Unit - 1

Offer and Acceptance

The meaning of offer and acceptance is the basis of a contract. To form a contract, there must be an offer made by one
party which is, in turn, accepted by another party, and then, in most cases goods and/or services must be exchanged
between the two.
Elements to an Offer
In contract law, the party making the offer is called the “offeror.” Put simply, this is the person or company that has
ownership in some form of the goods and/or services being offered.
The other party to the agreement is called the “offeree.” This is the person or company willing to pay the other party some
form of compensation in order to use or acquire ownership of the goods and/or services. The result of this agreement is a
legally binding contract, which is usually, but not always, finalized through the signatures of both parties.
There are two parts to any offer:
The Expression: This is where the parties articulate in some form an inclination to enter into a contract and to make that
contract legally binding upon the acceptance by both parties. The expression may take a wide variety of forms, from a
personal discussion to a letter that lays out the basics of the terms.
The Intention: This is a slightly more vague concept, and it is often left up to the courts to determine whether or not
intention was breached by a party. Essentially, intention involves a presumption by both parties that the agreement will be
legally binding and comes down to the belief that neither party would begin discussions without the intent to live up to their
side of the bargain.
Offers can really cover anything, from a verbal agreement to provide a service, such as housesitting, to a detailed contract
with legal terminology that one may find in an agreement to transfer real estate. It’s more than a promise, because it must be
made with the understanding that what is being agreed to will be legally binding. It can be for the sale of goods, a pledge to
perform a service, or even a promise not to engage in an activity. The more complex the agreement, the greater the
likelihood will be that each party would engage legal counsel to negotiate the contract.
Elements to Acceptance
Acceptance is the final agreement of both parties to consent to the terms of the offer. While it is common for the terms of the
offer to be negotiated before acceptance, if it can be shown that through conduct and communications that the parties did in
fact intend to agree to the final terms of the contract, then formal acceptance of an offer is not required for it to be legally
binding.
It is also not always necessary that acceptance be in the form of a signature on a piece of paper, although this is the most
commonly accepted agreement between parties. For instance, if a
party performs an act that would not otherwise happen, such as a painting contractor painting a house or a professional moving
company moving furniture from one location to another, it would be interpreted as acceptance and agreement to the terms of the
offer of payment for these services.
Assent Versus Meeting of the Minds
A long held and essential element of whether or not a contract is valid is that a “meeting of the minds” existed between the
parties when they entered into contract. Thus it was a common defense against breach of contract for a party to argue that
they never were of a mind to intend to be bound by the contract.
However, establishing that a “meeting of the minds” did indeed exist is difficult and is no longer the sole criteria used by a
court to determine a contract’s validity. Factors such as conduct and assent indicate the intention to enter into the agreement
and outweigh the “meeting of the minds” criteria.
Contracts are the very essence of the way individuals and companies agree to exchange practically everything that anyone
can imagine. If one party owns something and another party wished to use it, and is willing to pay for that right, a contract is
the safest way to make sure both parties are protected in the case of something going wrong. No matter how minor or major
the exchange, it all starts with an offer being made and that offer being accepted.

Capacity to contract; consent and free

consent; Consideration
 Capacity to contract
Capacity to contract means a party has the legal ability to enter into a contract.
Capacity to contract means a party has the legal ability to enter into a contract. Capacity also means a person has to be
competent as defined by law. Someone’s capacity is determined by whether or not they have reached the age of majority and
if they are mentally capable of understanding the applicable contract terms.
A contract must contain these six elements:

● Offer
● Acceptance
● Consideration
● Capacity
● Intent
● Legality

Who Doesn’t Meet Criteria for Capacity

Some people lack the capacity to enter into a legally binding contract:

● Minors: In general, anyone under 18 years old lacks capacity. If he or she does enter into a contract before they turn
18, there is usually the option to cancel while he or she is still a minor. There are some exceptions to this rule, however.
Minors are allowed to enter into contracts for purchasing various necessities like clothing, food, and accommodations.
Some states allow people under 18 to obtain bank accounts, which often carry strict terms and stipulations.
● Mental Incapacitation: If a person is not cognitively able to understand his or her responsibilities and rights under the
agreement, then they lack the mental capacity to form a contract. Many states define mental capacity as the ability to
understand all terms of the contract, while a handful of others use a motivational test to discern whether someone
suffers from mania or delusions.
● Intoxication: Someone who is under the influence of drugs or alcohol is generally believed to lack capacity. If
someone voluntarily intoxicated themselves, the court may order the party to uphold the obligation. This is tricky
because many courts have also agreed a sober party shouldn’t take advantage of an intoxicated person.

