transferred to ‘O’ without consideration. ‘O’ transferred it to ‘P’ for ₹ 10,000. On dishonour of the bill, ‘P’ sued ‘O’ for recovery of the value of ₹ 10,000. Examine whether ‘O’ has any right to action against M and N.

Answer:

Section 43 of the Negotiable Instruments Act, of 1881 provides that negotiable instruments made, drawn, accepted, endorsed or transferred without consideration, or for consideration which fails, creates no obligation of payment between the parties to the transaction.

• But if any such party has transferred the instrument with or without endorsement to a holder for consideration, such holder.
• And every subsequent holder deriving title from him may recover the amount on due on such instrument from the transferor for consideration or any prior party thereto.

Present Case:

In the problem, M drew a bill for N and N accepted the bill without consideration and transferred it to O without consideration. Later on, the next transfer by O to P is for ₹ 10,000.

• According to provisions of the aforesaid Section 43, the bill ultimately has been transferred to P with consideration.
• Therefore, P can sue any of the parties i.e. M, N and O, as P arrived at a good title on it being taken into consideration. So P can sue O. for recovery of ₹ 10,000.
• Further, the prior parties before P i.e. M, N and O have no right of action because the first part of Section 43 lays down that a negotiable instrument; is made, drawn, accepted, endorsed or transferred without consideration, or for a consideration which fails.

Creates no obligation of payment between the parties to the transaction before the parties who receive it on consideration. So O has no right to action against M and N.

Question 24. ‘A’ draws a bill amounting ₹ 5,000 for 3 3-month maturity period on ‘B’ but signs it in the fictitious name of ‘C’. Bill is payable to the order of ‘C’ and it is duly accepted by ‘B’. ‘D’ obtains the bill. from ‘A’ and thus becomes its ‘Holder-in-Due course. On maturity ‘D’ presents the bill to ‘B’ for payment. Is ‘B’ bound to make the payment of the bill? Examine it referring to the provisions of the Negotiable Instruments Act, of 1881.

Answer:

This problem is based on the provision of Section 42 of the Negotiable Instruments Act, of 1881. In case a bill of exchange is drawn payable to the drawer’s order in a fictitious name and is endorsed by the same hand as the drawer’s signature.

• It is not permissible for the acceptor to allege against the holder in due course that such a name is fictitious.
• Accordingly, B cannot avoid payment by raising the plea that drawer C is fictitious. The only condition is that the signature of C as drawer and as endorser must be in the same handwriting.

Question 25. Mr, X is the payee of an order cheque. Mr Y steals the cheque and forges Mr X’s signature and endorses the cheque in his favour. Mr. Y then further endorses the cheque to Mr. Z, who takes the cheque in good faith and for valuable consideration. Examine the validity of the cheque as per provisions of the Negotiable Instruments Act, 1881 and also state whether Mr Z can claim the privileges of holden-in-due-course.

Answer:

As per Section 8 of the Negotiable Instruments Act, 1881 holder of a Negotiable Instrument means any person entitled in his name to the possession of it and to receive or recover the amount due thereon from the parties thereto.

• According to Sec.9 of Negotiable Instruments Act, 1881 holder in due course means any person who for consideration becomes the processor of a promissory note, bill of exchange or cheque if payable to bearer or the payee or endorsee thereof, if payable to order.
• Before the amount in it became payable and without having sufficient cause to believe that any defect existed in the title of the person from whom he derives his title.

Present Case:

As Z in this case prima facie became a processor of the bill for value’ and in good faith before the bill became payable, he can be considered as a holder in due course.

• But where a signature on the negotiable instrument is forged, it becomes a nullity. The holder of a forged instrument cannot enforce payment thereon.
• In the event of the holder (z) being able to obtain payment despite forgery, he cannot retain the money. A holder in due course is protected when there is a defect in the title.
• But he derives no title when there is an entire absence of title as in the case of forgery, Hence, Z cannot receive the amount on the bill.

Question 26. State whether the following alteration is material alteration under the provisions of the Negotiable Instruments Act, of 1881. A promissory note was made without mentioning any time for payment. The holder added the words “on demand” on the face of the instrument.

Answer:

Provision:

An alternation is a material which in any way alters the operation of the instrument and affects the liability of parties thereto. Any alteration is material

• Which alters the business effect of the instrument if used for any business purpose;
• Which causes it to speak a different language in legal effect from that which it originally spoke or which changes the legal identity or character of the instrument.

Present Case:

A Promissory note was made without mentioning any time for payment. The holder added the words “on demand” on the face of the instrument.

• As per Section 87 of the Negotiable Instruments Act, 1881 this is not a material alteration as a promissory note where no date of payment is specified will be treated as payable on demand.
• Hence, adding the words “on demand” does not alter the business effect of the document.

Question 27. State with reasons whether each of the following instruments is an Inland Instrument or a Foreign Instrument as per The Negotiable Instruments Act, 1881:

1. Ram draws a Bill of Exchange in Delhi upon Shyam a resident of Jaipur and accepts it to be payable -in Thailand after 90 days of acceptance.
2. Ramesh draws a Bill of Exchange in Mumbai upon Suresh a resident of Australia and accepted’ to be payable in Chennai after 30 days of sight.
3. Ajay draws a Bill of Exchange in California upon Vijay a resident of Jodhpur and accepted to be payable in Kanpur after 6 months of acceptance.
4. Mukesh draws a Bill of Exchange in Lucknow upon Dinesh a resident of China and accepts to be payable in China after 45 days of acceptance.

Answer:

As per Sections. 11 and 12, Inland Instrument means, any instrument drawn in or made in India and either payable in or drawn upon any person Resident in India shall be deemed to be an Inland Instrument.

Any Instrument [Foreign] not so drawn, made or made payable shall be deemed to be a foreign Instrument.

Following are the answers as to the nature of the Instruments:

1. In the first case, a Bill is drawn in Cfelhi by Ram on a person (Shyam), a resident of Jaipur (though accepted to be payable in Thailand after 90 days) is an Inland instrument.
2. In the second case, Ramesh drew a bill in Mumbai on Suresh resident of Australia and accepted it to be payable in Chennai after 30 days of sight, which is an Inland instrument.
3. In the third case, Ajay draws a bill in California (which is situated outside India) and accepted to be payable in India (Kanpur), drawn upon Vijay, a person resident in India (Jodhpur), therefore the Instrument is a Foreign instrument.
4.  In the fourth case, the said instrument is a Foreign instrument as the bill is drawn in India by Mukesh upon Dinesh, the person resident outside India (China) and also payable outside India (China) after 45 days of acceptance.

Question 28. Vikram accepts a Bill of Exchange for ₹ 50,000 which is an accommodation bill drawn by A on 1^st January 2020 to be payable at Mumbai on 1^st July 2020. A transferred the bill to B on 1^st February 2020 without any consideration. B further transfers it to C on 1^st March 2020 for value. Then C transfers it again to D on 1^st April 2020 without consideration. D holds the bill till maturity and on the due date of payment he presented the bill for payment but the bill was dishonoured by Vikram. Discuss the rights of A, B, C and D to recover the amount of this bill as per the provisions of The Negotiable Instruments Act, of 1881.

Answer:

As Per Section 8 Holder means a person who has a right to hold and who is entitled to Receive or Recover the amount due thereon from the Parties thereto.

• His Rights and Title are dependent on the transferors.
• He has the right to demand and receive but does not have a Right to Sue.

As Per section 9, Holder in. due course means, a person who receives an instrument, for consideration. Before maturity and in good faith.

• His Rights and Title are independent of the transferor.
• He has the Right to Demand & Receive and also has a Right to Sue.

Again according to section 43 of the Negotiable Instruments Act, of 1881′, a negotiable instrument made, drawn, accepted, indorsed, or transferred without consideration, or for a consideration which fails, creates no obligation of payment between the parties to the transaction.

• But if any such party has transferred the instrument with or without endorsement to a holder for consideration, such holder.
• And every subsequent holder deriving title from him may recover the amount due on such instrument from the transferor for consideration or any prior party thereto.
• Because of the above provisions, A and B have no right to recover the bill amount. But, C, being a holder for consideration and the subsequent party D have the right to recover the amount of the bill.

Question 29. Ram draws a cheque of ₹ 1 lakh. It was a bearer cheque. Ram kept the cheque to himself. After some time Ram gives this cheque to Shyam as a gift on his birthday. Decide whether Shyam has a valid title over the cheque and whether Shyam is a holder in due course or not with this cheque as per Section 9 of the Negotiable Instruments Act 1881.

Answer:

Bearer instrument where the name of the payee is blank or where the name of the payee has specified the words” or bearer” or where the last endorsement is blank.

• Such an instrument can be negotiated by mere delivery. So, in the given case, Ram draws a cheque of ₹ 1 lakhs.
• It was a bearer cheque, Ram kept the cheque with himself. After some time Ram gives that cheque to Shyam as a gift on his birthday.
• So, based on above mentioned provision, Shyam has a valid title as the bearer cheque can be negotiated by mere delivery.

So, he has a valid title of that bearer cheque as per the provision of the Negotiable Instrument Act, of 1881.

Question 30.

1. Are the following instruments signed by Mr. Honest valid promissory Notes? Give the reasons.
   • I promise to pay D’s son ₹ 10000 for value received (D has two sons)
   • I promise to pay ₹ 5000/- on demand at my convenience
2. Who is the competent authority to issue a promissory note ‘payable to the bearer?

Your answers shall be under the provisions of the Negotiable Instruments Act, of 1881.

Answer:

1. As per Section 4, a promissory note means, an instrument in writing (not being a bank note or a current note) containing an unconditional undertaking signed by the maker, to pay a certain sum of money to a certain person or the order of a certain person.
   • This is not a valid promissory note as D has two sons and it is not specified in the promissory note which son of D is the payee.
   • This is not a valid promissory note as details of the payee are not mentioned in it and it is not an unconditional undertaking.
2. A promissory note cannot be made payable to the bearer (Section 31 of the Reserve Bank of India Act, 1934). Only the Reserve Bank or the Central Government can make or issue a promissory note ‘payable to the bearer.

Question 31. Referring to the provisions of the Negotiable Instruments Act, of 1881, examine the validity of the following: A Bill of Exchange originally drawn by R for a sum of ₹ 10,000 but accepted by S only for ₹ 7,000.

Answer:

Provision:

As per the provisions of Section 86 of the Negotiable Instruments Act, of 1881, if the holder of a bill of exchange acquiesces in a qualified acceptance.

• One limited to part of the sum mentioned in the bill, or which substitutes a different place or time for payment, or which, where the drawees are not partners, is not signed by all the drawees.
• All previous parties whose consent is not obtained to such acceptance are discharged as against the holder and those claiming under him unless, on notice given by the holder, they assent to such acceptance.

An explanation of the above section states that an acceptance is qualified where it undertakes the payment of part only of the sum ordered to be paid.

• Given the above provisions, the bill, which has been drawn by R for ₹ 10,000/-, has been accepted by S only for ₹ 7,000/-.
• It is a clear case of qualified acceptance; which may either be rejected by R or he may give assent to the acceptance of ₹ 7,000/- only.

Question 32. A promissory note specifies that three months after, A will pay ₹ 10,000 to B or his order for value received. It is to be noted that no rate of interest has been stipulated in the promissory note. The promissory note falls due for payment on 01.09.2019 and is paid on 31.10.2019 without any interest. Explaining the relevant provisions under the Negotiable Instruments Act, of 1881, state whether B shall be entitled to claim interest on the overdue amount.

Answer:

When no rate of interest is specified in the instrument:

As per the provisions of Section 80 of the Negotiable Instruments Act, 1881, when no rate of interest is specified in the instrument, interest on the amount due thereon shall.

• Notwithstanding any agreement relating to interest between any parties to the instrument, be calculated at the rate of eighteen per cent per annum, from the date at which the same ought to have been paid by the party charged.
• Until tender or realization’ of the amount due thereon, or until such date after the institution of a suit to recover such amount as the Court directs.

Present Case:

• In the given question, the promissory note falls due for payment on 1.9.2019 and was paid on 31.10.2019. The note does not mention any rate of interest, hence interest will be charged @ 18% p.a.
• Thus, B shall be entitled to claim interest on the overdue amount for the period from 01.09.2019 to 31.10.2019, @ 18% p.a.

Question 33. Gireesh, a legal successor of Ripun, the deceased person, signs a Bill of Exchange in his name admitting a liability of ₹ 50,000 i.e. the extent to which he inherits the assets from the deceased payable to ‘ Mukund after 3 months from 1st January, 2019. On maturity, when Mukund presents the bill to Gireesh, he (Gireesh) refuses to pay for the bill on the ground that since the original liability was that of Ripun, the deceased, therefore, he is not liable to pay for the bill. Referring to the provisions of the Negotiable Instruments Act, 1881 decide whether Mukund can succeed in recovering ₹ 50,000 from Gireesh. Would your answer be still the same in case Gireesh specified the limit of his liability in the bill and the value of his inheritance is more than the liability?

Answer:

Liability of a legal representative (Section 29 of the Negotiable Instruments Act, 1881): A legal representative of a deceased person, who signs his name on a promissory note, bill of exchange or cheque is liable personally thereon unless he expressly limits his liability to the extent of the assets received by him.

• Thus, in the absence of an express contract to the contrary, the liability of a legal representative is unlimited. However, a legal representative may, by an express agreement, limit his liability to the extent of the assets received by him.
• In the light of the stated provision, Mukund can succeed in recovering ₹ 50,000 from Gireesh as he has admitted liability of ₹ 50,000 i.e. to the extent of the assets received by him from the Ripun, the deceased.

Yes, the limit of liability specified in the bill by Gireesh, will remain the same even if the value of his inheritance is more than the liability, in case he specified the liability by an express agreement.

Question 34. Signs his name on a blank cheque with a ‘not negotiable crossing’ which he gives to B with the authority to fill up a sum of ₹ 3,000 only. But B fills it for ₹ 5,000. B then endorsed it to C for a consideration of ₹ 5,000 who takes it in good faith. Examine whether C is entitled to recover the full amount of the instrument from B or A as per the provisions of the Negotiable Instruments Act, of 1881.

Answer:

Provision:

• As per Section 130 of the Negotiable Instruments Act, of 1881, a cheque marked “not negotiable” is a transferable instrument.
• The inclusion of the words ‘not negotiable’ however makes a significant difference in the transferability of the cheques i.e., they cannot be negotiated. The holder of such a cheque cannot acquire a title better than that of the transferor.

Present Case:

• A gave, B the blank cheque with a ‘not negotiable crossing’. B had the authority to fill only a sum of ₹ 3,000 but he filled it up ₹ 5,000. This makes B’s title defective.
• B then endorsed it to C for consideration of ₹ 5,000. Thus, as per above stated facts and provision, C is not entitled to recover the full amount from A or B as C cannot acquire a title better than that of the transferor (B).

Question 35. Mr. Harsha donated ₹ 50,000 to an NGO by cheque for sponsoring the education of one child for one year. Later on, he found that the NGO was a fraud and did not engage in philanthropic activities. He gave a “stop payment” instruction to his bankers and the cheque was not honoured by the bank as per his instruction. The NGO has sent a demand notice and threatened.to file a case against Harsha. Advise Mr Harsha about the course of action available under the Negotiable Instruments Act, of 1881.

Answer:

• As per the facts stated in the question Mr. Harsha after having issued the cheque, informed the bank not to honour the cheque for payment and also gave a stop-payment request.
• Section 138 of the Negotiable Instruments Act, of 1881, is a penal provision in the sense that once a cheque is drawn on an account maintained by the drawer with his banker for payment of any amount of money to another person out of that account for the discharge.

In whole or in part if any debt or liability is informed by the bank unpaid either because of insufficiency of funds to honour the cheques or the amount exceeding the arrangement made with the bank, such a person shall be deemed to have committed an offence.

• However, any cheque given as a gift Or donation, as a security or in the discharge of a mere moral obligation, would be considered outside the purview of section 138.
• Here, the cheque is given as a donation for the sponsoring child’s education for 1 year and is not legally enforceable debt or other liability on Mr Harsha.
• Therefore, he is not liable for the donated amount which is not honoured by the bank to the NGO.

Question 36. A is a payee and holder of a bill of exchange. He endorses it in blank and delivers it to B. B endorses it in full to C or order. C without endorsement transfers the bill to D. State giving reasons whether D, as the bearer of the bill of exchange, is entitled to recover the payment from A, B or C.

Answer:

According to Sec. 49 of the Negotiable Instruments Act, 1881, the holder of a negotiable instrument indorsed in blank may

Without signing his name, by writing above the endorser’s signature a direction to pay to any other person as endorsee, convert the indorsement in blank into an indorsement in full; and the holder does not thereby incur the responsibility of an endorser.

According to Sec. 55, if a negotiable instrument, after having been indorsed in blank, is indorsed in full, the amount of it cannot be claimed from the endorser in full, except by the person to whom it has been indorsed in full, or by one who derives title through such person.

Present Case:

D as the bearer of the Bill of Exchange, is entitled to receive payment or to sue drawer, acceptor, or A who indorsed the bill in blank, but he cannot sue B or C.

Question 37. Referring to the provisions of the Negotiable Instruments Act, 1881 answer the following:

1. A promissory note was made without mentioning any time for payment. The holder added the words ‘on demand’ on the face of the instrument. Whether this may be treated as a material alteration in the instrument?
2. Ankit draws a cheque for ₹ 2,000 and hands it over to Shreya by way of gift. Whether Shreya be a holder in due course?

Answer:

1. Material alteration: An alteration is a material which in any way alters the operation of the instrument and affects the liability of parties thereto.

Amy’s alteration is material

• Which afters the business effect of the instrument if used for any business purpose;
• Which causes RT to speak a different language in legal effect from that which it originally spoke or which changes the legal identity or character of the instrument.

The following alterations are specifically declared to be material: any alteration of

1. The date,
2. The sum payable,
3. The time of payment,
4. The place of payment, or the addition of a place of payment.

A promissory note was made without mentioning any time for payment. The holder added the words “on demand” on the face of the instrument.

• As per the above provision of the Negotiable Instruments Act, of 1881 this is not a material alteration as a promissory note where no date of payment is specified will be treated as payable on demand.
• Hence, adding the words “on demand” does not alter the business effect of the instrument.

2. Person to be called as a holder: As per section 8 of the Negotiable Instruments Act, 1881 ‘holder1 of a Negotiable Instrument means any person entitled in his name to the possession of it and to receive or recover the amount due thereon from the parties thereto.

Person holder in due course: Holder in due course means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque (if payable to bearer) or the payee or endorsee thereof (if payable to order).

• Before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.
• In the given case, Ankit draws a cheque for ₹ 2,000 and hands it over to Shreya by way of a gift.
• Hence, Shreya can be termed as a holder because she has a right to possession and to receive the amount of clue in her name. But she cannot be termed as a holder in due course.

Question 38. Examine the validity of the following statements about the Negotiable Instruments Act, of 1881.

1. When payment on an instrument is made in due course, both the instrument and the parties to it are discharged.
2. Alteration of the rate of interest specified in the Promissory Note is not a material alteration.
3. Conversion of the blank indorsement into an indorsement in full is not a material alteration and it does not require authentication.

Answer:

1. This statement is valid:
2. • When payment on an instrument is made in due course, both the instrument and parties to it are discharged subject to the provision of Section 82(C).
   • The payment on an instrument may be made by any party to the instrument. It may even be made by a stranger provided it is made on account of the party liable to pay.
3. This statement is not valid: Any alteration of the rate of interest specified in the promissory Note is a material alteration.
4. This statement is valid: Conversion of the blank endorsement into an endorsement in full is not a material alteration and it does not require authentication.

Question 39. Healthcare Services Limited (the Bidder), bids the tender, floated by Super Care Hospital (the Tenderer), attaching a cheque dated 01.04.2021 for ₹ 5,00,000/- towards earnest money deposit. Since the tender process was extended, the Tenderer returned the cheque expiring on 30.06.2021 to the Bidder for its resubmission after having revalidated by changing the date of the cheque to 01.07.2021. Accordingly, the revalidated cheque was resubmitted by the Bidder to the Tenderer. The cheque was presented by the Tenderer to the banker. It was dishonoured by the bank. Examine, whether, the cheque altered with a new date shall be deemed a valid cheque binding the Bidder for payment as per The Negotiable Instruments Act, 1881.

Answer:

As per the provisions of the Negotiable Instrument Act, of 1881, the parties who have agreed to be liable on the original instrument cannot be made liable on the new contract contained in the altered instrument to which they never consented.

• The party who consents to the alteration as well as the party who alters are disentitled to complain such alteration For Example. the drawer of the cheque himself altered the date of the cheque to validate the same instrument.
• He cannot take advantage of it by saying that the cheque becomes void as there was a material alteration thereto. It is always open to a drawer to voluntarily re-validate a negotiable instrument including a cheque.
• So, from the above provisions, in this case, the cheque altered with a new date shall be a valid cheque binding the bidder for the payment.

Question 40. ’A’ draws a cheque ₹ 5,000 in favour of ‘B’. ‘A’ had sufficient funds in his bank account to meet it, when the cheque ought to be presented in the bank. The bank fails before the cheque is presented. ‘B1 wants to claim, it from ‘A1. Decide, whether ‘A1 is liable as per the Negotiable Instruments Act, 1881.

Answer:

As per Section 84 of the Negotiable Instrument Act, 1881, if a holder does not present a cheque within a reasonable time after its issue, and the bank fails to cause damage to the drawer, the drawer is discharged as against the holder to the extent of the actual damage suffered by him.

• In this case, ‘A’ draws a cheque for ₹ 5,000 in favour of ‘B’, ‘A’ had sufficient funds in his bank account to meet it when the cheque ought to be presented in the bank.
• The bank fails before the cheque is presented, and now ‘B’ wants to claim it from ‘A’ so, as per the above provisions, ‘A’ is discharged and is not liable to the extent of the actual damage suffered by him as per the Negotiable Instrument Act, 1881.

Question 41. Mr A made an endorsement of a bill of exchange amounting to ₹ 50,000 to Mr B. But, before the same could be delivered to Mr. B, Mr. A passed away. Mr. S, son of Mr. A, who was the only legal representative of Mr. A approached Mr. B and informed him about his father’s death. Now, Mr. S is willing to complete the instrument which was executed by his deceased father. Referring to the relevant provisions of the Negotiable Instruments Act, of 1881, decide, whether Mr S can complete the instrument in the above scenario.

Answer:

As per Sec. 57 of the Negotiable Instruments Act 881, if a person makes the endorsement of an instrument, but before the same can be delivered to the endorsee, the endorser dies, the legal representatives of the deceased person cannot negotiate the same by mere delivery thereof.

Present Case: Mr A made an endorsement of a bill of exchange amounting to ₹ 50,000 to Mr B. But, before the same could be delivered to Mr B, Mr A passed away, Mr, S the son of Mr A who was the only legal representative of Mr A, approached Mr B and informed him about his father’s death. Now, Mr. S is willing to complete the instrument which was executed by his deceased father.

Conclusion: In the present case, Mr. S cannot complete the instrument as Mr. S is the legal representative of Mr. A and Mr. A died before delivering the instrument. A legal representative is not an agent of the deceased.

Question 42. Venkat executed a promissory note in favour of Raman for ₹ 45 Lakhs. The amount was payable a hundred days after sight. Raman presented the promissory note for sight on 4th May 2021. Ascertain the date of maturity of the promissory note about the relevant provisions of the Negotiable Instruments Act, of 1881.

Answer:

As per Sec. 24 of the Negotiable Instruments Act 881, in calculating the date at which a promissory note or bill of exchange was made payable at a certain number of days after the date or after sight or after a certain event is at maturity.

The day of the date or presentment for acceptance or sight or of protest for non-acceptance or on which the event happens shall be excluded.

Also, as per Sec. 25 of the Negotiable Instrument Act, 1881, when the day on which a promissory note or bill of exchange is at maturity is a public holiday, the instrument shall be deemed to be due on the next preceding business day.

Present Case: Venkat executed a promissory note in favour of Raman for ₹ 45 Lakhs. The amount was payable a hundred days after sight. Raman presented the promissory note for sight on 4th May 2021.

Conclusion: Date of presenting promissory not for sight = 4th May 2021.

Date of maturity: 100th day after 4th May 2021 = 12th Aug. 2021 Adding 3 days of grace to 12th. August 2021 = 15th August 2021 (Independence Day National holiday).

So, the date of maturity will be 14th August 2021.

Question 43. A bill of exchange was drawn by Mr. G on Mr. H for ₹ 50,000 towards the value of goods purchased by Mr. H from Mr. G. Mr. H accepted the bill and returned it to Mr. G. After that Mr. G handed over the bill to his supplier Mr. K to settle the amount of a transaction. On the due date, Mr. K presented the bill before Mr. H for payment. Mr. H refused to make payment and the bill was dishonoured. Five days after the date of dishonour of the bill, Mr K gave written notice of dishonour by post with acknowledgement to Mr G without knowing the fact that Mr G had passed away one day back. One month, thereafter, Mr K claimed the amount from Mr L, the only son of Mr G, who was the only legal representative of Mr G; Mr L contended that the notice Of dishonour was neither served to him nor he had received the notice of dishonour which was sent by Mr K addressing to his father and therefore, he is not liable for the amount of the bill. Referring to the relevant provisions of the Negotiable Instruments Act, of 1881, advise Mr K, whether the contention of Mr L is tenable. Would your answer differ in case Mr L contended that even though he received the notice of dishonour addressed to his father, since it was not addressed to him, he is not liable for the amount of the bill?

Answer:

As per Sec. 92 of the Negotiable Instrument Act, 1881, when a promissory Note, bill of exchange or cheque is dishonoured by non-payment or non-acceptance, a notice of dishonour must be given by the holder or by a person liable for the instrument.

As per Sec.97 of the Negotiable Instruments Act 1881, when the party to whom the notice of dishonour is dispatched is, dead, but the party dispatching is notice is ignorant of his death, the notice is sufficient.

Facts of the case: A bill of exchange was drawn by Mr G on Mr H for ₹ 50,000 towards the value of goods purchased by Mr H from Mr G. Mr H accepted the bill.

• After that, Mr. G handed over the bill to his supplier Mr. K to settle the amount of the transaction, on the due date, Mr. K presented the bill before Mr. H for payment. Mr H refused to make payments, and the bill was dishonoured.
• Five days after the dishonour of the bill, Mr K gave written notice of dishonour by post With’ acknowledgement to Mr G without knowing the fact that Mr G had passed away one day back.
• After one month, Mr K claimed the amount from Mr L, the only son of Mr G, who was the only legal representative of Mr G. Mr L contended that the notice of dishonour was neither served to him nor he had received the notice of dishonour which was sent by Mr K addressing to his father and therefore he is not liable for the amount of the bill.

Conclusion: In the present case, the contention of Mr L is not valid as Mr K did not have knowledge of Mr G’s death, and still, he gave a notice of dishonour addressed to Mr G, so, the notice is valid, and Mr. L is liable for the amount.

In case Mr. L contended that he received the notice of dishonour addressed to his father, Mr. L will still be liable for the amount.

The Companies Act 2013 Self-Study Notes

1. Introduction:

• Companies Act, 201 3 was notified on 30th August, 201 3.
• It consists of 470 sections (covered in 29 chapters) and 7 Schedules
• 1. Companies under Company law (existing and previous).
  2. Insurance Company (except in so far as the said provisions are inconsistent with the provisions of the Insurance Act, 1938, IRDA Act, 1999).
  3. Banking Company (except in so far as the said provisions are inconsistent with the provisions of the Banking Regulation Act, 1949).
  4. Power Company (except in so far as the said provisions are inconsistent with the provisions of the Electricity Act, 2003).
  5. Other companies governed by any special Act for the time being in force, except in so far as the said provisions are inconsistent with the provisions of such special Act.
  6. Body corporate, incorporated by any Act for the time being in force as the CG may, by notification, specify on this behalf, subject to such exceptions, modifications, or adaptations, as may be specified in the notification.

2. Company: Meaning and its features:

As per Section 2 (20) of the Companies Act, 201 3 “Company” means a company incorporated under the Companies Act, 2013 or under any previous company law.

Features of a Company:

1. Corporate Personality or Separate Legal Entity:
   • A company is a separate legal entity district from individuals who are its members.
   • It is known by its name.
   • It has its seal (common seal i.e. official signature of the company).
   • Its members are its owner but they can be its creditors simultaneously.
   • It is capable of owing property, incurring debts, borrowing money, having a bank account, employing people, entering into contracts, and suing or being sued in the same manner as an individual.
   • A shareholder can be held liable for the company’s Act even if he holds virtually the company’s entire share capital.
   • Shareholders are not the company’s agent and so they cannot bind it by their acts.
   • The company does not hold its property as an agent or trustee for its members and it cannot sue to enforce its rights nor can it be sued in respect of its liabilities.
   • Members do not even have an insurable interest in the company’s property.
   • Relevant Case Law:
     1. Macaura V/s Northern Assurance Co. Ltd.
     2. Macaura was the holder of all shares (except one).
     3. He was also the major creditor of the company.
     4. He insured the company’s timber in his name instead of the name of the company.
     5. A fire broke and timber was destroyed, Macauro claimed compensation from an insurance company.
     6. Held, the Insurance company is not liable to pay him, since, the shareholder has no right to the property owner by the company, for he has no legal or equitable interest in them.
2. Perpetual succession:
   • Death, insolvency, insanity, etc. of any member does not affect the continuity legal existence, and identity of the company.
   • Members may come and go, but the company goes on forever.
   • It can be dissolved only under law through a winding-up procedure.
3. Limited Liability:
   • Members of a company cannot be held liable for its debts.
   • In the case limited company, the liability of members is limited to the extent of the unpaid value of shares held by them.
   • In the case of a company limited by guarantee members are liable to the extent of the amount guaranteed by them.
   • The guaranteed amount can be called only at the time of the company’s liquidation winding up.
4. Artificial Legal Person:
   • A company is purely a creation of law, it is invisible, intangible, and exists only in the eyes of law.
   • It has no soul, nobody, but has a position to enter or exit into a contract, to appoint people as its employees.
5. Common Seal:
   • It is the official signature of the company.
   • The company’s name is engraved on it.
   • A document not bearing the common seal of the company is not authentic and has no legal force behind it.
   • A rubber stamp does not serve the purpose.

3. Corporate Veil Theory:

• Due to law’s fiction; a company is seen as an entity distinct from its members, but a company is an association of persons who are the beneficial owners of company property.
• No member can be held, liable for the company’s Act even if he holds virtually the entire share capital of the company.
• Lifting of corporate veil means ignoring the company’s separate legal identity. It involves disregarding the corporate personality and looking behind the corporate entity, at the controlling persons, and may make them liable for debts and obligations of the company.
• It is permissible only when it is permitted by the statute.

Relevant Case Law:

• Saloman V/s Saloman and Co.
• Mr. Saloman was carrying on the business of leather merchant and boot manufacturing as a sole proprietor.
• He formed a limited company to take over his business.
• The company’s nominal capital was £ 40,000 in £ 1 shares.
• Payment of the total purchase consideration of £ 38,782 was in the following form:

1. • Fully paid shares of £ each issued to Salomon – £ 20,000
   • Secured debentures issued to Salomon – £ 10,000
   • Cash Paid – £ 8, 782

• The other 6 members of his family were issued 1 share each.
• Solomon held virtually the entire share capital of the company.
• Hence, the company was called a ‘one-man company’.
• Due to the trade depression, the company went into liquidation.
• The company’s liabilities were £ 10,000 secured by debentures and its assets realised £ 6,050.
• Unsecured creditors owing £ 8,000 claimed that Salomon was carrying on business in the name of the company. Thus, the company was a mere agent of Salomon.
• They claimed that one man cannot owe money to himself.
• The court held that:
  • Salomon and Co. was a real company fulfilling all the legal requirements.
  • It had an identity separate from its members.
  • Thus, secured debentures even though held by Salomon, were to be paid in priority to unsecured creditors.
  • This case established the legality of a “one-man company” and the principle of limited liability.

Lifting of the corporate veil is permitted in the following cases:

1. If the company is formed for the commission of
   • Fraud and improper conduct.
   • To defraud creditors.
   • To avoid legal obligations.
   • Relevant Case Laws:
     • Gilford Motor Co. V/s Harne.
     • Jones V/s Lipman.
2. To determine whether the company is an enemy company or not.
   • Relevant Case Law:
   • Daimler Co. Ltd. V/s Continental Tyre and Rubber Co.
3. To prevent evasion of taxes and duties.
   • Relevant Case Laws:
     • CIT V/s Meenakshi Mills Ltd.
     • Sir Dinshaw Manakjee Petit.
4. If the purpose of a company’s formation is to avoid welfare legislation For Example. reducing its liability of bonus payable under the Bonus Act.
   • Relevant Case Law:
     • The workers employed in Associated Rubber Industries Ltd. Bhavnagar V/s The Associated Rubber Industries Ltd. Bhavnagar and other, A.I.R. 1986 SCI.
5. To protect the public policy and thus, prevent the transaction contrary to public policy.
   • Relevant Case Law:
     • Connors Bros. V/s Connors.
6. If the holding company has incorporated the subsidiary company for the sole purpose of using it as an agent.
   • Relevant Case Law:
     • Re, R.G. Films Ltd.

Various statutory provisions for lifting the corporate veil are as follows:

1. Reduction in membership below the statutory minimum.
2. Misdescription of name.
3. Presentation of group accounts of holding and subsidiary companies.
4. Fraudulent Trading.
5. Payment of Arrears of tax.
6. Ultra-vires acts.
7. Misrepresentation in the prospectus.

4. Classes of Companies under the Act:

1. Based on liability:

1. Company limited by shares:
   • It is a registered company where public or private company.
   • Liability of members is limited to the unpaid amount on the shares held by them.
   • This should be stated in the MOA of such a company.
   • It arises when a valid call is made by the company.
2. Company limited by Guarantee:
   • It is a registered company whether public or private company.
   • The liability of members is limited to the amount that he has guaranteed to pay to the company.
   • Liability arises only in the event of the winding up of the company.
   • Its MOA should state the amount guaranteed given by members.
   • Examples: Clubs, trade associations, etc.
3. Unlimited Company:
   • Its memorandum does not in any way limit the liability of its members.
   • Every member is liable to contribute to the company’s assets until all its debts are paid in full.
   • Not common in India.
   • Members are not, however, liable directly to the company’s creditors.
   • The liquidator asks the members to contribute in the event of the company’s winding up.
   • It may be subsequently converted into a limited company, subject to certain conditions.
   • The liability is extended to the personal property of the member

2. Based on members:

1. One Person Company:
   • It means a company that has only one person as a member.
   • The MOA of such company is required to indicate, the name of other people, with his prior consent in the prescribed form, who shall, in the event of the subscriber’s death or his incapacity to contract become a member of the company and the written consent of such person shall be filed with ROC at the time of its incorporation along with MOA and AOA.
   • Only a natural person who is an Indian citizen and resident in India is eligible to incorporate OPC and be its nominee.
   • “Resident in India” means a person who has stayed in India for not less than 182 days during the immediately preceding calendar year.
   • It is considered a private company.
   • It has been granted many relaxations in compliance and procedural aspects.
   • No person shall be eligible to incorporate more than one OPC or become a nominee in more than one OPC.
   • No minor shall become a member or nominee of OPC or hold shares with beneficial, interest.
   • It cannot be incorporated or converted into a Section 8 company.
   • It cannot carry out Non-Banking Financial -Investment Activities including investment in securities of any Body corporate.
   • It cannot convert voluntarily into a private company unless two years have expired from the date of its incorporation, except if its paid-up capital is increased beyond ₹ 50 lakh or its average annual turnover exceeds ₹ 2 crore.
2. Private Company [Section 2 (68)]:
   • A company which has the following features is a private company
     • Restricts the right to transfer its shares.
     • Except in the case of OPC, a private company should have a minimum of 2 members and a maximum of 200 members.
     • Prohibits any invitation to the public to subscribe to any securities of the company.
   • The company can only accept deposits for its members, directors, or their relatives.
   • Joint shareholders are counted as one member.
   • It must add the words, ‘Private Limited’ at the end of its name.
   • They are granted certain privileges and exemptions under the Companies Act, 2013 because not much public interest is involved in private companies.
   • The company is required to file its annual accounts and returns to ROC (Registrar of Company) which can be accessed by any person by paying fees.
3. Small Company:
   1. Section 2(85) of the Companies Act, 2013 defines “Small company” means a company, other than a public company.
   2. Paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees; and
   3. Turnover of which as per its last profit and loss account for the immediately preceding financial year does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than a hundred crore rupees:
   4. Provided that nothing in this clause should apply to:
      • A holding company or a subsidiary company
      • A company registered under Section 8
      • A company or body corporate governed by any special Act
   5. However, nothing applies to:
      • Holding company or subsidiary company.
      • Company registered under Section 8.
      • Company or body corporate governed by any special Act.
4. Public Company [Section 2 (71)]:
   • A public Company is a company that:
     1. Is not a private company.
     2. Has a minimum paid-up share capital of ₹ 5 lakh or such higher paid-up capital as may be prescribed.
     3. A subsidiary of a company, not a private company, shall be deemed to be a public company for this act and a subsidiary of a public Co. is also treated to be a public company.
     4. Should have a minimum of seven members and have no limit for maximum members.
   • It requires a minimum of 7 members for its formation.
   • Any member of the public can acquire its shares or debentures.
   • Its shares are capable of being dealt with on the stock exchange.

Amendment made by Companies (Amendment) Act, 2015: Provides that in Clause (71) the words “of ₹ 5 lakhs or higher paid-up share capital” shall be omitted.

3. Based on control:

1. Holding and subsidiary companies:
   1. When a company:
      • Controls the composition of the board of directors, or
      • Exercises or controls more than one-half of the total share per capital either as its own or together with one or more of its subsidiary companies then, it is known as the holding company and the other company is the subsidiary company.
      • Total share capital for this purpose means the aggregate of:
        1. Paid-up equity share capital and
        2. Convertible Preference share capital.
   2. The holding company shall not have layers of subsidiaries beyond the prescribed limit.
   3. The expression “company” includes any body corporate.
   4. The word control includes:
      • The right to appoint the majority of the directors or
      • To control the management or
      • The policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly including by their shareholding or
      • Management rights or shareholders agreements voting agreements or in any other manner.
2. Associate Company:
   • As per Section 2(6) “associate company” about another company, means a company in which that other company has a significant influence.
   • However, it is not a subsidiary company of the company having such influence and includes a joint venture company.
   • Significant influence means control of at least 20% of total share capital or business decisions under an agreement.

4. Based on access to capital:

1. Listed Company:
   • The company is listed on any of the recognized stock exchanges.
   • It is a company whose shares are traded on the recognized stock exchange.
2. Unlisted Company:
   • Companies except those listed on the stock exchange i.e. companies other than listed companies.

5. Other Companies:

1. Government Company [Section 2 (45)]:
   • It is a company
     1. In which not less than 51% of the paid-up share capital is held by
        • CG (Central Government)
        • SG (State Government)
        • Partially by CG and partially by SG
     2. Which is a subsidiary of a Government Company.
        • Its auditor is appointed by the Comptroller and Auditor General of India (C and AG).
2. Foreign Company [Section 2 (42)]:
   • Foreign company means any company or body corporate incorporated outside India that:
   • Has a place of business in India, whether by itself or through an agent, physically or through electronic mode, and;
   • Conduct any business activity in India in any other manner. Thus, the companies doing business through electronic mode are also termed as foreign companies and need to comply with specified provisions.
3. Formation of Companies with charitable objects, etc. (Section 8 company):
   1. License may be granted by CG if the following conditions are satisfied:
      • The company’s object is to promote art, commerce, science, religion, charity, or any other useful object.
      • The company applies its income to promoting its objectives.
      • The company prohibits the payment of any dividend to its members.
   2. It is not required to use the words ‘Limited’ or ‘Private Limited’ at the end of its name even though it is a limited company.
   3. It shall enjoy all privileges and be subject to all obligations of a limited company.
   4. A firm may become its member.
   5. The company can alter its object clause as MOA or AOA only by obtaining the previous approval of CG in writing.
   6. It can convert itself into a company of any kind only after complying with the prescribed conditions.
   7. Conditions for revoking licence by CG:
      • Company contravenes any of the requirements or any of the conditions subject to which a license was issued.
      • Its affairs are conducted fraudulently.
      • Its affairs are conducted in a manner violative of the company’s objects, or
      • Prejudicial to public interest.
   8. On revocation, CG may also direct the company:
      • To wound up, or
      • Amalgamate with another company registered u/s 8 if it is in the public interest.
   9. On revocation of licence by CG:
      • Limited’ or ‘Private Limited’ shall be inserted at the end of the company’s name.
      • Company shall cease to enjoy exemptions granted by CG u/s 8.
      • Before revocation, CG shall be allowed to be heard by the company.
4. Dormant Company (Section 455):
   • It is a company that is registered under the Companies Act for future projects or to hold an asset or intellectual property and has no significant accounting transactions, and
   • It can make an application to the Registrar in the manner prescribed and obtain the status of a dormant company.
   • Significant accounting transactions are the transactions other than those mentioned below:
     1. Payment of fees to Registrar.
     2. Payment under this Act or any other Act.
     3. Allotment of shares in compliance with this Act.
     4. Payment for office and record maintenance.
5. Nidhi Company:
   • The main object of Nidhi Company is to cultivate the habit of cost-cutting and saving among members.
   • Receiving deposits from, and lending to its members for their mutual benefit in compliance with rules as prescribed by CG.
6. Public Financial Institution:
   • It is the institution
   • Established or constituted by or under any Central or State Act or
   • At least 50% of paid-up-share capital is held or controlled by CG or by SG or partly by CG and SG or by one or more SG.
   • It includes
     1. LIC was established under the Life Insurance Corporation Act, of 1956.
     2. Infrastructure Development Finance Company Ltd.
     3. Institution notified by CG u/s 465.
     4. Any other institution as notified by CG in consultation with RBI.

5. Mode of Registration or Incorporation of Company: Promoters – It means a person:

• Who has been named as such in the prospectus or is identified by the company in the annual return referred to in Section 92;
• Who has control over the affairs of the company, directly or indirectly whether as a shareholder, director, or otherwise, or
• Under whose advice, directions, or instructions the Board of Directors of the company is accustomed to Act.

Provided that Sub-clause (c) shall not apply to a person who is acting merely in a professional capacity.

• A director officer or employee who has control over the affairs of the company, directly or indirectly whether as a shareholder, director, or otherwise is considered as promoted.
• However, a director officer, or employee of the issuer or a person, if acting as such merely in his professional capacity, shall not be treated as a promoter.

Formation of Company:

Certain legal requirements to be fulfilled:

• There must be an association of persons.
• A minimum of 2 people are required in the case of a private company, (one in the case of OPC) and 7 persons in the case of a public company.
• The company must have a common object.
• Formalities of incorporation must be complied with.

Incorporation of Company:

1. Filing a necessary document with the Registrar of Companies. These include:
   • MOA and AOA signed by all subscribers.
   • Affidavit from each subscriber and person’s names as first directors.
   • Proof of place of registered office.
   • Particulars of all subscribers.
   • Particulars of Directors along with Director Identification Number.
2. Issued of Certificate of Incorporation by Registrar of Companies containing Corporate Identity Number (CIN).
3. Preparation and maintenance of documents and information at the registered office of the company for the period prescribed usually till the lifetime of the company.
4. If at the time of registration, any person knowingly furnished any false or incorrect particulars which are material, then such person shall be liable for fraud u/s 447.
5. If the company has been incorporated based on false documents or suppression of material facts, the person named as the first director of the company and the person making the declaration shall be liable for fraud u/s 447.
6. If the company is incorporated in the manner as stated in Point No. 5, the Tribunal may, on an application made to it, on being satisfied that the situation so warrants:
   • Pass such order, as it may think fit, for regulation of the management of the company in the public interest or interest of the company and its members, creditors.
   • Direct the liability of members to be unlimited.
   • Remove the name of the company from the register of companies.
   • Pass such other order as it may deem fit; after providing a reasonable opportunity of being heard and taking into consideration the transactions entered into by the company.

Simplified Proforma for Incorporating Company Electronically [SPICE]:

• A significant step was taken by MCA by introducing the SPICE scheme vide MCA notification dated 01-10-2016.
• SPICE form is also introduced with a function to prepare e-MOA and e-AOA via this attribute there is no opportunity to prepare manual MOA and AOA.
• Form INC 32 under the SPICE scheme is a single window form that can be used for multiple purposes such as:
  1. Application of DIN.
  2. Application of Name Availability.
  3. No need to file a separate form for the first director.
  4. Address of Registered Office of the proposed company.
  5. PAN or TAN application.

Effects of Registration:

• The company becomes a body corporate.
• It acquires legal recognition.
• It gets a name in which it will carry on its business.
• Its objects are laid down.
• Subscribers become the members of the company.
• The Incorporation Certificate issued by the Registrar of Companies is the conclusive evidence that:
  1. All the requirements of the act have been complied with in respect of registration and matters precedent and incidental thereto.
  2. An association is a company authorized to be registered.
  3. The association has been duly registered under the Companies Act.

Relevant Case Laws:

• Hari Nagar Sugar Mills Ltd. V/s SS Jhunjhunwala.
• State Trade Corporation of India V/s Commercial tax officer.
• Spencer and Co. Ltd. Madras V/s CWT Madras (if the company purchases all shares of another company it will not put an and on the corporate character of such other company).
• Heavy Electrical Union V/s State of Bihar:
  • If the entire share capital of the company is contributed by CG and all shares are held by the President of India, it does not make a company an agent either of the President or for CG.

6. Classification of Capital:

• Authorized (Nominal) Capital: It is the maximum amount of capital mentioned in the MOA of the company, which it can raise during its lifetime. It is also known as the registered capital to increase the limit of authorized capital, the memorandum of company should be altered.
• Issued Capital: It refers to that portion of authorized capital that has been offered to the public for subscription.
• Subscribed Share Capital: It refers to the part of the issued share capital that has been subscribed by the public. It also includes the issue of shares for consideration other than cash.
• Called-up Share Capital: It is that portion of subscribed capital that the shareholders are called upon to pay. The amount remaining to be called up is called the uncalled capital.
• Paid-up Capital: It is that portion of called-up capital that is paid by the shareholders. The amount that is not paid is known as the calls in arrears. This is the actual capital of the company that is included in the Balance Sheet.

7. Shares:

• Shares mean shares in the share capital of the company.
• It can be said as “an existing bundle of rights and Liabilities”.
• Share into which the total share capital is divided.
• Every person who contributes capital to the company gets a share in the company which represents his capital in the company.

Kinds of Share Capital:

Shares all of two types:

1. Preference Shares – preference shareholders following 2 rights.
   • Preferential right as to payment of dividend – in the case where a dividend is declared by the company.
   • Preferential right as to repayment of capital – in the event of winding up of the company.
2. Equity Shares – These are the shares other than preference shares. These can be:
   • With voting rights or
   • With differential rights as to dividend voting or otherwise under prescribed rules.

8. Memorandum of Association:

• It contains the constitution of the company.
• It is the first step in the company’s formation.
• As per Section 2 (56), “memorandum” means the memorandum of association of a company as originally framed and altered from time to time in pursuance of any private company law or this Act.
• It not only shows the objects of formation but also determines the scope of its operations beyond which its actions cannot go.
• According to Palmer, “MOA is a document of great importance with the proposed company”.
• It is the charter of the company.
• It is the premise on which the whole foundations of the company stand.
• Forms of Memorandum are drawn as

Table A – Memorandum of company limited by shares.

Table B – Memorandum of a company limited by guarantee and not having a share capital.

Table C – Memorandum of the company limited by guarantee and having a share capital.

Table D – Memorandum of Unlimited Company.

Table E – Memorandum of unlimited company and having a share capital.

It contains six clauses which are known as the ‘conditions of memorandum’.

1. Name Clause:
   • Contains the name of the proposed company.
   • The name should not be undesirable.
   • It should not be identical to the name of another company.
   • It should not be prohibited.
   • It should end with the words limited or Private Limited.
   • It must be approved by ROC.
2. Registered Office Clause:
   • It contains the name of the state in which the registered office is situated.
3. Object Clause:
   • It contains the objects to be pursued by the proposed company and other incidental and ancillary objects.
4. Liability Clause:
   • It is required by limited companies.
   • It contains whether the liability of members is limited by shares, guarantees, or both.
5. Capital Clause:
   • It is mandatory for every company.
   • It states:
     1. Number of Shares.
     2. Nominal value of each share.
     3. Total capital with which the company is to be registered.
6. Association or Subscription Clause:
   • MOA must be subscribed by at least 7 persons in case of public company at least 2 persons in case of private company and 1 in case of OPC.
   • Every subscriber shall take at least one share in case of company is limited by shares. The MOA should be signed by each subscriber also stating his address, description, and occupation.
   • Particulars of every subscriber shall be witnessed.
     1. In the case of OPC, the name of the person who is in the event of the death of the subscriber shall become a member of the company.
     2. A company being a legal person can through its agent, subscribe to the memorandum.
     3. Minor- cannot be a signatory to the memorandum as he is incompetent to contract. The guardian of a minor, who subscribes to the memorandum on his behalf, will be deemed to have subscribed in a personal capacity.