Contracts made with people who don’t have legal capacity are voidable. The other person has the right of rescission, the
option to void the contract and all related terms and conditions. Courts may opt to void or rescind a contract if one of the
parties lacked legal capacity. If the court voids the contract, it will attempt to put all parties back in the position they were in
before the agreement, which may involve returning property or money when feasible.
Capacity of Companies
Companies also have to have capacity when entering into an agreement. If they don’t, there can be serious consequences,
particularly regarding guarantees. There are similarities across legal systems and jurisdictions when it comes to the general
rules that govern the legal capacity of companies. For example, the legal theory that a business has a separate legal
personality is recognized in both civil and common law jurisdictions. This means that as a defined legal person, a company
has the capacity to enter into a contract with other parties and can be held liable for its actions.
Civil Law Countries
The United States isn’t the only country that recognizes this legal concept. For example, France, a civil law country, has also
adopted this idea. Legal capacity regarding entities was recently reformed by Ordinance n°2016-131, which went into effect
in 2016. Under French Civil Code Article 1147, a company’s lack of capacity is a grounds for relative nullity, a defense that
can be invoked by the aggrieved party to void the contract. In this case, the aggrieved party would be the company.
Furthermore, Article 1148 allows French companies who lack capacity to contract to legally enter into contracts that are day-
to-day acts which are authorized by usage or legislation.
In Spain, there is a special relationship with church and state. As a result, the church is governed by elements of a specific
concordat: Spanish Civil Code Article 37, which says that companies enjoy “civil capacity.”
Common Law Countries
In common law countries, a company’s capacity is limited by the company’s memorandum of association. This document
contains the clause that describes the commercial activities the business is involved in, thereby delineating the company’s
capacity.

Different mode of Discharge of Contract

MDUTHEINTACTONE6 MAY 2019 1 COMMENT
 A contract creates certain obligations on one or all parties involved. The discharge of a contract happens when these
obligations come to an end. There are many ways in which a contract is discharged. In this article, we will look at various
such scenarios.

1. Discharge by Performance

When the parties to a contract fulfill the obligations arising under the contract within the time and manner prescribed, then
the contract is discharged by performance.
Example: Peter agrees to sell his cycle to John for an amount of Rs 10,000 to be paid by John on the delivery of the cycle.
As soon as it is delivered, John pays the promised amount.
Since both the parties to the contract fulfill their obligation arising under the contract, then it is discharged by performance.
Now, discharge by the performance of a contract can be by:

1. Actual performance
2. Attempted performance

As shown in the example above, actual performance is when all the parties to a contract do what they had agreed for under
the contract. On the other hand, it is possible that when the promisor attempts to perform his promise, the promisee refuses
to accept it. In such cases, it is called attempted performance or tender.

1. Discharge by Mutual Agreement

If all parties to a contract mutually agree to replace the contract with a new one or annul or remit or alter it, then it leads to a
discharge of the original contract due to a mutual agreement.
Example: Peter owes Rs 100,000 to John and agrees to repay it within one year. They document the debt under a contract.
Subsequently, he loses his job and requests John to accept Rs 75,000 as a final settlement of the loan. John agrees and they
make a contract to that effect. This discharges the original contract due to mutual consent.

1. Discharge by the Impossibility of Performance

If it is impossible for any of the parties to the contract to perform their obligations, then the impossibility of performance
leads to a discharge of the contract. If the impossibility exists
from the start, then it is impossibility ab-initio. However, the impossibility might also arise later due to:

● An unforeseen change in the law

● Destruction of the subject-matter essential to the performance
● The non-existence or non-occurrence of a particular state of things which was considered a given for the performance
of the contract.
● A declaration of war

Example: Peter enters into a contract with John to marry his sister Olivia within one year. However, Peter meets with an
accident and becomes insane. The impossibility of performance leads to a discharge of the contract.

1. Discharge of a Contract by Lapse of Time

The Limitation Act, 1963 prescribes a specified period for performance of a contract. If the promisor fails to perform and the
promisee fails to take action within this specified period, then the latter cannot seek remedy through law. It discharges the
contract due to the lapse of time.
Example: Peter takes a loan from John and agrees to pay installments every month for the next five years. However, he does
not pay even a single installment. John calls him a few times but then gets busy and takes no action. Three years later, he
approaches the court to help him recover his money. However, the court rejects his suit since he has crossed the time-limit of
three years to recover his debts.
 1. Discharge of a Contract by Operation of Law

A contract can be discharged by operation of law which includes insolvency or death of the promisor.

1. Discharge by Breach of Contract

If a party to a contract fails to perform his obligation according to the time and place specified, then he is said to have
committed a breach of contract.
Also, if a party repudiates a contract before the agreed time of performance of a contract, then he is said to have committed
an anticipatory breach of contract.
In both the cases, the breach discharges the contract. In case of:

● An actual breach, the promisee retains his right of action for damages.
● An anticipatory breach of contract, the promisee cannot file a suit for damages. It also discharges the promisor from
performing his part of the contract.
1. Discharge of a Contract by Remission

A promisee can waive or remit the performance of promise of a contract, wholly or in part. He can also extend the time
agreed for the performance of the same.
In example 3 above, Peter only repays a part of the money he owes to John. However, John agrees to accept it as a final
settlement of the debt. John’s act of remission discharges the contract.

1. Discharge by Non-Provisioning of Facilities

In many contracts, the promisee agrees to offer reasonable facilities to the promisor for the performance of the contract. If
the promisee fails to do so, then the promisor is discharged of all liabilities arising due to non-performance of the contract.
Example: Peter agrees to fix John’s garage floor provided he keeps his car out for at least 6 hours. Peter approaches him a
few times but John is reluctant to get his car out. John fails to provide reasonable facilities to Peter (an empty floor). This
discharges him of all obligations arising under the contract.

1. Discharge of a Contract due to the Merger of Rights

In some situations, it is possible that inferior and superior right coincides in the same person. In such cases, both the rights
combine leading to a discharge of the contract governing the inferior rights.
Example: Peter rents John’s apartment for two years. One year into the contract, he offers to buy the property from John,
who agrees. The enter a sale contract and Peter becomes the owner of the apartment. Here Peter has two rights; one accorded
by the lease agreement making him the renter and second by the sale agreement making him the owner. The former being an
inferior right merges with the superior one and discharges the lease contract.

Remedies for Breach of Contract

The Indian Contract Act lays out all the provisions for the performance of a contract. It also contains the provisions in case
of breach of contract by either party. Let us take a detailed look at the available remedies for breach of contract.
When a promise or agreement is broken by any of the parties we call it a breach of contract. So when either of the parties
does not keep their end of the agreement or does not fulfill their obligation as per the terms of the contract, it is a breach of
contract. There are a few remedies for breach of contract available to the wronged party. Let us take a look.

1. Recession of Contract
 When one of the parties to a contract does not fulfill his obligations, then the other party can rescind the contract and refuse
the performance of his obligations.
As per section 65 of the Indian Contract Act, the party that rescinds the contract must restore any benefits he got under the
said agreement. And section 75 states that the party that rescinds the contract is entitled to receive damages and/or
compensation for such a recession.
2) Sue for Damages
Section 73 clearly states that the party who has suffered, since the other party has broken promises, can claim compensation
for loss or damages caused to them in the normal course of business.
Such damages will not be payable if the loss is abnormal in nature, i.e. not in the ordinary course of business. There are two
types of damages according to the Act,