9. Doctrine of Ultra Vires:

• It means beyond (their) powers.
• If any Act is done, that is legal but is not authorized by the object clause of the MOA of the company or by the statute, it is said to be ultra vires the company and thus null and void.
• An ultra Act vires the company, cannot be ratified even by the unanimous consent of all the shareholders of the company.
• An Act that is ultra vires the directors can be ratified by the members by passing a resolution at general meeting.
• An ultra Act vires the Articles of Association, can be ratified by amending the Articles after passing a special Resolution at a general meeting.
• An ultra vires contract can never be made binding on the company. It cannot become Infra vires because of estoppel, acquiescence, lapse of time, delay, or ratification.

Relevant Case Law:

• Ashbury Railway Carriage and Iron Company Limited V/s Riche.
• The main objects of the company were:
  1. To make, sell or lend on hire, railway carriages and wagons;
  2. To carry on the business of mechanical engineers and general contractors.
  3. To purchase, lease, sell, and work mines.
  4. To purchase and sell as merchants or agents, coal, timber, metals, etc.
• Directors of the company entered into a contract for financing the construction of a railway line.
• The company ratified this act of directors by passing SR but however repudiated the contract being ultra vires.
• The other party brought an action for damages for breach of contract. The contract was null and void.

10. Articles of Association:

• As per Section 2(5) “AOA” means the articles of association of a company as originally framed or as altered from time to time or applied in pursuance of any previous company law or Act.
• It contains the regulations relating to the internal management of the company.
• These rules and regulations are framed by the company for its governance.
• It is also called as regulations or bylaws of the company.
• It is subordinate to and is controlled by MOA.
• In case of contradiction with AOA, MOA prevails.
• Public companies limited by shares need not have their articles. It can adopt Table F of Schedule I.
• Private companies must register their articles.
• Some of the important clauses are as follows:
• Share capital and variation of rights, lien on shares, forfeiture of shares, directors, their appointment, accounts and audit, general meeting, share certificate, etc.
• Forms of the article include:

Table F – Articles of Company limited by shares.

Table H – Articles of Company limited by guarantee.

Table G– Articles of a company limited by guarantee having a share capital.

Table I – Articles of an unlimited company having a share capital.

Table J – Articles of an unlimited company not having a share capital.

• The articles play a part that is subsidiary to the memorandum of association.
• The articles govern how the object of the company is to be carried out and can be framed and altered by the members.
• It must be within the limits marked out by the memorandum and the Companies Act.
• It must be printed, divided into paragraphs, numbered consecutively stamped adequately, signed by each subscriber to the memorandum, and duly witnessed and filed along with the memorandum.

Difference between Memorandum of Association and Articles of Association:

11. Doctrine of Indoor Management:

The doctrine of Constructive Note:

• Since a memorandum and article is a public document it is considered that every person dealing with the company is deemed to have notice of the content of the memorandum and articles of the company.
• It is presumed that the person has not only read these documents but also has understood their proper meaning.
• Any person can now inspect the documents kept by the registrar by way of electronic means on payment of prescribed fees.
• If a person enters into a contract with the company which is beyond the power of the company as defined in MOA, or outside the authority of directors as per MOA or AOA, he cannot acquire any right under the contract against the company.

The doctrine of Indoor Management:

• It is an exception to the Doctrine of constructive notice.
• It protects the outsiders against the company, who acted in good faith.
• According to this doctrine, a person who deals with the company is not bound to enquire into the regularity of the internal procedures of the company.
• The contracting party may assume that every act is done under the procedures laid down in the articles of the company and hence not affecting adversely the rights of the outside parties in any manner due to irregularity of internal procedures.
• It is popularly known as the Turquand Rule

Relevant Case Law:

• The Royal British Bank V/Turquand.
• Turquand, a Co. had a clause in its constitution that allowed the company to borrow money once it had been approved by shareholders by passing a resolution at a general meeting.
• Turquand entered into a loan with the Royal British Bank and two of the directors signed and attached the company Seal on the loan agreement.
• The loan however was not been approved by the shareholders.
• The company defaulted in repayment of the loan and the bank sought restitution.
• Company refused to repay the loan claiming that directors had no right to enter into such agreement.
• It also claimed that the bank had constructive notice of the shareholders. approval clause in their constitution.

Held: Royal British Bank could enforce them. The bank could not be deemed to know or look into the company’s internal workings.

Exceptions to the Doctrine of Indoor Management:

1. In case of Actual or Constructive knowledge of irregularity.
   • Case Laws:
     • Howard V/s Patent Ivory Manufacturing Co.
     • Morris V/s Kansseon.
2. In cases where a person dealing with the company has suspicion of irregularity, they have behaved negligently.
   • Case Laws:
     • Anand Bihari Lai V/s Dinshaw and Co.
     • Haughton and Co. V/s Nothard, Lowe and Wills Ltd.
3. In case of forgery
   • Case Law:
     • Ruben V/s Great Fingall Consolidate

The Companies Act 2013 Descriptive Questions And Answers

Question 1. What is the main difference between a Guarantee Company and a Company having Share Capital?

Answer:

The main difference between a Guarantee Company and a Company having Share Capital

1. Company limited by shares:
   • In this case, the liability of members is limited to the extent of the unpaid value of shares held by them.
   • This liability can be enforced either during the
     • lifetime of the company
     • winding -up of the company.
2. Company Limited by Guarantee:
   1. Guarantee Company not having Share Capital:
      • In this case, the liability of members is limited to the extent of the amount guaranteed by them.
      • This liability can only be enforced at the time of winding up and not during the lifetime of the company.
   2. Guarantee Company having Share Capital:
      1. In this case, the liability of members is limited to the extent of:
         • The amount guaranteed by them and
         • Unpaid value of shares held by them
      2. Member can be demanded to pay call money at any time. throughout the lifetime of the company but the guaranteed amount can be called only at the time of winding up.

Question 2. Define OPC (One Person Company) and state the rules regarding its membership. Can it be converted into a non-profit company under section 8 or a private company?

Answer:

OPC

Section 2(62) of the Companies Act, 2013 defines a person company (OPC) as a company that has only one person as a member.

Rules Regarding its Membership:

1. Only a natural person who is an Indian citizen and resident in India shall be eligible to incorporate an OPC or shall be a nominee for the sole member of an OPC.
2. No minor shall become a member or nominee of the OPC or can hold a share with beneficial interest.
3. No person shall be eligible to incorporate more than one OPC or become a nominee in more than one such company.
4. OPC is a private company in nature.
5. OPC cannot be incorporated or converted into a company under section 8 of the Act i.e. a non-profit company.
6. OPC may be converted to private or public companies in certain cases.
7. Such companies cannot carry out Non-Banking Financial Investment activities including investment in securities of any body corporate.

Question 3. State the limitations of the doctrine of indoor management under the Companies Act, 2013.

Answer:

The limitations of the doctrine of indoor management under the Companies Act, 2013

Doctrine of indoor management also known as the case of Royal British Bank Vs. Turquand i.e. Turquand’s rule is an exception to the doctrine of constructive notice.

• The doctrine says that outsiders can in no way be asked to be responsible or to enquire into the infernal management of the company.
• They can safely presume that the company must have done all that it was supposed to do at its internal level.

Question 4. There are cases, where company law disregards the principle of corporate personality or the principle that the company is a legal entity distinct from its shareholders or members. Elucidate.

Answer:

The cases based on which the principle of Corporate Personality of a company can be disregarded under the Companies Act, 2013 are:

1. To determine the character of the company i.e. to find out whether the company is an enemy or friend: In the law relating to trading with the enemy where the list of control is adopted.
2. To protect revenue or tax: In certain matters concerning the law of taxes duties and stamps particularly where the question of the controlling interest is in issue.
3. To avoid a legal obligation: Where it was found that the sole, purpose for. the formation of the Company was to use it as a device to reduce the amount to be paid by way of bonuses to workmen.
4. Formation of subsidiaries as agents: A company may sometimes be regarded as an agent or trustee of its members, or of another company and may therefore be deemed to have lost its individuality in favor of its principal. Here the principal will be held liable for the acts of that company.
5. A company formed for fraud or improper conduct or to defeat law: Where the device of incorporation is adopted for some illegal or improper purpose For Example. to defeat or circumvent the law, to defraud creditors, or to avoid legal obligations.

Question 5. What do you mean by “Companies with charitable purpose” (section 8) under the Companies Act 2013? Mention the conditions of the issue and revocation of the license of such company by the government.

Answer:

“Companies with charitable purpose” (section 8) under the Companies Act 2013

Section 8 of the Companies Act, 2013 deals with the formation of companies that are formed to:

• Promote the charitable objects of commerce, art, science, sports, education, research, social, welfare, religion, charity, protection of environment, etc. Such a company intends to apply its profits in
• Promoting its objects and
• Prohibiting the payment of any dividend to its members.

Examples of section 8 companies t are ASSOCHAM, FICCI, NATIONAL SPORTS CLUB of INDIA, etc.

Powers of Central Government to issue license:

• Section 8 allows the Central Government to register such person or association of persons as a company with limited liability without the addition of the words ‘limited or’ private limited to its name, by issuing a license on such conditions as it deems fit:
• The registrar shall on an application register such person or association as a company under this section.
• On registration, the company shall enjoy the same privileges and obligations as a limited company.

Revocation of license:

The Central Government may by order revoke the license of the company where the company contravenes any of the requirements or the conditions of this section subject to which a license is issued or where the affairs of the company are conducted fraudulently, or violative of the objects of the company or prejudicial to the public interest.

• Before such revocation, the Central Government must give it a written notice of its intention to revoke the license and the opportunity to be heard in the matter.
• On revocation of the license, the Registrar shall put ‘limited’ or ‘private limited’ against the name of the company in its register.

Question 6. “The Memorandum of Association is a charter of a company”. Discuss. Also explain.in brief the contents of the Memorandum of Association.

Answer:

“The Memorandum of Association is a charter of a company”.

The Memorandum of Association of the company is its charter, it defines its constitution and the scope of the powers of the company With which it has been established under the Act.

• It is the very foundation on which the whole edifice of the company is built.
• It defines the scope of the company’s activities and its relations with the outside world. It is the charter of, the company.
• It contains the objects to pursue in which the company is formed. It lays down the scope of operations beyond which the company cannot go.

Contents of Memorandum:

1. Name Clause: The name of the company must end with the words “limited” in case of public co., or “private limited” in case of private co.
2. Registered office clause: It mentions the State in which the registered office of the company is situated.
3. Object Clause: The object for which the company is proposed to be incorporated and any matter considered necessary in furtherance, therefore, is stated in this clause.
4. Liability Clause: The liability of members of the company, whether limited or unlimited, and also states how the liability is limited,
5. Capital Clause: It states the amount of authorized capital divided into shares of fixed amounts and the number of shares with the subscribers to the memorandum have agreed to take. A company not having share capital need not have this clause.
6. Association Clause: It states the desire of the subscribers to be formed into a company. The Memorandum shall conclude the association clause. Every subscriber to the memorandum shall take atleast one share, and shall write against his name, the number of shares taken by him.’

Question 7. What are the significant points of Section 8 Company which do not apply to other companies? Briefly explain about provisions of the Companies Act, 2013.

Answer:

Formation of companies with Charitable Objects:

(Section 8) of the company deals with the formation of a company with charitable objects.

1. License may be granted by the Central Government. If the following conditions are satisfied:
   • The company’s object is to promote Art, Commerce, Science, Religion, Charity, or any other useful object.
   • The company applies its income to promoting such objects.
   • The company prohibits the payment of any dividend to its members.
2. It is not required to use the words ltd or private ltd. at the end of its name even though it is a limited company.
3. It shall enjoy all privileges and be subject to all obligations of the Ltd. company.
4. A firm may become its member.
5. A company can alter its object clause in MOA or AOA only by obtaining the previous approval of the Central Government in Writing.
6. It can convert itself into a company of any kind only after complying with the prescribed conditions.

Conditions for Revoking Licence by Central Government:

• If the company contravenes any of the conditions subject to which the license was issued.
• If affairs are conducted fraudulently.
• If affairs are against the public interest.

On Revocation Central Government may also direct the Company to:

• To wound up.
• To amalgamate with another company registered u/s 8 if it is in the public interest.

On Revocation of Licence by Central Government:

• Words Ltd. or private Ltd. shall be inserted at the end of the company’s name.
• Company shall cease to enjoy exemptions granted by Central Government u/s 8.
• Before revocation, the Central Government shall give an opportunity of being heard to the company.

Question 8. Mike Limited company incorporated in India having a Liaison office in Singapore. Explain in detail the meaning of Foreign Company and analyze whether Mike Limited would be called a Foreign Company as it established a Liaison office in Singapore as per the provisions of the Companies Act, 2013.

Answer:

Foreign Company Section 2(42) of the Companies Act, 2013:

Foreign company means any company or body corporate incorporated outside India, that:

• Has a place of business in India, whether, by itself or through an agent physically or through electronic mode, and;
• Conduct any business activity in India in any manner. Thus, the companies doing business through electronic mode are also termed as foreign companies and need to company with specified provisions.

According to the given case, Mike Limited Company is incorporated in India having a liaison office in Singapore. Thus, as it is Incorporated in India it is an Indian Company and not a foreign company.

Question 9. Explain the Doctrine of ‘Indoor Management’ under the Companies Act, 2013. Also, state the circumstances where the outsider cannot claim relief on the ground of ‘Indoor Management’.

Answer:

The Doctrine of ‘Indoor Management’ under the Companies Act, 2013

Doctrine of Indoor Management: The Doctrine of Indoor Management is the exception to the doctrine of constructive notice.

• The aforesaid doctrine of constructive notice does’ in no sense mean that outsiders are deemed to have notice of the internal affairs of the company.
• For instance, if an act is authorized by the articles or memorandum, an outsider is entitled to assume that all the detailed formalities for doing that act have been observed.
• This can be explained with the help of a landmark case The Royal British Bank vs. Turquand. This is the doctrine of indoor management popularly known as the Turquand Rule.

Facts of The Royal British Bank vs. Turquand

Mr. Turquand was the official manager (liquidator) of the insolvent Cameron’s Coal Brook Steam, Coal, and Swansea and Loughor Railway Company. It was incorporated under the Joint Stock Companies Act, of 1844.

• The company had given a bond for £ 2,000 to the Royal British Bank, which secured the company’s drawings on its current account.
• The bond was under the company’s seal, signed by two directors and the secretary.
• When the company was sued, it alleged that under its registered deed of settlement (the articles of association),, directors only had the power to borrow up to an amount authorized by a company resolution.
• A resolution had been passed but did not specify how much the directors could borrow.

Held, it was decided that the bond was valid, so the Royal British Bank could enforce the terms. He said the bank was deemed to be aware that the directors could borrow only up to the amount of resolutions allowed.

• Articles of association were registered with Companies House, so there was constructive notice. But the bank could not be deemed to know which ordinary resolutions passed, because these were not registrable.
• The bond was valid because there was no requirement to look into the company’s internal workings. This is the indoor management rule, that the company’s indoor affairs are the company’s problem.

Exceptions to the doctrine of Indoor Management: Thus, you will notice that the aforementioned rule of Indoor Management is important to persons dealing with a company through its directors or other persons.

• They are entitled to assume that the acts of the directors or other officers of the company are validly performed if they are within the scope of their apparent authority.
• So long as an act is valid under the articles if done in a particular manner, an outsider dealing with the company is entitled to assume that it has been done in the manner required.

The above-mentioned doctrine of Indoor Management or Turquand Rule has limitations of its own. That is to say, it is inapplicable to the following namely:

1. Actual or constructive knowledge of irregularity: The rule does not protect any person when the person dealing with the company has notice, whether actual or constructive, of the irregularity.
   • In Howard vs. Patent Ivory Manufacturing Co. where the directors could not defend the issue of debentures to themselves because they should have known that the extent to which they, were lending money to the company required the assent of the general meeting which they had not obtained.
   • Likewise, in Morris v Kansseen, a director could not defend an allotment of shares to him as he participated in the meeting, which made the allotment.
   • His appointment as a director also fell through because none of the directors who appointed him was validly in office.
2. Suspicion of Irregularity: The doctrine in no way, rewards those who behave negligently. Where the person dealing with the company is put upon an inquiry.
   • For example, where the transaction is unusual or not in the ordinary course of business, the outsider must make the necessary inquiry.
   • The protection of the “Turquand Rule” is also not available where the circumstances surrounding the contract are suspicious and therefore invite inquiry.
   • Suspicion should arise, for example, from the fact that an officer is purporting to act in a matter, which is apparently outside the – scope of his authority.
   • Where, for example, as in the case of Anand Bihari Lai vs. Dinshaw and Co. the plaintiff accepted a transfer of a company”s property from its accountant, the transfer was held void.
   • The plaintiff could not have supposed, in the absence of a power of attorney that the accountant had the authority to effect the transfer of the company“s property.
     • Similarly, in the case of Haughton and Co. v. Nothard, Lowe and Wills Ltd. where a person holding directorship in two companies agreed to apply the money of one company in payment of the debt to another.
   • The court said that it was something so unusual “that the plaintiff was put upon inquiry to ascertain whether the persons making the contract had any authority in fact to make it:
   • ” Any other rule would “place limited companies without any sufficient reasons for so doing, at the mercy of any servant or agent who should purport to contract on their behalf.”
3. Forgery: The doctrine of indoor management applies only to irregularities that might otherwise affect a transaction but it cannot apply to forgery which must be regarded as nullity.

• Forgery may in circumstances exclude the ‘Turquand Rule’. The only clear illustration is found in the Ruben v Great Fingall Consolidated.
• In this case, the plaintiff was the transferee of a share certificate issued under the seal of the defendant’s company.
• The company’s secretary, who had fixed the seal of the company and forged the signature of the two directors, issued the certificate.
• The plaintiff contended that whether the signature was genuine or forged was a part of the internal management, and therefore, the company should be stopped from denying the genuineness of the document.
• But it was held, that the rule has never been extended to cover such a complete forgery.

Question 10. Explain the classification of the companies based on control as per The Companies Act, 2013.

Answer:

Classification of companies based on control:

1. Holding and Subsidiary Company:
   1. Holding Company: A company is a holding company concerning one or more other companies, which means a company of which such companies are subsidiary companies.
   2. Subsidiary Company or Subsidiary: With the other company, (i.e. say the holding company), means a company in which the holding company.
      • Control the composition of the Board of Directors or
      • Exercises or controls more than one-half of the total voting power either
        1. At its own or
        2. Together with one or more of its subsidiary companies.
2. Associate Companies: Associate Company concerning another company, means a company (other than a subsidiary) in which another company has significant influence and includes a joint venture company.

Question 11. What do you mean by the term Capital? Describe its classification in the domain of Company Law.

Answer:

Capital

The term Capital has a variety of meanings. The contributions of persons to the common stock of the company form the Capital of the company. In the domain of company law, the term ‘capital’ is used in the following senses:

1. Nominal or authorised or registered Capital: This form of capital has been defined in section 2 (8) of the Companies Act, 201 3.
   • “Authorised Capital” or “Nominal Capital” means such capital as is authorized by the memorandum of a company to be the maximum amount of share capital of the company.
   • Thus, it is the sum stated in the memorandum as the capital of the Company with which it is to be registered-being the maximum amount which it is authorized to raise by issuing shares, and upon which it pays the stamp duty.
   • It is usually fixed at the amount, which, it is estimated, the company will need, including the working capital and reserve capital, if any.
2. Issued Capital: Section 2(50) of the Companies Act, 2013 defines “Issued Capital” which means such capital as the company issues from time to time for subscription.
   • It is that part of authorized capital that is offered by the company for subscription and includes the shares allotted. for consideration other than cash.
   • Schedule 3 to the Companies Act, 2013, makes it obligatory for a company to disclose its issued capital in the balance sheet.
3. Subscribed Capital: Section 2(86) of the Companies Act, 201 3 defines “Subscribed Capital” as such part of the capital which is for the time being subscribed by the members of a company: It is the nominal amount of shares taken up by the public.
4. Called-up Capital: Section 2(15) of the Companies Act, 2013 defines “Called-up capital” as such part of the Capital, which has been called for payment. It is the total amount called up on the shares issued.
5. Paid-up Capital: Paid-up is the total amount paid or credited as paid up on shares issued. It is equal to Called up capital less Calls in arrears.

Question 12. Explain the ‘doctrine of ultra vires under the Companies Act, 2013. What are the consequences of ‘ultra vires’ acts of the company?

Answer:

The doctrine of Ultra-vires and its consequences

1. The legal phrase ultra-vires (i.e. beyond the power) applies only to the acts done over the legal powers of the company. It denotes that the powers of the company are limited in nature.
2. To an ordinary citizen, the law permits whatever the law does not expressly forbid. But a company can do anything that is specified in its objects clause of the memorandum. Memorandum also has to operate within the boundaries set by the Act.
3. Any act done by the company which is beyond the powers not only of the direction but also of the company, then such act is
   • Wholly void and in operative in law and
   • Not binding upon the company.
4. The company can neither be sued nor can it sue on an ultra-vires transaction.
5. The company can be restrained from employing funds for purposes other than those specified in its memorandum, or from carrying on a trade different from what it is authorized to do.
6. A person who is coming to deal with the company must know about the powers of the company by going through its memorandum. As the memorandum is a public document, it is open for public inspection.
7. Even after this, if anyone enters into an ultra-vires transaction with the company, then they cannot enforce it against the company.
8. An ultra-vires transaction can never be made binding on the company. It cannot be made ultra-vires, even if the whole body of shareholders ratifies it.

• Ratification of ultra – vires actsAn act that is ultra-vires the company cannot be ratified even with the help of the unanimous consent of all the shareholders.
• An act ultra-vires the Articles can be ratified by altering the Articles by passing a special resolution in a general meeting.
• An act ultra-vires the directors but intra-vires the company can be ratified with the help of resolution in general meeting.
• Shareholders can ratify the irregularity but only such which is within the powers of the company.

Question 13. Explain listed companies and unlisted companies as per the provisions of The Companies Act, 2013.

Answer:

• Listed Company: As per the definition given in Section 2(52) of the Companies Act, 201 3, it is a company that has any of its securities listed on any recognized stock exchange.
• Unlisted Company: Unlisted company means a company other than listed company.

Question 14. Mike LLC incorporated in Singapore has an office in Pune, India. Analyse whether Mike LLC would be called a foreign company as per the provisions of The Companies Act, 2013. Also, explain the meaning of foreign company.

Answer:

Provision or Meaning of the foreign company:

According to Section 2(42) of the Companies Act, 2013. foreign company means any company or body corporate incorporated outside India that:

• Has a place of business in India whether itself or through an agent, physically or through electronic mode, and
• Conducts any business activity India has in any other manner. In the present case Mike LLC is incorporated in Singapore and has its control and management from Pune, India, hence, Mike LLC would be called as a foreign company as per the provisions of the Companies Act, 2013.

Question 15. Explain the concept of ‘Corporate Veil’. Briefly state the circumstances when the corporate veil can be lifted as per the provisions of the Companies Act, 2013.

Answer:

‘Corporate Veil’

As per the provisions of Companies Act, 201 3, the corporate veil refers to a legal concept whereby the company is identified separately from the members of the company. Thus, the shareholders are protected from the acts of the company.

The following are the cases where the company law disregards the principle of corporate personality:

1. To determine the character of the company i.e. to find out whether co-enemy or friend: It is true that, unlike a natural person, a company does not have a mind or conscience, therefore it cannot be a friend or foe.
   • It may however be characterised as an enemy company if its affairs are under the control of the people of an enemy country.
   • For this purpose, the court may examine the character of the persons who are really at the helm of the affairs of the company.
2. To protect revenue or tax: In certain matters where a corporate entity is used to evade or circumvent tax, the court can disregard the corporate entity.
3. To avoid legal obligation: Where it is found that the sole purpose for the formation of the company was to use it as a device to reduce the amount to be paid by way of bonus to the workman, the Supreme Court upholds the piercing of the veil to look at the real transaction.
4. Formation of subsidiaries to act as agents: A company may sometimes be regarded as an agent or trustee of its members, or of another company, and therefore be deemed to have lost its individuality in favor of its principal. Here the principal will be held liable for the acts of the company.
5. The company formed for fraud or improper conduct or to defect law: Where the device of incorporation is adopted for some illegal or improper purpose, For Example., to defeat or circumvent the law, to defraud creditors, or to avoid legal obligations.

Question 16. Ravi Private Limited has borrowed ₹ 5 crores from Mudra Finance Ltd. This debt is ultra vires to the company. Examine, whether the company is liable to pay this debt. State the remedy if any available to Mudra Finance Ltd.?

Answer:

When an act is performed, which though legal in itself, is not authorized by the object clause of the memorandum, or by the statute, it is said to be ultraviolet the company, and hence null and void. This is known as the “Doctrine of ultra-vires”.

• The impact of the doctrine of ultra-vires is that a company can neither be sued on an ultra-vires transaction nor can sue on it. If you enter into a transaction that is ultra-vires the company, you Cannot enforce it against the company.
• If you have lent money to the company in such a transaction, you cannot recover it from the company. But, if the money has not been expended, then the lender may bring an injunction order on the Co. to stop it from parting from it.

This is because the company does not become an owner of it.

• However, if the money has been used, then the lender slips into the shoes of the debtor paid – and consequently can recover his loan to that extent.
• In the given case, the transaction is ultra-vires and hence the company Ravi Private Limited is not liable to pay the debt. Mudra Finance Ltd. may be an injunction order on Ravi Pvt. Ltd. to stop it from parting with the funds.

Question 17. A company registered under Section 8 of the Companies Act, 2013, earned huge profits during the financial year that ended on 31^st March 2018 due to some favorable policies declared by the Government of India and implemented by the company. Considering the development, some members of the company wanted the company to distribute dividends to the members of the company. They approached you to advise them about the maximum amount of dividend that can be declared by the company as per the provisions of the Companies Act, 2013. Examine the relevant provisions of the Companies Act, 2013, and advise the members accordingly.

Answer:

According to the facts of this case, there exists a situation in which certain members of a Section 8 company have approached a person to seek relevant

• Informed advice on the amount of dividend that can be distributed amongst them from the pool of profits made over a financial year by a company registered under Section 8.
• The first and foremost thing in this case that such members need to be educated about is the definition and objects of a Section 8 company which clearly states that “ a Section 8 company is formed to promote the charitable object of commerce, art, science, sports education.

Research, social welfare, religion, charity, protection of the environment, etc, and a section 8 company intends to apply its profit in –

1. Promoting its objects
2. Prohibiting the payment of any dividend to its members.

Now when it is evident that a Section 8 company is not statutorily bound to pay dividends to its members unlike a public or private company then automatically the demand of the members for dividends stands invalid and cannot be enforced on the company.

Question 18. Mr. X had purchased some goods from M/s ABC Limited on credit. A credit period of one month was allowed to Mr. X. Before the due date Mr. X went to the company and wanted to repay the amount due from him. He found only Mr. Z there, who was the factory supervisor of the company. Mr. Z told Mr. X that the accountant and the cashier were on leave, he is in charge of receiving money and he may pay the amount to him. Z issued a money receipt under his signature. After two months M/s ABC Limited issued a notice to Mr. X for non-payment of the dues within the stipulated period. Mr. X informed the company that he had already cleared the dues and he is no longer responsible for the same. He also contended that Mr. Z is an employee of the company to whom he had made the payment and being an outsider, he trusted the words of Mr. Z as duty distribution is a job of the internal management of the company. Analyze the situation and decide whether Mr. X is free from his liability.

Answer:

In this case, according to the facts provided it is observable that the situation points towards the applicability of the Doctrine of Indoor Management in relevance to the affairs of the company M/s ABC Limited.

• According to the terms of the Doctrine of Indoor Management, if an act is authorized by the articles or memorandum, an outsider is entitled to assume that all the detailed formalities for doing that act have been observed.
• Here in this case we view the facts from the perspective of the applicability of the Doctrine.

Question 19. Sound Syndicate Ltd. a public company, its articles of association empower the managing agents to borrow both short and long-term loans on behalf of the company, Mr. Liddle, the director of the company, approached Easy Finance Ltd. a nonbanking finance company for a loan ₹ 25,00,000 in name of the company. The Lender agreed and provided the above-said loan. Later on, Sound Syndicate Ltd. refused to repay the money borrowed on the pretext that no resolution authorizing such a loan had been passed by the company and the lender should have enquired about the same before providing such a loan hence the company was not liable to pay such loan. ’Analyse the above, situation in terms of the provisions of Doctrine of Indoor Management under the Companies Act, 2013 and examine whether the contention of Sound Syndicate Ltd. is correct or not.

Answer:

As per the doctrine of Indoor Management, outsiders are entitled to assume that all the detailed formalities for doing an act authorized by the articles have been observed.

• Outsiders are not at all required to inquire into the internal affairs of the company. In the case of The Royal British Bank Vs. Turquand, this doctrine was clearly explained.
• The bond signed by the director and secretary on behalf of the company was held to be valid and the bank was not required to inquire whether any ordinary resolution was passed or not.

This is the Indoor Management rule, that the company’s indoor affairs are the company’s problem. In the given case, the articles of the company, authorize the director to borrow on behalf of the company.

• Mr. Liddle a director borrowed money but, later on company denied its liability to repay on the pretext that no resolution was so passed and the lender should have enquired about the same before providing the loan.
• Held, the contention of Sound Syndicate Ltd. is not correct, as the outsider is not obligated to enquire into the internal affairs of the company.

Question 20. Popular Products Ltd. is a company incorporated in India, having a total Share Capital of ₹ 20 Crores. The Share capital comprises 12 Lakh equity shares of ₹ 100- each and 8 Lakh Preference Shares of ₹ 100 each. Delight Products Ltd. And Happy Products Ltd. hold 2,50,000 and 3,50,000 shares respectively in Popular Products Ltd. Another company Cheerful Products Ltd. holds 2,50,000 shares in Popular Products Ltd. Jovial Ltd. is the holding company for all the above three companies namely Delight Products Ltd; Happy Products Ltd; Cheerful products ltd. Can Jovial Ltd., be termed a subsidiary company of Popular Products Ltd., if it Controls the composition of directors of Popular Products Ltd. State the related provision’ in favour of your answer.

Answer:

Holding and Subsidiary companies are relative terms. A subsidiary company in relation to any other company means a company in which the holding company

1. Controls the composition of the Board of Directors; or
2. Exercises or controls more than one-half of the total share capital either on its own or together with one or more of its subsidiary companies.

In the given case. Jovial Ltd. is controlling the composition of the Board of Directors of Popular Products Ltd. and hence it can be called as Holding Co. of Popular Products Ltd. and Popular Products Ltd., its subsidiary.

Question 21. Mr. Anil formed a Person Company (OPC) on 16^th April 2018 to manufacture electric cars. The turnover of the OPC for the financial year ended 31^st March 2019 was about ₹ 2.25 Crores. His friend Sunil wanted to invest in his OPC, so they decided to convert it voluntarily into a private limited company. Can Anil do so?

Answer:

As per Companies Act, 201 3 OPC cannot convert voluntarily into any kind of company unless two years have expired from the date of incorporation, except where the paid-up share capital is increased beyond fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees.

• In the given case Mr. Anil formed OPC on 16^th April 2018 and the turnover for the first financial year ending is about ₹ 2.25 crore. He wants to voluntarily convert it into a private limited company.
• Held, Mr. Anil can do so as the threshold limit of turnover is crossed, thus the OPC can be converted into a Private Limited Company even before the expiry of two years from incorporation.

Question 22. A, an assessee, had a large income in the form of dividends and interest. To reduce his tax liability, he formed four private limited companies and transferred his investments to them in exchange for their shares. The income earned by the companies was taken back by him as a pretended loan. Can A be regarded as separate from the private limited company he formed?

Answer:

The facts of the given case are similar to that of “Dinshaw Maneckjee Petit”, it was- held that the company was not genuine at all but merely the assessee himself disguised under the legal entity of a limited company.

• The assessee earned huge income by way of dividends and interest.
• So he opened some companies and purchased their shares in exchange for his income by way of dividends and interest.
• This income was transferred back to the assessee by way of a loan.
• The Court decided that the private companies were a share and the corporate veil was lifted to decide the real owner of the income.

Thus, A cannot be regarded as separate from the private limited company he formed.

Question 23. ABC Limited has allotted equity shares with voting rights to XYZ Limited worth ₹ 15 Crores and issued Non-Convertible Debentures worth ₹ 40 Crores during the Financial Year 2019-20. After that total Paid-up Equity Share Capital of the company is ₹ 100 Crores and Non-Convertible Debentures Stand at ₹ 120 Crores. Define the Meaning of Associate Company and comment on whether ABC Limited and XYZ Limited would be called Associate Company as per the provisions of the Companies Act, 2013.

Answer:

Associate Company:

Section 2(6) of the Companies Act, 2013:

Associate company in relation to another company means a company in which that other company has a significant influence.

• However, it is not a subsidiary company of the company having such influence and includes a joint venture company.
• Significant influence means control of atleast 20% of the. the total share capital of a business decision under an agreement.
• In the given case, ABC Ltd. is not an associate company. We will ignore the non-convertible portion and we will see the convertible portion which is also not stated thus we will do (15/100) x 1 00 = 15% Thus not touching 20% hence, it is not an associate company.

Question 24. ABC Limited was registered as a public company. There were 245 members in the company. Their details are as follows:
Directors and their relatives – 190
Employees – 15
Ex-employees (shares were allotted when they were employees) – 20
Others(Including 10 joint holders holding shares jointly in the name of father and son) – 20
The Board of Directors of the company proposes to convert it into a private company. Advice on whether the reduction in the number of members is necessary for conversion.

Answer:

According to section 2(68) of the Companies Act, 2013, “Private company” means a company having a minimum paid-up share capital as may be prescribed, and which by its articles, except in the case of One Person Company, limits the number of its members to two hundred.

However, where two or more persons hold one or more shares in a company jointly, they shall, for this clause, be treated as a single member.

It is further provided that

• Persons who are in the employment of the company; and
• Persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be embers after the employment ceased, Shall not be included in the number of members.

In the instant case, the Total No. of Members of ABC Ltd. will be Counted as follows:

Directors and their relatives – 190

Others (10 Couple) (10×1) – 10

= 200

Since No. of members does not exceed 200. Therefore, there is no need for a reduction in the number of members.

Question 25. SK Infrastructure Limited has a paid-up share capital divided into 6,00,000 equity shares of INR 100 each, 2,00,000 equity shares of the company are held by the Central Government and 1,20,000 equity shares are held by the Government of Maharashtra. Explain regarding relevant provisions of the Companies Act, 2013, whether SK Infrastructure Limited can be treated as a Government Company.

Answer:

Legal Provision – As per Section 2(45) of the Companies Act, 2013 Government company means any company in which not less than 51% of the paid-up share capital is held by

1. The Central Government, or
2. By any State Government or Governments, or
3. Partly by the Central Government and partly by one or more State Governments, and the section includes a company which is a subsidiary company of such a Government company.

Facts: Here in the given problem out of 6 Lac equity shares of SK Infrastructure Ltd. 3,20,000 (2,00,000 + 1,20,000) shares are with the Central Govt, and Govt, of Maharashtra which is more than 51 % of the paid-up share capital of SK Infrastructure Ltd.

Conclusion: Applying the above legal provision we can say, that SK Infrastructure Ltd. is. a Government.Company.

Question 26. Y incorporated a “One Person Company (OPC)” making his sister Z as nominee. Z is leaving India permanently due to her marriage abroad. Due to this fact, she is withdrawing her consent of nomination in the said OPC. Taking into consideration the provisions of The Companies Act, 2013 answer the questions given below:

1. Is it mandatory for Z to withdraw her nomination in the said OPC, if she is leaving India permanently?
2. Can Z continue her nomination in the said OPC, if she maintains the status of Resident of India after her marriage?

Answer:

As per the provisions of the Companies Act, 2013, “Only a person Resident in India is allowed to become and carry on as a nominee of OPC.

“If a person stays in India for not less than 182 days during the immediately preceding financial year, then he becomes a resident in India.

In the given case we can conclude as follows:

Since, in this case, ‘Z’ is leaving India permanently, she will no longer hold a residential status. Thus, it is mandatory for ‘Z’ to withdraw her nomination to the OPC.

In this case, ‘Z’ can maintain her residential status in India even after her marriage. Thus, Z can carry on her nomination in the said OPC.

Question 27. AK Private Limited has borrowed ₹ 36 crores from BK Finance Limited. However, as per the memorandum of AK Private Limited, the maximum borrowing power of the company is ₹ 30 crores. Examine, whether AK Private Limited is liable to pay this debt. State the remedy, if any available to BK Finance Limited.

Answer:

• When an act is performed, which though legal in itself, is not authorized by the object clause of the memorandum, or by the statute, it is said to be ultraÿ vires the company, and hence null and void. This is known as the “ Doctrine of ultra vires”.
• The Impact of the doctrine of ultra viresis that a company can neither be sued on an ultra-vires transaction nor can sue on it. If an individual enters into a transaction that is ultra vires the company, he or she cannot enforce it against the company.

If an individual has lent money to the company in such a transaction, He or She cannot recover it from the company. But if the money has not been expended, then the lender may bring an injunction order on the company to stop it from parting from it.

• This is because the company does not become the owner of it. However, if the money has been used, then the lender slips into the shoes of the debtor paid -and consequently can recover his loan to that extent.
• In the given case, the transaction is ultra vires, and hence the company AK Private Limited is not liable to pay the debt. BK Finance Limited may have an injunction order on AK Pvt . Ltd. to stop it from parting with the funds.

Question 28. BC Private Limited and its subsidiary KL Private Limited hold 90,000 and 70,000 shares respectively in PQ Private Limited. The paid-up share capital of PQ Private Limited is ₹ 30 Lakhs (3 Lakhs equity shares of ₹ 10 each fully paid). Analyse regarding provisions of the Companies Act, 2013 whether PQ Private Limited is a subsidiary of BC Private Limited. What would be your answer if KL Private Limited is holding 1,60,000 shares in PQ Private Limited and no shares are held by BC Private Limited in PQ Private Limited?

Answer:

Holding and subsidiary companies are relative terms. A subsidiary company in relation to any other company means a company in which the holding company.

• Controls the composition of the board of directors, or
• Exercises or controls more than one-half of the total share capital either on its own or together with one or more of its subsidiary companies.

In the given case BC Ltd. is controlling the composition of the board of directors of PQ Ltd. and KL Pvt. Ltd. and hence it can be called a holding company.

If KL Pvt. Ltd. holds 160,000 shares in PQ Ltd. no shares are held by BC Pvt. Ltd. then KL Pvt. Ltd. will be the holding company of PQ Pvt. Ltd. and PQ Pvt. Ltd. will be the subsidiary company of KL Pvt. Ltd.

Question 29. The Articles of Association of Aarna Limited empowers its managing agents to borrow loans on behalf of the company. Ms. Anika, the director of the company, borrowed ₹ 18 Lakhs in the name of the company from Quick Finance Limited, a non-banking finance company. Later on, Aarna Limited refused to repay the money borrowed on the pretext that no resolution authorizing such a loan had been actually passed by the company, and therefore the company was not liable to pay such a loan. Decide whether the contention of Aarna Limited is correct under the provisions of the Companies Act, 2013.

Answer:

According to the doctrine of Indoor management:

1. Outsiders are safely entitled to assume that everything has been done properly, as far as the internal compliance and procedures by the company are concerned.
2. In other words, we can say that this doctrine says that everything that was required to be done by the company, will be assumed by the outsiders to have been done properly. This doctrine aims to protect the outsider against the company.

In the above case, Quick Finance Ltd. is an outsider, hence, it need not enquire whether the necessary resolution -was passed properly or not by the company. Even if no resolution was passed for authorizing the loan, the company would be held liable to repay the loan. In the light of above, we can say that the contention of Aarna Ltd is not correct.

Question 30. Mr. R is an Indian citizen, and his stay in India during the immediately preceding financial year is for 130 days. He appoints Mr.S, a foreign citizen, as his nominee, who has stayed in India for 125 days during the immediately preceding financial year. Is Mr. R eligible to be incorporated as a One – Person Company (OPC)? If yes, can he give the name of Mr. S ‘ in the memorandum of Association as his nominee? Justify your answers with relevant provisions of the Companies Act, 2013.

Answer:

In this case, Mr. R is eligible to be incorporated as a One-Person-Company (OPC).

• Since his stay in India is for a period of atleast 120 days (he stayed for 130 days) during the proceeding financial year.
• However, Mr. R cannot give the name of Mr. S in the memorandum of association as his nominee even though he is staying in India.

During the proceeding financial year is at atleast 120 days (actually he stayed for 125 days), since Mr. S, is not an Indian Citizen, which is a statutory requirement.

Question 31. Mr. R, a manufacturer of toys approached MNO – Private Limited for a supply of raw materials worth ₹ 1,50,000/-. Mr. R was offered a credit period of one month. Mr. R went to the company before the due date and met Mr. C, an employee at the billing counter, who convinced the former that the payment could be made to him as the billing cashier was on leave. Mr. R paid the money and was issued a signed and sealed receipt by Mr. C. After the lapse of the due date, Mr. R received a recovery notice from the company for the payment of ₹ 1,50,000/-. Mr. R informed the company that he had already paid the above amount and being an outsider had genuine reasons to trust Mr. C who claimed to be an employee and had issued him a receipt. The Company filed a suit against Mr. R for non-payment of dues. Discuss the fate of the suit and the liability of Mr. R towards the company as of the current date in consonance with the provision of The. Companies Act 2013? Would your answer be different if a receipt under the company seal was not issued by Mr. C after receiving payment?

Answer:

Doctrine of Indoor Management: The Doctrine of Indoor Management is the exception to the doctrine of constructive notice. The doctrine of constructive notice does not mean that outsiders are deemed to have notice of the internal affairs of the company for instance.

• If an act is authorized by the articles or memorandum, an outsider is entitled to assume that all the detailed formalities for doing that act have been observed.
• The Doctrine of Indoor Management is important to persons dealing with a company through its directors or other persons.
• They are entitled to assume that the acts of the directors or other officers of the company are validly performed if they are within the scope of their apparent authority.

So long as an act is valid under the articles if done in a particular manner, an outsider dealing with the company is entitled to assume that it has been done in the manner required.

• In the given question, Mr. R has made payment to Mr. C and he (Mr. C) gave the receipt of the same to Mr. R. Thus, it will be rightful on the part of Mr. R to assume that Mr. C was also authorized to receive money on behalf of the company.
• Hence, Mr. R will be free from liability for payment of goods purchased from MNO Private Limited, as he has paid the amount due to an employee of the company.
• It is affirmed means the answer would be different if a receipt under the company seal was not issued by Mr. C after receiving payment. In this situation, the company will be held liable and Mr. C can not escape from the liability.

Question 32. Mr. Anil formed a One Person Company (OPC) on 16 April, 201 8 for manufacturing electric cars. The turnover of the OPC for the financial year ended 31 March 2019 was about ₹ 2.25 crores. His friend Sunil wanted to invest in his One Person Company (OPC), so they decided to convert it voluntarily into a private limited company. Can Anil do so, as per the provisions of The Companies Act, 2013?

Answer:

As per the provisions of- sub-rule (7) of Rule 3 of the Companies (Incorporations) Rules, 2014, an OPC cannot convert voluntarily into any kind of company unless two years have expired from the date of its incorporation.

• Except the threshold limit (paid-up share capital) is increased beyond 50 lakh rupees or its average annual turnover during the relevant period exceeds 2 crore rupees.
• In the instant case, ‘Mr. Anil formed an OPC on 16th April 2018 and its turnover for the” financial year ended 31st March 2019 was ₹ 2.25 crores.

Even though 2 years have not expired from the date of its incorporation, since its average annual turnover during the period starting from 16th April 2018 to 31^st March 2019 has exceeded ₹ 2 crores, Mr. Anil can convert the OPC into a private limited company along with Sunil.

Question 33. ABC Limited has allotted equity shares with voting rights to XYZ Limited worth ₹ 15 crores and convertible preference shares worth 10 crores during the financial year 2022-2023. After that, the total share capital of the company is ₹ 100 crores. Comment on whether XYZ Limited would be called an Associate Company as per the provisions of the Companies Act, 2013. Also, define an Associate Company.

Answer:

As per section 2(6) of the Companies Act, 2013 associate company, in relation to another company means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.

• Here, the expression significant influence means control of at least twenty percent of total voting power, or control of or participation in business decisions under an agreement.
• The shows held by a company in another company in a fiduciary capacity shall not be counted to determine the relationship of the associate company.
• The term ‘share capital’ Excludes paid-up equity share capital and convertible preference more capital.

In the above case, XYZ Ltd. is an associate company of ABC Ltd. as ABC Ltd. holds 25% of the total share capital of XYZ (25 crores).

Question 34. ABC Private Limited is a registered company under the Companies Act, 201 3 with paid-up capital of ₹ 35 lakhs and turnover of ₹ 2.5 crores. Whether the ABC Private Limited can avail of the status of a Small Company by the provisions of the Companies Act, 2013? Also, discuss the meaning of a Small Company.

Answer:

As per Section 2, (85) of the Companies Act, 2013 small company means a company, other than a public company:

• Paid up share capital of which does not exceed four crore rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees; and
• Turnover of which as per profit and loss account for the immediately preceding financial year does not exceed forty crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees.

[In the above case ABC Pvt. has a paid-up share capital of ₹ 35 lakhs and a turnover of ₹ 2.5 crores.

In the right of the above-mentioned provisions, ABC Pvt. Ltd. can avail the states of a small company as its paid-up share capital is less than the prescribed amount of ₹ 4 crores and turnover is also less than the prescribed limit of ₹ 40 crores.

The Limited Liability Partnership Act 2008 Self-Study Questions And Answers

Question1. What do you understand by a limited liability partnership?

Answer:

Limited liability partnership

• Limited Liability Partnership (LLP) Act was passed by parliament on 12^th December 2008 and assent by the President was given on 7^th January 2009.
• It has 81 Sections and 4 Schedules
  • Schedule 1 – Mutual rights and duties of partners and partnership in the absence of agreement.
  • Schedule 2 – Conversion of Firm to LLP.
  • Schedule 3 – Conversion of Private Ltd. to LLP.
  • Schedule 4 – Conversion of Public Ltd. to LLP.
• Partnership Act does not apply to LLP forms of business.

Limited Liability Partnership – Meaning and Concept:

Meaning:

• Is a new form of business with limited liability.
• It is a mid-way between a partnership firm and a Private Limited Company.
• It contains elements of ‘body corporate’ and ‘partnership’ forms of business.

Question 2. What are the Characteristics of Salient Features of a Limited Liability Partnership?

Answer:

The Characteristics of Salient Features of a Limited Liability Partnership

• It is a body corporate.
• It has perpetual succession.
• Separate Legal Entity.
• Mutual Agency between partner and LLP only.
• Rights and duties as per agreement.
• Artificial legal person.
• Common seal.
• Limited liability of partners.
• The designated Partner is responsible for legal compliance.
• Must have a minimum of 2 individual partners and a maximum no limit.
• LLP cannot be formed for charitable and non-economic purposes.
• Can be investigated by the Central Government through the appointment of competence authority.
• Compromise, arrangements will be as per LLP Act, 2008.
• Forms are to be e-filed on the portal of www.mca.gov.in using a digital signature.
• LLP formed, incorporated, or registered outside India having a place of business in India is called a Foreign LLP. It can become a partner in an Indian LLP.

Question 3. How many Advantages of a Limited Liability Partnership (LLP) are there?

Answer:

Advantages of a Limited Liability Partnership (LLP

• Easy formation or dissolution.
• Limited Liability of Partners.
• Less legal formalities.
• Flexible capital structure.
• Low-cost compliance.

Question 4. What are the steps followed for the Incorporation of a Limited Liability Partnership?

Answer:

Essential Elements for Incorporation:

• At least two designated partners.
• Registered office in India along with utility bill as proof.
• Designated Partners must be individuals.
• One of them must be resident in India.
• Designated Partner must have DPIN i.e. Designated Partner Identification Number which is allotted by MCA.
• LLP Agreement consisting of all rights and duties of partners.
• In the absence of LLP Agreement provisions of Schedule First of LLP Act, 2008.
• Name of LLP form of business.

Incorporation of Limited Liability Partnership Process:

Step 1: Elect members and design among them at least two designated partners.

Step 2: Obtain the DPIN of Designated Partners and a Digital Signature Certificate (DSC) to sign the e-form.

Step 3: Fill e-form Limited Liability Partnership-1 for the reservation of the name (Up to 6 choices can be indicated).

Step 4: Once LLP-1 is approved, fill LLP-2 giving details of all partners along with Designated Partners who have consented to be partners.

Step 5: Draft the LLP Agreement and file it with a registrar in E-form LLP-3 within 30 days of incorporation of LLP.

Question 5. The distinction between a Limited Liability Partnership and a Partnership Firm.

Answer:

The difference between a Limited Liability Partnership and a Partnership Firm

Question 6 Distinguish between a Limited Liability Partnership and a Limited Liability Company (LLC).

Answer:

Difference between a Limited Liability Partnership and a Limited Liability Company (LLC)

Question 7. What is the difference between partnership and co-ownership as per The Indian Partnership Act, of 1932?

Answer:

Difference between Partnership and Co-ownership:

The Limited Liability Partnership Act 2008 Descriptive Questions

Question 1. What are the essential elements to form a LLP in India as per the LLP Act, 2008?

Answer:

The essential elements to form a LLP in India as per the LLP Act, 2008

Limited Liability Partnership (LLP) is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership. Thus, it is a hybrid between a company and a partnership.