● Liquidated Damages: Sometimes the parties to a contract will agree to the amount payable in case of a breach. This is
known as liquidated damages.
● Unliquidated Damages: Here the amount payable due to the breach of contract is assessed by the courts or any
appropriate authorities.
1. Sue for Specific Performance

This means the party in breach will actually have to carry out his duties according to the contract. In certain cases, the courts
may insist that the party carry out the agreement.
So if any of the parties fails to perform the contract, the court may order them to do so. This is a decree of specific
performance and is granted instead of damages.
For example, A decided to buy a parcel of land from B. B then refuses to sell. The courts can order B to perform his duties
under the contract and sell the land to A.

1. Injunction

An injunction is basically like a decree for specific performance but for a negative contract. An injunction is a court order
restraining a person from doing a particular act.
So a court may grant an injunction to stop a party of a contract from doing something he promised not to do. In a prohibitory
injunction, the court stops the commision of an act and in a mandatory injunction, it will stop the continuance of an act that
is unlawful.

1. Quantum Meruit

Quantum meruit literally translates to “as much is earned”. At times when one party of the contract is prevented from
finishing his performance of the contract by the other party, he can claim quantum meruit.
So he must be paid a reasonable remuneration for the part of the contract he has already performed. This could be the
remuneration of the services he has provided or the value of the work he has already done.

Purpose and Meaning of the Contract of the

Guarantee
Section 126 of Indian Contract Act defines Contract of guarantee. It defines a contract of guarantees a contract to perform
the promise or discharge the liability of a third person in case of his default
The person who gives the guarantee is called “surety”. The person of whose default the guarantee is given is called the
“Principal debtor”. The person to whom the guarantee is given is called the creditor.
Contract of guarantee can be of two types. It can be oral or written. However, for a contract to form in between the parties
there should be meeting of minds that means all three parties should be privy to the contract. Contract of guarantee is a
promise to answer for the payment of the debt that the principal debtor takes from the creditor or the performance of some
duty. IN case the principal debtor fails who is in the first instance liable to pay or perform. Therefore, the primary liability to
pay is of the principal debtor. Whereas, the secondary liability is of the Surety i.e. when the principal debtor fails to pay, the
surety comes into role.
 Therefore, the contract of guarantee is to indemnify if principal debtor fails to fulfil his promise. In this indemnify is not
equal to the contract of indemnify in Section 124 of ICA.
Continuing Guarantee
Section 129 of ICA defines continuing guarantee. A guarantee which extends to a series of transactions is called continuing
guarantee. It is not confined to a single transaction. In this guarantee, surety is liable to pay the creditor for all the
transactions. However, it is very important to find out if the guarantee is a continuing one or not.
Difference between continuing guarantee and simple guarantee

● A continuing guarantee can be revoked by the surety any time either by the notice to the creditor or

until the surety’s death. Whereas, simple guarantee can not be revoked in any circumstances.

● In continuing guarantee, the transaction can go for long period of time therefore the surety will be held liable for
long time as well whereas in simple guarantee the surety liability is over when the debt is paid or the performance
is done.

To understand the nature of a guarantee, you must look at :

● The intention of the parties as expressed by the language in the contract.

● surrounding circumstances to see what was the subject matter which the parties examine.

Example of a continuing guarantee: A in consideration that B will employ C in collecting the rents of B’s zamindari,
promises B to be responsible to the amount of Rs 5000 for the due collection and payment by C of those rents. This is a
continuing guarantee.
Section 130 of ICA explains the revocation by notice. A continuing guarantee may be revoked anytime by the surety for the
future transactions only by notice to the creditor.
The main ingredients in this section is :

● As to future transactions
● Notice to the creditor

Continuing guarantee extends to a series of transactions, surety has a right to withdraw such guarantee. As soon as the surety
sends the notice of revocation to the creditor, the surety does not remain liable for any transaction that happens after he has
given notice, however, the surety continues to remain liable for any transactions that has already taken place. If the mode of
revocation by notice is mentioned in the contract, then notice must be given in that mode only and if no mode is given in the
contract then the notice may be given in any form.
Section 131 of ICA explains the revocation by death of surety. The liability for any transactions that took place prior to the
death of the surety will be borne by his heirs. This contract could be implied from the circumstances.
Essentials of a Contract of Guarantee

1. Concurrence of All the Parties

All the three parties namely, the principal debtor, the creditor and the surety must agree to make such a contract.