Essential Elements to in Corporate LLP:

Under the LLP Act, 2008, the following elements are very essential to form an LLP in India:

1. To complete and submit incorporation documents with the Registrar electronically.
2. To have atleast two partners for incorporation (whether individual or body corporate).
3. To have a registered office in India to which all communication will be made.
4. To appoint a minimum of two individuals as designated partners who will be responsible for some duties. Atleast one of them should be resident in India.
5. Designated partner (s) should hold a Designated Partner Identification Number (DPIN) allotted by MCA.
6. To execute a partnership deed or agreement between and partner intense or between the LLP and its partner.
7. Decide upon LLP name. LLPs are body corporate and hence must be registered with the Registrar of LLP.

Question 2. Explain the essential elements to incorporate a Limited Liability Partnership and the steps involved therein under the LLP Act, 2008.

Answer:

The essential elements to incorporate LLP are:

1. To complete and submit incorporation document in the form prescribed by the registrar electronically;
2. To have at least two partners for incorporation of LLP (individual or body corporate);
3. To have a registered office in India to which all communications will be made and received;
4. To appoint a minimum of two individuals as designated partners who will be responsible for some duties including doing all acts, matters, and things as are required to be done by the LLP. At least one of them should be resident in India.
5. A person or nominee of a body corporate intending to be appointed as a designated partner of LLP should hold a Designated Partner Identification Number (DPIN) allotted by MCA.
6. To execute a partnership agreement interse or between the LLP and its partners. In the absence of any agreement the provisions as set out in the first schedule of the LLP Act, 2008 will be applied.
7. LLP Name – Limited liability Partnerships are bodies corporate and must be registered with the Registrar of LLP after following the provisions specified in the LLP Act.

Question 3. “LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership”. Explain.

Answer:

“LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership”.

A LLP is a new form of legal business entity with limited liability. It is an alternative corporate business vehicle that not only gives the benefits of limited liability at low compliance cost but allows its partners the flexibility of organizing their internal structure as a traditional partnership.

• The LLP is a separate legal entity and, while the LLP itself will be liable for the full extent of its assets, the liability of the partners will be limited.
• LLP provides the benefits of limited liability but allows its members the flexibility of organizing their internal structure as a partnership based on a mutually arrived agreement.
• Owing to its flexibility in its structure and operation, the LLP is a suitable vehicle for small enterprises and investment by venture capital.

LLP is a hybrid between a company and a partnership:

Some features or advantages of LLP are:

1. It is organized and operates based on agreement.
2. It provides flexibility without imposing detailed legal and procedural requirements.
3. Easy to form.
4. All partners enjoy limited liability.
5. It has a flexible capital structure.
6. It is easy to dissolve.

Question 4. Discuss the conditions under which LLP will be liable and not liable for the acts of the partner.

Answer:

The conditions under which LLP will be liable and not liable for the acts of the partner

A Limited Liability Partnership, popularly known as LLP combines the advantage of both the company and Partnership into a single form of organization.

• In an LLP one partner is not responsible or liable for another partner’s misconduct or negligence.
• Every partner of an LLP would be, for the business of the LLP, an agent of the LLP but not of the other partners. Liability of partners shall be limited except in case of unauthorized acts, fraud, and negligence.
• But a partner shall not be personally liable for the wrongful acts or omission of any other partner.
• An obligation of the limited liability partnership whether in a contract or otherwise, is solely the obligation of the LLP. The liabilities of the LLP shall be met out of the property of the LLP.

Liability of LLP and its fraudulent partner shall be unlimited if an act carried out by a limited liability partnership, or any of its partners,

1. With Intent to defraud creditors or any other person, or
2. For any fraudulent purpose.

The liability of the LLP and partners who acted with intent to defraud creditors or for any fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the LLP.

Question 5. State the circumstances under which LLP may be wound. up by the Tribunal under the Limited Liability Partnership Act, 2008.

Answer:

The circumstances under which LLP may be wound. up by the Tribunal under the Limited Liability Partnership Act, 2008

The winding up of an LLP may either be voluntary or by the Tribunal and LLP such winding up may be dissolved. (Section 63)

LLP may be wounded up by the Tribunal (Section 64) in the following circumstances:

1. If the LLP decides that LLP be wound up by the Tribunal.
2. For more than six months, the number of partners in LLP has been reduced to below two.
3. If the LLP is unable to pay its debts
4. If the LLP has acted against the interests of the sovereignty and integrity of India.
5. If the LLP made a default in filing with the Registrar the Statement of Account and Solvency for five consecutive financial years.
6. If the tribunal thinks that it is just and equitable LLP may be wound up.

Question 6. State the circumstances under which a LLP and its partners may face unlimited liability under the Limited Liability Partnership Act, 2008.

Answer:

Unlimited liability in case of fraud (Section 30 of LLP Act, 2008):

1. In case of fraud:
   • In the event of an act carried out by an LLP, or any of its partners
   • With intent to defraud creditors of the LLP or any other person, or for any fraudulent purpose
   • The liability of the LLP and partners who acted with intent to defraud creditors or for any fraudulent purpose.
   • shall be unlimited for all or any of the debts or other liabilities of the LLP.
   • However, in case any such act is carried out by a partner, the LLP is liable to the same extent as the partner unless it is established by the LLP that such act was without the knowledge or the authority of the LLP.
2. Where any business is carried on with such intent or for such purpose as mentioned in sub-section (1), every person who was knowingly a party to the carrying on of the business in the manner aforesaid shall be punishable with:
   • Imprisonment for a term which may extend to 2 years and
   • With a fine which shall not be less than ₹ 50.000 but which may extend to ₹ 5 Lakhs.
3. Where a LLP or any partner or designated partner or employee of such LLP has conducted the affairs of the LLP fraudulently, then without prejudice to any criminal proceedings which may arise under any law for the time being in force.
4. The LLP and any such partner or designated partner or employee shall be liable to pay compensation to any person who has suffered any loss or damage because of such conduct.

However, such LLP shall not be liable if any such partner or designated partner or employee has acted fraudulently without knowledge of the LLP.

Question 7. Limited Liability Partnership (LLP) gives the benefits of limited liability of a company on one hand and the flexibility of a partnership on the other. Discuss.

Answer:

Limited Liability Partnership (LLP) gives the benefits of limited liability of a company on one hand and the flexibility of a partnership on the other.

1. Limited Liability Partnership means a partnership formed and registered under the LLP Act.
   • It is a hybrid form of business organization structure which combines the advantages of both
   • The corporate form of organization
   • The partnership firm.
2. It is viewed as an alternative corporate business vehicle that provides its partners the benefits of limited liability at low-cost compliance and at the same time flexibility of running the business as per traditional partnership structure.
3. LLP since is a separate legal entity will be fully liable for all its liabilities to the extent that all its assets but the liability of the partner will be limited up to their agreed contribution only i.e. limited liability.
4. Due to the greater flexibility in its structure and operation LLP is a suitable and most viable business form for small enterprises and investment by venture capitalists and other risk investors.

Question 8. State the rules regarding the registered office of a Limited Liability Partnership (LLP) and change therein as per provisions of the Limited Liability Partnership Act, 2008.

Answer:

Rules regarding the registered office of LLP and change therein (section 13):

1. Every LLP shall have a registered office to which all communications and notices may be addressed and where they shall be received.
2. A document may be served on an LLP or a partner or designated partner thereof by sending it by post under a certificate of posting by registered post or by any other manner, as may be prescribed.
3. At the registered office and any other address specifically declared by the LLP for the purpose in such form and manner as may be prescribed.
4. An LLP may change the place of its registered office and file the notice of such change with the registrar in such form and manner and subject to such conditions as may be prescribed and any such change shall take effect only upon such filing.
5. If the LLP contravenes any provisions of this section, the LLP and its partners shall be punishable with a fine which shall not be less than ₹ 2,000 but which may extend to ₹ 25,000.

Question 9. Explain the incorporation by registration of a Limited Liability Partnership and its essential elements under the LLP Act, 2008.

Answer:

Incorporation by Registration

1. After filing of incorporation document and the declaration form issued by a professional engaged in the incorporation of LLP, the Registrar shall retain the incorporation document within 14 days:
   • Register the incorporation document, and
   • Issue a certificate of incorporation of LLP
2. The certificate shall be signed by the Registrar and authenticated by his official seal.
3. The certificate shall be conclusive evidence that LLP is incorporated by the name specified therein.

Following are the essential elements to Incorporate A LLP

Under the LLP Act, 2008, the following elements are very essential to form an LLP in India:

1. To submit complete documents to the Registrar electronically.
2. To have atleast two partners for incorporation of LLP (ie. individual or body corporate).
3. To have a registered office in India to which all communications will be made and received.
4. To appoint a minimum of two individuals as designated partners who will be responsible for the number of duties and carrying out day-to-day duties or works. Atleast one of them should be resident in India.
5. A person or nominee of a body corporate intending to be appointed as a designated partner of LLP should hold a Designated Partner Identification Number (DPIN) allotted by MCA.
6. To execute a partnership agreement between the partners, inter se or between the LLP and its partner. In the absence of any agreement the provisions as set out in the first schedule of the LLP Act, 2008 will be applied.
7. LLP should have a name.

Question 10. “An LLP (Limited Liability Partnership) is a type of partnership in which participants’ liability is fixed to the amount of money they invest whereas an LLC (Limited Liability Private/Public Company) is a tightly held business entity that incorporates the qualities of a corporation and a partnership”. In line with the above statement elaborate on the difference between LLP and LLC.

Answer:

The distinction between LLP and LLC:

Question 11. Discuss the liabilities of a Limited Liability Partnership (LLP) and its partners in case of fraud as per the provisions of the Limited Liability Partnership Act, 2008.

Answer:

The liabilities of a Limited Liability Partnership (LLP) and its partners in case of fraud as per the provisions of the Limited Liability Partnership Act, 2008

As per section 30 of the Limited Liability Partnership Act, 2008, in the event of any act carried out by an LLP, or any of its partners, with intent to defraud creditors of the LLP or any other person.

• For any fraudulent purpose, the liability of the LLP and partners who acted fraudulently shall be unlimited for all or any of the debts or other liabilities of the LLP.
• Every person who was knowingly a party to the carrying on of the business in the manner aforesaid shall be punishable with imprisonment for a term which may extend to 2 years and with a fine which shall not be less than ₹ 50,000.
• But which may extend to ₹ 5 lakhs and shall also be liable to pay compensation to any person who has suffered any loss or damage because of such conduct.However, in case any such act is carried out by a partner, the LLP is liable to the same extent as the partner unless it is established by the that such act was without the knowledge or the authority of the LLP.

Registration And Dissolution Of Firm Self-Study Questions And Answers

Question 1. What are the Steps Adopted for the Registration of a Firm?

Answer:

Registration of firm is affected:

• By sending post, or
• By delivering a statement in a prescribed form to the registrar of the area, in which any place of business of the firm is situated or proposed to be situated.

The statement must include:

• Firm’s name
• Principal Place of Business
• Other Places of Business
• Date of joining of each partner
• Partner’s full name and addresses
• Firm’s duration.

The statement should be signed by all the partners

• Registrar on being satisfied, shall record this entry in his register of firms and shall file the statement
• The registrar then issues a certificate of Registration
• An unregistered firm is not an illegal association.

Question 2. How Many Consequences of Non-Registration?

Answer:

As per Section 69:

Indian Partnership Act does not make, registration of Partnerships compulsory nor does it impose any penalty.

However, non-registration gives rise to certain disabilities such as:

• The firm or any person on its behalf cannot bring action against the third party for breach of contract unless the firm is registered and persons suing are shown in the register of firms.
• Neither the firm nor any partner can claim set off if any suit is brought by a third party against the firm.
• Partner of an unregistered firm cannot bring any action against the firm or any partner of such firm.
• Unregistered firms however can bring a suit for enforcing the right arising otherwise than out of contract.

Question 3. How to Suits allowed by the Act?

Answer:

• Dissolution of a firm
• Rendering accounts of a dissolved firm
• Realisation of property of a dissolved firm
• Set off values not exceeding 100
• Proceeding arising incidentally of value not exceeding ₹ 100
• The firm does not have a business place in territories to which this act extends
• Realisation of property of insolvent partner
• Firms having business places in areas exempted from the application of the Indian Partnership Act, of 1932.

Question 4. What is the Condition Apply on Dissolution of Firm?

Answer:

As per Section 39-47

• It takes place when the relationship between all the partners of the firm is so broken to close the business of the firm.
• As a result, the firm’s assets are sold and its liabilities are paid off.

Question 5. Distinguish between the Dissolution’ of the firm and the Dissolution of a partnership.

Answer:

Difference between the Dissolution’ of the firm and the Dissolution of a partnership

Question 6. How Many Modes of Dissolution of Firm?

Answer:

• Section 40 – Result of an agreement between all partners.
• Section 41 (a) – By adjudication of all partners, or declaration of all partners as insolvent except one.
• Section 41 (b) – By firm’s business becoming unlawful. Subject to agreement between parties, on the happening of certain contingent events.
• Section 42 (a) – By the expiry of the fixed term for which the partnership was formed.
• Section 42(b) – By the completion of the venture.
• Section 42 (c) – By death of a partner.
• Section 42 (d) – By insolvency of a partner.
• Section 42 (e) – By retirement of a partner.
• Section 43 – In case of partnership at will, by a partner giving notice of his intention to dissolve the firm. The firm dissolves from the date mentioned in the notice. If no date is mentioned, then from the date of communication of the notice.
• Section 44- By court intervention is a case of:
  1. A partner becoming unsound mind.
  2. Permanent in the capacity of partners to perform their duties.
  3. Misconduct of partners affecting the business.
  4. Willful or persistent breach of agreement by a partner.
  5. Transfer or sale of the whole interest of a partner.
  6. The improbability of business being carried on except at a loss.
  7. Court being satisfied on other just and equitable grounds.

Question 7. What do you mean by Consequences of Dissolution?

Answer:

Consequences of Dissolution

As per Section 45 – 55:

1. Continuing liability until public notice: Partners continue to be liable for any act done by them, done on behalf of the firm until public notice of dissolution is given.
2. Right to enforce winding up: Partner or his representative has a right against others, on dissolution:
   1. Apply the firm’s property in payment of the firm’s debt.
   2. Distribute surplus amongst all partners.
3. Continuing authority of partners: Authority of partner continues:
   1. So far as necessary to wind up the firm,
   2. To complete the pending transactions till the dissolution date.
4. Settlement of partnership accounts:
   1. Losses including capital deficiencies:
      1. Our first paid-out-of-profits
      2. Then out of capital
      3. Lastly partners in their profit sharing ratio.
   2. Assets including the partner’s contribution are applied in the following order:
      1. In paying debts of third parties.
      2. In paying the advances of each partner.
      3. In paying capital of each partner.
      4. The residue is distributed among partners in their profit-sharing ratio.
5. If the assets are not sufficient, the partners have to bear the loss in equal shares.
6. Personal Profits earned after dissolution: If surviving partners along with the representatives of the deceased partner carry on the firm’s business and earn some personal profits, it must be accounted for by them to other partners.
7. Return of premium on premature dissolution: On dissolution of partnership earlier than the fixed period in all cases except
   1. Death of a partner.
   2. Misconduct of partner paying a premium.
   3. Subject to an agreement containing no provision for the return of the premium, the partner paying the premium is entitled to the return of a reasonable part of the premium.
8. Rights where the partnership contract is rescinded for fraud or misrepresentation:
9. Party is entitled to:
   1. To a lien on the surplus or assets of the firm remaining after the debts of the firm are paid by him for the purchase of a share in the firm and any capital contributed by him.
   2. To rank as a creditor of the firm in respect of any payment made by him towards the debts of the firm, and
   3. To an indemnity for the partners guilty of fraud or misrepresentation against all the debts of the firm.
10. Sale of goodwill after dissolution: It can be sold separately or along with other properties of the firm.

Question 8. Describe the Buyer Rights include.

Answer:

tThe Buyer Rights include.

1. Representing himself in business continuation.
2. Maintaining his exclusive rights of business continuation.
3. Soliciting former customers and restraining the seller from it.

Question 9. Describe the Seller’s right.

Answer:

Seller’s right

Vendors can enter into competition with purchasers unless there is an agreement of valid restrictions.

Question 10. How many Mode of Giving Public Notice?

Answer:

Mode of Giving Public Notice

As per Section 72:

• Notice to Registrar of Firms u/s 63
• Publication in the official gazette.
• Publication in one vernacular newspaper circulating in the district of the principal place of business.

Registration And Dissolution Of Firm Objective Questions And Answers

Question 1. State with reasons whether the following statement is ‘Correct’ or ‘Incorrect’. A third party cannot exercise any right against a non-registered firm.

Answer:

Incorrect: Non-registration of a firm does not affect the right of third parties against the firm or its partners or the power of an official assignee or Receiver of the court.

Therefore, non-registration of a firm will not make the partnership agreement or any transaction between the partners and third parties void (Section 69 of the Partnership Act, 1932).

Question 2. State with reasons in brief whether the following is ‘Correct’ or ‘Incorrect’. A partner making advance of money to the firm, beyond the amount of his agreed capital is entitled to interest on such advanced money.

Answer:

Correct: The general rule is that partners are not considered debtors and creditors among themselves and hence advances made to the firm by a partner cannot be regarded as a loan.

But clause (d) of Section 13 of the Indian Partnership Act, 1932 lays down that a partner who makes any payment or advance of money to the firm beyond the amount of his greed capital is entitled to interest thereon at the rate of six percent per annum, subject to a contract between the partners.

Question 3. State with reasons in brief whether the following is ‘Correct’ or ‘Incorrect’.

Answer:

Correct: Though registration of a firm is not compulsory unregistration creates certain disabilities.

• The general principle under Section 69 of the Indian Partnership Act, 1932 is that an unregistered firm cannot file a suit against a third party to enforce a right arising from a contract.
• But it is an exception to the general rule that an unregistered firm may institute a suit or claim of set-off if the value of the suit does not exceed ₹ 100.

Question 4. State with reasons in brief whether the following is ‘Correct’ or ‘Incorrect’. A partner of an unregistered firm can sue for the dissolution of a firm.

Answer:

Correct: According to Section 69(3)(a) of the Indian Partnership Act, 1932, a partner of an unregistered firm can sue for the dissolution of the firm.

Distinguish Between Registration And Dissolution Of Firm

Question 1. Distinguish between a Partnership and a Joint Stock Company.

Answer:

Partnership and Joint Stock Company:

1. Personality: A firm is not a legal entity whereas a company is a juridical person distinct from its members.
2. Agency: In the case of a firm, every partner is an agent of other partners as well as of the firm but in the case of a company, members are not agents of the company.
3. Profits: Profits of a firm are among the partners according to the deed of partnership. But in the case of a company, distribution of profit is optional as the company may or may not declare dividends.
4. Liability: In a firm, the liability of partners is unlimited but in a company, liability is always limited to the amount of shares or guarantee.
5. Property: The property of a firm is the joint estate of all the partners whereas in a company, the property belongs to the company and not to shareholders.
6. Transfer of share: In the case of partnership transfer of a partner’s right is not possible without the consent of all the partners, though his interest can be assigned to a third party who has a right to share in profits but has no other right, but in the case of a public company, share is transferable and quoted on stock exchange.
7. Management: In partnership, management is by partners, but in a company, the Board of Directors does the management, shareholders only attend general meetings to vote.
8. Several members in the partnership is a minimum of 2 and a maximum of 20 (in banking it is 10) but in the case of a private company, the minimum is 2 and. a maximum of 50 excluding past and present employees. In the case of a public company, it is 7, and no restriction on the maximum.

Question 2. Distinguish between ‘Dissolution of firm’ and ‘Dissolution of partnership’.

Answer:

Dissolution of firm Vs. Dissolution of Partnership:

Registration And Dissolution Of Firm Descriptive Questions And Answers

Question 1. Define ‘Partnership’ and state the procedure for its registration.

Answer:

‘Partnership’

Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all. (Section 4).

The above definition of the Partnership given by the Indian Partnership Act lays down three important elements:

1. It must be a result of an agreement between two or more persons;
2. The agreement must be to share the profits of the business; and
3. The business must be carried on by all or any of them acting for all.

All the above elements must co-exist before a partnership can come into existence. Thus existence of an agreement, a business, sharing of profits, and mutual agency form a core part of the existence of a partnership.

Procedure for Registration: The firm has to file a statement in the prescribed form either in person by post with the prescribed fee, or with the Registrar of the Firms of the area in which the firm is situated or is to be situated.

The Statement is to state the following particulars:

1. The firm’s name:
2. The principal place of business.
3. The name of its other places of business.
4. The date of joining of each partner.
5. The names in full and the permanent addresses of the partners, and
6. The duration of the firm.

When the Registrar is satisfied that the above-mentioned provisions have been complied with, he shall record an entry of this statement in the. register (called the Register of Firms) and shall file the statement.

• The registration shall be completed only when the firm receives a certification of Registration.
• However, registration is deemed to be complete as soon as the application in the prescribed form and with the prescribed fee with necessary details concerning the particulars of the partnership is delivered to the Registrar.

The recording of an entry in the Register of Firms is a routing duty of the Registrar.

Question 2. Explain the meaning of ‘dissolution of a partnership firm’. When does a dissolution of a firm take place?

Answer:

The meaning of ‘dissolution of a partnership firm’

Dissolution of a firm means the discontinuation of the jural relation existing between all the partners of the firm.

• But when only one of the partners retires or becomes incapacitated from acting as a partner due to death, insolvency, or insanity, the partnership, i.e. the relationship between such a partner and others is dissolved, but the rest may decide to continue.
• In such cases, there is in practice no dissolution of the firm. The particular partner goes out, but the remaining partners carry on the business of the firm.

In the case of dissolution of the firm, on the other hand, the whole firm is dissolved. The partnership terminates between each and every partner of the firm.

Section 39 of the Indian Partnership Act, defines it as follows: ‘The dissolution of partnership between all the partners of a firm is called the dissolution of the firm”.

Thus, the business is stopped and the relations between all the partners come to an end.

When does a dissolution of a firm take place?

Dissolution of a firm may take place in the following manner (Sections 39-44):

1. As a result of any agreement between all the partners, this is called dissolution by agreement.
2. By the adjudication of all the partners, or of all the partners but one, as insolvent, this is known as compulsory dissolution.
3. If the business of the firm becomes unlawful, this is known as compulsory dissolution.
4. As per the agreement, upon happening of any of the following contingencies:
   • Efflux of time;
   • Completion of the venture for which it was entered into;
   • Death of a partner;
   • Insolvency of partner.
   • In case of the death of a partner, the number of the partners does not exceed two, the firm is to be dissolved. In case the number of partners is more than two, the firm may continue even after the death of one partner, provided other partners agree to do so.
5. By a partner giving notice of his intention to dissolve the firm, in case of partnership at will and the firm being dissolved as from the date mentioned as from the date of the communication of the notice; and
6. By the intervention of the court in the case of:
   • A partner becoming of unsound mind;
   • Permanent incapacity of a partner;
   • Misconduct of a partner affecting the business;
   • Wilful persistence in breach of agreement by a partner;
   • Transfer or sale of the whole interest of the partner;
   • The improbability of the business being carried on save at a loss;
   • The court was satisfied on other equitable grounds that the firm should be dissolved.

Question 3. What will be the consequences in the relationships partners of a partnership firm resulting from:

1. Insolvency of partner, and
2. Death of a partner?

Answer:

Consequences of Insolvency and death of a partner:

1. Insolvency of a partner (Section 34): When a partner in a firm is adjudicated insolvent. He ceases to be a partner on the date of the order of adjudication whether or not the firm is thereby dissolved.
   1. His estate (which thereupon vests in the official assignee) ceases to be liable for any act of the firm done after the date of the order
   2. The firm also is not liable for any act of such a partner after such date(whether or not under a contract between the partners the firm is dissolved by such adjudication).
2. Death of a partner (Section 35): Where under a contract between the partners the firm is not dissolved by the death of a partner, the estate of a deceased partner is not liable for any act of the firm done after his death (Section 35).

Ordinarily, the effect of the death of a partner is the dissolution of the partnership, but the rule concerning the dissolution of the partnership by death of a partner is subject to a contract between the parties and the partners are competent to agree.

• The death of one will not have the effect of dissolving the partnership as regards the surviving partners unless the firm consists of only two partners [Commissioner of Income Tax v. G.S Mill, AIR (1966) S.C. 24].
• Section 35 deals with the situation where the firm continues its business without dissolution and lays down that, in such a case, the estate of a deceased partner is not to be held liable for any act of the firm done after his death.
• Proviso to Section 45 lays down an incidental rule applicable to a case where the death of a partner has caused the dissolution of the firm.

So that the estate of a deceased partner may be absolved from liability for the future obligations of the firm, it is not necessary to give any notice either to the public or the person having dealings with the firm.

Question 4. State the matters for which a partner of a partnership firm is required to give ‘Public Notice’ under the provision of the Indian Partnership Act, 1932. State also the consequences for not giving a public notice where it is required to be given under the Partnership Act.

Answer:

Public Notice: As per the requirements of Section 72 of the Indian Partnership Act, 1932 a public notice has to be given:

1. On the retirement or expulsion of a partner from a registered firm.
2. On the dissolution of a registered firm.
3. On the election to become or not to become a partner in a registered firm by a minor on his attaining majority.

Consequences of not giving public notice as required above;

1. If a minor admitted to the benefits of partnership under Section 30 fails to give public notice within 6 months of his attaining majority or of his obtaining knowledge that he had been admitted to the benefits of a partnership.
2. Whichever date is later, that he has elected to become or not to become a partner in the firm, he shall become a partner in the firm on the expiry of the said 6 months and is liable as a partner of the firm.
3. If a retiring partner does not give public notice of the retirement from the firm under Section 32, he and the other partners shall continue to be liable as partners to third parties for any act done by any of them which would have been an act of the firm if done before the retirement.
4. If in case of expulsion of a partner from the firm, a public notice is not given, the expelled partner and the other partners shall continue to be liable to third parties dealing with the firm as in the case of a retired partner. (Section 33).
5. If public notice is not given on the dissolution of a registered firm, the partners shall be liable to third persons for any act done by any of them which would have been an act of the firm if done before the dissolution (Section 45).
6. When public notice is given of the dissolution of a firm, no partner shall have the authority to bind the firm except for certain specific purposes as given in Section 47.
7. According to this section, after the dissolution of a firm, the authority of each partner to bind the firm and the mutual rights and obligations of the partners shall continue:
   • So far as may be necessary wind up the affairs of the firm; and
   • To complete transactions begun but unfinished at the time of the dissolution.

Question 5. Explain briefly the following: Dissolution of partnership may or may not involve the dissolution of the firm.

Answer:

Dissolution of partnership may or may not involve the dissolution of the firm: The Indian Partnership Act, 1 932 makes a distinction between the dissolution of a partnership and the dissolution of a firm.

Section 39 of the Act provides that the dissolution of a partnership between all the partners of a firm is called the dissolution of the firm. Dissolution of a partnership involves change in the relation of partners but it does not end the partnership.

For example, where X, Y, and Z were partners in a firm and X died or retired, the partnership firm would come to an end. If Y and Z agree to continue the business, the partnership between X, Y, and Z will come to an end, although the firm of Y and Z continue in the firm.

• So the dissolution of a partnership may or may not include the dissolution of the firm, but the dissolution of the firm necessarily means the dissolution of the partnership as well.
• On the dissolution of the partnership, the business may be carried on by the remaining constituted firm but on, the dissolution of the firm, all business must be stopped, and the assets of the firm realized and distributed among the partners.

Question 6. Is registration of a partnership firm necessary? Discuss the effects of non-registration of a firm.

Answer:

The registration of a firm is not compulsory. However, an unregistered firm suffers from certain disabilities so registration is necessary.

The effects of non-registration as provided in Section 69 of the Indian Partnership Act, 1932 are:

• In an unregistered firm, a partner cannot file a suit against the firm on any other partner for enforcing his conferred in the act or arising from a contract.
• No suit can be filed on behalf of an unregistered firm against any third party to enforce a right arising from a contract.
• An unregistered firm or any partner thereof cannot claim set off in a suit instituted against the firm by a third party to enforce a right arising from a contract.

But the non-registration of a firm does not attract the following rights:

• The right of a third party to sue the firm or any other partner.
• The right of a partner to sue for dissolution of a firm or for accounts of a dissolved, firm or any right or power to realize the property of a dissolved firm.
• The power of the official assignee or receiver to realize the property of an insolvent partner.
• The rights of firms having no place of business in India.
• A suit for set off not exceeding ₹ 100 in an amount which is of a nature cognizable by Small Causes Court.

Question 7. Answer briefly the following: Mode of effecting registration of a partnership firm.

Answer:

Mode of Effecting Registration of a Partnership Firm: The registration of a partnership firm may be effected, at any time by sending by post or delivering to the Registrar of the area in which any place of business of the firm is situated or proposed to be situated, a statement in the prescribed form.

• The firm doesn’t have to be registered from the very beginning. When the partners so decide they may go for registration of the firm.
• However, the application is to be made by then in the prescribed form as per the provisions of Section 58 of the Indian Partnership Act, of 1832.

The statement must be accompanied by the prescribed fee and must contain the following matters:

1. The firm’s name.
2. The principal place of business.
3. The names of its other places of business.
4. The date of joining the firm by each partner.
5. The name in full and the permanent addresses of the partners.
6. The duration of the firm.

The aforesaid statement is signed by all the partners or by their agents specially authorized on this behalf. Each partner so signing it shall also verify it in the manner prescribed.

• When the Registrar is satisfied that the above-mentioned provisions have been complied with, he shall record an entry of this statement in the register’ (called the Register of Firms) and shall file the statement.
• Subsequent alterations like alterations in the name, place of business, constitution of the firm, etc. may also be registered.

Question 8. You want to form a partnership firm. Would you like to get it registered? If so, why? Also, state the procedure you have to follow for getting the firm registered.

Answer:

Yes, the firm should be registered under the Indian Partnership Act, of 1932 since its non-registration has the following, consequences; (Section 69).

1. A person suing as a partner of an unregistered firm cannot sue the firm or any partners of the firm to enforce a right arising from a contract or conferred by the Partnership Act.
2. An unregistered firm cannot sue a third party to enforce a right arising from a contract.
3. An unregistered firm or any partner thereof cannot claim a set-off in a proceeding instituted against the firm by a third party to enforce a right arising from a contract.

Non-registration, however, does not affect the rights of a firm or of its partners having no place of business in India. It also does not affect the right to any suit or claim of set-off not exceeding ₹ 100.

Procedure; (Sections 58 and 59):

The registration of a firm may be effected at any time by applying the form of a statement and giving the necessary information to the Registrar of Firms of the area. The application shall be accompanied by the prescribed fee. It shall state:

1. The name of the firm;
2. The place or principal place of business of the firm;
3. The names of other places where the firm carried on business.
4. The date, when each partner joined the firm;
5. The names in full and permanent addresses of the partners;
6. The duration of the firm.

The statement shall be signed by all the partners or by their agents specially authorized on this behalf. [Section 58(1)]. It shall also be verified by them in the prescribed manner. [Section 58(2)].

• When the Registrar is satisfied that the above provisions have been duly complied with, he shall record an entry of the statement in the Register of Firms and file the statement. (Section 59).
• He shall then issue under his hand a certificate of registration. Registration is effective from the date when the Registrar files.
• The statement makes entries in the Register of Firms and not from the date of presentation of the statement to him.

Question 9. Explain the following: Dissolution of a Partnership Firm by the intervention of the Court.

Answer:

Dissolution of a firm by the intervention of the Court:

A firm can be dissolved by the intervention of the Court on the following grounds:

1. A partner becoming of unsound mind;
2. Permanent, incapacity of a partner to perform his duties as such.
3. Misconduct of a partner affecting the business.
4. Willful or persistent breaches of agreement by a partner.
5. Transfer or sale of the whole interest of a partner.
6. The improbability of the business being carried on save at a loss.
7. The Court was satisfied on other equitable grounds that the firm should be dissolved.

Question 10. What are the consequences of Non-Registration of a Partnership Firm? Discuss.

Answer:

The consequences of Non-Registration of a Partnership Firm

Under the English law, the registration of firms is compulsory. But the Indian Partnership Act does not make the registration of firms compulsory nor does it impose any penalty for non-registration.

• However, under section 69, nonregistration of partnership gives rise to many disabilities.
• Thus, the consequences of non-registration have a persuasive pressure on their registration.

These disabilities are as follows:

1. No suit in a civil court by the firm or other co-partners against a third party: The firm or any other partner on its behalf cannot bring an action against a third party for breach of contract entered into by the firm unless the firm is registered and the person suing are or have been shown in the register of firms as partners in the firm.
2. No relief to partners for set-off of claim: In an action against the firm by a third party, neither the firm nor the partner can claim any set-off, if the suit is valued at more than ₹ 100.
3. Aggrieved partner cannot bring legal action against other partner or the firm: A partner of an unregistered firm is precluded from bringing legal action against the firm or any person alleged to be or to have been a partner in the firm. (But such a person may sue for dissolution of firm).
4. A third party can sue the firm: In the case of an unregistered firm, an action can be brought against the firm by a third party.

Question 11. State any four grounds on which the Court may dissolve a partnership firm in case any partner files a suit for the same.

Answer:

The four grounds as mentioned under Section 44 on which the Court can dissolve a partnership firm are:

1. Insanity or Unsound mind: Where a partner (not a sleeping partner) has become of unsound mind, the Court may dissolve the firm on a suit of the other partners or by the next friend of the insane partner.
2. Permanent incapacity: When a partner other than the partner suing has become in any way permanently incapable of performing his duties as a partner, then the Court may dissolve the firm.
3. Misconduct: Where a partner, other than the partner suing, is guilty of conduct which is likely to affect prejudicially the carrying on of business, the Court may order for dissolution of the firm, by giving regard to the nature of business.
4. Persistent breach of agreement: Where a partner other than the partner suing, wilfully or persistently commits a breach of agreements relating to the management of the affairs of the firm or the conduct of its business, or otherwise so conducts himself in matters relating to the business that it is not reasonably practicable for other partners to carry on the business in partnership with him.

Question 12. Indian Partnership Act does not make the registration of firms compulsory nor does it impose any penalty for non-registration.” Explain. Discuss the Various disabilities or disadvantages that a nonregistered partnership firm can face in brief.

Answer:

Under the English Law, the registration of firms is compulsory. But the Indian Partnership Act does not make the registration of firms compulsory nor does it impose any penalty for non-registration.

However, section 69, of the Act, gives rise to several disabilities which will attach to an unregistered partnership firm. Although registration of firms is not compulsory, the consequences or disabilities of non-registration have a persuasive pressure for their registration.

These disabilities are as follows:

1. No suit in a civil court by the firm or other co-partner against the third party: The firm or any other person on its behalf cannot bring an action against the third party for breach of contract unless the firm is registered.
2. No relief to partner for set off of claim: Neither the firm nor the partner can claim any set off if the suit is valued at more than ₹ 100.
3. Aggrieved partner cannot bring legal action against the other partner of the firm: A partner of an unregistered firm is precluded from bringing legal action against the firm or any person alleged to be or to have been a partner in the firm.
4. A third party can sue the firm: In the case of an unregistered firm, an action can be brought against the firm by a third party.

Question 13. Dissolution of a firm is different from dissolution, of Partnership”. Discuss.

Answer:

As per the Indian Partnership Act, of 1932, the dissolution of a partnership between all partners of a firm is called the “dissolution of the firm.” The particular partner goes out, but the remaining partner carries on the business of the firm, it is called dissolution of the partnership.

Dissolution of Firm Vs. Dissolution of Partnership

Question 14. Referring to the Provisions of the Indian Partnership Act, of 1932, answer the following:

1. What are the consequences of the Non-Registration of a Partnership firm?
2. What are the rights that won’t be affected by the Non-Registration of the Partnership firm?

Answer:

1. Consequences of Non-Registration of a Partnership (Section 69) According to the Indian Partnership Act, of 1932 the registration of a partnership firm is optional but it has to face various disabilities:
   • No suit in a civil court by a firm or other co-partners against a third party: The firm or any person on its behalf cannot take any legal action against the third party for a breach of a contract entered into by the firm until and unless the firm is registered.
   • No relief to partners for set-off of claim: If an action is brought against the firm by a third party then neither the firm nor the partner can claim any set-off if the suit is valued for more than ₹ 100 or pursue other proceedings to enforce the rights arising from any contract.
2. Non-registration of a partnership firm, however, affects the following rights:
   • The right of a third party to sue the firm or
   • The right of partners to sue feel the dissolution of the firm or for the settlements of the accounts of a dissolved firm.
   • The power of an official assignee to release the property of the insolvent partner and to bring an action.
   • The right to sue or claim a set-off if the value of the suit does not exceed ₹ 100 in value.

Question 15. Subject to agreement by partners, state the rules that should be observed by the partners in settling the accounts of the firm after dissolution under the provisions of The Indian Partnership Act, 1932.

Answer:

Subject to the Contract between the partners, after the distribution of the firm, its accounts must be settled as follows.

1. Payment of Losses: Losses including deficiencies of capital are to be paid first out of profits then out of capital and lastly by partners individually in the proportion in which they have contributed capital.
2. Application of Assets: The assets of the firm, including any sums contributed by the partners to make up the deficiencies of capital, must be applied in the following manner and order:
   • In payment of debt to third parties
   • In payment of each partner’s advances
   • In payment of each partner’s Surplus Capital i.e. which is over capital ratio.
   • The remaining is divided amongst partners in profit sharing ratio.

Question 16. Explain the grounds on which the court may dissolve a partnership firm in case any partner files a suit for the same.

Answer:

The Court may dissolve a firm on any of the following grounds if a partner files a suit

1. Insanity or unsound Mind – Where an active partner (not sleeping partner) has become of unsound mind, then the court may dissolve the firm on a suit filed by any other partner or by the next friend of such unsound partner. Although, temporary sickness, is not a ground for the dissolution of the firm.
2. Permanent Incapacity – Where an active partner (but not sleeping partner) has become permanently incapable of performing his duties as a partner, then the Court may dissolve the firm on a suit filed by any other partner. Such permanent incapacity may result from physical disablement, illness, etc.
3. Misconduct – Where a partner is guilty of misconduct, which is likely to affect prejudicially the carrying on of business, then the Court may order for dissolution of the firm by giving regard to the nature of business upon a suit filed by any other partner. It is not necessary that misconduct must relate to the conduct of the business. If misconduct is adversely affecting the business, then it is a sufficient ground.
4. Persistent breach of agreement – Where a partner wilfully or persistently commits a breach of agreements relating to the business and the management of the affairs of the firm, or the conduct of the business, or otherwise so conducts himself in a matter relating to the business in such a way that other partner can’t carry on the business in partnership with him, then the court may order for dissolution of the firm on a suit filed by any other partner.
5. Transfer of interest – Where a partner, transfers the whole of his interest in the firm to a third party or allows his share to be charged or sold by the Court, in the recovery of arrears of land revenue due by the partner, then the Court may order for dissolution of the firm on a suit filed by any other partner.
6. Continuous or Perpetual losses – Where the business of the firm cannot be carried on except at a loss, then the Court may order for dissolution of the firm. In such a case suit may be filed by any partner of the firm.
7. Just and Equitable Grounds – Where the Court considers any other ground to be just and equitable for the dissolution of the firm, then it may dissolve the firm.

Question 17. “Indian Partnership Act does not make the registration of firms compulsory nor does it impose any penalty for non-registration.” In light of the given statement, discuss the consequences of non-registration of the partnership firms in India. Also, explain the rights unaffected due to non-registration of firms.

Answer:

1. A consequence of non-registration (Section 69): Under the English Laws, the registration of firms is compulsory. Therefore, there is a penalty for non-registration of firms.
   • But the Indian Partnership Act does not make the registration of firms compulsory nor does it impose any penalty for non-registration.
   • However, under Section 69, non-registration of partnership has given rise to some disabilities which we shall presently discuss.
   • Although registration of firms is not compulsory, yet the consequences or disabilities of non-registration have a persuasive pressure for their registration. These disabilities briefly are as follows:
2. No suit in a civil court by the firm or other co-partners against a third party: The firm or any after person on its behalf cannot bring an action against the third party for a branch of the contract entered into by the firm unless the firm is registered and the persons suing are or have been shown in the register of firms as partners in the firm.
   • In other words, a registered firm can only file a suit against a third party and the persons suing have been in the register; of firms as partners in the firm.
3. No relief to partners for set-off of claim: If an action is brought against the firm by a third party, then neither the firm nor the partner can claim any set-off if the suit is valued for more than ₹ 100 or pursue other proceedings to enforce the rights arising from any contract.
4. Aggrieved partner cannot bring legal action against other partner or the firm: A partner of an unregistered firm (or any other person on his behalf) is precluded from bringing legal action against the firm or any person alleged to be or to have been a partner in the firm.
   • But, such a person may sue for dissolution of the firm dr for accounts arid realization of his share in the firm’s property where the firm is dissolved.
5. A third party can sue the firm: In the case of an unregistered firm, an action can be brought against the firm by a third party.

Exception: Non-registration of a firm does not, however, affect the following rights:

1. The right of third parties to sue the firm or any partners.
2. The right of partners to sue for the dissolution of the firm the settlement of the accounts of a dissolved firm, or the realization of the property of a dissolved firm.
3. The power of an official assignee, receiver of the court to release the property of the insolvent partner and to bring an action.
4. The right to sue or claim a set-off if the value of the suit does not exceed ₹ 100 in value.
5. The right to suit and proceeding instituted by legal representative or heirs of the deceased partner of a firm for accounts of the firm or to realize the property of the firm.

Question 18. Explain about the registration procedure of a partnership firm as prescribed under the Indian Partnership Act, of 1932.

Answer:

As per section 58 of the Indian Partnership Act, 1932, following the registration procedure of a partnership firm.

• The registration of a firm may be effected at any time by sending by post or delivering to the registrar of the area in which any places of business of the firm is situated or proposed to be situated.
• A statement in the prescribed form and accompanied by the prescribed fee, stating the firm’s name place or principal place of business firm the names of any other places where the firm carries on business.

The date when each partner joined the firm, the names full and permanent addresses of the partners, and the duration of the firm.

1. The statement shall be signed by all the partners, or by their agents specially authorized on this behalf.
2. When the Registrar is satisfied that the provisions of section 58 have been duly complied with, he shall record an entry of the statement in a Register called the Register of Firms and shall file the statement.
3. The registrar shall then issue a certificate of Registration. However, registration is deemed to be completed as soon as an application in the prescribed form with the prescribed fee and necessary details concerning the particulars of the partnership are delivered to the Registrar.
4. If the statement in respect of any firm is not sent or delivered to the Registrar within the time specified in sub-section (1A) of section 58, then the firm may be registered on payment, to the Registrar of a penalty of one hundred rupees per year of delay or a part thereof.

Question 19. M/S XYZ and Associates, a partnership firm with X, Y, and Z as senior partners were engaged in the business of carpet manufacturing and exporting to foreign countries. On 25^th Aug. 2016, they inducted Mr. G an expert in the field of carpet manufacturing as their partner. On 10^th Jan. 2018, Mr. G was blamed for unauthorized activities and thus expelled from the partnership by the united approval of the rest of the partners.

1. Examine whether the action by the partners was justified or not.
2. What should be the factors to be kept in mind before expelling a partner from the firm by other partners according to the provisions of the Indian Partnership Act, 1932?

Answer:

A partner may not be expelled from a firm by a majority of partners except in exercise, in good faith of powers conferred by contract between the partners. It is, thus, essential that:

1. The power of expulsion must have existed in a contract between the partners.
2. The power has been exercised by a majority of the partners, and
3. It has been exercised in good faith.

If all these conditions are not present the expulsion is not deemed to be done in bonafide interest of the business of the firm.

If a partner is otherwise expelled, the expulsion is null and void. Thus, the action taken by a partner in expelling partner G is valid.

Question 20. Mr. M is one of the four partners in M/s. XY Enterprises. He owes a sum of 16 crore to his friend Mr. Z which he is unable to pay on due time. So he wants to sell his share in the firm to Mr. Z to settle the amount. In light of the provisions of The Indian Partnership Act, of 1932, discuss each of the following:

1. Can Mr. M validity transfer his interest in the firm by way of sale?
2. What would be the rights of the transferee (Mr. Z) in case Mr. M wants to retire from the firm after 6 months from the date of transfer?

Answer:

1. As per Section 29 of The Indian Partnership Act, of 1932.
   1. A share in a partnership firm is transferable like any other property.
   2. But as this relationship is based on confidence,
   3. The assignee of a partner’s interest by sale, mortgage, or otherwise cannot enjoy the same rights and privileges as the original partner.
2. The rights of a transferee on the retirement of the transferring partner are as follows:
   1. The transferee is entitled to receive the share of the assets of the firm to which the transferring partner was entitled.
   2. To ascertain his share, he is entitled to access and inspect the accounts of the firm.

Four Partners Conclusion:

In the given case,

1. Mr. M can validly transfer his interest in the firm by way of sale.
2. Mr. Z is entitled to aforesaid rights after the retirement of Mr. M from the firm.

Relations Of Partners Self Study Questions And Answers

Question 1. What are the Relations of Partners to One Another?

Answer:

The Relations of Partners to One Another

• It arises through an agreement that provides for the rights and duties of partners.
• If articles are silent, rights and duties are governed by the Act.

Question 2. How many Rights of Partners are there?

Answer:

Rights of Partners

• To take part in management
• To express opinion
• To inspect and take out copies of Books of Accounts
• To share profits equally
• To have an interest in capital
• To have an interest in advances
• Right to be indemnified
• To prevent the introduction of the new partner
• Implied Authority
• Right to dissolve
• Profits after retirement or death.

Question 3. What are the Duties and Liabilities of partners?

Answer:

The Duties and Liabilities of partners

• To carry on the business of the firm to the greatest common advantage
• Being diligent and honest
• Being just good faithful
• To render accounts and information
• To indemnify the firm (Section 10)
• Not to make any secret profits
• Not to hold and use the property of the firm.
• Not to start a business in competition with the firm.
• Not to receive any remuneration
• Not to transfer his interest
• To act within the scope of his authority
• To share losses.

Question 4. Describe the Partnership Property.

Answer:

The Partnership Property

As per Section 14:

• It is also known as “property of the firm”, “Partnership assets”, “Joint stock”, “Or joint estate”.
• It represents the property to which all partners and entitled collectively.

Question 5. What conditions are included in Partnership Property?

Answer:

Conditions are included in Partnership Property

1. All property, rights, and interests that partners may have brought into the common stock as their contribution.
2. All property, rights, and interests which are acquired or purchased by the firm in the course of business.
3. Goodwill of the business.
   • Every partner is a joint owner of partnership property.
   • Every partner is entitled to hold and apply the same exclusively for business purposes.
   • A partner’s property being used for a firm’s business does not automatically makes it a firm’s property.

Question 6. Write a short note on Goodwill.

Answer:

Goodwill

• Goodwill is defined as the value of the reputation of a business house concerning profits expected in the future over and above normal profits.
• It is a partnership property.
• In case of dissolution of the firm, every partner has a right according to the deed in the absence of any agreement, to have a share in the goodwill on it being sold.
• It can be sold separately or along with other properties of the firm.

Question 7. Which condition Applies in the Case of Personal Profit Earned by Partners?

Answer:

As per Section 16:

If a partner derives any profits for himself from any business transaction of the firm or use of the property of the firm or carries on a competing business, he must account for and pay all the profits made by him to the firm.

Question 8. Describe the Relation of partners to third parties.

Answer:

The Relation of partners to third parties

• Every partner is the agent of the firm for the purpose of business of the firm.
• Every partner is both the principal and agent.
• The law of partnership is regarded as a breach of the law of agency.

Act of every partner binds the firm and other partners unless:

• The acting partner has no authority to act for the firm in such a matter
• A person with whom he is dealing knows that he has no authority
• Believes such a person to be a partner.

Question 9. Which Conditions Apply for implied authority?

Answer:

• The act must relate to the normal business of the firm.
• Act must be, done in the usual way of carrying on the firm’s business.
• The act must be done in the firm’s name.

Question 10. Which Acts Apply within implied authority?

Answer:

• To buy, sell, and pledge goods on behalf of the firm.
• To raise loans on the security of such assets.
• To receive payments of debts due to the firm.
• To accept, make, and issue bills of exchange, etc on the firm’s behalf.
• To engage servants for the firm’s business.
• To take on lease premises on the firm’s behalf.

Question 11. Which Acts Apply Beyond the Implied Authority?

Answer:

As per Section 19(2):

• Submission of a dispute relating to the business of the firm to arbitration.
• Opening a bank account on the firm’s behalf in his name.
• Comprising of relinquishing any claim or portion of claim against a third party by the firm.
• Withdrawing a suit or proceedings filed on behalf of the firm.
• Admitting any liability in a suit or proceedings against the firm.
• Transferring immovable property of the firm.
• Entering into partnership on the firm’s behalf.

Question 12. What are the Extensions and Restrictions of Partners on Implied Authority?

Answer:

As per Section 20:

• The partners may either extend or restrict the implied authority of any partner by contract between them.
• The third party is not affected by a secret limitation’ of a partner’s implied authority unless he had actual notice of it.
• All partner’s consent is required for it.

Question 13. Describe the Partner’s authority in an Emergency.

Answer:

The Partner’s authority in an Emergency

As per Section 21:

Subject to provisions of section 20, each partner binds the firm by all acts done in the case of emergency, to protect the firm from any loss provided, As he has acted as a man of ordinary prudence.

Question 14. Describe the Liability to third parties.

Answer:

As per Sections 25 to 27:

Section 25: Contractual liability:

Every partner is liable jointly and severally for all acts or omissions binding the firm while he is a partner.

Question 15. What is Section 26: Liabilities for fort or wrongful Act?

Answer:

Liabilities for fort or wrongful Act

(Generally, other partners are not liable for one partner’s fort but where the fort is committed by the authority of other partners then partners are liable).

The firm is liable to the same extent as the partner for any loss or injury caused to the third party by the wrongful act of the partner if they are done by the partner acting:

• In the ordinary course of business
• With the partner’s authority.

Question 16. Which Liabilities arise for misappropriation by a partner?

Answer:

When a partner, acting within his apparent authority, receives money or other property from a third person and applies it, or.

where a firm, in business course, receives money or property from a third party and is misapplied by a partner, while it is in the firm’s custody is liable to make good the loss.

Question 17. What are the Rights of the Transferee of a partner’s interest?

Answer:

The Rights of the Transferee of a partner’s interest

As per Section 29:

1. During the continuance of the partnership, if a partner transfers his interest, the transferee will not be entitled to it.
   • Interfere with the conduct of business
   • Require account, or
   • Inspect books of the firm.
   • He will only be entitled to share of profits and he is bound to accept the same without challenging the accounts.
2. At the time of dissolution or retirement, the transferee is entitled, against other remaining partners:
   • To receive the share of assets of the firm to which the transferring partner was entitled, and
3. To ascertain the share, he is entitled to an account from the date of dissolution.

Question 18. What are the benefits that arise on the admission of a minor partner in a Partnership Firm?

Answer:

The benefits that arise on the admission of a minor partner in a Partnership Firm

As per Section 30:

• Minor is a person who has not completed 18 years of age and, thus, cannot become a partner as he is not competent to contract.
• As per section 30,’ he can, however, be admitted to the benefits of partnership with the mutual consent of all partners. No partnership firm can be formed only with minors.
• A minor’s agreement is altogether void
• If a minor has to be admitted into the benefits of partnership, there must be at least 2 major partners.

Question 19. What are the Rights of Minorities?

Answer:

Rights of Minorities

• Section 30(2): Share profits of the firm
• Section 30(2): Inspect and copy the book of accounts of the firm.
• Section 30(4): Can file a suit for accounts and his share in the firm but only when severing his connection with the firm.
• Section 30 (5): On attaining majority he may within 6 months either

Question 20. What are the Liabilities of a Minor?

Answer:

Liabilities of a Minor

• Section 30(3): His liability is limited to the extent of his share in the firm.
• Section 30(3): He is liable for all acts of the firm but he is not personally liable.
  • Within 6 months of his attaining majority or
  • On his obtaining knowledge of had been admitted to the benefits of partnership, whichever is later, he may give a public notice- of not electing to become a partner.

Question 21. What are the Liabilities of an Incoming Partner?

Answer:

Liabilities of an Incoming Partner

As per Section 31(2):

• Liability of the new partner ordinarily commences from the date of his admission.
• He can also agree to be liable for obligations incurred before that date by the firm.
• The new firm constituted, may agree to assume liability for existing debts of the old firm.
• Creditors may agree to accept the new firm as their debtor and discharge the old partners.
• Creditors’ consent is necessary.

Question 22. What are the Agreements that arise between partners in the case of Novation?

Answer:

The Agreements that arise between partners in the case of Novation

• Novation refers to a tripartite agreement between:
• Firm’s creditor
• Partner existing at the time when the debt was incurred.
• Incoming partner.

Question 23. What are the Liabilities of an outgoing or retiring partner?

Answer:

The Liabilities of an outgoing or retiring partner

As per Section 32:

1. Liability of such partner continues until a public notice of his retirement has been given.
2. He remains liable for the firm’s acts done before his retirement unless there is an agreement made.
3. He may be discharged by novation.

Question 24. What do you mean by Insolvency of partner?

Answer:

Insolvency of partner

As per Section 34:

• Such a partner ceases to be a partner on the date of the order of adjudication.
• His estate cases are to be liable for any act of the firm done after that date of order.
• The firm is also not liable for any act of such a partner after such date.

Question 25. Write a short note on the Death of Partner.

Answer:

Death of Partner

As per Section 35:

If the firm is not dissolved, the estate of a deceased partner is not liable for acts of the firm after his death.

Question 26. What are the Rights of Outgoing Partners to Carry on Competing Business?

Answer:

Rights of Outgoing Partners to Carry on Competing Business

As per Section 36:

1. An outgoing partner may carry on business competing with that of the firm and he may advertise such business, but subject to contract to the contrary, he may not:
   • Use the firm name
   • Represent himself as carrying on the business of the firm or
   • Solicit the custom of persons who were dealing with the firm before he ceased to be a partner.
2. Partner may agree not to carry on a similar business within a specified period or specific local limits and any such agreement will be treated as valid if refractions of restrain are reasonable.

Question 27. What are the Rights of Outgoing Partners in Certain Cases to Share Subsequent Profits?

Answer:

Rights of Outgoing Partners in Certain Cases to Share Subsequent Profits

As per Section 37:

The representatives of the deceased partner would be entitled, at their discretion to interest @ 6% p.a. on the amount due from the date of death to the date of payment or to that portion of profit which is earned by the firm with the amount due to the deceased partner.

Question 28. What do you understand by Revocation of Continuing guarantee by change in the firm?

Answer:

Revocation of Continuing guarantee by change in the firm

As per Section 38:

• A continuing guarantee is given to a firm or third party:
• In respect of a transaction of the firm in the absence of any contrary agreement, “revoked as to future transactions from the date of any change in the constitution of the firm”.

Relations Of Partners Objective Questions And Answers

Question 1. State with reason whether the following statement is Correct or Incorrect. A partner is not entitled to claim remuneration.

Answer:

Correct: The Indian Partnership Act does not allow any remuneration to any partner, unless and until agreed upon by all the partners of the firm. (Section 13(a) Indian Partnership Act).

Question 2. State with reason whether the following statements are Correct or Incorrect.

1. A new partner may be introduced in the firm even by any existing partner of the firm.
2. The implied authority of a partner empowers him to acquire immovable property on behalf of the firm.

Answer:

1. Incorrect: Section 31(1) of the Indian Partnership Act lays down that subject to a contract between the partners and to the provisions regarding minors in a firm, no new partner can be introduced without the consent of all the existing partners.
2. Incorrect: According to Section1 9(2)(f), if there is no usage or custom of trade to the contrary, the implied authority of the partner does not empower him to acquire immovable property on behalf of the firm.

Question 3. State with reason whether the following statement is Correct or Incorrect. A transferee of a partner’s interest in a firm accepts a loan on behalf of the firm, for which the other partner was authorized to do so, invest it in the non-partnership business, without the consent of all the partners. The transferee is empowered to accept the loan.

Answer:

Incorrect: Section 29 of the Partnership Act, 1932 lays down that a transferee of a partner’s interest is not entitled, during the continuance of the Partnership to interfere in the conduct of business. Therefore, the acceptance of a loan on behalf of the firm by the transferee of a partner’s interest is not in his purview and he has no right to do so unless the other partners unanimously, agree thereto.

Question 4. State with reason whether the following statements are Correct or Incorrect.

1. A partner who has purchased the goodwill of the firm on the dissolution of the partnership firm has the right to make use of the firm’s name to earn profits.
2. All partners are not joint owners of the property of the firm unless otherwise provided in the agreement.

Answer:

1. Correct: As per the provisions of the Indian Partnership Act, 1 932 as contained in Section 50, where any partner has bought the goodwill of the firm on its dissolution, he has the right to use the firm name and earn profits by its use.
2. Incorrect: Section 14 of the Indian Partnership Act, 1 932, states that unless a contrary intention appears, all partners are joint owners of the property of the firm because property acquired with money belonging to the firm is deemed to have been acquired for the firm. If the personal property of the partner is used by the firm the partner must show an intention to make it so.

Question 5. State with reason whether the following statement is Correct or Incorrect. A partner may acquire immovable property on behalf of the firm, in the exercise of his implied authority.

Answer:

Incorrect: Section 19 of the Indian Partnership Act, 1932 says if there is no usage or custom of trade to the contrary, the implied authority of the partner does not empower him to acquire immovable property on behalf of the firm.

Question 6. State with reason whether the following statements are Correct or Incorrect.

1. A partner is not an agent of other partners in a partnership firm.
2. A minor can be a partner in a partnership firm.

Answer:

1. Incorrect: The basis of the partnership is mutual agency, hence a partner is an agent of all other partners.
2. A minor cannot contract, he can not be a partner in a firm. However, he can be admitted to the benefits of the partnership with the consent of all the partners.

Question 7. State with reason whether the following statements are Correct or Incorrect.

1. The transferee of a partner’s interest is entitled to inspect the books of the firm during the continuance of the firm.
2. The goodwill of the firm cannot be regarded as an asset of the firm.

Answer:

1. Incorrect: A transfer by a partner of his interest in the firm does not entitle the transferee, during the continuance of the firm to interfere in the conduct of the business, to require accounts, or to inspect the books of accounts of the firm [Section 29 (1) of the Indian partnership Act, 1932].
2. Correct: Section 25 of the Indian Partnership Act, 1932 declares that “every partner is liable, jointly with all the partners and also severally, for the acts of the firm done while he is a partner. The liability of the partner is dependent on two things
   1. It should be an act of the firm and
   2. The act should have been done by the firm while he was a partner.

Question 8. State with reason whether the following statements are Correct or Incorrect.

1. In a partnership firm where a partner is entitled to get interest on the capital subscribed by him, such interest can be paid to him out of the capital of the firm.
2. A partner carrying on a business,’ which is similar and competing with that of the firm is bound to pay to the firm, all the profits earned by him, even when there is no such agreement among the partners.

Answer:

1. Incorrect: In a partnership firm where a partner is entitled to get interest on his capital subscribed by him in terms of the partnership agreement, he can be paid such interest only out of the profits of the firm and not out of the capital of the firm. (Section 13(c): Indian Partnership Act, 1932).
2. Correct: According to Section 16(b) of the Indian Partnership Act, 1932, subject to a contract between the partners if a partner carries on any business of the same nature as and competing with that of the firm, he shall account for and pay to the firm, all profits made by him in that business.

Question 9. State with reason whether the following statement is Correct or Incorrect. A partner making advance of money to the firm, beyond the amount of his agreed capital is entitled to interest on such advanced money.

Answer:

Correct: The general rule is that partners are not considered as debtors and creditors among themselves and hence advances made to the firm by a partner cannot be regarded as a loan.

But clause (d) of Section 13 of the Indian Partnership Act, 1932 lays down that a partner who makes any payment or advance of money to the firm beyond the amount of his greed capital is entitled to interest thereon at the rate of six percent per annum, subject to a contract between the partners.

Relations Of Partners Short Notes

Question 1. Write a short note on the following: Liability of an incoming partner.

Answer:

Liability of an incoming partner

An incoming partner is not liable for any act of the firm done before his admission as a partner. This is because the old partners were not the agents of the new partners at the time when they acted.

• By a mutual agreement, the new partners may agree with the old partners to be liable for the past liabilities of the firm.
• However, the creditors of the firm cannot sue the new partners for their past debts because there is no privity of contract between the creditors and the new partner.
• Similarly, the acts of the old partner can not be ratified by the new partner because he was not in existence as a principal at the time when the acts were done.

He is liable for the acts of the old firm only if the new firm assumes the liabilities of the old firm and the creditors accept the new firm as their debtor and discharge the old firm from his liability.

Question 2. Write a short note on the following: Right to remuneration of a partner.

Answer:

Right to remuneration of partner:

The general rule is: No partner is entitled to receive any remuneration in addition to his share in the profits of the firm for taking part in the business of the firm.

• But this rule can always the varied by an express agreement, or by a cause of dealings, in which event the partner will be entitled to remuneration.
• Thus a partner can claim remuneration even in the absence of a contract, when such remuneration is payable under the contained usage of the firm.

Similarly, a partner on whom the whole conduct of the business has been cast because of the other partner’s wilful neglect of the business to which the latter ought to attend can claim compensation for the undue labor and trouble being imposed upon him] (Krishnamachriar vs. Sankara Saha 91920).

Question 3. Write a short note on the following: Minor in partnership.

Answer:

Minor in partnership

Minor in Partnership: A minor cannot become a partner, as he is not competent to contract. But if all the partners agree, he can be admitted to the benefits of a partnership.

• Such a minor has a right to his agreed share of the profits; he cannot take part in the management, and he can have access to inspect and copy the accounts of a firm but not to book the firm.
• On attaining majority, he has to elect whether he wants to continue as a partner or not within 6 months of his attaining majority.
• If he fails to give such notice he shall become a partner in the firm on the expiry of the said six months.

If the minor becomes a partner of his willingness, his position is as follows:

• His rights and liabilities as a minor will continue up to the date on which he becomes a partner.
• He becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of a partnership.
• His share in the property and profits of the firm remains the same as to which he was entitled as a minor.

Question 4. Write a short note on the following: Explain the duties of a Partner in Partnership.

Answer:

Duties of Partner [Indian Partnership Act, 1932]:

1. To work for the greatest common advantage. [Section 9]
2. To be just and faithful [Section 9]
3. To render true accounts. [Section 9]
4. To give full information. [Section 9]
5. To indemnity for frauds [Section 1 0]
6. To indemnity for wilful neglect. [Section 13 (f)j
7. To share losses. [Section 13 (b)]
8. To attend diligently without remuneration. [Sections 12 (b) and 13 (a)]
9. To hold and use the property of the firm exclusively for business. [Section 15]
10. To account for private profits from .transactions of firms etc. and competing businesses [Section 16]
11. To act within the authority.
12. Not to assign his rights [Section 29]
13. To be liable jointly and severally. [Section 25]

Relations Of Partners Descriptive Questions And Answers

Question 1. Comment on the following: “The relationship arises from an agreement and not from status.”

Answer:

“The relationship arises from an agreement and not from status.”

A partnership is the result of a contract and cannot arise by status is sufficiently emphasized by Section 4 of the Indian Partnership Act itself by the use of the word “partnership is the relation between the persons who have agreed to share the profits of a business”.

• It is clear from the definition that the partnership is contractual.
• It springs from an agreement. The same point is further stressed by the opening words Of Section 5 that the relation of partnership arises from contract and not from status.
• Unlike in the case of sole proprietorship and joint Hindu Family business, the legal heirs do not automatically become partners on the death of a partner. A fresh agreement will have to be made.

Thus from the above, it is clear that partnership always arises out of a contract and not from status.

Question 2. Answer in brief the following: What is meant by the term, ‘property of a partnership firm’?

Answer:

‘property of a partnership firm’

Normally, the partners by an agreement are free ‘to determine as to what shall be the property of the firm and what shall be treated as a separate property of one or more of the partners.

But when there is no such agreement and to know whether a certain property is the property of the firm or not it has to be ascertained from the source from which the property has been acquired the purpose for which it was acquired.

And how it has been dealt with According to Section 14 of the Partnership Act, when there is no contract to the contrary, the property of the firm includes:

1. All properties, rights-and-interests originally brought to the stock of the firm.
2. The property acquired by purchase or otherwise by or for the firm.
3. The property was acquired with the money belonging to the firm.
4. The goodwill of the business of the firm.

However, if a partner’s property is used for the purchase of the business of the firm, it does not automatically become the property of the firm.

• It can become to property of the firm if the partners have an intention to manage it so.
• For example, a piece of land that has been bought in the name of one partner but is paid for any the firm shall be deemed to be the property of the firm unless there is an intention to the contrary.

Question 3. Comment on the following: Notice to an acting partner is the notice to the firm.

Answer:

Notice to an acting partner:

Section 24 of the Partnership Act, 1932 lays down that the notice to a partner, who habitually acts in the business of the firm of any matter relating to the affairs of the firm operates as notice to the firm, except in the case of a fraud on the firm committed by or with the consent of that partner.

• The rule embodied in this section is an instance of the application of the general principles of agency to the partnership.
• Accordingly, the notice to one is equivalent to the notice to the rest of the partners of the firm, just as a notice and not to an agent is a notice to his principal. This notice must be actual and not constructive.
• It must be received by a working partner and not by a dormant or sleeping partner. It must further relate to the firm’s business. Only then it would constitute a notice to the firm.

Notice to a clerk or agent of the firm operates as notice to the firm. However, the provisions of this section would not lie in the case of fraud, whether active or tacit.

• Thus the knowledge of a partner as to a particular defect in the goods which he is buying for the firm will be knowledge of the firm, although the other partners are, in fact, not aware of the defect.
• The only exception is in the case of fraud. If, therefore, the purchasing partner, in collusion with the seller, has conspired to conceal the existence of the defect from the other partners.
• The rule will not operate and the other partners would be entitled on the defect being discovered by them, to reject the goods.

Question 4. Answer the following: What are the rights and duties of a partner after a change in the constitution of the firm?

Answer:

Rights and duties of partners after a change in the constitution of the firm (Section 17):

A change in the constitution of the firm may be in one of the four ways, namely:

1. Where a new partner or partners come in;
2. Where one partner or partners go out;
3. Where the partnership concerned carries on business other than the business of the firm;
4. Where the partnership business is carried on after the expiry of the term fixed for the purpose.

This section lays down the following provisions as regards to rights and duties after the change in the constitution of the firm:

1. Change in the constitution of the firm: Where a change occurs in the constitution of a firm, the mutual rights and duties of the partners in the reconstituted firm remain the same as they were immediately before the change, as far as may be.
2. Business continued after expiration of the term: Where a firm constituted for a fixed term continues to carry on business after the expiry of that term, the mutual rights and duties of the partners remain the same as they, were before the expiry, so far as they may. be consistent with the incidents of Partnership at will; and
3. In case of additional undertaking: Where a firm constituted to carry out one or more adventures or undertakings carries out other adventures or undertakings the mutual rights and duties of the partners in respect of the other adventures or undertakings are the same as those in respect of the original adventures or undertakings. But the above provisions are however subject to the contract between the partners.

Question 5. Comment on the following: “The power to expel a partner must be exercised in good faith”.

Answer:

The power to expel a partner must be exercised in good faith: A partner may not be expelled from a firm by a majority of partners except in exercise, in good faith, of powers conferred by the contract between the partners. It is thus, essential that:

• The power of expulsion must have existed in a contract between the partners:
• The power has been exercised by. a majority of the partners; and
• It has been exercised in good faith.

If all these considerations are not present, the expulsion is not deemed to be in the bonafide interest of the business of the firm.

The test of good faith as required under section 33(1) includes three things:

• That the expulsion must be in the interest of the partnership.
• That the partner to be expelled is served with a notice.
• That he is allowed to be heard. If a partner is otherwise expelled, the expulsion is null and void. The only remedy, when a partner misconducts in the business of the firm is to seek judicial dissolution.

The provisions of Section 32 regarding the retirement of a partner also apply to an expelled partner as if he were a retired partner [Section 22(2)].

Question 6. What are the mutual duties of partners in a partnership firm to regulate the relations between the partners?

Answer:

Duties of Partners: The following duties should be observed by the partners to regulate the relations between the partners:

1. To observe good faith: A partnership contract is a contract of absolute good faith and therefore Section 3 of the Partnership Act, 1932 lays down that partners are bound
   • To carry on the business of the firm to the greatest common advantage;
   • To be just and faithful, to each other and
   • To render to any partner or his legal representative a time account and full information of all things affecting the firm.
2. To attend to his duties diligently [Sections 12(b) and 13 (a)]: Every partner is bound to attend diligently to his duties in conducting the business of the firm. He has no right to receive any remuneration for taking part in the conduct of the business.
3. To indemnify for fraud (Section 10): A partner shall be held liable to make good any loss caused to the firm by his fraud in the conduct of the business. It is an absolute provision and is not subject to the terms of the contract between the partners. A clause in the deed of partnership exempting a particular partner from liability to the firm for loss caused by his fraud shall be invalid and unenforceable.
4. To indemnify for willful Neglect [Section 13 (f)]: Every partner is liable to the firm for any loss caused to it by his wilful neglect in the conduct of the business. The partners can contract themselves out of this liability except in case of fraud.
5. To share losses [Section 13(b)]: Each partner is liable to contribute to the firm’s losses equally in the absence of any contract to the contrary.
6. To hold and use the property for the firm (Section 13): The property of the firm is the property of all the partners, and therefore, each partner should hold and use the property of the firm exclusively for the firm.
7. To account for private profits [Section 16 (a)]: A partner shall be liable to account for and pay to the firm any private profits derived from the transactions of the firm or the use of the property or goodwill of the firm.
8. To account for the profits of a competing business [Section 16 (b)]: If a partner carries on a business of the same nature as and competes with that of the firm, then he must account for and pay to the firm all profits made by him in the business. The firm will not be liable for any loss.
9. To act within authority: A partner is bound to act within the scope of his actual or apparent authority. In case, he exceeds his authority and the other partners do not ratify his unauthorized acts, he will be liable to the other partners for the loss that they may suffer on account of his such acts.
10. Not to assign his rights (Section 29): A partner cannot assign his rights or interest in a partnership firm to an outsider, to make the outsider a partner in the firm’s business without the consent of other partners.
    • In case such an assignment has been made the assignee cannot during the continuance of the firm, interface in the conduct of the business, or require accounts or inspect the books of the firm.
    • The transferee will be only entitled to receive the share of profits of the transferring partner, and the transferee shall accept the accounts of profits agreed to by the partners.
11. To the liable jointly and severally (Section 25): Every partner is liable, jointly with all the other partners, and also severally for all the acts of the firm done while he is a partner. A retired partner continues to be liable for the debts of the firm incurred till he gets public notice of his retirement.
12. Duties after a change in the firm (Section 17): Rights and duties of v the partners of a firm, unless otherwise agreed upon shall remain the same as they were in the beginning even after a change in the constitution of the firm or on the expiry of the term of the firm or even when the firm has taken up additional ventures after the complete of the work for which the firm was constituted.

Question 7. Explain clearly the meaning of implied authority of a partner in a partnership firm. State the matters for which a partner does not have implied authority.

Answer:

Meaning of Implied Authority of a Partner: The authority of a partner means the capacity of a partner to bind the firm by his act. This authority may be express or implied.

• Where the authority to a partner to act is expressly conferred by an agreement, it is called express authority.
• But where there is no partnership agreement or where the agreement is silent, the act of a partner is done to carry on, in the usual way.

Business of the kind carried on by the firm, bind the firm’. [Section 19(1) Indian Partnership Act, 1932].

The authority of a partner to bind the firm by his acts is called implied authority. It is subject to the following conditions:

1. The act done by the partner must relate to the normal business of the firm.
2. The act must be such as is done within the scope of the business of the firm in the usual way.
3. The act must be done in the name of the firm, or any other manner expressing or implying an intention to bind the firm (Section 22).

Matters for which no Implied Authority is available to a Partner:

1. To submit a dispute relating to the business of the firm to arbitration.
2. To open a bank account on behalf of the firm in his name.
3. Compromise or relinquish any claim or portion of a claim by the firm.
4. Withdraw a suit or proceeding filed on behalf of the firm.
5. Admit any liability in an audit or proceeding against the firm.
6. Acquire immovable property on behalf of the firm.
7. Transfer immovable property belonging to the firm, or
8. Enter into a partnership on behalf of the firm (Section 1 9(2)).

Question 8. Answer the following: Describe the position of a minor, who has been admitted to the benefits of partnership, on attaining majority.

Answer:

Position of a Minor in Partnership: Under Section 11 of the Indian Contract Act, 1 872, a minor’s agreement is void. Given this, a minor and a major cannot agree partnership.

• Thus, a minor person may not be a partner in a firm but under Section 30 of the Indian Partnership.
• Act, 1 932, he may be admitted to the benefits of partnership with the consent of all the partners for the time being.

Section 30 of the Indian Partnership Act provides that the minor who has been admitted to the benefits of partnership has to decide whether he shall remain a partner or leave.

• The firm and this decision is to be taken by him within six months of his attaining majority, or his obtaining knowledge that he had been admitted to the benefits of partnership, whichever date is later.
• If he decides to sever his connection with the firm, he must give a public notice of his intention. If he does not give such public notice, it must be presumed that he has opted to become a partner in the firm.

If the minor becomes a partner of his willingness or by his failure to give the public notice within a specified time, his rights and liabilities are as follows:

1. He becomes personally liable to third parties for all acts of the firm done from the date when he was admitted to the benefits of the firm.
2. His share in the property and the profits of the firm remains the same to which he was entitled as a minor.

If the minor decides to sever his connection with the firm, his rights and liabilities shall be as follows:

1. His rights and liabilities continue to be those of a minor up to the date of giving public notice.
2. His share shall not be liable for any acts of the firm done after the date of the notice.
3. He shall be entitled to sue the partners for his share of the property and profits.

Question 9. Explain the following: Explain the position of a person who had been admitted to the benefits of partnership as a minor, after attaining majority.

Answer:

Position of a minor in partnership after attaining majority: A partnership is a relation resulting from a contract, and a minor’s agreement is altogether void. A minor, being incompetent to contract, cannot become a partner.

• But he can be admitted to the benefits of an already existing partnership if all the partners agree to admit him. Such a minor is not personally liable nor his separate property and profits will be liable.
• Within six months of his attaining majority or when he comes to know of his being so admitted, whichever date is later, he has to elect whether he wants to continue his relationship and become a full-fledged partner or sever his connection with the firm.
• He may give a public notice of his election to continue or discontinue, but if he fails to give any public notice within this, period, he will be deemed to have elected to become a partner in the firm.
• A minor who thus becomes a partner will become personally liable for all debts and obligations of the firm incurred since the date of his admission to the benefits of the partnership.

Question 10. Briefly answer the following: Transferee of a partner’s interest cannot exercise the rights of the transferring partner.

Answer:

Section 29 of the Indian Partnership Act, of 1932, states the rights of transferee of a partner’s share. A share in a partnership is transferable like any other property, but the partnership relation is based upon confidence.

• The assignee of a partner’s interest by sale, mortgage, or otherwise cannot enjoy the same rights and privileges as the original partner.
• The Supreme Court in Narayanappa v. Krishnappa has held that the assignee will enjoy only the rights to receive the share of the profits of the assignor and account of profits agreed to by other partners.

The rights of such a transferee are:

1. During the continuance of the partnership, such transferee is not entitled to:
   • Interfere with the conduct of the business;
   • Require accounts or
   • Inspect books of the firm.
   • He is only entitled to receive a share of the profits of the transferring partner and he is bound, to accept the profits as agreed to by the partners, i.e. he cannot challenge the accounts.
2. On the dissolution of the firm or the retirement of the transferring partner, the transferee will be entitled, against the remaining partners:
   • To receive the share of the assets of the firm to which the transferring partner was entitled, and
   • To ascertain the share,.to an account as from the date of the dissolution.

Thus, the transferee of a partner’s interest cannot exercise the rights of the transferring partner.

Question 11. Discuss the rights of a Partner in a Partnership Firm.

Answer:

Discuss the rights of a Partner in a Partnership Firm:

Where there is no specific agreement or where the agreement is silent on a certain, the relations of partners to one another as regards their rights are governed by the provisions of the Indian Partnership Act, 1932 as contained in Sections 9 to 17.

There are:

1. Right to take part in business: Subject to any contract between the partners, every partner has the right to take part in the conduct of the business of the firm. [Section 12 (a)]
2. Right to be consulted: Every partner has an inherent right to be consulted in all matters affecting the business of the partnership before any decision is taken by the partners. Where there is any difference of opinion among the partners as to ordinary matters connected with the business, it may be settled, subject to contract between the partners, by a majority of the partners. [Section 12 (c)].
3. Right of access to account: Subject to the contract between the partners, every partner has a right to have access to and inspect and copy any of the books of the firm. [Section 12 (d)].
4. Right to share in profit: In the absence of any agreement, the partners are entitled to share equally in the profits earned and are liable to contribute equally to the losses sustained by the firm. [Section 13 (b)]
5. Right to interest on capital: The partnership may contain a clause as to the right of the partners to claim interest on capital at a certain rate. Such interest, subject to a contract between the partners, is payable only out of profits, if any, earned by the firm. [Section 13 (c)]
6. Right to interest on advances: Where a partner makes, for the business of the firm any advance beyond the amount of capital, he is entitled to interest on each advance at the rate of 6 percent per annum. [Section 13 (d)]
7. Right to be indemnified: Where a partner incurs any liability in the ordinary course of the partnership business, or an emergency, to protect the firm from loss, the firm must indemnify such partner. [Sections 13 (e) and 21]
8. Right to the use of partnership property: Subject to the contract between the partners, the property of the firm must be held and used by the partners exclusively for the business of the firm. No partner has the right to treat it as his individual property. [Section 15]
9. Right of partner as agent of the firm: Every partner for the business of the firm is the agent of the firm And subject to the provisions of the Indian Partnership Act, the act of a partner which is done to carry on, in the usual way, the business of the kind carried on by the firm, binds the firm. [Sections 18 and 19]
10. No new partner to be introduced: Every partner has a right to prevent the introduction of a new partner unless the consents to that or unless there is an expression in the contract permits such introduction [Section 31 (1)]
11. No liability before joining: A person who is introduced as a partner into the firm is not liable for any act of the firm done before he became a partner [Section 31 (2)]
12. Right to retire: A partner has a right to retire with the consent of all the other partners or per an expression agreement between the partners, or where the partnership is at will, by giving notice to all the other partners of his intention to retire. [Section 32 (1)].
13. Right not to be expelled: A partner has a right not to be expelled from the firm by any majority of the partners, save in the exercise; in good faith of powers conferred by the contract between the partners. [Section 33(1)] .
14. An outgoing partner can claim subsequent profits or interest of 66% per annum till final accounts are settled.

Question 12. Briefly answer the following: What are the liabilities of an outgoing Partner?

Answer:

The liabilities of an outgoing Partner

An outgoing partner or a retiring partner continues to be liable to a third party for acts of the firm after his retirement until public notice of his retirement has been given either by himself or by any other partner.

• However, the retired partner will not be liable to any third party if the letter deals with the firm without knowing that the former was a partner. [Sections 32 (3) and (4) Indian Partnership Act, 1932].
• The liability of a retired or outgoing partner to the third parties continues until public notice of his retirement has been given.
• Regarding his liability for the acts of the firm done before his retirement, he remains liable for the same, unless there is an agreement made by him with the third party concerned and the partners of the reconstituted firm.

Such an agreement may be implied by the course of dealings between the third party and the reconstituted firm after he knew the retirement [Section 32(2)].

Question 13. Briefly answer the following: What are the legal provisions relating to the expulsion of a partner under the Indian Partnership Act?

Answer:

The legal provisions relating to the expulsion of a partner under the Indian Partnership Act

According to Section 33 of the Indian Partnership Act, of 1932, a partner may be expelled from a partnership subject to the following three conditions:

• The power of expulsion of a partner should be conferred by the contract between the partners.
• The power should be exercised by a majority of the partners.
• The power should be exercised in good faith.

If all these conditions are present, the expulsion is not deemed to be in the bonafide interest of the business of the firm.

The test of good faith is:

• That the expulsion must be in the interest of the partnership.
• That the partner to be expelled is served with a notice.
• That he is allowed to be heard.,

Irregular expulsion: Where the expulsion of a partner takes place without the satisfaction of the conditions given above, the expulsion is irregular. The expelled partner may in such a case either

• Claim reimbursement as a partner or
• Sue for the refund of his share of capital and profits in the firm.

An irregular expulsion is wholly ineffectual and inoperative. The expelled partner, in such a case, does not cease to be a partner.

Regular expulsion: Where a partner is expelled subject to the satisfaction of the conditions as above, his expulsion would be regular. The rights and liabilities of an expelled partner are the same as those of a retiring partner [Section 33 (2)].

Question 14. Answer the following: What constitutes Partnership property or Property of the firm?

Answer:

Partnership property consists of the following:

1. All property and rights and interests in a property originally brought into the stock of the firm or acquired by purchase or otherwise, by or for the firm, or for the purpose and in the course of the business of the firm; and includes also the goodwill of the business. (Section 14).
2. The property and rights and interests on property acquired with many belonging to the firm and deemed to have been acquired for the firm. (Section 14).
3. The property of the firm is held and used by the partners exclusively for the -purpose of the firm’s business. (Section 15 Indian Partnership Act, 1832).

Question 15. Explain clearly the meaning of the term “Authority of a partner”. State the acts which fall within the ‘Implied Authority’ of a partner.

Answer:

Meaning: The Authority of a partner means the capacity of a partner to bind the firm by his acts. This authority may be express or implied. Where the authority to a partner to act is expressly conferred by an agreement, it is called express authority.

But where there is no partnership agreement or where the agreement is silent; the authority conferred on a partner by the provision ‘is silent, the authority conferred on a partner by the provisions of Section 19 of the Indian Partnership Act is called implied authority.

Implied authority covers those acts of partners that fulfill the following conditions:

1. The act done by the partner must relate to the normal business of the firm. [Section 19(1)].
2. The act must be such as is done within the scope of the business of the firm in the usual way.
3. The act must be done in the name of the firm, or any other manner expressing or implying an intention to bind the firm. (Section 22).

Acts falling within the implied authority of a partner: In a trading firm, i.e., a firm that depends for its existence on the buying and selling of goods, the implied authority of a partner has been held to include.

1. Purchasing goods, on behalf of the firm, in which the firm deals or which are employed in the firm’s business.
2. Selling goods of the firm.
3. Receiving payment of the debt due to the firm and giving receipts for them.
4. Settling accounts with the persons dealing with the firm.
5. Engaging servants for the partnership business.
6. Borrowing money on the credit of the firm.
7. Drawing, accepting, and endorsing bills and other negotiable instruments in the name of the firm.
8. Pledging any goods of the firm to borrow money.
9. Employing a solicitor to defend an action against the firm for goods supplied.

Question 16. Briefly answer the following: What is the position of a minor in a partnership firm before he attains the age of majority?

Answer:

The position of a minor in a partnership before attaining the age of majority (Indian Partnership Act, 1932):

Rights:

1. A minor has a right to such share of the property and of profits of the firm as may have been agreed upon.
2. He has a right to have access to and inspect and copy any of the accounts, but not the books of the firm. [Section 30(2))].
3. When he is not given his due share of profit, he has the right to file a suit for his share of the property of the firm. But he can do so only if he wants to sever his connection with the firm. [Section 30(4)].

Liabilities:

1. The liability of a minor partner is confined only to the extent of his share in the profits and property of the firm. Over and above this, he is either personally liable or his private estate liable. [Section 30(3)].
2. A minor cannot be declared insolvent, but if the firm is declared insolvent his share in the firm vests in the Officials Receiver or Official Assignee.

Question 17. Briefly answer the following: The liability of a retired partner to third parties continuing after his retirement.

Answer:

Goods forming subject matter of the contract of sale may be classified as under:

1. Existing Goods
   • Specific goods
   • Unascertained goods.
   • Ascertained goods.
2. Future Goods
3. Contingent Goods.

Existing Goods are those goods which are in actual existence at the time of contract of sale.

The seller is the owner of goods or he has the possession of such goods.

Existing goods may be of the following three types:

1. Specific goods: Goods that have either been identified or agreed upon by the parties at the time of the contract of sale.
2. Unascertained goods: are those not specifically identified at the time of contract of sale. They are described by the description or sample only.
3. Ascertained goods: are those identified only after the formation of a contract of sale. When unascertained goods are identified and agreed upon by the parties, the goods.are called Ascertained goods.
4. Future goods: are those in existence at the time of contract of sale. These goods are, to be acquired or produced by the seller after the contract of sale is made. It is an agreement to sell and not sell.
5. Contingent goods are like future goods. The acquisition of the goods by the seller depends upon the uncertain contingencies which may or may not happen, For Example. goods will be supplied if the ship arrives.

Question 18. Subject to an agreement between the Partnership, state the rights of Partners.

Answer:

The mutual rights and duties of the partners of a firm may be determined by the contract between the partners, and such contract may be expressed or implied by a course of dealing.

In the absence of any express agreement among partners, their rights and duties are governed by the Partnership Act.

The rights of the partners in a partnership firm are discussed hereunder:

1. Participation in management [Section 12 (a)]: Every partner has a right to take part in the conduct of the business.
2. Right to be consulted: Any difference arising in connection with the business may be decided by a majority of the partners and every partner has a right to express his opinion before the matter is decided.
3. Access to books [Section 12 (d)]: A partner has a right to have access to and inspect and copy any of the books of the firm.
4. Sharing of profits [Section 13 (b)]: Partners are entitled to share equally in the profit earned.
5. Interest on capital [Section 13 (c)]: A partner is entitled to interest on advance made by him over and above his capital at the rate of 6% per annum. However, where the partnership agreement provides for the payment of interest at a certain rate such interest shall be payable only out of profits if any, earned, by the firm.
6. Making use of Partnership property [Section 15]: Every partner is entitled to use the property of the firm exclusively for the purpose of the business of the firm.
7. Indemnification [Section 13 (c)]: A partner is entitled to be indemnified by the firm in respect of payments made and liabilities incurred by him under certain circumstances.
8. Agent of the firm [Sections 18 and 19]: Because of the agency relationship every partner has implied authority to bind the firm by his act in the conduct of the business of the firm.
9. Dissolution of the firm [Sections 43, 44, and 46]: A partner is entitled to dissolve the firm under certain conditions. A partner has a right to have the business wound up after dissolution.
10. Authority in emergency [Section 21]: A partner has authority in an emergency to do all such acts as required to protect the firm from loss.
11. Retirement [Section 32]: Every partner has a right to retire from the partnership firm subject to the nature of the partnership.
12. Not to be expelled [Section 33 (1)]: Every partner has a right to continuance in the partnership. No partner can be expelled except in good faith.
13. No new partner to be introduced [Section 31 (1)]: Every partner has a right to prevent admission of a new partner to the firm.
14. Carrying on competing business [Section 36]: Unless otherwise agreed, an outgoing partner may carry on a business competing with that of the firm and may advertise such business. However, he can not use the name and representation of the firm.
15. Sharing profits by outgoing partner [Section 37]: An outgoing partner can claim subsequent profits or interest at the rate of 6% p.a. If final accounts have not been settled.
16. Share in the partnership property: On the dissolution of the firm, every partner or his representative has a right to have the property applied in the payment of debts and liabilities of the firm and to have a surplus distributed among the partners.

Question 19.

1. “Though a minor cannot be a partner in a firm, he can nonetheless be admitted to the benefits of partnership.”

1. Referring to the provisions of the Indian Partnership Act, of 1932, state the rights that can be enjoyed by a minor partner.
2. State the liabilities of a minor partner in both:
   1. Before attaining the majority and
   2. After attaining the majority.

OR

2. State the legal position of a minor partner after attaining majority:

1. When he opts to become a partner of the same firm.
2. When he decides not to become a partner

Answer:

1. The rights enjoyed by a minor partner are:
   1. A minor partner has a right to his agreed share of the profits and of the firm.
   2. He can have access to, inspect, and copy the accounts of the firm.
   3. He can sue the partners for accounts or payment of his share but only when severing his connection with the firm and not otherwise.
   4. On attaining majority he may within 6 months elect to become a partner or not to become a partner. If he elects to become a partner, then he is entitled to the share to which he was entitled as a minor.
   5. If he does not, then his share is not liable for any acts of the firm after the date of the public notice served to that effect.
2. The liabilities of a minor partner:
   1. Before attaining majority:
      • The liability of the minor is confined only to the extent of his share in the profits and the property of the firm.
      • Minor has no personal liability for the debts of the firm incurred during his minority.
      • Minor cannot be declared insolvent but if the firm is declared insolvent his share in the firm vests in the Official Receiver or Assignee.
   2. After attaining majority:

Within 6 months of his attaining majority or on his obtaining knowledge that he had been admitted to the benefits of partnership whichever date is later, the minor partner has to decide whether he shall remain a partner or leave the firm.

OR

2. The legal position of a minor partner after attaining majority:

1. When he opts to become a partner of the same firm. If the minor becomes a partner on his willingness or by his failure to give the public notice within a specified time, his rights and liabilities as given in section 30(7) are as follows:
   • He becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of a partnership.
   • His share in the property and the profits of the firm remains the same to which he was entitled as a minor.
2. When he does not become a partner:
   • His rights and liabilities continue to be those of a minor up to the date of giving public notice.
   • His share shall not be liable for any acts of the firm done after the date of the notice.
3. He shall be entitled to sue the partners for his share of the property and profits. It may be noted that such a minor shall give notice to the registrar that he has or has not become a partner.

Question 20. What is the provision related to the effect of notice to an acting partner, of the firm as per the Indian Partnership Act 1932?

Answer:

The provision related to the effect of notice to an acting partner, of the firm as per the Indian Partnership Act 1932

The notice to a partner, who habitually acts in the business of the firm, on matters relating to the affairs of the firm, operates as a notice to the firm except in the case of fraud on the firm committed by or with the consent of that partner.

• Thus, the notice to one is equivalent to the notice to the rest of the partners of the firm, just as a notice to an agent is a notice to his principal.
• The notice must be actual and not constructive. It must be received by the working partner and not by the sleeping partner.

It must further relate to the firm’s business. Only then it would constitute a notice to the firm.

Question 21. Discuss the provisions regarding personal profits earned by a partner under the Indian Partnership Act 1932.

Answer:

According to the Indian Partnership Act, of 1932, subject to a contract between the partner:

1. If a partner derives any profit for himself from any transaction of the firm, or from the sale of the property or business connection of the firm or the firm name, heÿhall accounts for that profit and pays it to the firm.
2. If a partner carries on any business of the same nature as and competing with that of the firm, he shall account for and pay to the firm all profits made by him in that business.

Question 22. When the continuing guarantee can be revoked under the Indian Partnership Act, of 1932?

Answer:

1. According to Section 38, a continuing guarantee given to a firm or a third party in respect of the transaction of a firm is, in the absence of an agreement to the contrary, revoked as to future transactions from the date of any change in the constitution of the firm.
2. In other words, mere changes in the constitution of the firm operate to revoke the guarantee as to all future transactions. Such change may occur by the death, or retirement of a partner, or by introduction of a new partner.

Question 23. What do you mean by Goodwill as per the provisions of the Indian Partnership Act, of 1932?

Answer:

Goodwill as per the provisions of the Indian Partnership Act, of 1932

Section 14, specifically states that the goodwill of a business is subject to a contract between the partners, to be regarded as “property” of the “firm”.

• It may be defined as the value of the reputation of a business house in respect of profits expected in the future over and above.
• The normal level of profits earned by undertaking belonging to the same class of business. Goodwill is a part of the property of the firm.

Question 24. The provisions of the Indian Partnership Act, 1932 explain the various effects of insolvency of a partner.

Answer:

As per the provisions of the Indian Partnership Act, of 1932, the effects of the insolvency of a partner will be as follows:

1. The insolvent partner cannot be continued as a partner.
2. He will cease to be a partner from the very date on which the order of adjudication is made.
3. The estate of the insolvent partner is not liable for the acts of the firm done after the date of order of adjudication. . .
4. The firm is also not liable for any act of the insolvent partner after the date of the order of adjudication.
5. Ordinarily, the insolvency of a partner would result in the dissolution of the firm but the remaining partners may agree to carry it on.

Question 25. Comment on ‘the right to expel partner must be exercised in good faith’ under the Indian Partnership Act, 1932.

Answer:

Expulsion of a partner (Section 33):

A partner may not be expelled from a firm by any majority of partners save an exercise in good faith of powers conferred by a contract between the parties.

The following are the conditions:

1. The powers of expulsion must have existed in a contract between the partners.
2. The power must have been exercised by a majority of the partners.
3. It has been exercised in good faith.

The test of good faith as required under is as follows:

1. The expulsion must be in the interest of the partnership
2. The partner to be expelled is served with a notice
3. He is given an opportunity to be heard

Question 26. Explain in detail the circumstances that lead to the liability of the firm for misapplication by partners as per provisions of the Indian Partnership Act, 1932.

Answer:

Liability of firm for Misapplication by Partners (Section 27) of the Indian Partnership Act, 1932:

It may be observed that the workings of the two clauses of section 27 are designed to bring out an important point of distinction between the two categories of such cases of misapplication of money by partners.

Clause (1): Covers the case where a partner acts within his authority and due to his authority as a partner, he receives money or property belonging to a third party and misapplies that money to all property.

For this provision for the attracted, the money doesn’t need to have come into the custody of the firm.

On the Other hand the provision of Clause (2): Would be attracted when such money or property has come into the custody of the firm and it is misapplied by any of the partners. The firm would be liable in both cases.

If receipt of money by one partner is not within the scope of his apparent authority, his receipt cannot be regarded as a receipt by the firm and other partners will not be liable, unless the money received comes into their possession all under their control.

Example: A, B, and C are partners of a place for car parking. P stands his car in the parking place but A sold out the car to a stranger. For this liability, the firm is liable for the acts of A.

Question 27. Discuss the liability of a partner for the act of the firm and the liability of the firm for the act of a partner to third parties as per the Indian Partnership Act, 1932.

Answer:

Liability to Third Party (Section 25-27 of Indian Partnership Act 1932):

The partners are jointly and severally responsible to third parties for all acts which come under the scope of their express or implied authority.

• This is because all the acts done within the scope of authority are the acts done towards the business of the firm.
• The question of liability of partners to third parties may be considered under different heads.

These are as follows:

1. Contractual liability or Liability of a partner for acts of the firm:

• Every partner is liable jointly with other partners and also severally for the acts of the firm done while he is a partner.
• The expression “act of firm” connotes any act or omission by all the partners or by any partner or agent of the firm, which gives rise to a right enforceable by or against the firm.

Example: Thus, where certain persons were found to have been partners in a firm when the acts constituting an infringement of a trademark by the firm took place.

It was held that they were liable for damages arising out of the alleged infringement, it being immaterial that the damages arose after the dissolution of the firm.

2. Liability for tort or wrongful Act: A firm is liable for the loss or injury caused to a third party by the wrongful acts of a partner if they are done by the partner while acting

• In the ordinary course of the business of the firm
• With the authority of the partners.

Example: One of the two partners in the coal mine acted as a manager was guilty of personal negligence in omitting to have the shaft of the mine properly fenced. As a result thereof, an injury was caused to a workman. The other partner was held responsible for the same.

3. Liability for misappropriation by a partner: A firm is liable:

• When a partner, acting within his apparent authority receives money or other property from a third person and misapplies it.
• Where a firm, in the course of its business, received money or property from a third person, and the same is misapplied by a partner while it is in the custody of the firm.

Example: A, B, and C are partners of a place for the car. parking. P stands his car in the parking place but A sold out the car to a stranger. For this liability, the firm is liable for the acts of A.

Note: If receipt of money by one partner is not within the scope of his apparent authority, his receipt cannot be regarded as a receipt by the firm and the other partners will not be liable, unless the money received comes into their possession or under their control.

Question 28. Define Implied Authority. In the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not’ empower him to do certain acts. State the acts that are beyond the implied authority of a partner under the provisions of The Indian Partnership Act, of 1932.

Answer:

Implied Authority

The authority conferred on a partner under the provisions of the Indian Partnership Act, of 1932 is known as the Implied authority of a partner.

It is the authority conferred to act in a general way for the business of the partnership firm and if a partner acts this way he binds all the other partners by his acts.

However, there are certain acts which are beyond the implied authority of a partner.

They are as follows:

1. Submit a dispute relating to the business of the firm to arbitration.
2. Open a bank account in name his name on behalf of the firm.,
3. Compromise or relinquish any claim or portion of any claim by the firm.
4. Withdraw a suit or proceeding filed on behalf of the firm
5. Admit any liability in a suit or proceedings against the firm.
6. Acquire immovable property on behalf of the firm.
7. Transfer immovable property belonging to the firm.
8. Enter into a partnership on behalf of the firm.

Question 29. Can a minor become a partner in a partnership firm? Justify your answer and also explain the rights of a minor in a partnership firm.

Answer:

As per the Indian Contract Act, 1872, “ A minor is incompetent to enter into the contract and any agreement made with or by minor is void-ab-initio.”

• Therefore, a minor cannot be admitted to a partnership firm as a partner as this relationship emerges out of contract.
• Although Minor cannot become a partner in the firm, nonetheless, he can be admitted to the benefits of a partnership firm.
• He may validly have a share in the profits of the firm, but this can be done only with the consent of all the partners of the firm.

Rights of minors in the partnership firm

• He can access inspect and copy accounts of the firm.
• He will have a right to an agreed share of property and profits of the firm.
• At the time of his discontinuation, he can sue other partners for statements of his accounts, and payment thereof.
• On attaining majority, he may within 6 months elects to become a partner or not to become a partner. If he elects to become a partner then he is entitled to the share to which he was entitled as a minor.

If he does not, then his share is not liable for any acts of the firm, after the date of the public notice served to that effect.

Question 30. Can a partner be expelled? If so, how? Which factors should be kept in mind before expelling a partner from the firm by. the other partners according to the provision of the Indian Partnership Act, 1932?

Answer:

Expulsion of a partner (Section 33):

1. A partner may not be expelled from a firm by any majority of the partners, same in the exercise in good faith of powers conferred by contract between the partners.
2. The provisions of sub-section (2), (3)’ and (4) of Section 32 shall apply to an expelled partner as if he were a retired partner.

Analysis of Section 33.

1. The power of expulsion must have existed in a contract between the partners.
2. The power has been exercised by a majority of the partners; and
3. It has been exercised in good faith. If all these conditions are not present, the expulsion is not deemed to be in the bona fide interest of the business of the firm.

The test of good faith as required under Section 33(1) includes three things:

• The expulsion must be in the interest of the partnership.
• The partner to be expelled is served with a notice.
• He is given an opportunity to be heard. If a partner is otherwise expelled, the expulsion is null and void.