1. Liability

In a contract of guarantee, liability of the surety is secondary i.e., the creditor must first proceed against the debtor and if the
latter does not perform his promise, then only he can proceed against the surety.

1. Existence of a Debt

A contract of guarantee pre-supposes the existence of a liability, which is enforceable at law. If no such liability exists, there
can be no contract of guarantee. Thus, where the debt, which is sought to be guaranteed is already time barred or void, the
surety is not liable.
 1. Consideration

There must be consideration between the creditor and the surety so as to make the contract enforceable. The consideration
must also be lawful. In a contract of guarantee, the consideration received by the principal debtor is taken to be the sufficient
consideration for the surety.
Anything done, or any promise made, for the benefit of the principal debtor may be sufficient consideration to the surety for
giving the guarantee
– Sec. 127 of Indian Contract Act, 1872..
Thus, any benefit received by the debtor is adequate consideration to bind the surety. But past consideration is no consideration
for a contract of guarantee. There must be a fresh consideration moving from the creditor.

1. Writing not Necessary

A contract of guarantee may either be oral or written. It may be express or implied from the conduct of parties.

1. Essentials of a Valid Contract

It must have all the essentials of a valid contract such as offer and acceptance, intention to create a legal relationship,
capacity to contract, genuine and free consent, lawful object, lawful consideration, certainty and possibility of performance
and legal formalities.

1. No Concealment of Facts

The creditor should disclose to the surety the facts that are likely to affect the surety’s liability. The guarantee obtained by
the concealment of such facts is invalid. Thus, the guarantee is invalid if the creditor obtains it by the concealment of
material facts.

1. No Misrepresentation

The guarantee should not be obtained by misrepresenting the facts to the surety. Though the contract of guarantee is not a
contract of uberrimaefidei i.e., of absolute good faith, and thus, does not require complete disclosure of all the material facts
by the principal debtor or creditor to the surety before he enters into a contract. But the facts, that are likely to affect the
extent of surety’s responsibility, must be truly represented.

Contract of indemnity
A contract of indemnity is one of the most important forms of commercial contracts. Several industries, such as the
insurance industry, rely on these contracts. This is because of the nature of these contracts. They basically help businesses in
indemnifying their losses and, therefore, reduce their risks. This is extremely important for small as well as large businesses.
Contract of Indemnity
A contract of indemnity basically involves one party promising the other party to make good its losses. These losses may
arise either due to the conduct of the other party or that of somebody else.
To indemnify something basically means to make good a loss. In other words, it means that one party will compensate the
other in case it suffers some losses.
For example, A promises to deliver certain goods to B for Rs. 2,000 every month. C comes in and promises to indemnify B’s
losses if A fails to so deliver the goods. This is how B and C will enter into contractual obligations of indemnity.
A contract of insurance is very similar to indemnity contracts. Here, the insurer promises to compensate the insured for his
losses. In return, he receives consideration in the form of premium. However, the Contract Act does not strictly govern these
kinds of transactions. This is because the Insurance Act and other such laws contain specific provisions for insurance
contracts.
Parties under Indemnity Contracts
There are generally two parties in indemnity contracts. The person who promises to indemnify for a loss is the Indemnifier.
On the other hand, the person whose losses the indemnifier promises to make good is the Indemnified. We can also refer to
 the Indemnified party as the Indemnity Holder. For example, in the earlier example, C is the Indemnifier and B is the
Indemnity Holder.
Nature of Indemnity Contracts
An indemnity contract may be either express or implied. In other words, parties may expressly create such a contract as per
their own terms. The nature of circumstances may also create indemnity obligations impliedly. For example, A does an act at
the request of B. If B suffers some losses and A offers to compensate him, they impliedly create an indemnity contract.
Rights of an Indemnity Holder
When parties expressly make a contract of indemnity, they can determine their own terms and conditions. However,
sometimes they may not do so. In such a case, the indemnity holder can enforce the following rights against the indemnifier:

1. The indemnifier will have to pay damages which the indemnity holder will claim in a suit.
1. The indemnity holder can even compel the indemnifier to pay the costs he incurs in litigating the suit.
1. If the parties agree to legally compromise the suit, the indemnifier has to pay the compromise amount.