It is important to note that under the Act, the expulsion of partners does not necessarily result in the dissolution of the firm.

The invalid expulsion of a partner does not put an end to the partnership even if the partnership is at will and it will be deemed to continue as before.

Question 31. What are the rights of partners for the conduct of the business of a firm as prescribed under the Indian Partnership Act, of 1932?

Answer:

The rights of partners for the conduct of the business of a firm as prescribed under the Indian Partnership Act, of 1932

As per Section 12 of the Indian Partnership Act, of 1932, the following are the rights of the partners concerning the conduct of the business of the firms:

1. Right to take part in the conduct of business (Section 12(a)): Every partner has the right to take part in the business of the firm. This is because a partnership business is a business of the partners and the management powers are generally co-extensive.
2. Right to be consulted (Section 12(c): Where any difference arises between the partners about the business of the firm, it shall be determined by the views of the majority of there, and every partner shall have the right to express his opinion before the matter is decided.
3. Right to access to books (Section 12(d)): Every partner whether active or sleeping is entitled to have access to any of the books of the firms and to inspect and take out of copy thereof. The right must, however, be exercised bonafide.
4. Right of legal heirs and representatives and their duly authorized agents: (Section (2(e)) In the event of the death of the partner, his legal heirs of legal representatives or their duly authorized agents shall have a right of access to and to inspect and copy any of the books of the firms.

Question 32. X, Y, and Z are partners in a Partnership Firm. They have been carrying their business successfully for the past several years. Spouses of X and Y fought in the ladies’ club on their issue and X’s wife was hurt badly. X got angry about the incident and he convinced Z to expel Y from their partnership firm. Y was expelled from the partnership without any notice from X and Z. Considering the provisions of the Indian Partnership Act, 1932, state whether they can expel a partner from the firm. What are the criteria for the test of good faith in such circumstances?

Answer:

A partner may not be expelled from a firm by any majority of the partners, except in exercise of good faith of power conferred by contract between the partners.

If all these conditions are not present, the expulsion is not deemed to be in the bonafide interest of the business of the firm.

The test of good faith as required includes three things:

1. The expulsion must be in the interest of the partnership.
2. The partner to be expelled is served with a notice.
3. He is given an opportunity to be heard.

If a partner is otherwise expelled, the expulsion is null and void. Having regard to the above we can say that the expulsion of partner ‘Y’ by X and Z is not under the provision of indian contract act and thus not valid.

Question 33. Mr. A, Mr. B, and Mr. C were partners in a partnership firm M/s ABC and Co., which is engaged in the business of trading branded furniture. The name of the partners was written along with the firm name in front of the head office of the firm as well as on the letterhead of the firm. On 1^st October 2018, Mr. C passed away. His name was neither removed from the list of partners as stated in front of the head office nor from the letterheads of the firm. As per the terms of the partnership, the firm continued its operations with Mr. A and Mr. B. as partners. The accounts of the firm were settled and the amount due to the legal heirs of Mr. C was also determined on 10^th, October 2018. But the same was not paid to the legal heirs of Mr. C. On 16^th October 2018, Mr. X, a supplier supplied furniture worth ₹ 20,00,000 to M/s ABC and Co. M/s ABC and Co. could not repay the amount due to heavy losses. Mr. X wants to recover the amount not only from M/s ABC and Co. but also from the legal heirs of Mr. C. Analyse the above situation in terms of the provisions of the Indian Partnership Act, 1932, and decide whether the legal heirs of Mr. C can also. be held liable for the dues towards Mr. X.

Answer:

According to the facts of this case, the situation existent indicates the application of Section 37 of the Indian Partnership Act, 1932 according to which where any member of a firm has died or otherwise ceased to be a partner and

• The surviving or continuing partners carry on the business of the firm without any final settlement of the accounts as between them and the outgoing partner of his estate, then in the absence of a contract to the contrary.
• The outgoing partner or his estate is entitled at the option of himself or his representatives to such a share of the profits made.
• Since he ceased to be a partner as may be attributable to the use of his share of the property of the firm or to interest at the rate of six percent per annum on the amount of his share in the property of the firm.

In this case, since there has been no decisive settlement of accounts, between the heirs of Mr. A and Mr. B it’s pretty clear that the interest of the heirs of Mr. C still exists in the profits and the property of the firm and Mr. X wants to recover the amount not only from M/s ABC and Co. but also from the legal heirs of Mr. C he is justified in claiming such a recovery and his claim is legal and just according to the provisions of Section 37.

Question 34. Mr. M. Mr. N and Mr. P. were partners in a firm, which was dealing in refrigerators. On 1^st October 2018, Mr. P retired from the partnership but failed to give public notice of his retirement. After his retirement, Mr. M, Mr. N, and Mr. P visited a trade fair and enquired about some refrigerators with the latest techniques. Mr. X, who was exhibiting his refrigerators with new techniques was impressed with the interactions with Mr. P and requested the visiting card of the firm. The visiting card also included the name of Mr. P as a partner even though he had already retired. Mr. X supplied some refrigerators to the firm and could not recover his dues from the firm. Now. Mr. X wants to recover the dues not only from the firm but also from Mr. P. Analyse the above case in terms of the provisions of the Indian Partnership Act, 1932, and decide whether Mr. P is liable in this situation.

Answer:

According to the facts of this case, it can be easily concluded that the contention of Mr. X for recovery of his dues from all the partners including Mr. P is quite justified and legal on grounds of the provision.

• under Section 32 of the Indian Partnership Act that states a retiring partner continues to be liable to a third party for acts of the firm after his retirement until public notice of his retirement has been given.
• In this case, no such notice has been given by Mr. P of his retirement and so he cannot escape the liability incurred by the firm in its business dealing with Mr. X.

Question 35. Master X was introduced to the benefits of a partnership of M/s ABC and Co. with the consent of all partners. After attaining majority, more than six months elapsed and he failed to give a public notice as to whether he elected to become or not to become a partner in the firm. Later on, Mr. L, a supplier of material to M/s ABC and Co., filed a suit against M/s ABC and Co. for recovery of the debt due. In light of the Indian Partnership Act, of 1932, explain.

1. To what extent X will be liable if he fails to give public notice after attaining the majority?
2. Can Mr. L recover his debt from X?

Answer:

A minor who is admitted to the benefits of a partnership firm during his minority, must within six months of his attaining the age of majority or when he comes to know of his being so admitted (whichever date is later) he has to elect whether he wants to become a partner or sever his connection with the firm.

• He may give public notice of his election to continue or repudiate but if he fails to give any public notice within the period stated above, he will be deemed to have elected to become a partner in the firm.
• Since then he will be liable as otherpartner to the third parties for all acts of the firm done since he was admitted to the benefits of a partnership.

In the given case.

1. X will be liable to all third parties if he fails to give public notice after attaining a majority.
2. Yes, Mr, L a supplier to the firm, can recover his debt from x.

Question 36. P, Q, R, and S are the partners in M/S PQRS and Co., a partnership firm that deals in trading Washing Machines of various brands. Due to the conflict of views between partners, P and Q decided to leave the partnership firm and started a competitive business on 31^st July 2019, in the name of M/S PQ and Co. Meanwhile, R and S have continued using the property in the name of M/S PQRS and Co. in which P and Q also have a share. Based on the above facts, explain in detail the rights of outgoing partners as per the Indian Partnership Act, of 1932 and comment on the following:

1. Rights of P and Q to start a competitive business.
2. Rights of P and Q regarding their share in the property of M/S PQRS and Co.

Answer:

1. Right of outgoing partners to carry on a competing business (Section 36)

An outgoing partner may carry on a competing business with that of the firm and he may advertise such business but subject to the following conditions:

• He may not use the firm name
• He may not represent himself as a partner in the business of the firm.
• He may not solicit the custom of persons who well dealing with the firm before he ceased to be a partner. A partner may agree with his partner that on ceasing to be a partner he will not carry on any business similar to that of the firm within a specified period or specified local limits shall be valid.

2. Right of an outgoing partner in shall of profits (Section 37): When a partner ceases to be a partner in a firm and the continuing partners carry on the business of the firm with the property of the firm without any final settlement of accounts as between them and the outgoing partner then the outgoing partner shall be liable to such profits made since he ceases to be a partner in a firm from the use of his property in the firm or 6% interest on the property of the firm whichever is higher.

Thus in the given case P Q R and S all the partners or in P Q R S and Co. due to conflict P and Q left the firm and started a new firm in the name of P and Q Co. Meanwhile R and S continued the same business in the same name of P Q R S and Co. Thus,

1. P and Q have the following rights to start a competitive business as stated above in Section (36)
2. P and Q will have a shall in the property of P Q R S and Co., according to the terms and conditions of Section (27) of the Indian Partnership Act, 1932 which are property stated and explained above in the following paragraph of this page.

Question 37. M, N, and P were partners in a firm. The firm ordered JR Limited to supply the furniture. P dies, and M and N continue the business in the firm’s name. The firm did not give any notice of P’s death to the public or the persons dealing with the firm. The furniture was delivered to the firm after P’s death, the fact about his death was known to them at the time of delivery. Afterward, the firm became insolvent and failed to pay the price of furniture to JR Limited. Explain with reasons:

1. Whether P’s private estate liable for the price of furniture purchased by the firm?
2. Whether does it make any difference if JR Limited supplied the furniture to the firm believing that all the three partners are alive?

Answer:

1. Liability of estate of deceased partner (Sec.35 of Indian Partnership Act, 1932) Ordinarily, the effect of the death of a partner is the dissolution of the partnership.

• But the rule about the dissolution of the partnership, by the death of a partner is subject to a contract between the parties and
• The partners are competent to agree that the death of one will not have the effect of dissolving the partnership as regards the surviving partners unless the firm consists of only two partners.

So that the estate of the deceased partner may be absolved from liability for the future obligations of the firm, it is not necessary to give any notice either to the public or the persons having dealings with the firm.

The fact of the Case:

Only one order was placed during the lifetime of Mr. P but no delivery of furniture was made during his lifetime.

Applying the above Provision:

• Since there was no debt due in respect of goods in P’s lifetime his estate will not be held liable for the payment of the price of furniture to J.R. Limited.
• Further death of a partner does not require any public notice.

2. It will not make any difference even if JR Limited supplied the furniture to the firm believing that all three partners are alive since after the death of any partner his estate is not liable for any act done by the firm after his death. And the death of a partner does not require public notice either.

Question 38. M/S ABC Associates has been a partnership firm since 1 990. Mr. Ar Mr. B and Mr. C have been partners in the firm since the beginning. Mr. A, Being a very senior partner aged 78 years transfers his share in the firm to his son Mr. Prateek, a Chartered Accountant. Mr. B and Mr. C were not interested in Mr. Parteek joining them as partners at M/S ABC Associates. After some time, Mr. Prateek felt that the books of accounts were displaying only a small amount of profit despite a huge turnover. He wanted to inspect the book of accounts of the firm arguing that it is his entitlement as a transferee. However, the other partners believed that he could not challenge the books of accounts. Can Mr. Prateek. be introduced as a partner if his father wants to get a retirement? As an advisor, help them resolve the issues by applying the necessary provisions from the Indian Partnership Act, of 1932.

Answer:

1. As per the Indian Partnership Act, of 1932,
   • A share in a partnership is transferable like any other property,
   • However as the partnership relationship is based on confidence,
   • The assignee of a partner interest by sale, mortgage, or otherwise cannot enjoy the same rights and privileges as the original partner.
2. The rights of such transferee are as follows:
   1. When the firm is continuing in business)
      1. The transferee is not entitled
         • To interfere with the conduct of the business
         • To require an account, or
         • To inspect the books of the firm.
      2. The transferee is only entitled to receive the share of profits of the transferring partner and he is bound to accept the profits as agreed to by the partners ( ie. he cannot challenge the account.)
   2. On the retirement of the transferring partner or dissolution of the firm)
      1. The transferee is entitled to receive the share of the assets of the firm to which the transferring partner was entitled.
      2. To ascertain his share, he is entitled to an account as from the date of the dissolution or retirement as the case may be. Hence, we can say that Mr. Prateek cannot be introduced as a partner in the firm as other partners have not agreed to the same.

However, Mr. A can transfer his interest to Mr. Prateek. But Mr. Prateek cannot enjoy all the rights of a partner. Therefore, Mr, Prateek cannot challenge the books of accounts.

Question 39. P, Q, and R are partners in a partnership firm. R retires from the firm without giving public notice. P approached S, an electronic appliances trader, for the purchase of 25 fans for his firm. P introduced E, an employee of the firm, as his partner to S. S believing E and R as partners supplied 25 fans to the firm on credit. S did not receive the payment for the fans even after the expiry of the credit period. Advise S, from whom he can recover the payment as per the provisions of the Indian Partnership Act, 1932.

Answer:

As per section 32 of the Indian Partnership Act, 1932, a retiring partner continues to be liable to a third party for acts of the firm after his retirement until public notice of his retirement has been given either by himself orby any other partner.

• As per section 28 of the Indian Partnership Act, 1932 when a person represents himself, or knowingly permits himself, to be represented as a partner in a firm (when in fact he is not).
• He is liable, like a partner in the firm to anyone who on such representation has given credit to the firm.

In the above case, as R did not give any public notice of his retirement and E became a partner by estoppel or holding out, S can recover the payment from all the partners P, Q, R, and E.

General Nature Of A Partnership

Indian Partnership Act, 1932

Section 1: Short title

Section 2: Definitions

Section 3: Application of provision of Act, 9 of 1 872

Section 4: Definition of Partnership

Section 5: Partnership not created by status

Section 6: Mode of determining the existence of the partnership

Section 7: Partnership at will

Section 8: Particular Partnership

Section 9: General Duties of Partners

Section 10: Duty to indemnify for loss caused by fraud.

Section 11: Determination of rights and liabilities

Section 12: The conduct of the business

Section 13: Mutual rights and liabilities

Section 14: The property of the firm

Section 15: Application of the property

Section 16: Personal Profits Earned by Partners

Section 17: Rights and duties of partners after a change in the firm

Section 18: Partner to be an agent of the firm

Section 19: Implied Authority of Partner

Section 20: Extension and restriction of Partner’s implied authority

Section 21: Partner’s Authority in an emergency

Section 22: Mode of doing the act to bind the firm

Section 23: Effect of admission by a partner

Section 24: Effect of notice to acting partner

Section 25: Liability of a partner for acts of the firm

Section 26: Liability of the firm for wrongful acts by a partner

Section 27: Liability of firm for misapplication by partners

Section 28: Holding out

Section 29: Rights of transferee of a partner’s interest

Section 30: Minors admitted to the benefits of partnership

Section 31: Introduction of a partner

Section 32: Retirement of a partner

Section 33: Expulsion of a partner

Section 34: Insolvency of a partner

Section 35: Rights of outgoing partner to carry on competing business

Section 36: Same

Section 37: Rights of outgoing partner in certain cases

Section 38: Revocation of continuing guarantee by change in firm

Section 39: Dissolution of a firm

Section 40: Dissolution by agreement

Section 41: Compulsory dissolution

Section 42: Dissolution on the happening of certain events

Section 43: Dissolution by notice of partnership at will

Section 44: Dissolution by Court

Section 45: Liability for acts of partners done after dissolution

Section 46: Rights of partners to have business wound up after dissolution

Section 47: The continuing authority of partners to wind up

Section 48: Mode of settlements of accounts

Section 49: Payment of firm debts and separate debts

Section 50: Personal profits earned after dissolution

Section 51: Return of premium

Section 52: Rights where partnership contract is rescinded for fraud or misrepresentation

Section 53: Rights to restraint from use of the firm name

Section 54: Agreements in restraint of trade

Section 55: Sale of goodwill after dissolution

Section 56: Power to exempt from the application of this chapter

Section 57: Appointment of registrars

Section 58: Application for registration

Section 59: Registration

Section 60: Recording of alterations in the firm name

Section 61: Nothing of closing and opening of branches

Section 62: Nothing of change in names and addresses of partners

Section 63: Recording of changes in and dissolution of a firm

Section 64: Rectifications of mistakes

Section 65: Amendment of registers by order of Court

Section 66: Inspection of Register

Section 67: Grant of copies

Section 68: Rules of evidence

Section 69: Effect of non-registration

Section 70: Reality for furnishing false particulars

Section 71: Power to make rules

Section 72: Mode of giving public notice

Section 73: Repeals

Section 74: Savings.

General Nature Of A Partnership Self-Study Questions And Answers

Question 1. Define ‘Partnership’, ‘Partner’, ‘Firm’, and ‘Firm name’ as per the Indian Partnership Act, 1932.

Answer:

As per Section 4:

• As per Section 4, “partnership is the relation between persons who have agreed to share the profits of a business-carried on by all or any of them acting for all”.
• The person who enters into partnership with one another is individually called partners and collectively called firms.
• The name under which the business is carried on is “Firm Name”.
• The firm cannot use the words “limited” in its name.

Question 2. How many Elements of Partnership are there?

Answer:

Elements of Partnership

• It must be a result of an agreement between two or more persons to do business.
• It is voluntary.
• The agreement must be to share the profits of the business.
• Business must be carried on by all or any of them acting for all.
• All the above essentials must co-exist before any partnership comes into existence.
• The relation of partnership arises from contract and not from status.
• Agreement may be expressed or implied.
• As per Section 2 (b), “Business including every trade, occupation and profession”.
• Profit means the excess of return over advances.
• Sharing of profit includes sharing of losses.
• Sharing of profit is prima facie evidence of the existence of a partnership, this is not the conclusive test of the same.

Question 3. What do you understand by the True test of Partnership?

Answer:

True test of Partnership

• Mutual agency is the basis and most essential thing for partnership.
• The sharing of profit also involves the sharing of losses.
• Sharing of profits is not a conclusive test of the existence of a partnership.
• Even a partner is a principal and agent for himself and others.
• An agency relationship is the most important test of partnership.

Question 4. Briefly explain and distinguish between a Partnership and a Joint Stock Company.

Answer:

Distinguish between a Partnership and a Joint Stock Company

Question 5. How many kinds of Partnership are there?

Answer:

1. Partnership at will:
   • Here no provision is made in the agreement regarding the duration of the partnership.
   • Any partner can terminate the agreement anytime by giving the notice.
   • Such a type of partnership is usually formed for any particular project.
2. Partnership for a fixed period:
   • The agreement of partnership contains the provision as to the duration of the partnership.
   • At the expiry of the specified period, the partnership comes to an end.
3. Particular Partnership:
   • Partnership agreement formed to carry out a particular business or for a particular period.
   • After the completion of the business, for which it was constituted, the partnership comes to an end.
4. General Partnership:
   • Partnership constituted the business in general.

Question 6. What do you understand by a Partnership Deed?

Answer:

Partnership Deed

• It constitutes the mutual rights and obligations of partners in a written form.
• It is also known as a partnership agreement, constitution of partnership articles of partnership, etc.
• It must be drafted and stamped as per the provisions of the Indian Stamp Act.

Question 7. What are the contents of Partnership?

Answer:

The partnership deed must contain the following particulars:

1. Name of partnership firm
2. Particulars of partners
3. Place and nature of business
4. Date of commencement of the partnership
5. Duration or Terms and conditions
6. Capital Contribution
7. Profit sharing ratio
8. Rules regarding admission, retirement, etc.
9. Provisions for transactions and settlement of accounts

Question 8. How many Types of Partner?

Answer:

Types of Partner

Question 9. Describe the Active or Actual or Ostensible or Working Partners.

Answer:

The Active or Actual or Ostensible or Working Partners

• He is not only contributing capital but also taking an active part in the conduct of the firm’s business.
• He shares its profits and losses.
• He had to give public notice of his retirement if he had to free himself from all liabilities.

Question 10. Describe the Sleeping or Dormant Partners.

Answer:

The Sleeping or Dormant Partners

• He only contributes capital and shares profit or loss without taking an active part in the firm’s business.
• He has unlimited liability.
• He can retire from the firm without giving any public notice.
• He is entitled to access books and accounts of the firm, even though he performs no duty.

Question 11. Describe the Nominal or quasi-partners.

Answer:

The Nominal or quasi-partners

• He only lends his name and reputation for the firm’s benefit without sharing any profit or loss.
• He is known to outsiders as a partner but actually, he is not.
• He is liable to a third party for all his acts.
• He is required to give public notice of requirements.

Question 12. Which condition Applies to Partner in profits only?

Answer:

• He gets a share in profits but does not share any losses of the firm.
• He has to bear all the liabilities to a third party.

Question 13. Describe the Partner by estoppel.

Answer:

Partner by estoppel

• He is not a partner of the firm but conducts himself in such a way that leads third parties to believe that he is a partner.
• He is liable for all the debts to such third party.

Question 14. Describe the Partner by holding out.

Answer:

The Partner by holding out

• He is declared by others as a partner of the firm but does not contradict it immediately and remains silent.
• He is liable to a third party who is entering into contracts with the firm on the belief that he is the partner.
• Holding out means to reprint.
• It is based on the doctrine of estoppel of the Indian Evidence Act.

Question 15. What do you understand by an Incoming Partner?

Answer:

Incoming Partner

• The person being admitted as a partner in an existing partnership firm.
• He will not be liable for any act of the firm done before the date of admission.

Question 16. Describe the Outgoing Partner.

Answer:

Outgoing Partner

• The person leaving the partnership firm.
• He is liable to a third party unless he gives a public notice of his retirement sub-partner.
• He is a third person with whom a partner shares his profits.
• He has no rights or duties towards the firm.

General Nature Of A Partnership Objective Questions And Answers

Question 1. State with reason whether the following statement is correct or incorrect: Sharing of profits is conclusive evidence of partnership.

Answer:

Incorrect: Although sharing of profit is a .prima facie evidence of the establishment of partnership, it is not conclusive proof. The existence of an agreement, business, and mutual agency is also required along with the sharing of profits for the determination of partnership.

Question 2. State with reason whether the following statements are correct or incorrect:

1. Where two persons jointly run a coach and share the profits derived from running such business constitute a partnership business?
2. A partnership may be formed with two partnership firms as partners.

Answer:

1. Incorrect: It is not a partnership but a co-ownership. The sharing of ‘ profits or gross returns accruing from property by persons holding joint or common interest in a property would not by itself make such persons partners because there is no mutual agency.
2. Incorrect: According to Section 4 of the Indian Partnership Act, the term ‘person does not include a firm. This is because a firm is not a separate legal entity. Therefore, two partnership firms cannot enter into a partnership.

Question 3. State with reason whether the following statement is correct or incorrect: The test of the existence of a partnership is the element of ‘sharing of profits’ rather than ‘mutual agency’.

Answer:

Incorrect: Sharing of profits is an essential element to constitute a partnership. But it is only prima facie evidence and not conclusive evidence in that regard. The existence of mutual agency is the cardinal principle of partnership law.

Each partner carrying on the business is the principal as well as an agent of other partners. So, the act of one partner done on behalf of the firm binds all the partners (Section 6, Indian Partnership Act, 1932).

General Nature Of A Partnership Short Notes

Question 1. Write a short note on Partnership at will.

Answer:

Partnership at will: The definition of partnership at will has been given under Section 7 of the Partnership Act, 1932. It lays down that where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership, the partnership is “Partnership at will”.

Accordingly, a partnership is deemed to be a partnership at will when:

1. No fixed period has been agreed upon for the duration of the partnership, and
2. There is no provision made as to the determination of the partnership in any other way. Such partnership has no fixed date of termination therefore death or retirement of a partner does not affect the existence of such partnership.

Section 43(1) provides that “where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm”. The firm is dissolved from the date of notice or the date of communication of the notice.

However, if the freedom to dissolve the firm at will is curtailed by agreement, say, if the agreement provides that the partnership can be dissolved by the mutual consent of all the partners only, it will not constitute a ‘partnership at will’.

Question 2. Write a short note on the actual partner and sub-partner.

Answer:

Actual partner and sub-partner: A person who becomes a partner, by an agreement and is actively engaged in the conduct of the business of the partnership is known as the actual partner.

• He is the agent of the other partner in the ordinary course of the business of the firm.
• He binds himself and the other partners, so far as third parties are concerned, for all the acts which he does in the ordinary course of the business and the name of the firm.
• Whereas when a partner agrees to share his profits derived from the firm with a third person, that third person is known as a sub-partner.

A sub-partner is in no way connected with the firm and cannot represent himself as a partner of the firm. He has no rights against the firm nor is he liable for the acts of the firm.

Question 3. Write a short note on Partnership at Will.

Answer:

Partnership at will: The definition of partnership at will has been given under Section 7 of the Partnership Act, 1932. It lays down that where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership, the partnership is “Partnership at will”. Accordingly, a partnership is deemed to be a partnership at will when:

1. No fixed period has been agreed upon for the duration of the partnership, and
2. There is no provision made as to the determination of the partnership in any other way. Such partnership has no fixed date of termination therefore, death or retirement of a partner does not affect the existence of such partnership.

Section 43(1) provides that “where the partnership is at will, the firm may be” dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm”. The firm is dissolved from the date of notice or the date of communication of the notice.

However, if the freedom to dissolve the firm at will is curtailed by agreement, say, if the agreement provides that the partnership can be dissolved by the mutual consent of all the partners only, it will not constitute a ‘partnership at will’.

Question 4. Write a short note on Partner by estoppel.

Answer:

Partner by estoppel: Under Section 28 of the Indian Partnership Act, 1932, when a person represents himself or knowingly permits himself to be represented as a partner in a firm (when in fact he is not) he is liable, like a partner in the firm to anyone who on the faith of such representation has given credit to the firm.

It may be noted that where a retiring partner does not give public notice of his retirement and the continuing partners still use his name as a partner on letter-heads and bills etc., he will be personally liable, on the ground of holding out, to third parties who give credit to the firm on the faith that he is still a partner.

Distinguish Between General Nature Of A Partnership

Question 1. Briefly explain the difference” between a Partnership and an Association.

Answer:

The distinction between a Partnership and an Association: The two terms can be distinguished on the following basis:

1. Meaning: Partnership means and involves setting up relation of agency between two or more persons who have entered into a business for gains, to share the profits of such a business.
   • An association is a body of persons who have come together for mutual benefit such as a resident’s association of a particular area or for rendering service to the society such as a charitable or religious society say a dispensary or a temple etc.
2. Sharing of profits: A partnership is set up to share the profits of a business, while an association is not set up for sharing the profits. The intention of the association is not to carry on a business by the members of the association to earn profits.
3. Mutual Agency Trust: A partnership is based on mutual trust and is carried on by mutual agency, which is not so in the case of an association.
4. Dissolution: Retirement or death of a particular may dissolve a firm but retirement or death of a member of an association does not dissolve the association.

Question 2. Briefly explain the difference between a Partnership and a Joint Stock Company.

Answer:

Partnership and Joint Stock Company:

1. Personality: A firm is not a legal entity whereas a company is a juridical person distinct from its members.
2. Agency: In the case of a firm, every partner is an agent of other partners as well as of the firm but in the case of a company, members are not agents of the company.
3. Profits: Profits of a firm are distributed among the partners according to the deed of partnership. But in the case of a company, distribution of profit is optional as the company may or may not declare dividends.
4. Liability: In a firm, the liability of partners is unlimited but in a company, liability is always limited to the amount of shares or guarantee.
5. Property: The property of a firm is the joint estate of all the partners whereas in a company, the property belongs to the company and not to shareholders.
6. Transfer of share: In the case of partnership transfer of a partner’s right is not possible without the consent of all the partners, though his interest can be assigned to a third party who has a right to share in profits but has no other rights, but in the case of a public company, share is transferable and quoted on the stock exchange.
7. Management: In partnership, management is by partners, but in a company, the Board of Directors does the management, and shareholders only attend general meetings to vote.
8. The number of members in a partnership is a minimum of two and a maximum of 20 (in banking it is 10) but in the case of a private company, the minimum is two and a maximum of 50 excluding past and present employees. In the case of a public company, it is 7 arid with no restriction on the maximum.

Question 3. Briefly explain the difference between a Partnership and a Hindu undivided family.

Answer:

The difference between a Partnership and a Hindu undivided family

Following are the differences between a Partnership and a Joint Hindu Family:

1. Creation: The relation of partnership is created necessarily by an agreement, whereas a Joint Hindu Family is established by law. A person becomes a member of a Joint Hindu Family by birth.
2. Death: The death of a partner brings about the dissolution of the partnership. The death of a member of a Joint Hindu Family does not give rise to the dissolution of the family business.
3. Management: In a Joint Hindu family, only karta has the right to manage the business. In a partnership, all the partners have the right to take part in the management of the firm.
4. Liability: The liability of partners in a partnership concern is unlimited, joint, and several. The liability of members of a Joint Hindu Family except the Karta is limited only to the extent of their share in the business of the family.
5. Calling for accounts: On the partition of a joint Hindu Family a member is not entitled to ask for the accounts of the family business. However, a partner can bring a suit against the firm for accounts on the acquisition of the firm.
6. Governing Law: A partnership is governed by the Indian Partnership Act, of 1932, while a Joint Hindu Family is governed by Hindu Law.
7. Minor’s Position: A minor can be a member of a Hindu Joint Family, but a minor can not be a partner in a firm. However, he can be admitted to the benefits of partnership with the consent of all the partners.

Question 4. Briefly explain the difference between a Sleeping partner and a nominal partner.

Answer:

Sleeping Partner and Nominal Partner: A sleeping partner is neither an active partner nor known to outsiders. In reality, he is a partner in the firm.

• He contributes his share of capital and gets his share of profits, but he does not take an active part in the conduct of the business of the firm. He is liable to the third parties for all the acts of the firm.
• whether his existence is known to the third parties at the time of making the contract. A Nominal Partner has no real interest in the business of the firm.
• He is not entitled to share the profits and also does not contribute any capital. He also does not take part in the conduct of the business of the firm.

He lends his name only and his name is used in the firm like an actual partner and is liable for all acts of the firm.

General Nature Of A Partnership Descriptive Questions And Answers

Question 1. The law of partnership is an extension of the law of agency:

Answer:

The law of partnership is an extension of the law of agency: The concluding portion of the definition of partnership as given in Section 4 of the Act is very important for this quotation as it says that the business may be carried on “by all or any of them for all”.

• Thus, it is clear that the Act does require that the business should be carried on by all or it may be carried on by any of them on behalf of all of them.
• This establishes the implied agency, the partner who is conducting the affairs of the business is considered an agent of the remaining partners. The relationship between partners is governed by the law of agency.
• Section 18 of the Partnership Act provided, “Subject to the provisions of this Act, a partner is the agent of the firm for the business of the firm”.

In carrying on the business of the firm, partners act as agents as well as principals. While the relation between the partners inter se is that of principals, they are agents of one another concerning third parties for purposes of the business of the firm.

• Every partner has a two-fold character, he is an agent of the other partners (because other partners are bound by his acts) and also he is the principal (because he is bound by the acts of other partners).
• The liability of one partner for the acts of his co-partners is in truth the liability of a principal for the acts of his agent. This concept of mutual agency is, in fact, the true test of the existence of partnership.
• This relationship of principal and agent distinguishes a partnership business from co-ownership, a Joint Hindu family business as well as an agreement to share profits of the business.

From the above, we can conclude that the law of partnership is an extension of the law of principal and agent.

Question 2. Who may be a partner of a firm?

Answer:

Partner of a firm

Section 4 of the Indian Partnership Act, defines a partnership. This definition lays-stress on an agreement between persons.

These persons should be those, who are competent to contract as per provisions of S. No. 11 of the Indian Contract Act i.e., these persons must have the capacity to contract, meaning they are capable of entering into a valid contract.

Section 11 defines capacity to contract as follows:

“Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.

” Those who cannot contract can not be a partner. However, a minor under Section 30 of the Indian Partnership Act can be admitted to the benefits of the partnership firm with the consent of all the partners.

Thus to be a partner, a person must be

1. A major,
2. Of sound mind, and
3. Should not be, disqualified from contracting by any law.

Question 3. The true test of partnership is mutual agency.

Answer:

According to Section 4 of the Indian Partnership Act, of 1932, three elements of the firm appear from the definition of the partnership.

They are

1. There must be an agreement entered into by all the persons concerned
2. The agreement must be to share the profits of a business; and
3. The business must be carried on by all or any of the persons concerned, acting for all, All these elements must be present before a group of persons can be held to be partners.

The third element shows that the business must be carried on by the partners or some of them acting for all. This element very clearly brings out the fundamental principle of partners.

• When carrying on the business of the firm are agents as well as principals; an implied agency flows from their relationship with the result that every partner who conducts the business of the firm is in doing so deemed in law to be the agent of all the partners.
• The essence of a partnership is that each of the partners is the agent of the others to carry on the partnership business. This test is known as the test of mutual agency and is the most distinctive test of partnership.
• Failure by one partner to take part in the management of the business does not have the result that he is not carrying on business as a partner.
• Thus sharing the profits of a business though an essential element, would not be in itself sufficient to constitute a partnership, Besides sharing the profits of a business it is also necessary to show that the business was conducted on his behalf.

Therefore, the true test of partnership is mutual agency rather than sharing profits. If this element is lacking there will be no partnership.

Question 4. Explain the Partnership by holding out.

Answer:

Partnership by holding out (Section 28 Indian Partnership Act, 1932):

When a person represents himself or knowingly permits himself to be represented as a partner in a firm when in fact he is not, he is liable like a partner in the firm to anyone who on the faith of such representation has given credit to the firm.

In the case of partnership holding out some affirmative conduct by the principal is necessary.

Question 5. The true test of partnership is “mutual” agency between the partners.

Answer:

The true test of partnership is mutual agency rather than sharing of profits. If this element of mutual agency is absent then there will be no partnership. The prima facie evidence of partnership is mutual agency.

• Every partner carrying on the business is the principal as well as an agent of other partners. So, the act of one partner done on behalf of the firm binds all the partners.
• Section 4 of the Indian Partnership Act, 1932 says is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
• Thus an implied agency flows from their relationship as partners with the result that every person who conducts the business of the firm is in doing so, deemed in law to be the agent of all the partners. (Section 18).

Question 6. Partnership is an association of persons, who have agreed to share the profits of a business carried on by all or any one of them acting for all.

Answer:

This statement deals with the definition of partnership as laid down by Section 4 of the Indian Partnership Act, of 1932. The definition lays down the essential elements which must be fulfilled for making a partnership.

Accordingly,

1. There must be an agreement between the persons associating to form a firm.
2. The agreement must be to carry on a business i.e. there must be a business.
3. The agreement must be to share the profits of the business, equally or in agreed proportion.
   • However, sharing of profits is only a prima facie test of partnership since. there may be persons who share profits and yet may not be termed as partners For Example. a widow of a deceased partner or a loan creditor getting a share of profits over and above the interest charged by him.
4. The business must be carried in by all or it may be carried by one of them on behalf of all. This element establishes a relationship of mutual agency between the persons known to be partners of the business firm.

It is the agency relationship that binds all the partners to each other. A partnership is primarily an extension of the law of agency.

Question 7. The true test of partnership is the existence of mutual agency among the partners and not the sharing of profits.

Answer:

True Test of Partnership: To determine whether there exists a partnership among the partners, the definition given in Section 4 of the Indian Partnership Act, 1932 is used as a test, i.e. one must look to the agreement between them.

• If the agreement is to share the profits of a business, and the business is carried on by all or any of them acting for all, there is a partnership, otherwise not.
• In determining whether a group of persons is or is not a firm or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together.
• The difficulty arises when there is no specific agreement constituting partnership among the partners, or the agreement is such as does not specifically speak of partnership.

In such a case one has to determine the real relation’ between the partners as shown by all relevant facts taken together (Section 6) such as written or verbal agreement, real intimation and conduct of the partners, other surrounding circumstances, etc.

• The sharing of profits is prima facie a powerful evidence of partnership but the fact that there is a sharing of profit between some persons will not automatically make them partners.
• Therefore, receipt by a person of a share of the profits of a business or a payment contingent upon the earning of profits or varying with the profits earned by a business does not of itself make him a partner with the persons carrying on the business.
• Thus there is no partnership based on the sharing of profits only. The true test of partnership as laid down in the leading case of Cox vs. Hickman is mutual agency.
• Each partner carrying on the business is the principal as well as an agent of other partners, so the out-of-one partner done on behalf of the firm binds all the partners.

If the element of mutual agency relationship exists between the parties constituting a group formed to earn profits by running a business, it can be said that there is a partnership.

Question 8. Partner by Holding out?

Answer:

Partner by Holding Out: Section 28 of the Indian Partnership Act, 1932 provides for the meaning of the term, ‘Partner by Holding Out’. It states:

1. Anyone who by words spoken or written or by conduct represents himself, or knowingly permits himself to be represented, to a partner in a firm, is liable as a partner in that firm, to anyone who has on the faith of any such representation given credit to the firm, whether the person representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit.
2. Where after a partner’s death the business is continued in the old firm name, the continued use of that name or the deceased partner’s name as a part thereof shall not of itself make his legal representative or his estate liable for any act of the firm done after his death.

Thus, holding out means holding responsible a person who is not a partner in the real sense in a firm, but has represented himself as a partner, or has knowingly permitted himself to be represented, is to be treated as a partner of the firm to anyone.

• Who on the faith of such representation has given credit to the fire? He shall also be liable to such creditors for payment.
• The representation referred to above may be expressed or implied. It may be written or maybe even by conduct. The form of representation is immaterial for such a purpose.

Question 9. What is the conclusive evidence of partnership? State the circumstances when the partnership is not considered between two or more parties.

Answer:

Conclusive evidence of partnership

The business must be carried on by all the partners or by anyone or more of the partners acting for all. This is the cardinal principle of the ‘partnership law. An act of one partner in the course of the business of the firm is an act of all partners.

• It may be noted that the true test of partnership is mutual agency rather than sharing of profits.
• If the element of mutual agency is absent, then there will be no partnership.

Sharing of profits is an essential element to constitute a partnership, but it is only prima facie evidence and not conclusive evidence.

Conclusive evidence of the existence of a partnership is only mutual agency.

The receipt of profit share by one person of a business, does not itself make him a partner with the persons carrying on the business. Such cases are:

1. By a servant or agent as remuneration.
2. By a widow or child of a deceased partner, as an annuity.
3. By a lender of money to persons engaged or about to engage in any business.
4. By a previous owner or part owner of the business.

Question 10. Whether a group of persons is or is not a firm, or whether a person is or not a partner in a firm.,” Explain the mode of determining existence of a partnership as per The Indian Partnership Act 1932.

Answer:

Mode of Determining Existence of Partnership:

In determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm regard shall be had to the real relation between the parties, as shown by all relevant facts taken together.

To determine the existence of a partnership, it must be proved:

• There was an agreement between all the persons concerned.
• The agreement was to share the profits of a business, and
• The business was carried on by all or any of them acting for all.

1. Agreement: Partnership is created by agreement and not by status.
2. Sharing of Profits: Sharing of profit is an essential element to constitute a partnership. But, it is only prima facie evidence not conclusive evidence. Although the right to participate in profits is a strong test of partnership, whether the relationship is there or not, depends upon the whole contract between the parties.
3. Agency: The existence of mutual agency is the cardinal principle of partnership law, and is very much helpful in concluding in this regard. Each partner carrying on the business is the principal as well as an agent of other partners. So, the act of one partner done on behalf of the firm binds all the partners.

If the elements of a mutual agency relationship exist between the parties constituting a group formed to earn profits by running a business, a partnership may be deemed to exist.

Question 11. What do you mean by ‘Partnership at will’ as per the Indian Partnership Act, 1932?

Answer:

‘Partnership at will’ as per the Indian Partnership Act, 1932

Partnership at will (Section 7) of the Indian Partnership Act, 1 932 which says that partnership at will is a partnership when:

1. No fixed period has been agreed upon for the duration
2. There is no provision made as to the determination of partnership.

Question 12. What do you mean by “Particular Partnership” under the Indian Partnership Act, of 1932?

Answer:

Particular Partnership:

A partnership may be organized for the prosecution of a single adventure as well as for the conduct of a continuous business.

• Where a person becomes a partner with another person in any particular adventure or undertaking the partnership is called a ‘particular partnership’.
• A partnership, constituted for a single adventure or undertaking is, subject to any agreement, dissolved by the completion of the adventure or undertaking.

Question 13. Who is a nominal partner under the Indian Partnership Act, of 1932? What are his liabilities?

Answer:

Nominal Partner:

A person who lends his name to the firm, without having any real interest in it, is called a nominal partner.

• He is not entitled to share the profits of the firm. Neither did he invest in the firm nor take part in the conduct of the business.
• He is, however, liable to third parties for all acts of the firm.

Question 14. “Business carried on by all or any of them acting for all.” Discuss the statement under the Indian Partnership Act, of 1932.

Answer:

Mutual Agency:

The existence of a Mutual Agency which is the cardinal principle of partnership law, is very much helpful in concluding in this regard.

• Each partner carrying on the business is the principal as well as an agent of other partners.
• So, the act of one partner done on behalf of the firm binds all the partners.

If the elements of a mutual agency relationship exist between the parties constituting a group formed to earn profits by running a business, a partnership may be deemed to exist.

Question 15. Define partnership and name the essential elements for the existence of a partnership as per the Indian Partnership Act,1932. Explain any two such elements in detail.

Answer:

Definition of ‘Partnership’ (Section 4)

As per the Partnership Act, 1932 mentioned in section 4 ‘Partnership’ is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

Elements of Partnership:

The definition of a partnership contains the following five elements which must co-exist before a partnership can come into existence.

1. Partnership is an association of two or more persons.
2. The partnership must be a result of. an agreement entered into by all persons concerned.
3. The partnership is organized to carry on some business.
4. The agreement must be to share the profits of the business.
5. The business must be carried on by all or any of them acting for all.

Explanations of any two elements in detail are as follows.

1. Association of two or more persons: A partnership is an association of 2 or more persons. Again, only persons recognized by law can agree partnership.
   • Therefore, a firm since it is not a person recognized in the eyes of law cannot be a partner.
   • Again, a minor cannot be a partner in a firm, but with the consent of all the partners, may be admitted to the benefits of partnership.
   • The Partnership Act is silent about the maximum number of partners but section 464 of the Companies Act, 2013 has now put a limit of 50 partners in any association or partnership firm.
2. Agreement: It may be observed that a partnership must be the result of an agreement between two or more persons. There must be an agreement entered into by all the persons concerned.
   • This element relates to the voluntary contractual nature of the partnership. Thus the nature of the partnership is voluntary and contractual.
   • An agreement from which a relationship of partnership arises may be expressed.
   • It may also be implied from the act done by partners and from a consistent Course of conduct being followed, showing mutual understanding between them. It may be oral or in writing.

Question 16. Sharing in the profits is not conclusive evidence in the creation of partnership”. Comment.

Answer:

Evidence of partnership: Partnership, generally is an agreement between two or more competent persons to carry on some business and distribute or share the profits of such business.

• Section 6 of the Indian Partnership Act prescribes the test to determine the existence of a partnership.
• To determine whether a group of persons is a firm and its members are partners or not, their relation must be determined based on relevant facts.
• The parties to a partnership contract do not become partners simply on the basis that they have been described, in the deed, as partners.

Sharing in the profits of the firm is prima facie evidence of the establishment of the partnership but it is not conclusive proof.

• As per the provision of section 4 of the Indian Partnership Act, the sharing of profits is not the sole determining factor. Other tests are also required to be applied.
• A person may, in many ways share in the profits of a business without being a partner. Explanation 2 of section 6 of the Indian Partnership Act also makes it clear that a creditor is not a partner.
• Similarly, a servant, an agent, a widow, or a child of the deceased partner may receive a share in the profits. But they do not become a partner.

Thus, the real thing to be seen in such cases is whether they are participating in the business of the firm in the capacity of partners and representing each other in the said capacity.

Question 17. What do you mean by ‘Partnership for a fixed Period’ as per the Indian Partnership Act, 1932?

Answer:

A partnership for a fixed period is a partnership where

• A provision is made by a contract between the partners for the duration of the partnership, the partnership is called a ‘partnership for a fixed period.’
• It is a partnership created for a particular period. “
• Such a partnership comes to an end on the expiry of the fixed period.

Question 18. State whether the following are partnerships:

1. A and B jointly own a car which they use personally on Sundays and holidays and let it on hired as a taxi on other days and equally divide the earnings.
2. Two firms each having 12 partners combine by an agreement into one firm.
3. A and B, co-owners, agree to conduct the business in common for profit.
4. Some individuals form an association to which each individual contributes ₹ 500 annually. The objective of the association is to produce clothes and distribute the clothes free to the war widows.
5. A and B, co-owners share between themselves the rent derived from a piece of land.
6. A and B buy commodity X and agree to sell the commodity while sharing the profits equally.

Answer:

The definition of a partnership contains the following five elements that must co-exist before a partnership can come into existence:

1. Partnership is an association of two or more persons.
2. The partnership must be a. result of an agreement entered into by all persons concerned.
3. The partnership is organized to carry on some business.
4. The agreement must be to share the profits of the business.
5. The business must be carried on by all or any of them acting for all.
   • In the given situations if they satisfy any of the following conditions then they will be called as a partnership. Also if ‘they’ satisfy the true test of partnership condition i.e., Agreement, sharing of profit, and Agency.
   • A and B jointly own a car which they use personally on Sundays and holidays and let it on hired as a taxi on other days and equally divide the earnings creating an agreement between them for sharing of profits and mutual agency. Hence, it is a partnership.
   • Two firms each having 12 partners combined by an agreement into one firm is a partnership as they satisfy the above-mentioned basic conditions.
   • A and B, co-owners agree to conduct the business in common for profit is a partnership as it satisfies the basic conditions to form a partnership.
   • Some individuals who form an association with an object of charity do not amount to a partnership as they have created a not-for-profit organization that does not carry the basic requirements of agreement between them, sharing of profits, and mutual agency. Hence, it is not a partnership.
   • A and B, co-owners share between themselves the rent derived from a piece of land is not a partnership as it lacks the mutual agreement between them.
6. A and B brought commodity X without an agreement only to share profits equally does not amount to a partnership.

Unpaid Seller Self-Study Questions And Answers

Question 1. Define Unpaid Seller.

Answer:

Unpaid Seller

As per Section 45, the seller is deemed to be an unpaid seller, when:

1. The whole of the price has not been paid or tendered and the seller had an immediate right of action for the price.
2. A bill of exchange or other negotiable instrument was given as payment, but the same has been dishonored unless this payment was absolute and not conditional.

Question 2. What are the Rights of an Unpaid Seller?

Answer:

The Rights of an Unpaid Seller

• Right of lien or retention
• Right of stoppage in transit
• Right of resale
• Right to withhold delivery

Question 3. What are the Rights of unpaid sellers against the goods?

Answer:

The Rights of unpaid sellers against the goods

Seller’s lien (Section 47):

1. It can be exercised on the goods for the price while he is in possession until the payment of the price of such goods. It can be exercised in the following cases:
   • Where the goods have been sold without any stipulation as to credit.
   • Where goods have been sold on credit but the terms of credit have expired.
   • Where the buyer becomes insolvent.
2. The right depends upon physical possession.
3. It can only be exercised for the non-payment of price.

Part Delivery (Section 48):

In case of part delivery, a lien can be exercised for remaining goods unless contrary provided in the agreement.

Question 4. Which Conditions will be Applies in Termination of lien?

Answer:

As per Section 49

This right is terminated under the following circumstances:

• Where he delivers goods to a carrier or bailee for transmission to the buyer without reserving the disposal right.
• Where the buyer or his agent lawfully obtains possession of goods.
• Where the seller has waived the right of lien.
• By estoppel

Question 5. What are the Rights of stoppage in transit?

Answer:

The Rights of stoppage in transit

1. Right of stoppage in transit (Section 50)
2. It means the right, to stop the further transit of goods, to resume possession, and to hold the same till the price is paid.
3. It can be exercised in the following cases:
   • The seller must be unpaid
   • He must have parted with the possession of goods
   • Goods are in transit
   • The buyer has become insolvent
   • Right is subject to provisions of the act.
4. Insolvent here means that a person has ceased to pay his debts in the ordinary course of business or cannot pay his debts as they become due.

Question 6. What do you Understand by Duration of transit?

Answer:

Duration of transit

As per Section 51

Goods are deemed to be in transit from the time they are delivered to a carrier or another bailee for transmission until the buyer or his agent takes delivery of them.

• The right is lost in the following cases:
  1. Buyer taking delivery
  2. Acknowledgment by carrier
  3. Delivery to ship
  4. Wrong denial to deliver by carrier
  5. Sub sale
  6. Goods in possession of the ship’s master acting as buyer’s agent
• If the buyer rejects the goods and the carrier or bailee continues to be in its possession, the transit does not end, even if the seller refuses to receive them back.

Question 7. How stoppage in transit is affected?

Answer:

As per Section 52

It may be exercised by:

1. Taking actual possession of goods or.
2. Giving notice of his claim to the carrier or bailee who holds the goods.

Question 8. Distinguish between the right of lien and the right of stoppage in transit.

Answer:

Difference between the right of lien and the right of stoppage in transit

Question 9. Define the Effect of sub-sale or pledge by buyer.

Answer:

The Effect of sub-sale or pledge by buyer

As per Section 53

It is not affected by any sale or other disposition of goods made by the buyer unless the seller has assented to it.

Question 10. What are the Rights of re-sale?