Contract of Guarantee
Apart from indemnity contracts, the Contract Act also governs contracts of guarantee. These contracts might appear similar
to indemnity contracts but there are some differences between them.
In guarantee contracts, one party contracts to perform a promise or discharge a liability of a third party. This will happen in
case the third party fails to discharge its obligations and defaults. However, the burden of discharging the burden will first lie
on the defaulting third party.
The person who gives the guarantee is the Surety. On the other hand, the person for whom the Surety gives the guarantee is
the Principal Debtor. Similarly, the person to whom he gives such a guarantee is the Creditor.
Differences between Indemnity and Guarantee
There are some important differences between the contracts of indemnity and guarantee. Firstly, there are just two parties in
indemnity, while there are three in contracts of guarantee.
Secondly, in a guarantee, there is an existing debt/duty which the surety guarantees to discharge. On the other hand, liability
in indemnity is contingent and may not arise at all.
Thirdly, an indemnifier might act without the debtor’s behest, while a surety always waits for the principal debtor’s request.
Finally, the liability of an indemnifier towards the indemnity holder is primary. Whereas, in guarantee, the surety’s liability
is secondary. This is because the primary liability lies on the principal debtor himself.

Bailment and its kind

Contract of bailment and pledge are different from each other. According to section 148 of The Indian Contract Act, 1872,
Bailment means delivery of goods from one person to another person for some purpose. On the accomplishment of such
purpose, the person receiving the goods returns or otherwise disposes of them as per the instructions of the person delivering
them. The person who delivers the goods is known as bailor. The person to whom such goods are delivered is known as
bailee.
Gratuitous Bailment
In this type of bailment, neither the bailor nor the bailee receives any remuneration. Such a bailment may be for the
exclusive benefit of either the bailor or the bailee. However, it terminates on the death of either the bailor or the bailee.
Section 159 states that in the case of the gratuitous bailment, the bailor or the lender may require the bailee to return the goods at
any time, even before the expiration of the period of lending. Also, he can do so even before the fulfillment of the purpose of
bailment.
However, if the bailee or the borrower incurs any loss due to this act of the bailor, the bailor needs to indemnify him for the
loss or damages.
Bailment for Reward
It is for the mutual benefit of both the bailor and the bailee. For example, A hands over his goods to B for transporting them
to Delhi. A has the benefit of transportation and B gets transportation charges. Thus, both of them are benefitted.
There are three different types of bailments:
1. A Bailment that Benefits Both the Bailor and Bailee: An example of this would be parking your car in a paid
parking lot. You would get the benefit of parking your car and the owner of the lot would get the benefit of the fee that
is paid. A bailee can face liability for damaging the bailed items if they were negligent.
2. A Bailment that Only Benefits the Bailor: This is referred to as a gratuitous bailment. Free valet service would be an
example of this because the valet service (bailee) would not be receiving compensation for parking your car. A bailee
can face liability for damaging the bailed items if they have been grossly negligent or acted in bad faith.
3. A Bailment that Only Benefits the Bailee: A common example of this would be checking out a book or movie from
the library. You would be the bailee in this situation because you would be taking the book or movie. The library
(bailor) would receive no benefit from loaning out the book, but would still expect it to be returned at the end of the
rental period. In this scenario, a bailee can face liability for basically any damage done to the bailed item. This is the
highest standard of care required out of the three categories.

Termination of Agency; Power of Attorney

MDUTHEINTACTONE6 MAY 2019 1 COMMENT
Agency means a relationship between one person and another, where the first person brings the second mentioned person in
a legal relationship with others. There are different modes of the creation of agency and termination of agency.
Termination of Agency
An agent is a person employed to do any act or enter into a contractual relationship with others (third parties) on behalf of
his principal. An agent acts as a connecting link between his principal and third parties.
While representing his principal, an agent acts in the same capacity as of his principal. An agent is authorized by his
principal to act on his behalf. An agent binds his principal legally in business transactions with third parties due to their
agency relationship.
According to Section 201 of Indian Contract Act, 1872, Termination of agency takes place in the following circumstances:

1. By revocation of authority by the principal.

2. By renunciation of his authority by the agent.
3. On the performance of the contract of agency.
4. On the death of either principal or agent.
5. By insanity of either principal or agent.
6. With the expiration of time period fixed for the contract of agency.
7. By an agreement made between principal and his agent.
8. With the insolvency of principal or agent (in few cases).

Power of Attorney
General Power of Attorney
A general power of attorney gives broad powers to a person or organization (known as an agent or attorney-in-fact) to act in
your behalf. These powers include handling financial and business transactions, buying life insurance, settling claims,
operating business interests, making gifts, and employing professional help. General power of attorney is an effective tool if
you will be out of the country and need someone to handle certain matters, or when you are physically or mentally incapable
of managing your affairs. A general power of attorney is often included in an estate plan to make sure someone can handle
financial matters.
Special Power of Attorney
You can specify exactly what powers an agent may exercise by signing a special power of attorney. This is often used when
one cannot handle certain affairs due to other commitments or health reasons. Selling property (personal and real), managing
real estate, collecting debts, and handling business transactions are some of the common matters specified in a special power
of attorney document.
Health Care Power of Attorney
A health care power of attorney grants your agent authority to make medical decisions for you if you are unconscious,
mentally incompetent, or otherwise unable to make decisions on your own. While not the same thing as a living will, many
states allow you to include your preference about being kept on life support. Some states will allow you to combine parts of
the health care POA and living will into an advanced health care directive.
Durable Power of Attorney
Suppose you become mentally incompetent due to illness or accident while you have a power of attorney in effect. Will the
document remain valid? To safeguard against any problems, you can sign a durable power of attorney. This is simply a
general, special, or health care POA that has a durability provision to keep the current power of attorney in effect.

UNIT-2
Laws of sales of goods: Definition and essential of a Contract of Sale
Sale of commodities constitutes one of the important types of contracts under the law in India. India is one of the largest
economies and also a great country where and thus has adequate checks and measures to ensure the safety and prosperity of
its business and commerce community. Here we shall explain The Sale of Goods Act, 1930 which defines and states terms
related to the sale of goods and exchange of commodities.
Sale of Goods Act, 1930 – Important Terms
The Sale of Goods Act, 1930 herein referred to as the Act, is the law that governs the sale of goods in all parts of India. It
doesn’t apply to the state of Jammu & Kashmir. The Act defines various terms which are contained in the act itself. Let us
see below:

I. Buyer and Seller

As per the sec 2(1) of the Act, a buyer is someone who buys or has agreed to buy goods. Since a sale constitutes a contract
between two parties, a buyer is one of the parties to the contract.
The Act defines seller in sec 2(13). A seller is someone who sells or has agreed to sell goods. For a sales contract to come
into existence, both the buyers and seller must be defined by the Act. These two terms represent the two parties of a sales
contract.

I. Goods

“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 will be considered goods”