Answer:

The Rights of re-sale

As per Section 54

1. It can be exercised in the following cases:
   • Where the goods are perishable, the buyer need not be informed of the intention of resale.
   • Where he gives notice to the buyer of his intention to resell the goods,” the buyer does not within or reasonable time pay or tender the price.
   • Where the right is expressly reserved in the contract.
2. If no notice has been given to the buyer of the intention to re-sell, the unpaid seller cannot claim any damages and the buyer will be entitled to all profits.
3. An unpaid seller can recover from the buyer the balance amount (if any) on resale.
4. If notice has been given to the buyer, then the profit origin out of the sale of goods won’t be shared with the buyer. Only the seller with hold the samples.

Question 11. What are the Rights of the unpaid seller against the buyer?

Answer:

The Rights of the unpaid seller against the buyer

As per Section 55-61

Rights of unpaid seller against buyer:

• Suit for price
• Suit for damages for non-acceptance

Question 12. Write Short notes on the Suit for price.

Answer:

Suit for price

As per Section 55

Seller may sue

• Where the property has passed to the buyer and he wrongfully neglects or refuses to pay for goods.
• Where the property has not passed and the price is payable on a certain day irrespective of delivery and the buyer wrongfully neglects or refuses to pay such price.

Question 13. Write Short notes on the Suit for damages for non-acceptance.

Answer:

Suit for damages for non-acceptance

As per Section 56

The seller may sue the buyer for non-acceptance, where he wrongfully neglects or refuses to accept and pay for the goods.

Question 14. Describe the Repudiation of the contract before the due date.

Answer:

The Repudiation of the contract before the due date

As per Section 60

If the buyer repudiates the contract before the date of actual delivery, the seller may treat the contract rescinded and sue for the breach.

Question 15. Write Short notes on Suit for Interest.

Answer:

Suit for Interest

As per Section 61

If there is a specific agreement for interest on price, the seller can recover interest from the date on which payment becomes due.

If no specific agreement, the seller may charge interest from the day he notifies the buyer about the payment being due.

Question 16. What are the Conditions that apply to Remedies of the buyer against the seller?

Answer:

The Conditions that apply to Remedies of the buyer against the seller

• Damages for non-delivery
• Suit for specific performance (only in case when goods are ascertained or specific)
• Suit for breach of warranty.
• Repudiation of the contract before the due date and suing for damages for breach
• Suit for interest.

Question 17. What do you understand by Auction Sale?

Answer:

Auction Sale

As per Section 64

• It is a mode of selling property by inviting bids publically and the property is sold to the highest bidder.
• It is a public sale where goods are offered to be taken by bidders.
• The auctioneer is only an agent of the seller.
• Following rules apply
  1. Where goods are put up for sale in lots, each lot is treated to be the subject of a separate contract of sale.
  2. The sale is complete when the auctioneer announces its completion by fall of the hammer or in another customary manner.
  3. Right to bid may be reserved. expressly by or on behalf of the seller.
  4. If such right is not reserved, it is not lawful for the auctioneer knowingly to take any bid from the seller.
  5. A sale may be notified to be subject to a reserve or upset price.
  6. If the seller makes use of pretending bidding to raise the price, the sale is voidable at the buyer’s option.

Question 18. Write a Short note on the Inclusion of Increased or Decreased taxes as a contract of sale.

Answer:

The Inclusion of Increased or Decreased taxes as a contract of sale

As per Section 64A

1. If after entering into the contract of sale, tax revisions take place.
2. Buyer needs to pay the increased price in the case is an increase in taxes and vice versa unless anything contrary is stated in agreement.

Unpaid Seller Objective Questions And Answers

Question 1. State with reasons whether the following statement is Correct or Incorrect: The right of lien by an unpaid seller can be exercised for the nonpayment of the price of goods and other charges.

Answer:

Incorrect: The unpaid seller is given ‘right of lien’ over the goods, only in case of non-receipt of the price of goods and not for any other charges.

Question 2. State with reasons whether the following statements are Correct or Incorrect:

1. In an auction sale, goods to be auctioned can be put for sale in lots.
2. ‘Right of lien’ and ‘right to stoppage the goods in transit’ may be exercised simultaneously by an unpaid seller.

Answer:

1. Correct: Section 64 of the Sale of Goods Act, 1 932 provides that in the auction sale where goods are put up for sale in lots, each lot is prima facie deemed to be subject to a separate contract of sale.
2. Incorrect: The right of lien is exercisable as long as the seller owns goods whereas the Right of Stoppage in transit is exercisable as long as the goods are passing through channels of communication to reach in the hands of the vendee.

Question 3. State with reasons whether the following statements are Correct or Incorrect:

1. After completion of the sale in an auction, the property in the goods and the risk of the loss caused in an accident to the auctioned property therein is transferred to the bidder.
2. Where the goods are perishable the unpaid seller cannot re-sell the goods without any notice to the buyer.

Answer:

1. Correct: Section 26 of the Sale of Goods Act, 1930 lays down that unless otherwise agreed, the goods remain at the seller’s risk until the property therein is transferred to the buyer. When property therein is transferred to the buyer, the goods are at the buyer’s risk whether delivery has been made or not. Therefore, the property in the goods and the risk of loss thereof has been, passed to the bidder and the buyer has to bear the loss.
2. Incorrect: According to Section 53(2) and (3) of the Sale of Goods Act, 1930, an unpaid seller should give a notice to the buyer of his intention to re-sell the goods. However, in respect of perishable goods, no such notice appears to be compulsory.

Question 4. State with reasons whether the following statement is Correct or Incorrect: In an auction sale, the seller or any other person on his behalf may bid at the auction.

Answer:

Correct: A bid can be made provided such a right is expressly reserved by the seller. According to Section 64(3) of the Sale of Goods Act, 1930, in the case of a sale by auction, a right of the bid may be reserved expressly by or on behalf of the seller and, where such right is expressly so reserved, but not otherwise, the seller or any one person on his behalf may, subject to the provisions hereinafter contained bid at the auction.

Question 5. State with reasons whether the following statement is Correct or Incorrect: Right of lien is linked with the possession of goods.

Answer:

Correct: The unpaid seller has a lien on the goods, for the price, while he has goods, until the payment or the tender of the price. A lien is a right to retain possession of goods, until payment of the price.

Question 6. State with reasons whether the following statement is Correct or Incorrect: In an auction sale a bid once made cannot be withdrawn by the bidder.

Answer:

Incorrect: The bidder can withdraw his bid anytime before the fall of the hammer i.e. completion of the sale.

Question 6. State with reasons whether the following statement is Correct or Incorrect: A seller of goods shall be called an ‘Unpaid seller’ even when a part payment of the price of goods sold has been made to him by a buyer.

Answer:

Correct: According to Section 45(1) of the Sale of Goods Act, 1 930 a seller of goods is deemed to be an unpaid seller when the whole of the price has not been paid. Hence the seller shall be called an unpaid seller even when a part payment of the price of goods has been made.

Question 7. State with reasons whether the following statement is Correct or correct: In an auction sale, the seller or any other person on his behalf may bid at the auction, if such a right is expressly reserved.

Answer:

Correct: According to Section 4(3) of the Sale of Goods Act, 1930 in an. Agreement to Sell the transfer of property in the goods is to take place at a future time or subject to some conditions thereafter to be fulfilled. Hence the property in the goods does not pass to the buyer immediately.

Unpaid Seller Short Notes

Question 1. Write a short note on: What are the remedies available to the buyer, when goods in the wrong quantity are delivered to him?

Answer:

The remedies available to the buyer, when goods in the wrong quantity are delivered to him

The wrong quantity may be either a short delivery to the buyer or a quantity of goods less than he contracted to sell the buyer may reject them. But if the buyer accepts the goods so delivered he shall pay for them at the contract price. By accepting the lesser quantity the buyer is not debarred from suing or damages on the ground of short delivery.

1. Short delivery: When the seller delivers to the buyers a quantity of goods less than he contracted to sell the buyer may reject them. But if the buyer accepts the goods so delivered he shall pay for them at the contract price. By accepting the lesser quantity the buyer is not debarred from suing for damages on the ground of short delivery.
2. Excess delivery: Where the seller delivers to the buyer a quantity of goods larger than contracted for the buyer has the option:
   • To accept the contracted quantity and reject the excess or
   • To accept the whole and pay for them at the contract price or
   • To reject the whole quantity.
3. Mixed delivery: Where the seller delivers to the buyer the goods he contracted to sell mixed with the goods of a different description not included in the contract, the buyer may accept the goods which are per the contract and reject the rest, or reject the whole.

When the goods wrong quantity are delivered the buyer has the option to reject the whole lot and if he does so it does, not amount to cancellation of the contract. The seller has the right to deliver the goods contracted for and the buyer shall be bound to accept the same.

Question 2. Write a short note on the liability of an incoming partner.

Answer:

The liability of an incoming partner

An incoming partner is not liable for any act of the firm done before his admission as a partner. This is because the old partners were not the agents of the new partners at the time when they acted.

• By a mutual agreement, the new partners may agree with the old partners to be liable for the past liabilities of the firm. However, the creditors of the firm cannot sue the new partners for their past debts, because there is no privity of contract between the creditors and the new partner.
• Similarly, the acts of the old partner can not be ratified by the new partner because he was not in existence as a principal at the time when acts were done.

He is liable for the acts of the old firm only if the new firm assumes the liabilities of the old firm and the creditors accept the new firm as their debtor and discharge the old firm from his liability.

Question 3. Write a short note describing briefly the rights of the buyer against the seller in case of breach of contract of sale.

Answer:

Buyer’s rights against the seller in case of breach of contract: Sections 57 to 59 and 61 of the Sale of Goods Act, 1930, proceed to deal with the remedies of a buyer in cases where the seller commits a breach of the contract. They are as follows:

1. Damages for non-delivery (Section 57): Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may sue the seller for damages for non-delivery.
   • In this case, the general rules as regards the ascertainment of the damages given under Section 73 of the Contract Act, 1872, and the rule in Hadley vs. B Baxendale will be applicable.
2. Suit for specific performance (Section 58): Where a property has passed to the buyer, he also can exercise another right, i.e. a right to sue for specific performance and its limits regulated by the Specific Relief Act.
   • In such cases, the court may, in its discretion grant a decree ordering the seller to deliver those specific or ascertained goods which formed the subject matter of the contract.
   • The remedy is discretionary and will only be granted if the goods are of a specific value or are unique, For Example., a rare book, a picture, or a piece of jewelry, and the damages are not an adequate remedy.
3. Remedy for breach of warranty (Section 59): Where there is a breach of warranty by the seller, or where the buyer elects or is compelled to treat any breach of a condition on the part of the seller as a breach of warranty, the buyer is not by reason only of such breach of warranty entitled to reject of the goods; but he may:
   • Set up against the seller the breach of warranty in diminution or extinction of the price; or
   • sue the seller for damages for breach of warranty.
   • The measure of damage for breach of warranty is the estimated loss or damage arising directly or naturally from the breach, which is prima facie the difference between the value of the goods at the time of the delivery and the value they would have had if the goods had answered to the warranty.
4. Suit for recovery of price (Section 61): The buyer has a right to recover the money paid to the seller where the consideration for payment of it has failed. For example, where the buyer is deprived of goods by their true owner, he may recover the price for breach of the condition as to title.

Question 4. Write a short note to Discuss the remedies available to the seller against the buyer in case of breach of contract of sale.

Answer:

Remedies available to the seller against the buyer: The following remedies are available to the seller against the buyer in case of a breach of the contract of sale:

1. Suit for price: Where the property in the goods has passed to the buyer or he was wrongfully neglected or refused to pay for the goods according to the terms of the contract, the seller may sue him for the price of goods.

• Further, where the price is payable under the contract on a certain day irrespective of delivery and the buyer wrongfully neglects or refuses to pay such price.
• The seller may sue him for the price even if the property of the goods has not passed and the goods have not been appropriated to the Contract. (Section 55). For instance, there was a sale of some quantity of iron to be delivered between 3^rd May and 30^th June.
• If the buyers required, the price to be paid on the latter date at all costs By the 30^th, only a portion of the iron had been delivered since the buyer did not require any further delivery.
• In such a situation, the seller would be able to recover the whole price without showing that he had appropriated to the contract any specific iron to complete the delivery of the remainder.

Incidentally, the seller has a lien on the goods for the price while he owns them. The statement in a contract of sale that the seller would have the right to resell after notice will not deprive him of his legal right to sue for the price of the goods if he so desires.

2. Damages for non-acceptance (Section 56): Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may sue him for damages for non-acceptance.

Some of the rights of an unpaid seller via., lien stoppage in transit, and resale are additional rights. These, however, do not compensate the seller for the breach of the contract but simply protect him from additional loss.

The breach of the contract, no doubt remains, and the seller is entitled to be compensated for the same. The above-referred remedies under Sections 55 and 56 deal with the remedies available to a seller and may be exercised by him (seller).

• If the property in the goods sold has already passed to the buyer the seller can either sue for price or damages for nonacceptance [Section 55(1) and 56].
• If the property in the goods sold has not passed the seller’s only remedy is to sue for damages for non-acceptance (Section 56), but the seller can even if the property has not passed, bring an action for the price if it is “payable on a day certain” and the buyer has failed to pay such price [Section 55(2)].
• When the seller is ready and willing to deliver the goods and requests the buyer to take delivery, and the buyer does not within a reasonable time after such request take delivery of the goods.
• He is liable to the seller for any loss occasioned by his neglect or refusal to take delivery and also for a reasonable charge for the care and custody of the goods. In this case, the seller’s right will not be affected where the neglect or refusal of the buyer to take the delivery amounts to a repudiation of the contract – (Section 44).
• The seller’s right of re-sale is available subject to the provisions of Section 54(2) and (4).
• How much damages will be awarded to the seller in case of the breach of contract of sale by the buyer will be reassured according to the provisions of Sections 73 and 74 of the Indian Contract Act, 1872.

Question 5. Write a short note on: Who is an ‘Unpaid Seiler’? When can such a seller exercise his ‘Right of Lien’ against the goods? Explain the rules for exercising the right of lien by an unpaid seller.

Answer:

A seller be deemed to be an unpaid seller when:

1. The whole of the price has not been paid or tendered.
2. A bill of exchange or other negotiable instrument has been received as conditional payment, and the condition on which it was received has not been fulfilled because of the dishonor of the instrument or otherwise. (Section 45(1) Sale of Goods Act, 1930).

Thus the following conditions must be fulfilled before the seller can be deemed to be an unpaid seller:

1. He must be unpaid and the price must be due.
2. He must have an immediate right of action for the price.
3. A bill of exchange or other negotiable instrument was received but the same has been dishonoured.

Right of an unpaid seller:

Right of Lien:

A lien is a right to retain possession of goods until payment of the price. It is available to the unpaid seller who has the goods sold, where:

1. The goods have been sold without any stipulation as to credit;
2. The goods have been sold on credit, but the terms of credit have expired;
3. The buyer becomes insolvent [Section 47(1)].

Rules regarding lien:

1. The seller may exercise his right of lien notwithstanding that he has the goods as agent or bailee for the buyer [Section 47(2)]. If he loses the possession of the goods, he loses the right of lien also.
2. The lien depends on actual possession and not on title. It is not affected even if the seller has parted with the document capable of transferring the title.
3. The possession of the goods by the seller must not expressly exclude the right of lien.
4. The lien can be exercised by the unpaid seller only for the price and not for any other charges such as warehouse or dock charges.
5. Where an unpaid seller has made part delivery of the goods, he may exercise his right of lien on the remainder. He may refuse to deliver such remainder of the goods till he is paid for the goods already delivered and the goods are yet to be delivered.
6. Where, however, a part of the goods is delivered under such circumstances as to show an agreement to waive the lien, the seller cannot retain the remainder [Section 48].
7. The unpaid seller of goods, having a lien thereon, does not lose his lien by reason only that he has obtained a decree for the price of the goods [Section 49(2)].

Question 6. Write a short note on Stoppage in transit.

Answer:

Stoppage in Transit: (Section 50 Sale of Goods Act, 1930): It is a right to stop the goods while they are in transit, resuming possession of them and retaining possession until payment of the price.

This right is exerciseÿ by the seller when:

1. He is unpaid.
2. He may have parted with the possession of goods.
3. The goods must be in transit.
4. The buyer must have become insolvent.
5. The right is subject to provisions of the Act.

The unpaid seller may exercise this right either by taking actual possession of the goods or by giving notice of his claim to the carrier, or other bailee in whose possession the goods are. The right of stoppage in transit begins when the right of lien ends.

Question 7. Write a short note on State the provisions given under the Sale of Goods Act relating to ‘Auction Sale’.

Answer:

Auction Sale: An ‘Auction Sale’ is a mode of selling property by inviting bids publicly and the property is sold to the highest bidder. An auctioneer is an agent governed by the Law of Agency.

When he sells, he is only the agent of the seller. He may, however, sell his own properly as the principal and need not disclose the fact that he is so selling.

Under section 64 of the Sale of Goods Act, 1930 in the case of an auction:

1. Where goods are put for sale in lots, each lot is prima facie deemed to be the subject matter of a separate contract of sale.
2. The sale is complete when the auctioneer announces its completion by the fall of the hammer or in any other customary manner and until such announcement is made, any bidder may retract from his bid.
3. Right to bid may be reserved expressly by or on behalf of the seller and where such a right is expressly reserved, but not otherwise, the seller or any one person on his behalf may bid at the auction.

Where the sale is not notified to be subject to the right of the seller to bid, it shall not be lawful for the seller to bid himself or to employ any person to bid at such sale.

1. Or for the auctioneer knowingly to take any bid from the seller or any person representing him. Any sale contravening this rule may be treated as fraudulent by the buyer
2. The sale may be notified to be subject to a reserve or upset price; and
3. If the seller makes use of pretended bidding, to raise the price, the sale is voidable at the option of the buyer.

Question 8. Write a short note on the Unpaid seller’s right to re-sale.

Answer:

An unpaid seller’s right to resale: (Section 54 Sale of Goods Act, 1930).

1. When the goods are perishable, the unpaid seller may re-sell the goods without any notice to the buyer.
2. When the unpaid seller has exercised his right of lien or stoppage in transit, he has to give notice to the buyer of his intention to resell.
3. Then only he will be entitled to recover any loss and keep all profits with him. Otherwise not. But so far as the new buyer’s title is concerned it will be good whether the seller gives or does not give notice to the first buyer.

Unpaid Seller Descriptive Questions And Answers

Question 1. Right of lien and Right of stoppage of goods in transit available to an unpaid seller.

Answer:

Right of Lien and Right of Stoppage In Transit:

1. The unpaid seller’s right to stop the goods in transit arises only when the buyer is insolvent but the right of lien can be exercised even when the buyer can pay but does not pay.
2. The right of lien can be exercised on goods that are in actual or constructive possession of the seller, while the right of stoppage in transit can be exercised when the goods are in the possession of a middleman between the seller who has parted with the possession of the goods and the buyer, who has not yet acquired the possession.
3. The right of lien comes to an end when the possession of the goods is surrendered by the seller, but the right of stoppage in transit commences when the goods have left the possession of the seller and continues until the buyer has acquired their possession.
4. The right of lien is to retain possession while the right of stoppage in transit is to regain or resume possession.

Question 2. What are the rights of an unpaid seller against goods under the Sale of Goods Act, 1 930?

Answer:

Rights of an unpaid seller against the goods under the Sale of Goods Act, of 1930 are:

1. A lien or right of retention: An unpaid seller in possession of goods sold, may exercise his lien on the goods, i.e. keep the goods in his possession and refuse to deliver them to the buyer until the fulfillment or tender of the price. This right depends upon physical possession i.e. it is a possessory lien. Lien is cost as soon as the seller parts with the goods.
2. The Right of Stoppage in Transit: The right of stoppage in transit is a right to stop the goods while they are in transit, resuming the possession of them and retaining possession until payment of the price.
3. Right of re-sale: The unpaid seller may re-sell:
   • Where the goods are perishable.
   • Where such right is expressly resumed.
   • Where the seller tends to notify the buyer of his intention to re-sell and the buyer still does not tender the price within a reasonable time.
4. Right to withhold delivery: If the property in the goods has passed, the unpaid seller has the right as described above. If however, the property has not passed, the unpaid seller has a right of withholding delivery similar to and co-extensive with his rights of lien and stoppage in transit.

Question 3. What are the rules that regulate the Sale by Auction’ under the Sale of Goods Act, of 1930?

Answer:

The rules that regulate the Sale by Auction’ under the Sale of Goods Act, of 1930

An ‘Auction Sale’ is a mode of selling property by inviting bids publicly and the property is sold to the highest bidder. An auctioneer is an agent governed by the Law of Agency.

When he sells, he is only the agent of the seller. He may, however, sell his property as the principal and need not disclose the fact that he is so selling.

Legal Rules of Auction Sale: Section 64 of the Sale of Goods Act, 1930 provides the following rules to regulate the sale by auction:

1. Where goods are sold in lots: Where goods are put up for sale, in lots, each lot, is prima facie deemed to be subject to a separate contract of sale.
2. Completion of the contract of sale: The sale is complete when the auctioneer announces its completion by the fall of the hammer or in any other customary manner and until such announcement is made, any bidder may retract from his bid.
3. Right to bid may be reserved: Right to bid may be reserved expressly by or on behalf of the seller and where such a right is expressly reserved, but not otherwise, the seller or any one person on his behalf may bid at the auction.
4. Where the sale is not notified by the seller: Where the sale is not notified to be subject to a right to bid on behalf of the seller, it shall not be lawful for the seller to bid himself or to employ any person to bid at such sale, or for the auctioneer knowingly to take any bid from the seller or any such person; and any sale contravening this rule may be treated as fraudulent by the buyer.
5. Reserved price: The sale may be notified to be subject to a reserve or upset price; and
6. Pretended bidding: If the seller makes use of pretended bidding to raise the price, the sale is voidable at the option of the buyer.

Question 4. Discuss the rights of an unpaid seller against the buyer under The Sales of Goods Act, of 1930.

Answer:

The rights of an unpaid seller against the buyer are as follows:

1. Suit for price:
   • The seller may sue the buyer for the price if the buyer is unable to neglect or refuses to pay the price.
   • This may happen in any of the following cases:
     1. When the property in goods has passed to the buyer, but the buyer has failed to pay the price.
     2. When the price is payable on a certain day and the buyer fails to pay on that day.
     3. In the above cases, a seller may sue the buyer for the recovery of price, even though property in goods has not passed and the goods have not been appropriated to the contract.
2. Suit for damages for non-acceptance: If the buyer refuses to accept and pay for goods, the goods may suffer damage due to delay, and the seller may sue the buyer for that
3. Repudiation of the contract before the due date: When the buyer terminates the contract before the date of delivery, the seller may treat the contract as rescinded and sue for damages for the breach. This is also, known as ‘anticipatory breach of contract.
4. Suit for interest: The seller may also sue the buyer for the interest along with a suit for the recovery of the price. In the absence of any agreement between the parties, the rate of interest will be decided by the court.

Question 5. Describe in brief the rights of the buyer against the seller in case of breach of contract of Sale.

Answer:

The rights of the buyer against the seller in case of breach of contract of Sale

As per the provisions of the Sale of Goods Act, of 1930, if the seller commits a breach of contract, the buyer gets the following rights against the seller:

1. Damages for Non-Delivery (Section 57): Where the Seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may sue the seller for damages for non-delivery.
2. Suit for specific performance (Section 58): Where the seller commits a breach of contract of sale, the buyer can appeal to the court for specific performance. The court can order for specific performance only when the goods are ascertained or specific.
3. Suit for breach of warranty (Section 59): Where there is a breach of warranty on the part of the seller, or where the buyer elects to treat a breach of condition as a breach of warranty, the buyer is not entitled to reject the goods only on- the basis of such breach of warranty. But he may-
   • Set up against the seller the breach of warranty in diminutions or extinction of the price, or
   • Sue the seller for damages for breach of warranty.
4. Repudiation of the contract before the due date (Section 60): Where either, party to a contract of sale repudiates the contract before the date of delivery, the other may either treat the contract as subsisting and wait for bill the date of delivery or may treat the contract as rescinded and sue for damages for the breach.
5. Suit for interest: Nothing of this Act, shall affect the right of the seller or the buyer to recover interest or special damages in any case where by law interest or special damages may be recoverable, or to recover the money paid where the consideration for the payment of it has failed.

Question 6. AB sold 500 bags of wheat to CD. Each bag contains 50 Kilograms of wheat. AB sent 450 bags by road transport and CD himself took the remaining 50 bags. Before CD receives delivery of 450 bags sent by road transport, he becomes bankrupt. AB being still unpaid, stops the bags in transit. The official receiver, on CD’s insolvency, claims the bags. Decide the case regarding the provisions of the Sale of Goods Act, of 1930.

Answer:

The problem is based on section 50 of the goods in transit available to an unpaid seller.

The section states that the right is exercised by the seller only if the following conditions are fulfilled:

1. The seller must be unpaid.
2. He must have parted with the goods
3. The goods must be in transit.
4. The buyer must have become insolvent.
5. The right is subject to the provisions of the Act.

Applying the provisions to the given case, AB being still unpaid, can stop the delivery of 450 bags sent by the transport as these goods are still in transit.

Question 7. An auction sale of certain goods was held on 7 March 2023 by the fall of the hammer in favor of the highest bidder X. The payment of the auction price was made on 8 March 2023 followed by the delivery of goods on 10 March 2023. Based upon on the provisions of the Sale of Goods Act, of 1930, decide when the auction sale is complete.

Answer:

As per Section 64 of the Sale of Goods Act, 1930, an ‘Auction Sale’ is a mode of selling property by inviting bids publicly and the property is sold to the highest bidder.

• As per the legal rules of ‘Auction Sale’ the sale is complete when the auctioneer announces its completion by the fall of the hammer or in any other customary manner and until such announcement is made, any bidder may retract from his bid.
• In the above case, an auction sale was held on 7^th March 2023 by the fall of the hammer, the auction price was made on 8^th March 2023, and the delivery of goods was on 10^th March 2023.

In the right of the above provisions, the auction sale was completed on 7^th March 2023 by the fall of the hammer.

Transfer Of Ownership And Delivery Of Goods Self Study Questions And Answers

Question 1. Describe the rules relating to the passing of property in the Sale of Goods Act.

Answer:

The rules relating to the passing of property in the Sale of Goods Act

The sale of goods involves the transfer of ownership in three stages i.e. Passing of property → Delivery of goods → Passing of risk:

3.1 Passing of Property (Section 18-26)

• It means passing or transferring ownership.
• If the property has passed to the buyer, the risk in the goods sold is that of the buyer and not of the seller, though the goods may still be in the seller’s possession.

Question 2. What are the rules Related to the Transfer of Ownership?

Answer:

The rules Related to the Transfer of Ownership

1. Risk passes with the ownership.
2. Only owners have proprietary rights over the goods. The owner can take action in case goods are damaged by a third party. When there is a danger of good by the action of a third party.
3. Seller’s right for price.
4. If the buyer or seller is declared insolvent it is necessary to know the party with whom the property in goods is there to know if it can be taken over by an official assignee or not.
5. Ownership and possession are two different concepts.

Question 3. Describe the Rules Regarding the Passing of Property in Specific Goods.

Answer:

The Rules Regarding the Passing of Property in Specific Goods

It happens as and when parties intend to pass. The intention must be gathered from the terms of the contract of the parties and the circumstances of the case.

Where there is a contract for the sale of specific goods not in a deliverable state i.e. the seller has to do something to the goods to put them in a deliverable state, the property does not pass until that thing is done by the seller and the buyer has notice of it (Section 21).

1. When there is a sale of specific goods in a deliverable state, but the seller is bound to weigh, measure, test, or do something about the goods to ascertain the price, the property to the goods to ascertain the price does not pass until such act or thing is done and the buyer has notice of it (Section 22).
2. Deliverable state refers to that state in which the buyer would be bound to take the delivery of goods.
   • The fact that the time of delivery or the time of the payment is postponed does not prevent the property from passing it once (Section 20).
   • If goods are delivered to the buyer “on approval” or sale or return basis”:

The property passes to the buyer when:

1. He signifies his approval or acceptance to the seller.
2. He does any other act adopting the transaction.
3. He does not signify his approval or acceptance to the seller but retains goods beyond a reasonable time.

Question 4. What are the Rules relating to the Passing of Property in case of the Sale of Unascertained Goods?

Answer:

Rules relating to the Passing of Property in case of the Sale of Unascertained Goods

(Future Goods)

• The property does not pass until the goods are ascertained.
• The ascertainment of goods and their unconditional appropriation to the contract are the two pre-conditions for the transfer of property from seller to buyer.
• Ascertainment of goods is the process by which the goods to be delivered under the contract are identified and set apart.
• Section 23: The following conditions must be satisfied:
  1. Goods of description mentioned must be produced or obtained.
  2. They must be in a deliverable state.
  3. They must be unconditionally appropriated.

Note: Unconditional Appropriation of Goods is when the seller delivers the goods to the buyer or at a carrier or other bailee for transmission to the buyer.

• The assent of parties may be given either before or after the appropriation.
• In case of the sale of a quantity of goods out of a large quantity, the property will pass on the appropriation of the specified quantity by one party with the assent of the other.
• The property in goods does not pass if the seller reserves the right of disposal of goods.

Question 5. Describe the Exceptions Relating to Sec.23 of the Sale of Goods Act.

Answer:

The Exceptions Relating to Sec.23 of the Sale of Goods Act

1. If the goods are delivered to a railway administration for carriage by railway, the goods are deliverable to the order of the seller or his agent.
2. If the seller sends a bill of exchange along with the bill of lading to the buyer for his acceptance, the property in goods does not pass unless he accepts the bill.

Question 6. Write the Exceptions regarding under Sec. 26 of the Sale of Goods Act,1930.

Answer:

The Exceptions regarding under Sec. 26 of the Sale of Goods Act,1930

1. If there is agreement between the parties.
2. If the delivery of goods is delayed either due to buyer’s or seller’s default, goods are at risk of party in default.
3. Trade Customs.

Question 7. Describe the Rules Regarding the Transfer of Tile.

Answer:

The Rules Regarding the Transfer of Tile

Section 27

The general rule is where goods are sold by a person who is not the owner thereof and who does not Bell them under the authority or with the consent of the owner, the buyer acquires no better title to the goods than that the seller had.

This rule is expressed in the Latin maxim “Nemo dat quod non-habit” which means that no one can give what he has not got. i.e. no one can pass a better title than he has.

Example: A finds a ring of B and sells it to C, who purchases it in good faith so true owner B can have it from C.

Even a bonafide buyer gets no valid title.

Question 8. What are the Exceptions under Sec.27 of the Sale of Goods Act, of 1930?

Answer:

The Exceptions under Sec.27 of the Sale of Goods Act, of 1930

1. Effect of estoppel
2. Sale by mercantile agent
3. Sale by joint owner
4. Sale by a person in possession under a voidable contract.
5. Sale by seller in possession after sale.
6. Sale by the buyer in possession after sale.
7. Sale by an unpaid seller
8. Sale by the person under other laws

Question 9. Define the Effect of Estoppel.

Answer:

The Effect of Estoppel

Where the owner is stopped by the conduct from denying the seller’s authority to sell, the transferee will get a good title as against the true owner.

Sale by a Mercantile Agent Buyer will get a good title in the following cases:

1. If he had goods or documents with the owner’s consent.
2. If the sale was made by him when acting in the ordinary course of business.
3. If the buyer had acted in good faith.
4. At the time of the contract, the buyer had no notice of the fact that the seller had no authority to sell.

Question 10. What are the Rules Related to Sale by a Joint Owner (Co-owner)?

Answer:

The Rules Related to Sale by a Joint Owner (Co-owner)

As per Section 28

• If one of the several joint owners,
• Who is in sole possession of the goods by the permission of other co-owners,
• Sell the goods,
• The buyer gets a good title to the goods,
• If done in good faith.

Question 11. Describe the Sale by a person in possession under a voidable contract.

Answer:

The Sale by a person in possession under a voidable contract

As per Section 29

A buyer acquires a good title if goods are sold to him by a seller having possession under a voidable contract, provided it has not been rescinded until the time of sale.

Question 12. What are the Rules related to the Sale by the seller in possession after sale?

Answer:

The Rules related to the Sale by the seller in possession after sale

As per Section 30

• Where the buyer with the seller’s consent,
• Obtain possession of goods before property in them has passed to him,
• He may sell it to a third party,
• Third-party obtains goods in good faith and without notice of the lien,
• He would get a good title for them.

Question 13. Which Rule Applies in case of Sale by a person under other laws?

Answer:

• A finder of goods has the power to sell the goods under certain circumstances also called a “Quasi Contract”.
• Sale of goods pledged by Pawnee Conveys goods title to the buyer if
  • Pawner or pledger makes default
  • Pawnee has given reasonable notice to Pawnor
• Sale by the official receiver, official assignee, receiver, or liquidator conveys the title of the goods to the buyer.

Question 14. What do you understand by the Performance of the Contract of Sale?

Answer:

Performance of the Contract of Sale

(Section 31-44)

• It means voluntary transfer of possession from one person to another.
• The seller has to deliver the goods.
• The buyer has to accept the goods and pay for them per the contract.

Question 15. How many types of Delivery are there?

Answer:

Types of Delivery

Question 16. Describe all types of Delivery of Work Quantity.

Answer:

Types of Delivery of Work Quantity

1. Delivery of Work Quantity
   • Short Delivery: Buyer may either accept the goods and pay for them at a contract rate or reject them.
   • Excess Delivery: Buyer may accept or reject the delivery. If he accepts the whole of it, he shall pay for them at the contract rate.
   • Mixed Delivery: Buyer may accept the relevant goods and reject the rest or reject the whole.
2. Instalment Deliveries: Unless otherwise agreed, the buyer is not bound to accept delivery in installments.

Question 17. Describe the Suits for Breach of Contract.

Answer:

The Suits for Breach of Contract

Where the property in the goods has passed to the buyer, the seller may sue him for the price.

• Where the price is payable on a certain day regardless of delivery; the seller may sue him for the price.
• Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may sue him for damages for non-delivery.

Question 18. Write short notes on Acceptance of Delivery.

Answer:

Acceptance of Delivery

Acceptance is “deemed” to take place when the buyer:

1. Intimates to the seller that he had accepted the goods,
2. Does any act to the goods, which is inconsistent with the ownership of the seller,
3. Retains the goods after the lapse of reasonable time, without intimating to the seller that he has rejected them.

Question 19. Write a short note of the following: Kinds of Delivery of Goods.

Answer:

Kinds of Delivery of Goods: Delivery means voluntary transfer of possession by one person to another [(Section 2(2)]. As a general rule delivery of goods may be made by doing anything which has the effect of putting the goods in the possession of the buyer or any person authorised to hold them on his behalf.

Delivery may be of three kinds which may be enumerated as follows:

1. Actual delivery: It is actual when the goods themselves are delivered to the buyer or the key of a warehouse containing the goods is handed over to him.
2. Constructive delivery: When it is effected without any change in the custody or actual possession of the thing as in the case of delivery by attornment (acknowledgment) For Example. where a warehouseman holding the goods of A agrees to hold them on behalf of B, at A’s request.
3. Symbolic delivery: When there is a delivery of a thing in token of a transfer of something else, i.e., delivery of goods in case of transit may be made by handing over documents of title to goods, like bill of leading or railway receipt or delivery orders.

Transfer Of Ownership And Delivery Of Goods Descriptive Questions And Answers

Question 1. Comment on the following: Delivery of the goods and payment of the price are ‘concurrent conditions.

Answer:

Delivery of the goods and payment of the price are ‘concurrent conditions

The law in this regard is laid down in Section 32 of the Sale of Goods Act, of 1930. The section says that unless otherwise agreed the delivery of the goods and payment of the price are concurrent conditions, that is to say.

• The seller shall be ready and willing to give possession of the goods to the buyer in exchange for the price, and the buyer shall be ready and willing to pay the price in exchange for possession of goods.
• The general rule is that the obligations of the seller to deliver and that of the buyer to pay are implied concurrent conditions like mutual conditions precedent and that neither can enforce, that contract against the other without showing performance or offering’ to perform or averring readiness and willingness to perform his promise.
• This section lays down the rule as regards what are known as reciprocal promises to be simultaneously performed.

In such a case no promisor needs to perform his promise unless the promisee is ready and willing to perform his reciprocal promise [Pandurang vs. Dadabhay (1902) 26 Bom. 643].

Question 2. When the property in the goods passes to the buyer in case of the delivery of the goods on an approval basis?

Answer:

Goods Delivered on Approval Basis: (Passing of the property). According to Section 24 of the Sale of Goods Act, 1930, the property in the goods passes to the buyer in case of the goods on an approval basis in the following manner:

1. When he signifies his approval or acceptance to the seller, or
2. Does any other act adopting the transaction, or
3. If without signifying his approval or acceptance the buyer retains the goods without giving notice of rejection refection, then, if time fixed for the return of goods, on expiry of such time, and if no time is fixed, on the expiration of reasonable time.

Question 3. Comment on the following: Risk prima facie passes with the property in the goods.

Answer:

Section 26 of the Sale of Goods Act, of 1930 lays down the general rule that “risk prima facie passes with the property”. In other words, risk always follows ownership and the owner has to bear the burden or loss. Thus, whoever is the owner, carries the risk.

The goods remain at the seller’s risk until the ownership therein is transferred to the buyer and the goods are at the buyer’s risk when their ownership is transferred to him whether the delivery has been made to him or not.

However, there are following exceptions to the general rule that risk prima facie passes with the property:

1. If the parties have by a special agreement stipulated that the risk will pass sometime after or before the ownership has passed.
2. Where the delivery of the goods has been delayed due to the fault of either the seller or the buyer, in such cases the goods are at the risk of that party who is responsible for such fault as resulted in loss of any kind. The defaulting party will bear the loss.
3. Sometimes trade customs may put the ownership and risk separately in two parties.

Question 4. When the ownership in the goods may be transferred by a poison who does not have title over it?

Answer:

The general rule of law is that ‘no one can give that which he has not got’. However under, the following cases the goods can be sold even by persons who do not have title over it.

1. Sale by a person not the owner or title by estoppel. (Section 27): Sale of Goods Act i.e. where the true owner by his conduct, or by an act or omission, loads the buyer to believe that the seller has the authority to sell and induces the buyer to buy the goods he shall be estopped from denying the fact of want of authority of the seller. The buyer in such a case gets a better title than the seller.
2. Sale by a mercantile agent (Proviso to Section 27): Provided the agent has the goods or documents of title to the goods with the consent of the owner; the agent sells the goods while acting in the ordinary course of business of a mercantile agent; the buyer acts in good faith and the buyer has not at the time of the contract of sale notice that the agent has no authority to sell.
3. Sale by one of several joint owners (Section 28): If one of the several joint owners, who is in sole possession of the goods by permission of the other co-owners sells the goods, a buyer in good faith of those goods gets a good title to the goods.
4. Sale by a person in possession under a voidable contract. (Section 29): Where the seller of goods has obtained the possession under a voidable contract, but the contract has not been rescinded at the time of the sale, the buyer acquires a good title to the goods, provided he buys them in good faith and without notice of the seller’s defect of title.
5. Sale by seller in possession after sale [Section 30(1 )].
6. By buyer in possession after sale [Section 30(2)].
7. By an unpaid seller [Section 54(3)]

Question 5. What are the exceptions to the doctrine of “Nemo dat quad non-habet” (one cannot give a better title than what he has)?

Answer:

The exceptions to the doctrine of “Nemo dat quad non-habet”

The general rule is that the owner of goods can sell the goods. No one can convey a better title than he has. This rule protects the true owner as the buyer from a non-owner does not acquire a better title than what the seller had.

But the following are the exceptions to the above rule provided in the Sale of Goods Act, of 1930:

1. Sale by a mercantile agent: A sale made by a mercantile agent of the goods or document of title to goods would pass a good title to the buyer in the following circumstances, namely:
   • If he had the goods or documents with the consent of the owner.
   • If the sale was made by him when acting in the ordinary course of business as a mercantile agent, and
   • If the buyer had acted in good faith and had at the time of a contract of sale, no notice of the fact that the seller had no authority to sell (Proviso to section 27).
2. Sale can be made by co-owner (Section 28): If one of the several joint owners, who have the goods by permission of the other co-owners, sells the goods, a buyer in good faith of those goods gets a good title to the goods.
3. Sale can be made by a person in possession under a voidable contract (Section 29): When the seller of goods has obtained their possession under a voidable contract, but the contract has not been rescinded at the time of the sale, the buyer acquires a good title to the goods, provided he buys them in good faith and without notice of the seller’s defects of title.
4. Sale can be made by the seller in possession after the sale [Section 30(1)]: Where a seller having sold goods, continues to own the goods or documents of title to the goods and sells them either himself or through a mercantile agent to a person who buys them in good faith and without notice of the previous sale, the buyer gets a goods title.
5. Sale can be made by the buyer in possession [Section 30(2)]: When where a person, having bought or agreed to buy the goods, obtains, with the consent of the seller, possession of the goods or documents of title – to the goods and sells them, the buyer who acts in good faith and without notice of any lien or other rights of the seller in respect of the goods, gets a good title.
6. Effect of Estoppel (Section 27): Where the owner is stopped by the conduct from denying the seller’s authority to sell, the transferee will get a good title as against the true owner.
7. Exceptions in Other Acts:
   • Sale by a finder of lost goods under certain circumstances (Section 169 of the Indian Contract Act).
   • Sale by a pawnee or pledgee under certain circumstances (Section 176 of the Indian Contract Act).
   • Sale by an official receiver or official assignee or liquidator of a company.

Question 6. When the property in specific or ascertained goods passes to the buyer?

Answer:

Transfer of property in specific or ascertained goods to the buyer [Sale of Goods Act, 1930]: Passing of property implies passing of ownership. When property is transferred to the buyer, the risk of destruction or deterioration of the goods sold is that of the buyer and not of the seller, though the goods may still be in the seller’s possession.

• Where there is a contract for the sale of specific or ascertained goods, the property in the goods is transferred to the buyer at such time as the parties to the contract intend it to be transferred (Section 19).
• In an unconditional contract of sale of specific goods in a deliverable state. The property in the goods passes to the buyer when the contract is entered into. It is not affected by the time of payment of the price or the time of delivery of the goods (Section 20).
• Where there is a contract for the sale of specific goods and the seller is bound to do something to the goods to put them in a deliverable. state, the property does not pass until such a thing is done and the buyer has notice thereof (Section 21).
• Where there is a contract for the sale of specific goods in a deliverable state, but the seller is bound to weigh, measure, test, or do some other act or thing for ascertaining the price, the property does not pass till such act or thing is done and the buyer has notice thereof (Section 22).

Question 7. State the rules of the Sale of Goods Act; relating to the delivery of goods:

1. When it is given in installments.
2. When it is more than the Contracted quantity.

Answer:

Rules of Sale of Goods Act, 1930 Relating to the Delivery of Goods:

1. Where delivery of goods is given in installments:

Unless otherwise agreed upon, the buyer of the goods is not bound to accept delivery in installments.

However, under a contract, the goods sold may be delivered in installments. In such a case each instalment shall be treated separately and paid for.

In the following two cases, there will be a breach of such a contract:

1. Where the seller makes the delivery or makes defective delivery of one or more installments; or
2. Where the buyer neglects or refuses to take delivery of one or more installments.

In each such breach, it will depend upon the terms of the contract and the circumstances of the case whether;

• The whole contract is repudiated; or
• It is a severable breach giving rise to a claim for compensation, but not a right to treat the whole contract as repudiated. (Section 38)

2. Where delivery of goods is given more than the contracted quantity:

Section 37(2) of the Act, Sale of Goods Act, of 1930 deals with such a case.

Where the seller makes a delivery to the buyer or his agent of the excess quantity of goods contracted for the buyer:

• May accept the agreed quantity and reject the rest; or
• He may reject the whole lot.
• He may accept the whole lot even, and in such a case has to pay for the whole quantity at the contract rate.

Question 8. State the rules as to passing of the property, when goods are delivered on approval in a Contract of Sale.

Answer:

Section 24 of the Sale of Goods Act, of 1930 lays down rules as to the passing of property when goods are delivered on approval or “on return”. In such cases, property in goods passes either by acceptance or by failure to return.

1. By acceptance: The property in goods passes when the buyer signifies his acceptance or approval or otherwise adopts the transaction. Acceptance means acceptance of that part of the contract which makes him the purchaser.

• That will be some act that signifies that he intends to be the absolute purchaser. If he does some act that will be right only if he were the absolute purchaser that signifies an acceptance or adoption within the statute where a person pawned the goods.
• He had no power to return the goods unless he repaid the amount advanced by the Pawnee. That is inconsistent with his free power of returning the goods.

2. By failure to return (Section 24(2): The second circumstance in which the property in goods passes to the buyer, is when the latter fails to return the goods within a reasonable time or if a time has been fixed on the expiration of that time.

• Till the expiry of such time, goods remain the property of the seller. Where a horse was delivered to the defendant on terms that he should try it for eight days and then return it if he did not like it.
• The horse died on the third day without the fault of the defendant. The seller could not recover the price from the defendant, the horse being still his property when it perished (Elphick v. Barnes (1880) SCPD. 32).
• On failure to return within the specific time, the property passes to the buyer and the seller may then sue for price.

Where no time is fixed, the goods should be returned within a reasonable time, or else they become the property of the buyer. What is a reasonable time?

Question 9. Briefly answer the following: Risk in the goods sold passes with the delivery of goods to the buyer.

Answer:

Risk in the goods sold passes with the delivery of the goods to the buyer: Risk prima facie passes with ownership and not delivery. Passing the risk is not very much related to the delivery of goods.

1. Unless otherwise agreed upon, the goods remain at the seller’s risk until the property therein has passed to the buyer.
2. After passing the property to the buyer, the goods ‘remain at the buyer’s risk.
3. Thus, the risk is more related to the passing of the title than to the delivery of the goods. The goods may be in the possession of the buyer but the title upon them may be with the seller.

Thus, unless as agreed upon, the goods remain at the seller’s risk subject to the following two qualifications:

1. Delivery of the goods has been delayed by the fault of the buyer or the seller. In this case, risk will be in the party to the default, and
2. Duties and liabilities of the seller or the buyer as bailee of goods for the other party remain unaffected even where the risk has passed generally. However, parties may by special agreement stipulate about the passing of the risk.

Question 10. Briefly answer the following: Transfer of property when goods are sold on approval.

Answer:

Goods on Approval:

Under Section 24 of the Sale of Goods Act, 1930 when goods are delivered to the buyer on approval, the ownership of such goods passes to the buyer in any of the following situations:

1. When the buyer signifies his approval or acceptance to the seller.
2. When the buyer does some act, amounts to the adoption of the transaction, i.e. the acceptance of the goods.
3. When the buyer fails to return the goods on a fixed time, namely, retains It beyond the fixed time without notice of rejection.
4. When no time has been fixed for the return of goods and the buyer retains the goods beyond reasonable time without giving notice of rejection. Reasonable time is a question of fact and hence will depend on the facts and circumstances of every case.

Question 11. “Nemo dat quod non habet” i.e. one cannot sell what he does not possess. Discuss this statement and state the exceptions to this doctrine.

Answer:

Stranger to a Contract

It is a general rule of law that only parties to a contract may sue and be sued on that contract. This rule is known as the “doctrine of privity of contract”.

Privity of contract means a relationship subsisting between the parties who have entered into contractual obligations. It implies a mutuality of will and creates a legal bond or tie between the parties. These are two consequences of doctrine:

1. A person who is not a party to a contract cannot sue upon it even though the contract is for the benefit and he provided consideration.
2. A contract cannot confer rights or impose obligations arising under it on any person other than the parties to it.

The following are the exceptions to the general rule that a stranger to a contract cannot sue:

1. A trust or charge: A person in whose favor a trust or other interest in some specific immovable property has been created can enforce it even though he is not a party to the contract. (Madhav Trading Co. vs. Union of India).
2. Marriage settlement, partition, or other family arrangements: Where an arrangement is made in connection with marriage, partition, or other family arrangements and a provision is made for the benefit of a person, he may sue although he is not a party to the agreement.
3. Acknowledgment or estoppel: Where the promisor by his conduct, acknowledges or otherwise constitutes himself as an agent of the third party, a binding obligation is thereby incurred by him towards the third party.
4. Assignment of a contract: The assignee of rights and benefits under a contract not involving personal skill can enforce the contract subject to the equities between the original parties. (Krishan Lai Sadhu vs. Promila Bala).
5. Contracts entered into through an agent: The principal can enforce the contracts entered into by his agent provided the agent acts within the scope of his authority and in the name of the principal.
6. Covenants running with the land: In case of transfer of immovable property, the purchaser of land with notice that the owner of the land is bound by certain conditions or covenants created by an agreement affecting the land shall be bound by them although he was not a party to the original agreements which contained the conditions of covenants.

Question 12. Explain the following: Meaning of Constructive Delivery

Answer:

Meaning of Constructive Delivery:

Where a third person (For Example., a bailee) who has the goods of the seller at the time of the sale acknowledges to the buyer that he holds the goods on his behalf, there takes place a delivery by attornment or constructive delivery [Section 36(3)]. Sale of Goods Act, 1930.

This may happen in the following cases:

• Where the seller in possession of the goods agrees to hold them on behalf of the buyer.
• Where the buyer owns the goods and the seller agrees to the buyer’s holding the goods as owner.
• Where the third person in possession of the goods acknowledges to the buyer that he holds them on his behalf.

Question 13. What is meant by Constructive Delivery?

Answer:

Constructive Delivery of goods

Delivery may be actual or constructive. In actual delivery, the actual transfer of physical custody takes place, while in the case of constructive delivery.

• The change in the possession of goods is caused without any change in their actual and visible custody.
• For example, A sells to B 100 quintals of wheat lying in the possession of, a warehouseman; A makes delivery over to B, by an order to C, called a delivery order.
• To transfer the wheat to B, and C accepts such an order by transferring the wheat in his books to B.

This would be considered a constructive delivery. Thus, constructive delivery may take place in any of the following manners:

1. The seller in possession of the goods agrees to hold them on behalf of the buyer.
2. The buyer owns the goods but the seller agrees to the buyer’s holding the goods as owner.
3. A third person owns the goods but acknowledges to the buyer that he holds them on his behalf.

Question 14. What is the appropriation of goods under the Sale of Goods Act, of 1930? State the essentials regarding appropriation of unascertained goods.

Answer:

Appropriation of goods involves the selection of goods to use in the performance of the contract and with the mutual consent of the seller and the buyer.

The essentials regarding appropriation of unascertained goods are as follows:

• There is a contract for the sale of unascertained goods or future goods.
• The goods should conform to the description and quality stated in the contract.
• The goods must be in a deliverable state.
• Goods must be unconditionally appropriated.
• The appropriation must be made by:
• The seller with the assent of the buyer, or
• The buyer with the assent of the seller.
• The assent may be express or implied.
• The assent may be given either before or after the appropriation.

Question 15. “A non-owner can convey better title to the bonafide purchaser of goods for value”. Discuss the cases when a person other than the owner can transfer title in goods as per the provisions of the Sales of Goods Act 1930.

Answer:

The general rule regarding the transfer, of title is that the seller cannot transfer to the buyer of goods a better title than he has.

If the seller is not the owner of goods, then the buyer also will not become the owner i.e. the title of the buyer shall be the same as that of the seller. This rule is Expressed as “Nemo datquodNon babe which means that no one can give what he has not got.

In the following cases, a non-owner can convey better title to the bonafide purchaser of goods for value:

1. Sale by a Mercantile agent: A sale made by a mercantile agent of the goods for the document of title to goods would pass a good title to the buyer if the sale is made with the consent of the principal.
2. Sale by One of the Joint Owners: If one of several joint owners of goods has sole possession of them by permission of the Co-owners, the property in the goods is transferred to any person who buys from such joint owner in good faith.
3. Sale by a person in possession under voidable contract: A buyer would acquire a good title to the goods sold to him by a seller who had obtained possession of the goods under a contract voidable on the ground of coercion, fraud, etc. provided that the contract had not been rescinded until the time of sale.
4. Sale by one who has already sold the goods but continues in possession thereof: If a person has sold the goods but continues to have them or of the documents of title to them.
   • He may sell them to a third person, and if such a person obtains the delivery thereof in good faith and without notice of the previous sale, he would have good title to them, although property in goods had passed to the first buyer earlier.
5. Sale by buyer obtaining possession before the property in the goods has vested in him: Where a buyer with the consent of the seller. obtains possession of the goods before the property in them has passed to him.
   • He may sell, pledge, or otherwise dispose of the goods to a third person, and if such person obtains delivery of the goods in good faith and without notice of the lien, he would get a good title to them.
6. Effect of Estoppel: Where the owner is estoppel by the conduct of denying the seller authority to sell, the transferee will get a good title as against the true owner.
7. Sale by an unpaid seller: Where an unpaid seller who had exercised his right of lien or stoppage in transit, resells the goods, the buyer acquires a good title to the goods as against the original buyer.
8. Sale under provisions of other Acts:
   • Sale by an official receiver or liquidator.
   • Purchase of goods from the finder of lost goods.
   • A sale by a pawnee can convey a good title to the buyer.

Question 16. Explain any six circumstances in detail in which the nonowner can convey better title to a Bona fide purchaser of goods for value as per The Sale of Goods Act, 1930.

Answer:

Transfer of title (section 27-30) of the Indian Sale of Goods Act, 1930: Subjects to the provisions of this act or any other law for the time being in force.

• When the goods are sold by a person who is not the owner and does not sell them under the authority or with, the consent of the owner, the buyer acquires no better title to the goods than the seller had, unless the owner of the goods is by his conduct precluded from denying the seller’s authority to sell.
• In general, the rule regarding to transfer of title is that the seller cannot transfer to the buyer of a goods a better title than he has. If the seller is not the owner of the goods the buyer will also not become the owner.
• The rule is explained in Latin maxim which says ‘Nemo dat quod nonhabit’ which means no one can give what he has not got.

But this rule has certain exceptions that say that the non-owner can convey a better title to a bona fide purchaser of goods:

1. Sale by a mercantile agent: When the goods are sold by a mercantile agent the documents of title to goods would pass a good title to the buyer. In the following circumstances namely:
   • He has the possession of goods with the consent of the owner.
   • If the sale was made by him while acting as an agent in the normal course of business.
   • If the buyer has acted in good faith and has no notice of the fact that the seller has no authority to sell.
2. Sale by one of the joint owners: If one of the several joint owners of the goods has sole possession of them by the permission of the other co-owners, the property in the goods is transferred to any person who buys them of such joint owner in good faith and has no notice that has no authority to sell.
3. Sale by a person in possession under a voidable contract: A buyer would acquire a better title to the goods sold to him by a seller who had obtained possession of goods under a contract voidable on the ground of coercion, fraud, etc. provided that the contract has not been rescinded until time of sale.
4. Sale by one who has already sold the goods but continues in possession thereof: If a person has sold goods but continues to have them or of the documents of title to goods, he may sell them to a third person who obtains the delivery thereof in good faith, and without notice, he would have a good title to them.
5. Sale by an unpaid seller: When an unpaid seller who has exercised his right of lien or stoppage in transit resells the goods the buyer acquires a better title to the goods as against the original buyer.
6. Sale under the provisions of other Acts:
   • Sale by an official liquidator of the company which gives the purchaser a valid title
   • Sale of goods by a finder of lost goods which takes them under his custody
   • Sale by Pawnee will convey a better title to the buyer.

Question 17. “Risk Prima Facie passes with the property.” Elaborate in the context of The Sales of Goods Act, of 1930.

Answer:

Risk Prima Facie passes with property (Section 26):

• The term risk means the liability to bear the loss if goods are lost or damaged.
• The general rule is that risk follows ownership i.e. if the goods are lost or damaged at any point in time, the loss shall be borne by the owner of the goods.
• Price has been paid or delivery has been made or not, is immaterial for passing of risk.

However, there are certain exceptions to the above rule:

• If the loss or damage of goods is due to a delay in delivery, then the person who is responsible for such delay has to bear the loss.
• If a party holds the goods a bailee (whether buyer or seller), then that person has to bear the risk in case of lost or damaged goods.
• If the risk is separated either by an agreement or by a trade custom, then the person holding the risk has to bear the loss in case of loss or damage of goods.

In all these above cases, it is immaterial, whether the property has passed to the buyer or not.

Question 18. What are the consequences of the destruction of specified goods, before making of a contract and after the agreement to sell under the Sale of Goods Act, of 1930?

Answer:

The contract for the sale of specific goods is void ab initio if

1. At the time when the contract was made,
2. The goods have already perished or become so damaged that no longer correspond with their description in the contract.
3. Without the knowledge of the seller. If both the parties to the contract are under mistake as to a matter of fact essential to the contract, then the contract is void ab initio due to a bilateral mistake.

Similarly, an agreement to sell specific goods also becomes void, if the goods perish or get damaged, after the making of the contract, without any fault on the part of the buyer or seller. This is due to the impossibility of performance due to subsequent events.

Question 19. What are the rights of unpaid sellers in the context of the resale of the goods under the Sale of Goods Act, of 1930?

Answer:

Right of re-sale [Section 54]: The right, of resale, is a very valuable right given to an unpaid seller. In the absence of this right, the unpaid seller’s other rights.

Against the goods that are lien and the stoppage in transit would not have been of much use because these rights only entitle the unpaid seller to retain the goods until paid by the buyer.

The unpaid seller can exercise the right to re-sell the goods under the following conditions:

Where the goods are perishable: In such a case, the buyer need not be informed of the intention of resale.

Question 20. Explain the following: Meaning of Constructive Delivery

Answer:

Meaning of Constructive Delivery:

Where a third person (For Example., a bailee) who has the goods of the seller at the time of the sale acknowledges to the buyer that he holds the goods on his behalf, there takes place a delivery by attornment or constructive delivery [Section 36(3)]. Sale of Goods Act, 1930.

This may happen in the following cases:

1. Where the seller in possession of the goods agrees to hold them on behalf of the buyer.
2. Where the buyer owns the goods and the seller agrees to the buyer’s holding the goods as owner.
3. Where the third person in possession of the goods acknowledges to the buyer that he holds them on his behalf.

Question 21. What is meant by Constructive Delivery?

Answer:

Constructive Delivery of goods

Delivery may be actual or constructive. In actual delivery, the actual transfer of physical custody takes place while in the case of constructive delivery, the change in the possession of goods is caused without any change in their actual and visible custody.

For example, A sells to B 100 quintals of wheat lying in the possession of C, a warehouseman; A makes delivery over to B, by an order to C, called a delivery order, to transfer the wheat to B.

And C accepts such an order by transferring the wheat in his books to B. This would be considered a constructive delivery. Thus, constructive delivery may take place in any of the following manners:

• The seller in possession of the goods agrees to hold them on behalf of the buyer.
• The buyer has the goods but the seller agrees to the buyer’s holding the goods as owner.
• A third person owns the goods but acknowledges to the buyer that he holds them on his behalf.

Question 22. What is an appropriation of goods under the Sale of Goods Act, of 1930? State the essentials regarding appropriation of unascertained goods.

Answer:

Appropriation of goods involves the selection of goods to use in the performance of the contract and with the mutual consent of the seller and the buyer

The essentials regarding appropriation of unascertained goods are as follows:

1. There is a contract for the sale of unascertained goods or future goods.
2. The goods should conform to the description and quality stated in the contract.
3. The goods must be in a deliverable state.
4. Goods must be unconditionally appropriated.
5. The appropriation must be made by:
   • The seller with the assent of the buyer, or
   • The buyer with the assent of the seller.
6. The assent may be express or implied.
7. The assent may be given either before or after the appropriation.

Question 23. A non-owner can convey better title to the bonafide purchaser of goods for value”. Discuss the cases when a person other than the owner can transfer title in goods as per the provisions of the Sales of Goods Act 1930.

Answer:

The general rule regarding the transfer of title is that the seller cannot transfer to the buyer of goods a better title than he has.

• If the seller is not the owner of goods, then the buyer also will not become the owner i.e. the title of the buyer shall be the same as that of the seller.
• This rule is Expressed as “Nemo dat quod Nonbabe which means that no one can give what he has not got.

In the following cases, a non-owner can convey better title to the bonafide purchaser of goods for value:

1. Sale by a Mercantile agent: A sale made by a mercantile agent of the goods for the document of title to goods would pass a good title to the buyer if a sale is made with the consent of the principal.

In the following two cases, there will be a breach of such a contract:

1. Where the seller makes the delivery or makes defective delivery of one or more installments; or
2. Where the buyer neglects or refuses to take delivery of one or more installments.

In each such breach, it will depend upon the terms of the contract and the circumstances of the case whether:

• The whole contract is repudiated; or
• It is a severable breach giving rise to a claim for compensation, but not a right to treat the whole contract as repudiated. (Section 38)

2. Where delivery of goods is given more than the contracted quantity:

Section 37(2) of the Act, Sale of Goods Act, of 1930 deals with such a case.

Where the seller makes a delivery to the buyer or his agent of the excess quantity of goods contracted for the buyer:

1. May accept the agreed quantity and reject the rest; or
2. He may reject the whole lot.
3. He may accept the whole lot even, and in such a case has to pay for the whole quantity at the contract rate.

Question 24. State the rules as to passing of the property, when goods are delivered on approval in a Contract of Sale.

Answer:

Section 24 of the Sale of Goods Act, of 1930 lays down rules as to the passing of property when goods are delivered on approval or“on return”. In such cases, property in goods passes, either by acceptance or by failure to return.

1. By acceptance: The property in goods passes when the buyer signifies his acceptance or approval or otherwise adopts the transaction.

• Acceptance means acceptance of that part of the contract which makes him the purchaser absolutely. That will be some act that signifies that he intends to be the absolute purchaser.
• If he does some act that will be right only if he were the absolute purchaser that signifies an acceptance or adoption within the statute where a person pawned the goods.
• He had no power to return the goods unless he repaid the amount advanced by the Pawnee. That is inconsistent with his free power of returning the goods.

2. By failure to return (Section 24(2):

The second circumstance in which the property in goods passes to a buyer is when the latter fails to return the goods within a reasonable time or if a time has been fixed on the expiration of that time. Till the expiry of such time, goods remain the property of the seller.

• Where a horse was delivered to the defendant on terms that he should try it for eight days and then return it if he did not like it. The horse died on the third day without the fault of the defendant.
• The seller could not recover the price from the defendant, the horse being still his property when it perished (Elphick v. Barnes (1880) SCPD. 32). On failure to return within the specific time, the property passes to the buyer and the seller may then sue for price.
• Where no time is fixed, the goods should be returned within a reasonable time, or else they become the property of the buyer. What is reasonable time in a question fact in each case?

Question 25. Briefly answer the following: Risk in the goods sold passes with the delivery of goods to the buyer.

Answer:

Risk in the goods sold passes with the delivery of the goods to the buyer: Risk prima facie passes with ownership and not delivery. Passing of the risk is not very much related to the delivery of goods.

• Unless otherwise agreed upon, the goods remain at the seller’s risk until the property therein has passed to the buyer. After passing the property to the buyer, the goods remain at the buyer’s risk.
• Thus, the risk is more related to the passing of the title than to the delivery of the goods. The goods may be in the possession of the buyer but the title upon them may be with the seller.

Thus, unless as agreed upon, the goods remain at the seller’s risk subject to the following two qualifications:

1. Delivery of the goods has been delayed by the fault of the buyer or the seller. In this case, risk will be in the party to the default, and
2. Duties and liabilities of the seller or the buyer as bailee of goods for the other parts remain unaffected even where the risk has passed generally.

However, parties may by special agreement stipulate about the passing of the risk.

Question 26. Briefly answer the following: Transfer of property when goods are sold on approval.

Answer:

Goods on Approval:

Under Section 24 of the Sale of Goods Act, 1 930 when goods are delivered to the buyer on approval, the ownership of such goods passes to the buyer in any of the following situations:

1. When the buyer signifies his approval or acceptance to the seller.
2. When the buyer does some act which, amounts to the adoption of the transaction, i.e. the acceptance of the goods.
3. When the buyer fails to return the goods on a fixed time, namely, retains it beyond the fixed time without notice of rejection.
4. When no time has been fixed for the return of goods and the buyer retains the goods beyond reasonable time without giving notice of rejection.

Reasonable time is a question of fact and hence will depend on the facts and circumstances of every case.

Question 27. Nemo dat quod non habet” i.e. one cannot sell what he does not possess. Discuss this statement and state the exceptions to this doctrine.

Answer:

Stranger to a Contract

It is a general rule of law that only parties to a contract may sue and be sued on that contract. This rule is known as the “doctrine of privity of contract”.

Privity of contract means a relationship subsisting between the parties who have entered into contractual obligations. It implies a mutuality of will and creates a legal bond or tie between the parties.

These are two consequences of doctrine:

1. A person who is not a party to a contract cannot sue upon it even though the contract is for the benefit and he provided consideration.
2. A contract cannot confer rights or impose obligation arising under it on any person other than the parties to it.

The following are the exceptions to the general rule that a stranger to a contract cannot sue:

1. A trust or charge: A person in whose favor a trust or other interest in some specific immovable property has been created can enforce it even though he is not a party to the contract. (Madhav Trading Co. vs. Union of India).
2. Marriage settlement, partition, or other family arrangements: Where an arrangement is made in connection with marriage, partition, or other family arrangements and a provision is made for the benefit of a person, he may sue although he is not a party to the agreement.
3. Acknowledgment or estoppel: Where the promisor by his conduct, acknowledges or otherwise constitutes himself as an agent of the third party, a binding obligation is thereby incurred by him towards the third party.
4. Assignment of a contract: The assignee of rights and benefits under a contract not involving personal skill can enforce the contract subject to the equities between the original parties. (Krishan LaiSadhu vs. Promila Bala).
5. Contracts entered into through an agent: The principal can enforce the contracts entered into by his agent provided the agent acts within the scope of his authority and in the name of the principal.
6. Covenants running with the land: In case of transfer of immovable property the purchaser of land with notice that the owner of the land is bound by certain conditions or covenants created by an agreement affecting.

The land shall be bound by them although he was not a party to the original agreements which contained the conditions of covenants.

Question 28. Explain the following: Meaning of Constructive Delivery

Answer:

Meaning of Constructive Delivery:

Where a third person (For Example., a bailee) who has the goods of the seller at the time of the sale acknowledges to the buyer that he holds the goods on his behalf, there takes place a delivery by attornment or constructive delivery [Section 36(3)]. Sale of Goods Act, 1930.

This may happen in the following cases:

Where the seller in possession of the goods agrees to hold them on behalf of the buyer.

• Where the buyer has the goods and the seller agrees to the buyer’s holding the goods as owner.
• Where the third person in possession of the goods acknowledges to the buyer that he holds them on his behalf.

Question 29. What is meant by Constructive Delivery?

Answer:

Constructive Delivery of goods

Delivery may be actual or constructive. In actual delivery, the actual transfer of physical custody takes place while in the case of constructive delivery, the change in the possession of goods is caused without any change in their actual and visible custody.

For example, A sells to B 100 quintals of wheat lying in the possession of, a warehouseman. A makes delivery over to B, by an order to C, called a delivery order, to transfer the wheat to B, and C accepts such an order by transferring the wheat in his books to B.

This would be considered a constructive delivery. Thus, constructive delivery may take place in any of the following manners:

• The seller in possession of the goods agrees to hold them on behalf of the buyer.
• The buyer owns the goods but the seller agrees to the buyer’s holding the goods as owner.
• A third person owns the goods but acknowledges to the buyer that he holds them on his behalf.

Question 30. What is an appropriation of goods under the Sale of Goods Act, of 1930? State the essentials regarding appropriation of unascertained goods.

Answer:

Appropriation of goods involves the selection of goods intending to be them in the performance of the contract and with the mutual consent of the seller and the buyer.

The essentials regarding appropriation of unascertained goods are as follows:

1. There is a contract for the sale of unascertained goods or future goods.
2. The goods should conform to the description and quality stated in the contract.
3. The goods must be in a deliverable state.
4. Goods must be unconditionally appropriated.
5. The appropriation must be made by:
   • The seller with the assent of the buyer, or
   • The buyer with the assent of the seller.’
6. The assent may be express or implied.
7. The assent may be given either before or after the appropriation.

Question 31. A non-owner can convey better title to the bonafide purchaser of goods for value”. Discuss the cases when a person other than the owner can transfer title in goods as per the provisions of the Sales of Goods Act 1930.

Answer:

The general rule regarding the transfer of title is that the seller cannot transfer to the buyer of goods a better title than he has.

If the seller is not the owner of goods, then the buyer also will not become the owner i.e. the title of the buyer shall be the same as that of the seller.

This rule is Expressed as “Nemo dat quod Non habit” which means that no one can give what he has not got.

In the following cases, a non-owner can convey better title to the bonafide purchaser of goods for value:

1. Sale by a Mercantile agent: A sale made by a mercantile agent of the goods for the document of title to goods would pass a good title to the buyer if a sale is made with the consent of the principal.
2. Sale by One of the Joint Owners: If one of several joint owners of goods has sole possession of them by permission of the Co-owners, the property in the goods is transferred to any person who buys from such joint owner in good faith.
3. Sale by a person in possession under voidable contract: A buyer would acquire a good title to the goods sold to him by a seller who had obtained possession of the goods under a contract voidable on the ground of coercion, fraud, etc. provided that the contract had not been rescinded until the time of sale.
4. Sale by one who has already sold the goods but continues in possession thereof: If a person has sold the goods but continues to have them or of the documents of title to them.
   • He may sell them to a third person, and if such person obtains the delivery thereof in good faith and without notice of the previous sale, he would have good title to them, although property in goods had passed to the first buyer earlier.
5. Sale by buyer obtaining possession before the property in the goods has vested in him: Where a buyer with the consent of the seller. obtains possession of the goods before the property in them has passed to him, he may sell, pledge, or otherwise dispose of the goods to a third person, and if such person obtains delivery of the goods in good faith and without notice of the lien, he would get a good title to them.
6. Effect of Estoppel: Where the owner is estoppel by the conduct of denying the seller authority to sell, the transferee will get a good title as against the true owner.
7. Sale by an unpaid seller: Where an unpaid seller who had exercised his right of lien or stoppage in transit, resells the goods, the buyer acquires a good title to the goods as against the original buyer.
8. Sale under provisions of other Acts:
   • Sale by an official receiver or liquidator.
   • Purchase Of goods from the finder of lost goods.
   • A sale by a pawnee can convey a good title to the buyer.

Question 32. Explain any six circumstances in detail in which the nonowner can convey better title to a Bona fide purchaser of goods for value as per The Sale of Goods Act, 1930.

Answer:

Transfer of title (section 27-30) of the Indian Sale of Goods Act, 1930: Subjects to the provisions of this act or any other law for the time being in force, when the goods are sold by a person who is not the owner and does not sell them.

• Under the authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had, unless the owner of the goods is by his conduct precluded from denying the seller’s authority to sell.
• In general, the rule regarding to transfer of title is that the seller cannot transfer to the buyer of a goods a better title than he has.
• If the seller is not the owner of the goods the buyer will also not become the owner.
• The rule is explained in Latin maxim which says ‘Nemo dat quod nonhabit’ which means no one can give what he has not got.

But this rule has certain exceptions which say that the non-owner can convey a better title to a bonafide purchaser of goods:-

1. Sale by a mercantile agent: When the goods are sold by a mercantile agent the documents of title to goods would pass a good title to the buyer. In the following circumstances namely:
   • He has the possession of goods with the consent of the owner.
   • If the sale was made by him while acting as an agent in the normal course of business.
   • If the buyer has acted in good faith and has no notice of the fact that the seller has no authority to sell.
2. Sale by one of the joint owners: If one of the several joint owners of the goods has sole possession of them by the permission of the other co-owners, the property in the goods is transferred to any person who buys them of such joint owner in good faith and has no notice that has no authority to sell.
3. Sale by a person in possession under a voidable contract: A buyer would acquire a better title to the goods sold to him by a seller who had obtained possession of goods under a contract voidable on the ground of coercion, fraud, etc. provided that the contract has not been rescinded until time of sale.
4. Sale by one who has already sold the goods but continues in possession thereof:
   • If a person has sold goods but continues to have them or of the documents of title to goods, he may sell them to a third person who obtains the delivery thereof in good faith, and without notice, he would have a good title to them.
5. Sale by an unpaid seller: When an unpaid seller who has exercised his right of lien or stoppage in transit resells the goods the buyer acquires a better title to the goods as against the original buyer.
6. Sale under the provisions of other Acts:
   • Sale by an official liquidator of the company which gives the purchaser a valid title
   • Sale of goods by a finder of lost goods which takes them under his custody
   • Sale by Pawnee will convey a better title to the buyer.

Question 33. Risk Prima Facie passes with the property.” Elaborate in the context of The Sales of Goods Act, of 1930.

Answer:

Risk Prima Facie passes with property (Section 26):

1. The term risk means the liability to bear the loss if goods are lost or damaged.
2. The general rule is that risk follows ownership i.e. if the goods are lost or damaged at any point in time, the loss shall be borne by the owner of the goods.
3. Price has been paid or delivery has been made or hot is immaterial for the passing of risk.
4. However, there are certain exceptions to the above rule:
   • If the loss or damage of goods is due to a delay in delivery, then the person who is responsible for such delay has to bear the loss.
   • If a party holds the goods a bailee (whether buyer or seller), then that person has to bear the risk in case of lost or damaged goods.
   • If the risk is separated either by an agreement or by a trade custom, then the person holding the risk has to be the loss in case of loss or damage of goods.

In all these above cases, it is immaterial, whether the property has passed to the buyer or not.

Question 34. What are the consequences of the destruction of specified goods, before making of a contract and after the agreement to sell under the Sale of Goods Act, of 1930?

Answer:

The contract for the sale of specific goods is void ab initio if

1. At the time when the contract was made,
2. The goods have already perished or become so damaged that they no longer correspond with their description in the contract.
3. Without the knowledge of the seller. If both the parties to the contract are under mistake as to a matter of fact essential to the contract, then the contract is void ab initio due to a bilateral mistake.

Similarly, an agreement to sell specific goods also becomes void, if the goods perish or get damaged, after the making of the contract, without any fault on the part of the buyer or seller. This is due to the impossibility of performance due to subsequent events.

Question 35. What are the rights of unpaid sellers in the context of the resale of the goods under the Sale of Goods Act, of 1930?

Answer:

Right of re-sale [Section 54]: The right, of resale, is a very valuable right given to an unpaid seller. In the absence of this right, the unpaid seller’s other rights against the goods that are lien and the stoppage in transit would not have been of much use because these rights only entitled the unpaid seller to retain the goods until paid by the buyer.

The unpaid seller can exercise the right to re-sell the goods under the following conditions:

1. Where the goods are perishable: In such a case, the buyer need not be informed of the intention of resale.

2. Where he gives notice to the buyer of his intention to re-sell the goods: If after the receipt of such notice, the buyer fails within a reasonable time to pay or tender the price, the seller may resell the goods.

It may be noted that in such cases, on the resale of the goods, the seller is also entitled to:

• Recover the difference between the contract price and resale price, from the original buyer, as damages.
• Retain the profit if the resale price is higher than the contract price. It may also be noted that the seller can recover damages and retain the profits only when the goods are resold after giving the notice of resale to the buyer.

Thus, if the goods are resold by the seller without giving any notice to the buyer, the seller cannot recover the loss suffered on resale.

Moreover, if there is any profit on resale, he must return it to the original buyer, i.e. he cannot keep such surplus with him [Section 54(2)1.

3. Where an unpaid seller who has exercised his right of lien or stoppage in transit resells the goods: The subsequent buyer acquires the good title thereof as against the original buyer, although the notice of re-sale has not been given by the seller to the original buyer.

4. A re-sale by the seller where a right of re-sale is expressly reserved in a contract of sale: Sometimes, it is expressly agreed between the seller and the buyer that in case the buyer defaults in payment of the price, the seller will resell the goods to some other person.

In such cases, the seller is said to have reserved his right of resale, and he may resell the goods on the buyer’s default. It may be noted that in such cases, the seller is not required to give notice of resale. He is entitled to recover damages from the original buyer even if no notice of resale is given.

5. Where the property in goods has not passed to the buyer: The unpaid seller has in addition to his remedies a right of withholding delivery of the goods. This right is similar to a lien and is called “quasilien”.

Question 36. Mr. D sold some goods to Mr. E for ₹ 5,00,000 on 1 5-day credit. Mr. D delivered the goods. On the due date, Mr. E refused to pay for it. State the position and rights of Mr. D as per The Sale of Goods Act, of 1930.

Answer:

When the seller is ready and willing to deliver the goods and requests the buyer to take delivery, and the buyer does not within a reasonable time after such a request take delivery of the goods.

• He is liable to the seller for any loss occasioned by his neglect or refusal to take delivery and also for a reasonable charge for the care and custody of the goods.
• Provided that nothing in this section shall affect the rights of the seller where the neglect or refusal of the buyer to take delivery amounts to a repudiation of the contract.
• Thus, in the given case, Mr. D can recover damages from Mr. E and can repudiate the contract as well.

Question 37. Mr. G sold some goods to Mr. H for a certain price by issue of an invoice, but payment in respect of the same was not received on that day. The goods were packed and lying in the godown of Mr. G. The goods were inspected by H’s agent and were found to be in order. Later on, the dues of the goods were settled in cash. Just after receiving cash, Mr. G asked Mr. H that goods should be taken away from his godown to enable him to store other goods purchased by him. After one day, since Mr. H did not take delivery of the goods, Mr. G kept the goods out of the godown in an open space. Due to rain, some goods were damaged. Referring to the provisions of the Sale of Goods Act, of 1930, analyze the above situation and decide who will be held responsible for the above damage. Will your answer be different, if the dues were not settled in cash and are still pending?

Answer:

According to the facts of this case, it stands pretty much clear to the judgment of an independent observer that the property in the goods sold by Mr. G had already passed to Mr. H after the payment of dues and the examination of goods by the agent of Mr. H.

Hence it can be easily concluded that the liability for damage suffered by the goods would fall on the buyer i.e. Mr. H and not Mr. G since the transfer of title of the goods had already taken place before the damage occurred.

Question 38. State the various essential elements involved in the sale of unascertained goods and their appropriation as per the Sale of Goods Act, of 1930′.

Answer:

The property in unascertained goods or future goods does not pass until the goods are ascertained.

• Such goods are defined only by description and not as goods identified and agreed upon when the contract is made.
• The following rules are applicable for ascertaining the intention of the parties about the passing of property in respect of such goods.
• The property in such goods passes to the buyer when the goods in a deliverable state are unconditionally appropriated to the contract.

Appropriation of goods involves the selection of goods to use in the performance of the contract and with the mutual consent of the seller and the buyer.

The essentials are:

1. There is a contract for the sale of unascertained or future goods.
2. The goods should conform to the description and quality stated in the contract.
3. The goods must be in a deliverable state.
4. The goods must be unconditionally appropriated to the contract either by delivery to the buyer his agent or the carrier.
5. The appropriation must be made by:
   • The seller with the assent of the buyer, or
   • The buyer with the assent of the seller
6. The assent may be express or implied.
7. The assent may be given either before or after appropriation.

Question 39. Ms. R owns a two-wheeler which she handed over to her friend Ms. K on a sale or return basis. Even after a week Ms. K. neither returned the vehicle nor made payment for it. She instead pledged the vehicle to Mr. A to obtain a loan. Ms. R now wants to claim the Two Wheeler from Mr. A. Will she succeed?

1. Examine the provisions of the Sale of Goods Act, of 1930, what recourse is available to Ms. R?
2. Would your answer be different if it had been expressly provided that the vehicle would remain the property of Ms. R until the price has been paid?

Answer:

Goods sent on approval or on sale or return basis (Section 24) of the Sales of Goods Act, 1930. When the goods are delivered to the buyer on approval or a sale or return basis or other similar terms the property therein passes to the buyer.

1. When he signifies his approval or acceptance to the seller or does any other act adopting the transaction.
2. If he does not signify his approval or acceptance to the seller but retains the goods on the expiration of such time, if no time has been fixed, then on the expiration of the reasonable time.
3. he does something to the goods which is equivalent to accepting the goods.

But sometimes, it may be noted that where goods have been delivered by a person on ‘Sale or return’ on the terms that the goods well to remain the property of the sellers till they are paid, for, the property therein does not pass to the buyer until the terms are complied with i.e. cash is paid for.

In the given case Mr. R owns a two-wheeler which she handed over to her friend MSK on a sale or return basis After a week MSK neither returned the vehicle nor made payment for it. She instead pledges the vehicle to Mrs. A to obtain a loan.

1. Thus, according to this case, Mr. R has no right against Mr. A. He can only recover the price of the two-wheeler from Mr K.
2. Yes, my answer would be different if it had been expressly provided that the vehicle would remain the property of Mr. R until the price has been paid then it says that at the time of the pledge, the ownership was not transferred to Mr. K. Thus, the pledge was not valid and R can recover from the two-wheeler from A as well.

Question 40. Mr. T was a retail trader of fans of various kinds. Mr. M came to his shop and asked for an exhaust fan for the kitchen. Mr. T showed him different brands and Mr. M approved of a particular brand and paid for it. A fan was delivered to Mr. M’s house; at the time of opening the packet, he found that it was a table fan. He informed Mr. T about the delivery of the wrong fan. Mr. T refused to exchange the same, saying that the contract was complete after the delivery of the fan and payment of the price.

1. Discuss whether Mr. T is right in refusing to exchange as per provisions of the Sale of Goods Act, of 1930.
2. What is the remedy available to Mr. M?

Answer:

Legal Provision: According to Section 15 of the Sales of Goods Act, of 1930. Where there is a contract of sale of goods by description, there is an implied condition that the goods shall correspond with the description.

• This rule is based on the principle that “if you contract to sell peas, you cannot compel the buyer to take beans.” The buyer is not bound to accept and pay for goods which are not following the description of the goods.
• Thus, it has to be determined whether the buyer has undertaken to purchase the goods by their description, i.e., whether the description was essential for identifying the goods where the buyer had agreed to purchase.
• If that is required and the goods tendered do not correspond with the description, it would be a breach of condition entitling the buyer to reject the goods.
• It is a condition that goes to the root of the contract and the breach of it entitles the buyer to reject the goods whether the buyer can inspect them or not.
• Fact: Here in the given problem, Mr. M went to Mr. T’s (retail trader) shop and asked for an exhaust fan approved a particular brand, and paid for it.

The fan which was delivered to M’s house was a table fan. So, he asked Mr. T to exchange the same but Mr. T refused to do so.

Conclusion: Applying the above legal provision is the given problem we can conclude as follows:

1. Mr. T is not right he can’t refuse to exchange the fan as the goods are not according to the description. The buyer has asked for an exhaust fan and the seller has supplied a table fan condition as to description is breached.
2. The remedy available to Mr. M-Mr. M can repudiate or rescind the contract, i.e. he can return the table fan and ask for damages or both.

Conditions And Warranties Self-Study Questions And Answers

Question 1. Describe the stipulation as to time in the contract of sales.

Answer:

The stipulation as to time in the contract of sales

• Before concluding a contract of sale, certain statements are made by the contracting parties.
• The statement may be a stipulation – one by the seller on the reliance of which the buyer makes the contract.
• The statement may not be a stipulation if it is a mere recommendation by the seller thus, does not give rise to any action.
• “A stipulation or a representation is a contract of sale regarding goods which are subject thereof, maybe a condition or a warranty.”

Question 2. Define the Terms – Conditions and Warranties.

Answer:

Conditions and Warranties

• “A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated and claim damages.”
• “A warranty is a stipulation collateral to the main purpose of the contract, i.e. a subsidiary promise the breach of which gives rise to a claim for damages but not a right to reject the goods and treat the contract as repudiated.”
• As per section 11: Stipulation as to the time of payment is not the condition unless such an intention appears in the contract.

Question 3. When a condition a Contract of Sale may be Treated as a warranty.

Answer:

• Where the buyer waives the performance of the condition altogether, the party may for his benefit waive a stipulation.
• Where the buyer himself opts to treat the breach of condition as a warranty.
• Where the contract is indivisible and the buyer has accepted either the whole goods or any part thereof.
• Where the fulfillment of any condition or. warranty in excused by law because of impossibility or otherwise.

Question 4 How many types of Conditions are there?

Answer:

Types of Conditions are there

Question 5. Define the “Express Conditions” in a Contract of Sale.

Answer:

“Express Conditions” in a Contract of Sale

• Condition is expressed when the terms of the contract expressly state them.
• They are agreed upon between the parties at the time of the contract and are expressly provided in the contract.
• It does not negative an implied condition.

Question 6. What are the Implied conditions in a Contract of Sale?

Answer:

The Implied conditions in a Contract of Sale

• Conditions are implied when the terms are not expressly provided for.
• They are presumed by law to be present in the contract.
• They may be neglected or waived by an express agreement.
• It includes :
  1. Condition as to title,
  2. Condition as to sale by description.
  3. Condition as to sale by sample as well as description.
  4. Condition as to quality and fitness.
  5. Condition as to merchantability.
  6. Condition as to sale by sample.
  7. Condition as to wholesomeness.

Question 7. What are the Conditions as to title in a Contract Sale?

Answer:

The Conditions as to title in a Contract Sale

• It presumes that the seller has a valid title to the goods.
• The seller has the right to sell the goods in case of sale.
• In case of an agreement to sell, he will have the right to sell the goods at the time when the property is to pass unless there is a contract to the contrary.
• If the seller’s title turns out to be defective, the buyer may return the goods to the true owner and recover the price from the seller.

Question 8 What are the Conditions of Sale by Sample as well as Description in a Contract of Sale?

Answer:

The Conditions of Sale by Sample as well as Description in a Contract of Sale

Here, the implied condition is that the bulk of goods supplied must correspond both with the samples as well as with the description.

Question 9. What are the Conditions for Quality and Fitness in a Contract of Sale?

Answer:

The Conditions for Quality and Fitness in a Contract of Sale

1. Here the implied condition operates on the fulfilment of the following conditions:
   • The buyer requires the goods for a particular purpose which he has made known to the seller,
   • The buyer relies on the skill and judgment of the seller.
   • The seller sells such types of goods.
2. If the goods are bought under a patent or trade name, there is no such condition.

Question 10. What are the Conditions for Merchantability?

Answer:

The Conditions for Merchantability

• It means that when the goods are bought by description from a seller who deals in such goods, it is implied that the goods will be of merchantable quality.
• It is immaterial whether the seller is a manufacturer or producer or not.
• It does not operate where the buyer examines the goods before the sale and examination ought to have revealed the defects.

Question 11. What are the Conditions for Wholesomeness?

Answer:

The Conditions for Wholesomeness

In the Case of eatables and other provisions, there is an implied condition of wholesomeness i.e. fit for consumption, other than merchantability.

Question 12. What are the Conditions in Cash of Sale by sample?

Answer:

The Conditions in Cash of Sale by sample

There is an implied condition that:

• The bulk shall correspond with the sample in quality.
• The buyer shall have a reasonable opportunity to compare the bulk with the sample.
• The goods shall be free from any defect rendering them unmerchantable, which would not be apparent on a reasonable examination of the sample.

Question 13. What are the Types of Warranty?

Answer:

Types of Warranty

Question 14. What is the Express Warranty in a Contract of Sale?

Answer:

Express Warranty in a Contract of Sale

It is a warranty that has been expressly agreed on by the parties at the time of the contract of sale.

Question 15. What are the kinds of Implied Warranty, under the Provision of Sale of Goods Act, of 1930? Describe all types of Warranty.

Answer:

• It is a warranty which the law presumes that the parties have incorporated it into their contract.
• It may be excluded by the course of dealing between the parties.
• It includes:
  1. Warranty as to undisturbed possession.
  2. Warranty as to the non-existence of encumbrances.
  3. Warranty as to the dangerous nature of goods.
  4. Warranty as to the quality of fitness by the usage of trade.

Warranty as to undisturbed possession [Section 14 (b)]

• An implied warranty in that the buyer shall have and enjoy the quiet possession of the goods.
• If the buyer is later on disturbed in his possession, he is entitled to sue the seller.

Warranty as to Non-Existence of Encumbrances [Section 14(c))

• An implied warranty is that the goods shall be free from any charge or encumbrance in favor of any third party not declared or known to the buyer before or at the time of entering into a contract.
• If defects are known to the buyer at the time of entering into to contract, he is not entitled to ask for any compensation from the seller for discharging the encumbrance.

Warranty Implied by the custom or usage of trade [Section 16(3)]

An implied warranty or condition as to the quality of fitness for a particular purpose may be annexed by the usage of trade.

Warranty as to the dangerous nature of goods:

If goods are dangerous, and the buyer is not aware of such danger, it is implied warranty that the seller should warn the buyer about it else he will be liable for damages caused to the buyer.

Conditions And Warranties Objective Questions And Answers

Question 1. State with reason whether the following statement is Correct or Incorrect: If a seller does not disclose the dangerous nature of the goods to be sold to the buyer he breaches the contract.

Answer:

Incorrect: If a seller does not disclose the dangerous nature of the goods to be sold to the buyer and the buyer is ignorant of the danger, it is a breach of implied warranty.

In case of an implied warranty, the seller must warn to the buyer of the probable danger of the dangerous nature of the goods. It is not a breach of condition but it is merely a breach of implied warranty and the seller will be liable for damages.

Question 2. State with reason whether the following statement is Correct or Incorrect: Where the buyer elects to treat the breach of condition as one of warranty, he may repudiate the contract.

Answer:

Incorrect: Section 13 of the Sale of Goods Act, 1930 lays down that where the buyer elects to treat the breach of condition as one of a warranty, he may only claim damages instead of repudiating the contract.

Conditions And Warranties Short Notes

Question 1. Write short notes on the following: Implied warranties in a contract of sale.

Answer:

Implied Warranties in a contract of sale:

1. Warranty of quiet possession [Section 14(b)] Sale of Goods Act: In a contract of sale, unless there is a contrary intention, there is an implied warranty that the buyer shall have and enjoy quiet possession of the goods.
   • If the buyer is in any way disturbed in the enjoyment of the goods as a consequence of the seller’s defective title to sell, he can claim damages from the seller.
2. Warranty of freedom from encumbrances [Section 14(c)]: The buyer is entitled to a warranty that the goods are not subject to any change or right in favor of any change or right in any way disturbed because of the existence of any charge or encumbrances on the goods in favor of any third party, he shall have a right to claim damages for breach of this warranty.
3. Warranty as to quality or fitness by usage of trade [Section 16(4)]: An implied warranty as to quality or fitness for a particular purpose may be annexed by the usage of trade.
4. Warranty to disclose the dangerous nature of goods: Where a person sells goods, knowing that the goods are inherently dangerous or they are likely to be dangerous to the buyer and that the buyer is ignorant of the danger, he must warn the buyer of the probable danger, otherwise he will be liable for damages.

Question 2. Distinguish between the following: Condition and Warranty.

Answer:

Condition and Warranty:

Conditions And Warranties Descriptive Questions And Answers

Question 1. Comment on the following: Breach of a condition in a sale of goods can be treated as a breach of warranty, but not otherwise.”

Answer:

‘Breach’ of a condition in a sale of goods can be treated as a breach of warranty, but not otherwise:

• This statement is quite correct. Sections 1 2 and 1 3 of the Sale of Goods Act, throw light on this statement. The definitions given of these two terms under the Act are quite meaningful to support this statement.
• “The condition in a contract of sale regarding goods, is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated.” [Section 12(2)].
• “A warranty is a stipulation collateral to the main purpose of the contract.

The breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated.” [Section 12(3)].

• These definitions distinguish the nature of the two stipulations as well as the effect of the breach of the stipulations. Condition is an important stipulation than warranty.
• The law gives a right to the aggrieved party to cancel the contract in case of a breach of this stipulation, which right is not available in the case of a breach of a warranty. On this basis, the above statement is supported.

Question 2. What is meant by the doctrine of ‘Caveat Emptor’? State the circumstances under which the doctrine is not applicable.

Answer:

Caveat Emptor: In the case of the sale of goods, the doctrine applicable is “Caveat Emptor” which means “Let the buyer beware”.

• When sellers display their goods in the open market, it is for the buyers to make a proper selection or choice of the goods.
• If the goods turn out to be defective he cannot hold the seller liable. The seller is in no way responsible for the bad selection of the buyer, The seller is not bound to disclose the defects in the goods which is soiling.
• The buyer must satisfy himself before buying the goods that the goods will serve the purpose for which they are being bought.

If the goods turn out to be defective or do not serve his purpose or if he depends on his skill or judgment, the buyer cannot hold the seller responsible.

• The rule of Caveat Emptor is laid down in the opening lines of Section 16, which states that “subject to the provisions of this Act or any other law for the time being in force.
• There is no implied warranty or condition as to the quality of fitness for any particular purpose of goods supplied under a contract of sale”.

Exceptions: The doctrine of Caveat Emptor is, however, subject to the following exceptions;

1. Where the buyer makes known to the seller the particular purpose for which the goods are required, to show that he relies on the seller’s skill or judgment and the goods are of a description which is in the course of the seller’s business to supply, the seller must supply such goods as are reasonably fit for that purpose [Section 16(1)].
2. In the case where the goods are purchased under its patent name or brand name, there is no implied condition that the goods shall be fit for any particular purpose [Section 16(1)].
3. Where the goods are sold by description there is an implied condition that the goods shall correspond with the description.
4. Where the goods are bought by description from a seller who deals in goods of that description there is an implied condition that the goods shall be of merchantable quality.
5. The rule of Caveat Emptor is not applicable. But where the buyer has examined the goods this rule shall apply if the defects were such which ought to have been revealed by ordinary examination [Section 16(2)].
6. Where the goods are bought by sample, this rule of Caveat Emptor does not apply if the bulk does not correspond with the sample [Section 17].
7. Where the goods are bought by sample as well as description, the rule of Caveat Emptor is not applicable in case the goods do not correspond with both the sample and description [Section 15].
8. An implied warranty or condition as to quality or fitness for a particular purpose may be annexed by the usage of trade and if the seller deviates from that, this rule of Caveat Emptor is not applicable.
9. Whore the seller sells the goods by making some misrepresentation or fraud and the buyer relies on it own or when the seller actively conceals some defect in the goods so that the same could not be discovered by the buyer on a reasonable examination, then the rule of Caveat Emptor will not apply. In such a case, the buyer has a right to avoid the contract and claim damages.
10. If trade usage attached implied warrants or a condition as regards the quality of goods. [Section 1 6(3)].

Question 3. Explain the following: When a condition in a contract of sale may be treated as a warranty?

Answer:

When a condition may be treated as a warranty (Section 1 3, Sale of Goods Act, 1930).

In the following case, a contract is not avoided even on account of a breach of a condition. These are:

1. Where the buyer altogether waives the performance of the condition, a party may for his benefit, waive a stipulation or
2. Where the buyer elects to treat the breach of the condition as one of a warranty i.e. he may only claim damages instead of repudiating the contract.
3. Where the contract is non-severable and the buyer has accepted either the whole goods or any part thereof, unless there is an express or implied term in the contract to the effect that it amounts to a rejection of goods and repudiation of the contract.
4. Where the fulfillment of any condition or warranty is excused by law because of impossibility or otherwise.

Question 4. Explain the following: Give the exceptions to the ‘doctrine of caveat emptor in the Sale of Goods Act.

Answer:

The doctrine of Caveat Emptor (“Let the buyer beware”): It is no part of the seller’s duty in a contract of sale of goods to give to the buyer an article suitable for a particular purpose or of a particular quality unless such quality or fitness is made an express term of the contract. If the buyer makes a bad choice, he is to suffer for his judgment.

Exceptions: The doctrine has no application:

1. If the seller has made a false representation relating to the goods and the buyer relies upon it to his detriment.
2. When the seller has deliberately concealed a defect that is not apparent on the reasonable examination of goods.
3. When the seller is a manufacturer or a dealer of the type of goods sold, and the buyer has communicated to him the purpose for which the goods are required, he relies on the skill or judgment of the seller. [Section 16(1), Sale of Goods Act, 1930]. The exception does not apply if the goods are bought under the patent or trade name.
4. The goods shall be of “merchantable quality”, in case of goods sold by description.
5. In the case of goods sold by sample, if the bulk does not correspond with the sample the buyer is not provided a reasonable opportunity of inspecting the goods. [Section 17(2)].
6. If the trade usage attaches an implied warranty or a condition as regards the quality of goods. [Section 16(3)].
7. In the case of sale by sample as well as description, if the bulk does not correspond with the description as well as sample. [Section 15].

Question 5. Briefly answer the following: A contract of sale is not avoided even on account of a breach of a condition.

Answer:

A contract of sale is not avoided even on account of a breach of a condition

The Sale of Goods Act, of 1930 defines a condition as a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as having been repudiated.

• Thus it is clear from the definition that the buyer gets the right to avoid the contract in case of a breach of a condition on a contract for the sale of goods.
• However, the law does not force the buyer to avoid the contract in case of breach of a condition.
• The buyer can treat the breach of a condition, as a breach of a warranty. He also gets a right to waive the condition.

Further, where the contract is non-severable and the buyer has accepted either the whole goods or any part thereof, then he cannot avoid the contract.

• Further, where the law excuses the fulfillment of a condition or warranty, then the breach of a condition shall not allow the buyer to repudiate the contract.
• Thus, a contract of sale can be avoided by the buyer in case of breach of a condition, and therefore; the statement as given in the question is not true.

Question 6. Briefly answer the following: What are the implied conditions in a Contract of Sale?

Answer:

The implied conditions in a Contract of Sale

It is open to the parties to include in their contract any number of conditions and warranties. But in addition to what the contract may provide, the law implies every sale of goods has some conditions.

They are read with every contract of sale. They are known as implied conditions. They are stated as under:

1. Condition as to title (Section 14): It is an implied condition in every. sale that the seller has the right to sell. That means the title of the seller is perfect.
2. Sale by description: Section 15 lays down the condition that where the sale is by description the goods must correspond with a description. If the goods do not correspond with the description the sale may be set aside.
3. Sale by description as well as be sample (Section 15): Section 15 further provides that “if the sale is by sample as well as by description, the delivery of goods should correspond to description as well as sample.
4. Goods supplied must be fit for buyer purposes: If the buyer has disclosed the purpose it should be fit for his purpose otherwise the contract may be set aside (Section 16(1)).
5. Goods supplied should be of mercantile quality: It is an implied condition of sale that goods must be of mercantile quality [Section 16(2)].

It is open to the parties to include any express conditions in their contract. But an express condition does not negate a condition implied by the Sale of Goods Act, of 1930.

Question 7. Define the terms ‘Condition’ and ‘Warranty’ as used in the Sale of Goods Act, Can a breach of warranty be treated as a breach of condition and vice-versa?

Answer:

“Condition” and “Warranty”: Section 12(2) of the Sale of Goods Act, 1930, defines a condition as a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to a right to treat the contract as having repudiated.

• Section 12(3) of the Act defines a warranty as a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not a right to repudiate the contract.
• X buys a car from V for touring purposes. The car is unfit for touring purposes. Here X can repudiate the contract since “touring purpose” is a condition for buying the car.
• On the other hand, the home of the car is defective. X can not repudiate the contract, since the defective horn is only a warranty and the home can be repaired or replaced.
• Whether a stipulation is a condition or warranty depends in each case, on the construction of the contract. ‘Conditions and Warrantees’ may be either express or implied.

A warranty cannot be treated as a condition because it is of lesser importance to the concerned parties. But a condition may be treated as a warranty under the following circumstances:

1. The buyer altogether waives the performance of the condition.
2. The buyer elects to treat the breach of the condition as a breach of warranty and claims damages only.
3. Where the contract is non-severable and the buyer has accepted either the whole goods or any part thereof.
4. Where the fulfillment of a condition or warranty is excused by law because of impossibility of performance or otherwise.

Question 8. Briefly answer the following: What are the implied conditions in a Sale by Sample?

Answer:

Implied conditions in a sale by sample:

A sale is by sample where there is a term in the contract (express or implied) to that effect. The effect is that where goods are sold by sample, there should not be any latent defect that renders the goods unmerchantable.

1. The bulk must correspond with the sample in quality.
2. The buyer shall have a reasonable opportunity to compare the bulk with the sample; and
3. The goods shall be free from any defects rendering them unmerchantable, which would not be apparent on a reasonable examination of the sample. (Section 17, Sale of Goods Act, 1930).

Question 9. Briefly answer the following: When shall a condition be treated as a warranty?

Answer:

A condition shall be treated as a warranty in the following cases.

1. Voluntary wavier of condition: Where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer may
   • Waive the condition, or
   • Elect to treat the breach of the condition as a breach of warranty [Section 13(1)]. If the buyer once decides to waive the condition, he cannot afterward insist on its fulfillment.
2. Acceptance of goods by the buyer: If the contract of sale is not severable and the buyer has accepted the goods or part thereof, the breach of any condition to be fulfilled by the seller can only be treated as a breach of warranty, unless there is a term of the contract, express or implied, to the contrary. [Section 13(2)].

The provisions of Section 1 3 of the Sale of Goods Act, 1 930 do not affect the cases where the fulfillment of any condition or warranty is excused by law by reasons of impossibility or otherwise. [Section 13(3)].

Question 10. What is meant by the doctrine of ‘Caveat emptor’? State the circumstances under which the doctrine is not applicable.

Answer:

Caveat Emptor: This means “Let the buyer beware”, i.e. in a contract of sale of goods the seller is under no. duty to reveal unflattering truths about the goods sold.

• Therefore, when a person buys some goods, he must examine them thoroughly. If the goods turn out to be defective or do not suit his purpose or if he depends upon his skill or judgment and makes a bad selection, he cannot blame anybody except himself.
• The rule of caveat emptor is enunciated in the opening words of Section 1 6 which runs thus: “Subject to the provisions of this Act and of any other law for the time being in force.

There is no implied warranty or condition as to the quality or fitness, for any particular purpose of goods supplied, under a contract of sale”.

Exceptions: The doctrine of caveat emptor has certain importance. The exceptions are given below:

1. Fitness for buyer’s purpose: Where the buyer, expressly or by implication, makes known to the seller the particular purpose for which he requires the goods and relies on the seller’s skill or judgment and the goods are of a description which it is in the course of the seller’s business to supply, the seller must supply the goods which shall be fit for the buyer’s purpose [Sec. 16(1)].
2. Sale under a patent or trade name: In the case of a contract for the sale of a specified article under its patent or other trade name, there is no implied condition that the goods shall be reasonably fit for any particular purpose [Proviso to Sec. 16(1)].
3. Merchantable quality: Where goods are bought by description ‘from a seller who deals in goods of that description (whether he is the manufacturer or producer or not), there is an implied condition that the goods shall be of merchantable quality. But if the buyer has examined the goods, there is no implied condition as regards defects which such examination ought to have revealed [Sec. 16(2)].
4. Usage of trade: An implied warranty or condition as to quality or fitness for a particular purpose “may be annexed by the usage of trade [Sec. 10(3)].
5. Consent by fraud: Where the consent of the buyer, in a contract of sale, is obtained by the seller by fraud or where the seller knowingly conceals a defect that could not be discovered on a reasonable examination (i.e. where there is a latent defect in the goods), the doctrine of caveat emptor does not apply.
6. Sale by sample (Section 17): when goods are bought by sample’ the bulk must correspond with the sample and the buyer must have a reasonable opportunity to inspect the goods.

Question 11. What is the Doctrine of “Caveat Emptor”? What are the exceptions to the Doctrine of “Caveat Emptor”?

Answer:

Doctrine of “Caveat Emptor”

In the case of the sale of goods, the doctrine ‘Caveat Emptor’ means ‘let the buyer beware’. When sellers display their goods in the open market, it is for the buyers to make a proper selection or choice of the goods.

If the goods turn out to be defective he cannot hold the seller liable. The seller is in no way responsible for the bad selection of the buyer. The seller is not bound to disclose the defects in the goods which he is selling.

The exceptions to the Doctrine of Caveat Emptor are:

1. Fitness as to quality or use: Where the buyer makes known to the seller the particular purpose for which the goods are required, to show that he relies on the seller’s skill or judgment and the goods are of a description which is in the course of seller’s business to supply, it is the duty of the seller to supply such goods as are reasonably fit for that purpose [Section 16(1)].
2. Goods purchased under patent or brand name: In the case where the goods are purchased under the patent name or brand name, there is no implied condition that the goods shall be fit for any particular purpose [Section 16(1)].
3. Goods sold by description: Where the goods are sold by description there is an implied condition that the goods shall correspond with the description [Section 15]. If it is not so then the seller is responsible.
4. Goods of merchantable quality: Where the goods are bought by description from a seller who deals in goods of that description there is an implied condition that the goods shall be of merchantable quality. The rule of Caveat emptor is not applicable.
5. Sale by Sample: Where the goods are bought by sample, this rule of Caveat emptor does not apply if the bulk does not correspond with the sample [Section 17].
6. Goods by sample as well as description: Where the goods are bought by sample as well as description, the rule of Caveat Emptor is not applicable.
7. Trade Usage: An implied warranty or condition as to quality or fitness for a particular purpose may be annexed by the usage of trade and if the seller deviates from that, this rule of Caveat emptor is not applicable [Section 16(3)].
8. Seller actively conceals a defect or is guilty of fraud: Where the seller sells the goods by making some misrepresentation or fraud and the buyer relies on it or when the seller actively conceals some defect in the goods so that the same could not be discovered by the buyer on a reasonable examination, then the rule of Caveat Emptor will not apply.

Question 12. Discuss the various types of implied warranties as per the Sales of Goods Act 1930.

Answer:

Implied Warranties:

It is a warranty that the law implies in the contract of sale. It is a stipulation that has not been included in express words, but the law presumes that the parties have incorporated it into their contract.

The following types of implied warranties are provided by the Sale of Goods Act, of 1930:

1. Warranty as to undisturbed possession: An implied warranty that the buyer shall have and enjoy quiet possession of the goods. If the buyer is later disturbed, he is entitled to sue the seller for the breach of the warranty.
2. Warranty as to the non-existence of encumbrances: An implied warranty that the goods shall be free from any charge or encumbrance in favor of any third party not declared or known to the buyer at the time of making the contract.
3. Warranty as to quality or fitness by the usage of trade: An implied warranty as to quality or fitness for a particular purpose may be annexed or attached by the usage of trade.
4. Disclosure of the dangerous nature of goods: Where the goods are dangerous and the buyer is ignorant of the danger, the seller must warn the buyer of the probable danger.

Question 13. Write any four exceptions to the doctrine of Caveat Emptor as per The Sale of Goods Act, 1930.

Answer:

According to Section (16) of the Indian Contract Act, of 1872:

“Subject to the provisions of this act or any other law for the time being in force there is no implied warranty or condition as to quality or fitness for any particular purpose of goods supplied under a contract of sale. But, there are certain exceptions to this rule of CAVEAT EMPTOR.

1. Fitness as to Quality or use: When the buyer makes known to the seller the particular purpose for which the goods are required, to show that he relies on the seller’s skill or judgment and the goods are of a description which is in the course of seller’s business to supply the seller must supply goods as all reasonably fit for that purpose section 16(1).
2. Goods sold by description: When the goods are sold by description there is an implied condition that the goods shall correspond with the description. If it is not then the seller is responsible.
3. Sale by sample: When the goods are bought by sample, the rule of ‘CAVEAT EMPTOR’ does not apply if the bulk does not correspond with the sample.
4. Goods of merchantable quality: When the goods are brought by description from the seller who deals in goods of that description there is an implied condition that the goods should be of a merchantable quality. The rule of ‘CAVEAT EMPTOR’ is not applicable.

Question 14. What are the differences between a ‘Condition’ and ‘Warranty’ in a contract of sale? Also explain, when a ‘breach of condition’ be treated as a ‘breach of warranty’ under provisions of the Sale of Goods Act, 1930.

Answer:

The differences between a ‘Condition’ and ‘Warranty’ in a contract of sale

Section 13 of the Sales of Goods Act, 1930 specifies cases where a breach of condition be treated as a breach of warranty. As a result of which the buyer loses his right to rescind the contract and can claim damages only.

In the following cases, a contract is not avoided even, on account of a breach of a condition:

1. Where the buyer altogether waives the performance of the condition. A party may for his benefit, waive a stipulation. It should be a voluntary waiver by the buyer.
2. Where the buyer elects to treat the breach of the conditions, as one of a warranty. That is to say, he may claim only damages instead of repudiating the contract. Here, the buyer has not waived the condition but decided to treat it as a warranty.
   • Example: A agrees to supply B 10 bags of first-quality sugar @ ₹ 625 per bag but supplies only second-quality sugar, the price of Which is ₹ 600 per bag. There is a breach of condition and the buyer can reject the goods. But if the buyer so elects, he may treat it as a breach of warranty, accept the second quality sugar, and claim damages @ ₹ 25 per bag.
3. Where the contract is non-severable and the buyer has accepted either the whole goods or any part thereof. Acceptance means acceptance as envisaged in Section 72 of the Indian Contract Act, of 1872.
4. Where the fulfillment of any condition or warranty is excused by law because of impossibility or otherwise.

Question 15. What are the implied conditions in a contract of ‘Sale by sample under the Sale of Goods Act, of 1930? Also, state the implied warranties operative under the Act.

Answer:

Implied Condition in a contract of sale by sample

1. In a contract of sale of goods by sample, there is an implied condition that:
   • The bulk shall correspond with the sample in quality.
   • The buyer shall have a reasonable opportunity to compare the bulk with the sample.
   • The goods shall be free from any defects rendering them un-merchantable, which cannot be found even on a reasonable examination of the sample (ie. latent defects).
2. If any of the above conditions are not satisfied, then the buyer is entitled to reject the goods.
   1. Implied Warranties under Sale of Goods Act, 1930 warranty as to undisturbed possession An implied warranty, that the buyer shall have and enjoy quiet possession of the goods. In other words, if the buyer has got possession of the goods, later, disturbed in his possession, he is entitled to sue the seller for the breach of the warranty.
   2. Warranty as to Non-Existence of Encumbrances An implied warranty that the goods shall be free from any charge or encumbrance in favor of any third party not declared or known to the buyer before or at the time the contract is entered into.
   3. Warranty as to Quality or Fitness by Usage of Trade An implied warranty as to the quality or fitness of goods for a particular purpose may be annexed or attached by the usage of trade.
   4. Warranty as to disclosing the dangerous nature of goods Where goods are dangerous and the buyer is ignorant of the danger, the seller must warn the buyer of the probable danger. If there is a breach of warranty, the seller may be liable for damages.

Question 16. M/S Woodworth and Associates, a firm dealing with the wholesale and retail buying and selling of various kinds of wooden logs, customized as per the requirement of the customers. They dealt with Rose wood; Mango wood; Teak wood; Burma wood etc.
Mr. Das a customer came to the shop and asked for wooden logs measuring 4 inches broad and 8 feet long as required by the carpenter. Mr. Das specifically mentioned that he required the wood that would be best suited for making wooden doors and window frames. The Shop owner agreed and arranged the wooden pieces cut into as per the buyer’s requirements.
The carpenter visited Mr. Das’s house the next day, and he found that the seller had supplied Mango Tree wood which would be most unsuitable for the purpose. The carpenter asked Mr. Das to return the wooden logs as they would not meet his requirements.
The Shop owner refused to return the wooden logs on the plea that logs were cut to specific requirements of Mr. Das and hence could not be resold.

1. Explain the duty of the buyer as well as the seller according to the doctrine of “Caveat Emptor’.
2. Whether Mr. Das be able to get the money back or the right kind of wood as required to serve his purpose?

Answer:

Caveat emptor means “let the buyer beware”, i.e. in the sale of goods, the seller is under no duty to reveal unflattering truths about the goods sold. Therefore, when a person buys some goods, he must examine them thoroughly.

• If the goods turn out to be defective or do not suit his purpose, or if he depends upon his skill and judgment and makes a bad selection, he cannot blame anybody except himself.
• The rule is enunciated in the opening words of section 16 of the Sale of Goods Act, 1930, which runs thus, “subject to the provisions of this Act and of any other law for the time being in force.
• There is no implied warranty or condition as to the quality fitness for any particular purpose of goods supplied under a contract of sale.

The rule of caveat emptor does not apply in the following case: Fitness for buyer’s purpose:

Where the buyer, expressly orby implication, makes known to the seller the particular purpose for which he requires the goods and relies on the seller’s skill or judgment.

• The goods are of a description which it is in the course of the seller’s business to supply, the seller must supply the goods which shall be reasonably fit for the buyer’s purpose.
• In the given case Mr. Das had intimated the seller of his specific purpose and the goods supplied by the seller were unfit for that purpose.
• The seller is bound to supply the goods that are reasonably fit for the purpose.

Held, the contract is avoidable by Mr. Das and he holds full right to either get his money back or to get the right kind of wood as required for his purpose.

Question 17. Mrs. Geeta went to the local rice and wheat wholesale shop and asked for 100 kgs of Basmati rice. The Shopkeeper quoted the price of the same as ₹ 125 per kg. to which she agreed. Mrs. Geeta insisted that she would like to see the sample of what would be provided to her by the shopkeeper before she agreed upon such a purchase.
The shopkeeper showed her a bowl of rice as a sample. The sample exactly corresponded to the entire lot.
The buyer examined the sample casually without noticing the fact that even though the sample was that of Basmati Rice it contained a mix of long and short grains.
The cook on opening the bags complained that the dish if prepared with the rice would not taste the same as the quality of the rice was not as per the requirement of the dish.
Now Mrs. Geeta v/ants to file a suit of fraud against the seller alleging him of selling a mix of good and cheap quality rice. Will she be successful?
Explain the basic law on sale by sample under the Sale of Goods Act, of 1930. Decide the fate of the case and options open to the buyer for grievance redressal as per the provisions of the Sale of Goods Act, of 1930. What would be your answer in case Mrs. Geeta specified her exact requirement as to the length of rice?

Answer:

In a contract of sale by sample, there is an implied condition that

1. The bulk shall correspond with the sample in quality.
2. The buyer shall have a reasonable opportunity to compare the bulk with the sample.
3. The goods shall be free of any defect rendering them unmerchantable, which would not be apparent on a reasonable examination of the sample.

This condition applies only to defects, which could not be discovered by an ordinary examination of the goods. But if the defects are latent, then the buyer can avoid the contract.

In the given case;

• Mrs. Geeta casually examined the sample and did not notice that the sample contained a mix of long and short grains. Hence, Mrs. Geeta cannot avoid the contract and will not be successful in the suit.
• However, if the buyer had specified her exact requirements, then the seller must supply such goods which are reasonably fit for the given purpose.

Question 18. Mr. Das, a general store owner went to purchase 200 kg of Basmati Rice of a specific length from a whole seller. He saw the samples of rice and agreed to buy the one for which the price was quoted as ₹ 150 per kg. While examining the sample Mr. Das failed to notice that the rice contained a mix of long and short grains of rice.
The whole seller supplied the required quantity the same as shown in the sample. However, when Mr. Das sold the rice to one of his. regular customers, she complained that the rice contained two different qualities of rice and returned the rice.
Regarding the provisions of The Sales of Goods Act, 1930, discuss the options open to Mr. Das for grievance redressal. What would be your answer in case Mr. Das specified his exact requirement as to the length of rice?

Answer:

According to the provisions of the Sale of Goods Act, of 1930,

1. In a contract of Sale of Goods by sample; there is an implied condition that:
   • The seller must provide a reasonable opportunity for the buyer to inspect the bulk,
   • The bulk must correspond to the sample in terms of quality.
   • The goods must be from latent or hidden defects which renders them un-merchantable.
   • If any of the above conditions are not satisfied, then the buyers are entitled to reject the goods.
2. If goods are bought under the description, then the goods must correspond with the description. Otherwise, the buyer can reject the goods.

Conclusion:

• In this case, as per Mr.provisions does the Act have any option for grievance?
• In this case, Mr. Das specified her exact requirement as to the length of the rice. Therefore, she can reject the rice as they do not follow the description made by her.

Question 19. TK ordered timber of 1-inch thickness for being made into drums. The seller agreed to supply the required timber of 1 inch. However, the timber supplied by the seller varies in thickness from 1 inch to 1.4 inches. The timber is commercially fit for the purpose for which it was ordered. TK rejects the timber. Explain with relevant provisions of the Sale of Goods Act, 1930 whether TK can reject the timber.

Answer:

As per the provisions of the Sale of Goods Act, 1 930. The doctrine of Caveat emptor is subject to the exception of fitness as to quality or use. Which states that where the buyer makes known to the seller the particular purpose for
which the goods are required.

• To show that he relies on the seller’s skill or judgment and the goods are of a description which is in the course of the seller’s business to supply, the seller has to supply such goods as are reasonably fit for that purpose [section 16(1)].
• In the present case, timber was purchased to make the drums. However, the timber supplied by the seller varies in thickness from 1 inch to 1.4 inches.
• Now it is mentioned that timber is commercially fit for the purpose for which it was ordered hence that contract could not be avoided. [Bombay Burma Trading Corporation Ltd. vs Aga Mohammad.]

Question 20. Mr. K visited M/S Makrana Marbles for the purchase of marble and tiles for his newly built house. He asked the owner of the above ‘ shop Mr. J to visit his house before supply so that he could ascertain the correct mix and measurements of marble and tiles.
Mr. J agreed and visited the house the next day. He inspected the rooms on the first floor and the car parking space. Mr. K insisted he visit the second floor as well because the construction pattern was different. Mr. J ignored the’ above suggestion.
Mr. J supplied 146 blocks of marble as per the size of the rooms and 16 boxes of tiles with a word of caution that the tiles could bear only a reasonable weight.
Marble and Tiles were successfully laid except on the second floor due to the different sizes of the marble. The tiles fitted in the parking space also got damaged due to the weight of the vehicle that came for unloading cement bags.
Mr. K asked Mr. J for the replacement of marble and tiles to which Mr. J refused taking the plea that the marble was as per the measurement and it was unsafe to fit tiles in the parking area as it cannot take heavy load. Discuss in the light of provisions of the Sales of Goods Act 1930:

1. Can Mr. J refuse to replace the marble regarding the doctrine of Caveat Emptor? Enlist the duties of both Mr. K and Mr. J.
2. Whether the replacement of damaged tiles be imposed on M/S Makrana Marbles? Explain.

Answer:

1. Duty of the buyer according to the doctrine of “Caveat Emptor”: In the case of the sale of goods, the doctrine ‘Caveat Emptor’ means ‘let the buyer beware.

• When sellers display their goods in the open market, it is for the buyers to make a proper selection or choice of the goods.
• If the goods turn out to be defective he cannot hold the seller liable. The seller is in no way responsible for the bad selection of the buyer.

The seller is riot bound to disclose the defects in the goods which he is dealing or selling Duty of the seller according to the doctrine of “Caveat Emptor”.

The following exceptions to the Caveat Emptor are the duties of the seller:

1. Fitness as to the quality or use
2. Goods purchased under patent or brand name
3. Goods sold by description
4. Goods of merchantable quality
5. Sale by sample
6. Goods by sample as well as description
7. Trade usage
8. Seller actively conceals a defect or is guilty of fraud

Hence, in the given case Mr. J cannot refuse to replace the marble as it was mentioned that caveat emptor deals with the principle of fitness to the quality or use. Mr. J needs to replace the marbles.

2. As Mr. J has specifically mentioned the tiles can bear only a reasonable weight and not more than that. Hence, Mr. K cannot force him to replace the damaged tiles imposed on M/S Makhrana Marbles.

Question 21. Certain goods were sold by sample by J to K, who in turn sold the same goods by sample to L, and L by sample sold the same goods to M. M found that the goods were not according to the sample and rejected the goods and gave a notice to L. L sued K and K sued J. Can M reject the goods? Also advise K and L as per the provisions of the Sale of Goods Act, of 1930.

Answer:

As per Section 17 of the Sale of Goods Act, 1930, where the goods are sold by sample, there is an implied condition that the goods must correspond to the sample.

• If the goods do not correspond to the sample it amounts to a breach of condition as to the sample and the buyer has the right to reject the goods, cancel the contract, and claim damages.
• But if the buyer sub-sells the goods to another buyer, then the buyer loses the right to reject the goods but can claim only damages. In the above case, J sold goods by sample to K who in turn sold the same goods by sample to L.
• L by sample sold the same goods to M. M found that the goods did not correspond to the sample. Here, in light of the above-mentioned provisions, M can reject the goods to L.

L cannot reject the goods to K but can claim damages. K cannot reject goods to J but can claim damages.

Formation Of The Contract Of Sale

Sale Of Goods Act, 1930

Section 1: Short title, extent, and commencement.

Section 2: Definitions.

Section 3: Application of provisions of Act 9 of 1872.

Section 4: Sale and agreement to sell.

Section 5: Contract of Sale.

Section 6: Existing or future goods.

Section 7: Goods perishing before making of contract.

Section 8: Goods perishing before sale but after an agreement to sell.

Section 9: Ascertainment of price.

Section 10: Agreement to sell at valuation.

Section 11: Stipulations as to time.

Section 12: Condition and warranty.

Section 13: When condition to be treated as warranty.

Section 14: Implied undertaking as to title, etc.

Section 15: Sale by description.

Section 16: Implied condition as to quality.

Section 17: Sale by Sample.

Section 18: Goods must be ascertained.

Section 19: Property passes when intended to pass.

Section 20: Specific goods in a deliverable state.

Section 21: Specific goods to be put into a deliverable state.

Section 22: Specific goods in a deliverable state, when the seller has to do anything.

Section 23: Sale of unascertained goods and appropriation.

Section 24: Goods sent on approval.

Section 25: Reservation of right of disposal.

Section 26: Risk prima facie passes with property.

Section 27: Sale by person, not the owner.

Section 28: Sale by joint owners.

Section 29: Sale by the person in possession under voidable contract.

Section 30: Seller or buyer in possession after sale.

Section 31: Duties of Seller and Buyer.

Section 32: Payment and Delivery.

Section 33: Delivery.

Section 34: Effect of part delivery.

Section 35: Buyer to apply for delivery.

Section 36: Rules as to delivery.

Section 37: Delivery of wrong quantity.

Section 38: Instalments deliveries.

Section 39: Delivery to carrier.

Section 40: Risk where goods are delivered at distant places.

Section 41: Buyer’s right to examine the goods.

Section 42: Acceptance.

Section 43: Buyer not bound to return rejected goods.

Section 44: Liability of buyer for neglect or reflexing delivery of goods.

Section 45: Unpaid seller.

Section 46: Unpaid seller’s rights.

Section 47: Seller’s lien.

Section 48: Part delivery.

Section 49: Termination of lien.

Section 50: Right of stoppage in transit.

Section 51: Duration of transit.

Section 52: How stoppage in transit is affected.

Section 53: Effect of subscale.

Section 54: Sale not generally rescinded.

Section 55: Suit for price.

Section 56: Damages for non-acceptance.

Section 57: Damages for nondelivery.

Section 58: Specific performance.

Section 59: Remedy for breach of warrant.

Section 60: Repudiation of contract.

Section 61: Interest by way of damages.

Section 62: Exchange of implied terms

Section 63: Reasonable time.

Section 64: Auction sale.

Section 65: Repeal.

Section 66: Savings.

Formation Of The Contract Of Sale Self-Study Questions And Answers

Question 1. Describe the Introduction of Sales of Goods.

Answer:

The Introduction of Sales of Goods

• It is one of the special types of contract.
• Initially, it was the part of Indian Contract Act, 1 872.
• Later it was deleted and a separate Sale of Goods Act was passed in 1930.
• The basic provisions and requirements of the contract equally apply to the Sales of Goods Act.
• It contains and deals with the law relating to the sale of goods and not with mortgage or pledge.
• It received its assent on 15^th March 1930 and came force into on 1^st July 1930.
• It extends to the whole of India except the state of Jammu and Kashmir.

Question 2. What are the Definitions?

Answer:

Buyer: a person who buys or agrees to buy the goods.

Seller: a person who sells or agrees to sell the goods.

Goods: As per section 2(7), it means every kind of movable property other than actionable claims and money and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.

Money means current money and it includes rate and old coins. Actionable claims mean what a person cannot make a present use of or enjoy, but can recover utilizing a suit or an action.

Existing Goods: It means such goods that are in existence at the time of the contract of sale i.e. owned or possessed by the seller.

• Specific Goods: It means goods identified and agreed upon at the time the contract of sale has been made.
• Ascertained Goods: It means that the goods are identified under the agreement after the contract, of sale has been made.
• Generic or Unascertained Goods: It means the goods that are not specifically identified but are indicated by description.
• Future Goods: As per section 2(6), it means goods to be manufactured produced, or acquired by the seller after making the contract of sale.
• Contingent Goods: This means the goods the acquisition of by the seller depend upon a contingency that may or may not happen.
• Agreement to sell can only be there in respect of future or contingent goods.
• Actual sales can take place only in respect of specific goods.
• Goods are said to be in a deliverable state when they are in such a condition that the buyer would, under contract, be bound to take delivery of them.
• Delivery: it means Voluntary transfer of possession by one person to another.

Document of the title of Goods: It includes a bill of lading, dock- warrant, warehouse keeper’s certain, wharfinger’s certificate, or any other document used in the ordinary course of business as proof of the possession or control of the goods or authoring or purporting to authorize either by endorsement or delivery, the possessor of the document to transfer or receive goods thereby represented.

• Property: It means the general property and not merely a special property.
• Insolvent: a person is said to be insolvent when he ceases to pay his debts in the ordinary course of business.
• Mercantile Agent: Is the agent having in the customary course of business as such agent authority either to sell or consign goods, etc.
• Price: Is the money consideration received for the sale of goods.
• Quality of Goods: It includes their state or condition.

Question 3. Describe the Sale and Agreement to Sell.

Answer:

The Sale and Agreement to Sell

1. As per section 4(3) of the Act, “ 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.”
2. As per section 4(3) of the Act “where under a contract of sale the transfer of the property in the goods in to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.”

Question 4. The distinction between a Sale and an Agreement to Sell.

Answer:

The distinction between a Sale and an Agreement to Sell

Question 5. Define the distinguished from other similar contracts:

Answer:

1. Sale and Hire Purchase Agreement:

2. Sale and Bailment:

3. Sale and contract for work and labor:

Question 6. What are Contract of sale how made?

Answer:

1. There may be immediate delivery of goods.
2. There may be immediate payment of the price, but it may be agreed that the delivery is to be made at some future date.
3. There may be immediate delivery of the goods and an immediate payment of the price.
4. It may be agreed that the delivery or payment or both are to be made in installments.
5. It may be agreed that the delivery or payment or both are to be made at some future date.

Question 7. Define the Subject matter of the Contract of sale.

Answer:

As per section 6:

• Subject matter must always be goods which may be existing or future goods.
• Contract can also be made about the goods, the acquisition of which by the seller depends upon a contingency, which may or may not happen. Such contracts are contingent contracts.
• When the seller purports by his contract to effect a sale of future goods, the contract will operate only as an agreement to sell the goods and not as a sale.

Goods perishing before making a contract (section 7):

• The contract is void ab initio.
• If the seller enters into the contract even on being aware of the destruction, he is estoppel from, disputing the contract.
• It also includes the goods that have lost their commercial value.
• Mutual mistake of fact essential to the contract renders the contract void.

Goods Perishing after Agreement to sell (Section 8) without any of the party’s default:

• An agreement becomes void.
• Provided the risk has not passed to the buyer.
• It applies only to the sale of specific goods.
• For uncertain goods sale, the perishing of the whole quantity of such goods in the possession of the seller won’t relieve him of his obligation to deliver.

Question 8. Describe the Ascertainment of price.

Answer:

Price: It means a monetary consideration for the sale of goods.

• It may be money paid or promised to be paid.
• No sale can take place without a price.
• Only money transactions are valid, no dealing in kind.

As per Section 9:

1. Price may be
   • Fixed by a contract,
   • Agreed to be fixed is a manner provided by the contract, or
   • Determined by the course of dealings between the parties.
2. When it cannot be fixed in any of the above ways’, the buyer is bound to pay a reasonable price to the seller.
3. Generally market price would be reasonable price.

As per Section 10:

• Price is to be determined by third-party
• Where there is an agreement to sell goods on the terms that the price is to be fixed by a third party, and he either does not or cannot make such a valuation, the agreement will be void.
• If the third party is prevented by the default of either party from fixing the price, the party at fault will be liable for the damages to the other party who is not at fault.

Formation Of The Contract Of Sale Objective Questions And Answers

Question 1. State with reasons whether the following statement is Correct or Incorrect: Exchange of goods for goods between the two parties amounts to sale under the Sale of Goods Act, 1930.

Answer:

Incorrect: When goods are exchanged for goods, it is not a sale but a barter (Shelon (v) Cox). In sales there must be consideration in the form of money, called the price.

Question 2. State with reasons whether the following statements are Correct or Incorrect:

1. A bailment is the delivery of goods by one person to another for some purpose.
2. Means every kind of movable property other than actionable claims and money.

Answer:

1. Correct: The first important characteristic of bailment is that the goods must be handed over to the bailee for whatever is the purpose of bailment. Once this is done, bailment arises, irrespective of how this happens. Delivery of possession differs from mere custody. However, there is another important requirement for bailment is that the goods must be returned or otherwise disposed of according to the direction of the person delivering them.
2. Correct: Goods means every kind of movable property i.e. property of every description [except immovable property, other than actionable claims and money. Section 2(7) of the Sale of Goods Act, 1930]. According to this definition, money and actionable claims are not goods and cannot be bought or sold.

Question 3. State with reasons whether the following statement is Correct or Incorrect: Contract of Sale can also take place by the conduct of the parties to the contract.

Answer:

Correct: Subject to the provisions, of any law for the time being in force, a contract of sale may be expressed or may be implied from the conduct of the parties (Section 5(2) of the Indian Contract Act, 1872).

Question 4. State with reasons whether the following statement is Correct or Incorrect: ‘Goods’ means every kind of property other than actionable claims and money.

Answer:

Incorrect: Sub-section (7) of Section 2 of the Sale of Goods Act, 1930 defines the term ‘goods’ as “every kind of movable property” other than actionable claims and money. The term property includes both movable and immovable properties. Thus, the subject matter of sale under the said Act is “movable property” only excluding actionable claims and money.

Question 5. State with reasons in brief whether the following is Correct or Incorrect. In an agreement to sell, the property in the goods passes to the buyer immediately.

Answer:

Incorrect: According to Section 4(3) of the Sale of Goods Act 1930, in an agreement to sell, property in the goods is to be transferred to the buyer at some future date, or subject to the fulfillment of some conditions.

Formation Of The Contract Of Sale Short Notes

Question 1. Write a short note on the formalities of a contract of sale.

Answer:

Formalities of contract of Sale: Except where specifically required by any law, no particular form is necessary to constitute a valid contract. The agreement may be expressed or may be implied from the conduct of the parties.

Section 5 of the Sale of Goods Act, of 1930 lays down the rule as to how a contract of sale may be made and has nothing to do with the transfer or passing of the property in the goods.

A contract of sale may be made in any of the following modes:

1. There may be immediate delivery of the goods; or
2. There may be immediate payment of price, but it may be agreed that the delivery is to be made at some future date; or
3. There may be immediate delivery of the goods and an immediate payment of the price; or
4. It may be agreed that the delivery or payment or both are to be made in instalments; or,
5. It may be agreed that the delivery or payment or both are to be made at the same future date.

Question 2. Write a short note on the essentials of appropriation of goods.

Answer:

Essentials of Appropriation of Goods: Appropriation of goods involves the selection of, goods to use in the performance of the contract and with the mutual consent of the seller and the buyer.

The essentials are:

1. The goods should conform to the description and quality stated in the contract.
2. The goods must be in a deliverable state.
3. The goods must be unconditionally (as distinguished from an intention to appropriate) appropriated to the contract either by delivery to the buyer or his agent or the carrier.
4. The appropriation must be made by:
   • The seller with the assent of the buyer, or
   • The buyer with the assent of the seller.
5. The assets may be express or implied.
6. The assent may be given either before or after appropriation.

Question 3. Write a short note on: ‘Goods’ in a Contract of Sale.

Answer:

“Goods” in a Contract of Sale: In the Sales of Goods Act, 1930, ‘Goods’, means every kind of movable property, i.e. property of every description (except immovable property), actionable claims, and money and includes stocks, shares, growing crops, grass and things attached to or forming part
of the land.

For Example. growing trees, machinery fixed or embedded in the earth), which were agreed to be severed before sale or under the contract of sale. [Section 2(7)].

Goods can be of the following types:

1. Existing i.e. which are in existence at the time of sale.
2. Future goods i.e. which are in the process of manufacturing or production or acquisition by the seller after the contract of sale.
3. Specific i.e. which have been identified at the time of sale.

Question 4. Write a short note on the classification of goods in a contract of sale.

Answer:

Goods forming subject matter of the contract of sale may be classified as under:

1. Existing’Goods
   • Specific goods
   • Unascertained goods
   • Ascertained goods.
2. Future Goods
3. Contingent Goods

Existing Goods are those which are in actual existence at the time of the contract of sale. The seller is the owner of goods or he has the possession of such goods.

Existing goods may be of the following three types:

• Specific Goods: Goods that have either been identified or agreed upon by the parties at the time of the contract of sale.
• Ascertained Goods are those identified only after the formation of a contract of sale. When unascertained goods are identified and agreed upon by the parties, the goods are called Ascertained goods.
• Unascertained Goods are those not specifically identified at the time of contract of sale. They are described by the description or sample only.
• Future Goods are those which are not in existence at the time of contract. These goods are to be acquired or produced by the seller after the contract of sale is made. It is an agreement to sell and not sell.
• Contingent goods are like future goods. The acquisition of the goods by the seller depends upon the uncertain contingencies which may or may not happen For Example. goods will be supplied if the ship arrives.

Distinguish Between Formation Of The Contract Of Sale

Question 1. Distinguish between Existing goods and Contingent goods.

Answer:

Existing Goods and Contingent Goods:

The two terms can be distinguished on the following basis:

1. Meaning: Goods that are physically in existence and which are in the seller’s ownership or possession at the time of entering the contract of sale are called existing goods.
   • While goods, the acquisition of which by the seller depends upon an uncertain contingency are called contingent goods.
   • They are a type of future goods. Future goods are the goods to be manufactured, produced, or acquired after the making of the contract.
2. Type: A contract for the sale of contingent goods is always an agreement to sell while existing goods can be the subject matter of sale as well as an agreement of sale.
3. Classification: Existing goods may be classified as specific, ascertained, or unascertained goods while there cannot be any such classification of contingent goods.

Question 2. Difference between Sale and Hire-purchase.

Answer:

Sale and Hire Purchase Agreements:

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. [Section 4(1) Sale of Goods Act]. A contract of sale may be absolute or conditional. [Section 4(2)].
• A hire purchase agreement is a contract whereby the owner of the goods lets them on hire to another person called hirer on payment of rent to be paid in installments and upon an agreement that when a certain number of such installments is paid, the ownership in goods will pass on to the hirer.
• The hirer may return the goods at any time without any obligation to pay the balance rent. It 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.

Question 3. Briefly explain the distinction between Future goods and contingent goods.

Answer:

Future Goods and Contingent Goods: Those goods which are yet to be manufactured or produced or acquired by the seller after the making of the contract of sale, are called, “future goods”.

• Thus, future goods are not in existence at the time of the contract of sale or if they are in existence they have not yet been acquired by the seller by that time.
• When a present sale is made for some future goods, it is not a sale but an agreement to sell. (Section 2(6) and 6(3) of the Sale of Goods Act, 1 930).
• According to Section 6(2) of the Sale of Goods Act, contingent goods are goods the acquisition of which by the seller depends upon a contingency that may or may not happen.
• They are also a type of future goods and therefore, a contract for the sale of contingent goods operates as an agreement to sell.

Contingent goods are different from future goods in the same that the procurement of Contingent goods is dependent upon an uncertain event, whereas the obtaining of future goods does not depend upon any such uncertainty.

Question 4. Point out any four major differences between a sale and an agreement to sell.

Answer:

Difference between a sale and an agreement to sell: According to Section 4 of the Sale of Goods Act, 1930, a contract of goods is a contract whereby the seller transfers or agrees to transfer the property in the goods to the buyer for a price, whereas, under an agreement to sell, the transfer of the property in the goods is to take place at a future date.

• In a sale, the seller can sue the buyer for the price of the goods, but in an agreement to sell, the aggrieved party can sue for damages only and not for the price.
• In a sale, a subsequent loss or destruction of the goods is the liability of the buyer, but the liability remains with the seller if it is agreed to sell.
• In a sale, the seller’s breach gives the buyer to sue for damages and also a remedy of recovery of the goods from third parties who bought them. But in an agreement to sell, the buyer’s remedy is for a suit of damages.

Question 5. Distinguish between sale and agreement to sell under the Sale of Goods Act.

Answer:

Sale and Agreement to sell distinguished:

1. A sale implies an agreement plus a conveyance of property. In an agreement to sell, there is no conveyance, the conveyance takes place at a future date.
2. In a sale, the property in the goods passes to the buyer and risk also passes to the buyer. In agreement to sell, since property does not pass to the buyer, risk also does not pass to the buyer.
3. A sale is an executed contract. An agreement to sell is an executory contract.
4. In a sale, the seller can sue the buyer for the price of the goods. In an agreement to sell; the aggrieved party can sue for damages only and not for the price unless the price was payable at a stated date.
5. In a sale, a subsequent loss or destruction of the goods is the liability of the buyer, but the liability remains with the seller, where the transaction only amounts to an agreement to sell.
6. In an agreement to sell, the seller, being still the owner, may dispose of the goods as the likes and the buyer’s remedy would be to file a suit for damages.
   • In a sale, however, the seller’s breach gives the buyer the double remedy, a suit for damages against the seller, and the remedy of recovering of goods from third parties who bought them.
7. In a sale, in case of default by a buyer, the seller can sue the buyer for the price even if the goods are in his possession and can resell the goods. In an agreement to sell, the seller’s remedy in case of default, is to sue for damages for breach and not the price even though the goods are in the possession of the buyer.
8. In case of sale, if the seller becomes insolvent, while the goods are still in his possession, the buyer shall have a right to claim the goods from the official receiver or assignee.
   • In case of agreement to sell, when the seller becomes insolvent, the buyer’s remedy is to claim a rateable dividend from the estate of the insolvent seller for the price paid and not for the goods, since property in them still rests with the seller.

If the buyer becomes insolvent, the seller can refuse to deliver the goods to the official receiver or assignee unless the price is paid to him, in the case of an agreement to sell.

In the case of a sale, in the absence of a right of lien over the goods, the seller must deliver the goods to the official receiver or assignee of the buyer and is entitled to a rateable dividend only from the estate of the insolvent buyer.

Question 6. Differentiate between Ascertained and Unascertained Goods with example.

Answer:

Difference between Ascertained and Unascertained Goods

The basic point of distinction between ascertained and un-ascertained goods with examples can be discussed as under:

• Ascertained goods are those goods that are identified under the agreement after the contract of sale is made. This term is not defined in the act but has been judicially interpreted.
• In actual practice, the term ‘ascertained’ goods is used in the same sense as ‘specific’ goods’ when from a lot or out of the large quantity of unascertained goods, the number or quantity contracted for is identified, such identified goods are called ascertained goods.

Example: A wholesaler of cotton has 100 bales in his godown. He agreed to sell 50 bales and these bales were selected and set aside. On selection, the goods become ascertained.

• In this case, the contract is for the sale of ascertained goods, as the cotton bales to be sold are identified and agreed upon after the formation of the contract.
• Un-ascertained goods are goods that are not specifically identified or ascertained at the time of the making of the contract. They are indicated or defined only by description or sample.

Example: If A agrees to sell to B one packet of salt out of the lot of one hundred packets lying in his shop, it is a sale of un-ascertained goods because it is not known which packet is to be delivered. As soon as a particular packet is separated from the lot, it becomes ascertained or specific goods.

Question 7. Distinguish between ‘Sale’ and ‘Hire Purchase’ under the Sale of Goods Act, of 1930.

Answer:

The main points of distinction between the ‘sale’ and ‘hire purchase’ are as follows:

Formation Of The Contract Of Sale Descriptive Questions And Answers

Question 1. Describe the conditions implied in a contract for the sale of goods by

1. Description, and
2. Sample.

Answer:

1. Sale by description: Where there is a contract for the sale of goods by description, there is an implied condition that the goods shall correspond with the description. If the description of the article is different in any respect, the other party is not bound to take it.

The sale of goods by description may include:

1. Where the buyer has not seen the goods and relied on the description given by the seller.
2. Where the buyer has seen the goods but he relies not on what he has seen but what was stated to him and the deviation of the goods from the description is not apparent.
3. The packing of the goods may sometimes be a part of the description.

2. Sale by Sample: In the case of a contract for sale by sample, there is an implied condition that

1. The bulk shall correspond with the same in quality.
2. The buyer shall have a reasonable opportunity to compare the bulk with the sample.
3. The goods shall be free from any defect rendering them unmerchantable which would not be apparent on a reasonable examination of the sample.
4. This implied condition applies only to latent defects, i.e., defects that are not discoverable on a reasonable examination of the sample.

The seller is not responsible for the defects which are patent i.e. visible by examination of the goods. In such a case, there is no breach of condition as to merchantability.

Section 15 of the Sale of Goods Act also provides that if the sale is by sample as well as by description, the goods must correspond both with the sample and with the description.

Question 2. How the price of the goods be ascertained in the case of the state of goods?

Answer:

Ascertainment of Price: The meaning of the price and the rule regarding ascertainment of the price of the goods are contained in Sections 2(10), 9, and 10 of the Sale of Goods Act respectively, as follows:

• ‘Price means’ the monetary consideration for the sale of goods. The price may be fixed by the contract or agreed to be fixed in a manner provided by the contract, For Example., by a valuer or determined by the cause of dealings between the parties.
• When it can not be fixed in any of the above ways, the buyer is bound to pay the seller a reasonable price. What is a reasonable price is a question of fact in each case (Section 9).
• Section 10 provides for the determination of price by a third party. Where there is an agreement to sell goods on the terms that the price has to be fixed by the third party and he either does not or cannot make such a valuation, the agreement will be void.
• In case the third party is prevented by the default of either party from fixing the price, the party at fault will be liable for the damages to the others to the other party who is not at fault.

However’ a buyer who has received and appropriated the goods must pay a reasonable price for them in any eventuality.

Question 3. “Agreement to sell, differs from sale.”

Answer:

Sale and Agreement to sell differ to each other:

According to Section 4(3) of the Sale of Goods Act, when the property in the goods is transferred to the buyer immediately on making of a contract, it is called a ‘sale’.

• On the other hand, when the property in the goods is to be transferred on some future date or the fulfillment of certain conditions, it is called an ‘agreement to sell’.
• Section 4(4) further provides that an agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred.

The main points of distinction between t, the two are as under:

Question 4. In a sale of goods ‘goods’ sold must be of merchantable quality.

Answer:

Goods Must be of merchantable Quality: It is one of the implied conditions that the goods sold to a customer must be of merchantable quality.

• Section 16(2) of the Sale of Goods Act provides that where goods are bought by description from a seller who deals in goods of that description (whether he is the manufacturer or producer or not), there is an implied condition that the goods are of merchantable quality.
• The expression “merchantable quality” though not defined in the Act, nevertheless connotes goods of such quality and in such condition that a man of ordinary prudence would accept them as goods of that description.
• Goods should also, be such as are commercially saleable under the description by which they are known in the market at their full value.
• If goods are of such a quality and in such a condition that a reasonable person acting reasonably would accept them after having examined them thoroughly, they are of merchantable quality.

Sub-section (2) of Section 16 further provides that where the buyer has examined the goods, there is an implied condition as regards defects, which such examination ought to have revealed. [Proviso to. Section 16(2)].

Question 5. What are the essentials of a Contract of Sale?

Answer:

Essentials of a Contract of Sale: Section 4(1). of the Sale of Goods Act, 1930, defines a contract of sale, as a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price.

From the above definition, the following essentials can be deduced:

1. There must be at least two parties one seller, and two buyers.
2. There must be an agreement between the two parties for sale or an agreement to sell.
3. The subject matter of the contract must necessarily be goods, may be existing goods or future goods, ascertained goods, or unascertained goods.
4. There should be a price, which is to be paid in money.
5. A transfer of property in goods from seller to buyer must take place.
6. The contract may be absolute or even conditional.
7. All the essential characteristics of a valid contract must exist.

Question 6. What is meant by the delivery of goods under the Sale of Goods Act, of 1930? State various modes of delivery.

Answer:

The delivery of goods under the Sale of Goods Act, of 1930

Delivery means voluntary transfer of possession from one person to another. It may be made by doing anything, which has the effect of putting the goods, in the possession of the buyer, or any person authorized on his behalf.

Various modes of delivery are as follows:

1. Actual delivery: Physical delivery of goods to the buyer.
2. Constructive delivery: When it is effected without change in the custody or actual possession.
3. Symbolic delivery: Where there is a delivery of a thing in token of a transfer of something else.

Question 7. Discuss the essential elements regarding the sale of unascertained goods and its appropriation as per the Sales, of Goods Act, 1930.

Answer:

Sale of unascertained goods and Appropriation:

Appropriation of goods involves the selection of goods to use in the performance of the contract and with the mutual consent of the seller and the buyer.

The essentials are:

• There is a contract for the sale of unascertained or future goods.
• The goods should conform to the description and quality stated in the contract.
• The goods must be in a deliverable state.
• The goods must be unconditionally (as distinguished from an intention to appropriate) appropriated to the contract either by delivery to the buyer or his agent or the carriers.
• The appropriation must be made by:
• The seller with the assent of the buyer; or
• The buyer with the assent of the seller
• The assent may be express or implied
• The assent may be given either before or after appropriation.

Question 8. Sonal went to a Jewellery shop and asked the sales girl to show her diamond bangles with Ruby stones. The jeweler told her that we have a lot of designs of diamond bangles but with red stones if she chooses for herself any special design of diamond bangles with red stones, they will replace red stones with Ruby stones. But for the Ruby stones, they will charge some extra cost. Sonal selected a beautiful set of designer bangles and paid for them. She also paid the extra cost of Ruby stones. The Jeweller requested her to come back a week later for delivery of those bangles. When she came after a week to take delivery of the bangles, she noticed that due to Ruby stones, the design of the bangles had been completely disturbed. Now, she wants to terminate the contract and thus, asked the manager to give her money back, but he denied for the same. Answer the following questions as per the Sale of Goods Act, of 1930.

1. State with reasons whether Sonal can recover the amount from the Jeweller.
2. What would be your answer if Jeweller says that he can change the design, but he will charge extra cost for the same?

Answer:

As per the Sale of Goods Act, of 1930, where under a contract of sale, the property in the goods is transferred from the seller to the buyer, the contract is called that of a sale, but where the transfer of property in goods is to take place at a future date, subject to fulfillment of some condition, the contract is called an agreement to sell.

• An agreement to sell becomes a sale when the time elapses or the conditions one fulfilled subject – to which the property in goods is to be transferred.
• Based on the above provisions and facts given in the question, it can be said that there is an agreement to sell between Sonal and Jeweller but not a sale.
• Even though the payment made was by Sonal, the property in bangles can be transferred only after the fulfillment of conditions fixed between buyer and seller.
• Since, during the replacement of the Ruby stones, the original design was disturbed, Sonal has the right to avoid the agreement to sell and can recover the price paid.

On the other hand, if Jeweller offers to bring the bangles to their original position by repairing them, he cannot charge extra cost from Sonal. Even if he has to bear some expenses for repair, he cannot charge it from Sonal.

Question 9. Mr. A contracted to sell his swift car to Mr. B. Both failed to discuss the price of the said swift car. Later, Mr. A refused to sell his swift car to’ Mr. B because the agreement was void being uncertain about the price. Does Mr. B have any right against Mr. A under the Sale of Goods Act, of 1930?

Answer:

As per section 9 of the Sale of Goods Act, of 1930,

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 upon or may be determined by the course of dealing between the parties.
2. Where the price is not determined under the foregoing provisions, the buyer shall pay the seller a reasonable price. Estimation of a reasonable price depends upon the circumstances of each particular case.
3. In the above case A contracted to sell his swift car to B but failed to discuss the price.
4. Later, A refused to sell his car to B because the agreement was uncertain as the price was not discussed and declared the contract to be void.

Here B can legally demand the car from A and A can recover a reasonable price of the car from B as the contract of sale is still a valid contract even if the price is uncertain.