Conditions and Warrantees

All of us who have bought electronic items or similar devices, ask about the warranty periods. In some cases, you may have
seen that even the warranty is sold separately as a commodity. But does the law say about it? Here in this section on the
concepts of condition and warranty, we will see the manner in which we can define these terms and also the manner in
which they derive their legality in the light of The Sale Of Goods Act, 1930.
Warranty And Conditions
In a contract of sale, parties may make certain statements about the stipulation or the course of trade. These stipulations in
the contract of sale are made with reference to the subject matter of the sale. These stipulations may either be a condition or
in the form of a warranty. The provisions of the conditions and warranty are provided in the sections 11 to 17 of the Act. The
stipulations are the essence of the contract of sale and a breach of these stipulations provides a remedy to the grieved party.
Conditions
 A condition is a stipulation essential to the main purpose of the contract, the breach of which gives the right to repudiate the
contract and to claim damages. (Sec 12 (2)). We can understand this with the help of the following example:
Say ‘X’ wants to purchase a car from ‘Y’, which can have a mileage of 20 km/lt. ‘Y’ pointing at a particular vehicle says
“This car will suit you.” Later ‘X’ buys the car but finds out later on that this car only has a top mileage of 15 km/ liter. This
amounts to a breach of condition because the seller made the stipulation which forms the essence of the contract. In this case,
the mileage was a stipulation that was essential to the main purpose of the contract and hence its breach is a breach of
condition.
Warranty
A warranty is a stipulation collateral to the main purpose of the said contract. The breach of warranty which gives rise to a
claim for damages. However, it does give a right to reject the goods or treat the contract as repudiated. (Sec 12(3)). Let us
understand this with the help of an example below.
A man buys a particular car, which is warranted to be quite to drive and very comfortable. It turns out that after some days
the car starts to make a very unpleasant noise everytime it is operated. Also sitting inside it is also not very comfortable.
Thus the buyer’s only remedy is to claim damages. This is not a breach of condition but rather a breach of warranty, because
the stipulation made by the seller was only a collateral one.
Passing of Properties in Goods
MDUTHEINTACTONE6 MAY 2019 1 COMMENT
A sale of goods or property implies a transfer or passing of ownership to the buyer. The passing of property is an important
aspect to help determine the liabilities and rights of both the buyer and the seller. Once a property is passed to the buyer,
then the risk in the goods sold is that of the buyer and not the seller. This is true even if the goods are in the possession of the
seller. Let us learn more about the passing of property in the Sale of Goods Act.
Passing of Property
There are four primary rules that govern the passing of property:

● Specific or Ascertained Goods

● Passing of Unascertained Goods
● Goods sent on approval or “on sale or return”
● Transfer of property in case of reservation of the right to disposal In this article, we will be looking at the first two
rules.

Passing of Ascertained Goods

This is the first rule of the passing of property. It deals with the passing of specified goods and states that –Specific or
ascertained goods pass when intended to pass. Section 19 of The Sale of Goods Act, 1930, has three sub-sections as follows:

● Sub-section (1): Imagine a contract for the sale of specific or ascertained goods with a clear mention of the time when
the parties to the contract intend to transfer the property. In such cases, the property is transferred at the time mentioned
in the contract.
● Sub-section (2): To understand the intention of the parties, the terms of the contract, the conduct of the parties, and the
circumstances of the case are considered.

• Sub-section (3): Sections 20 to 24 of The Sale of Goods Act, 1930, contain rules to ascertain the intention of
the parties. This intention is about the time at which the property in the goods will pass to the buyer. Let’s look at these sections
Passing of Unascertained Goods
If there is a contract for the sale of unascertained goods, then the passing of the property of the goods to the buyer cannot
happen unless the goods are ascertained. This is specified under Section 18 of The Sale of Goods Act, 1930.
Passing of Property: Goods Sent on Approval
When a seller sends good to a buyer on approval basis or on terms similar to ‘on sale or return’, the property passes to the
buyer only when:

● The buyer communicates his approval to the seller or does an act which signifies acceptance of the transaction.
 ● He does not give his approval or acceptance to the seller but accepts the goods without giving a notice of rejection.
There are two possibilities here:
● A time has been fixed for the return of goods – In this case, if the approved time has elapsed, then the property is
passed to the buyer.
● A time has not been fixed for the return of goods – In this case, the property is passed to the buyer once a reasonable
time has elapsed.

Right of Unpaid Seller

In a contract, there is always a reciprocal promise. Even in a contract of sale, both the buyer and the seller must perform their
duties. And if the buyer does not pay the seller his due, the seller becomes an unpaid seller. This means such unpaid seller
has some rights against the buyer. Let us see.
Rights of Unpaid Seller against Buyer
When the buyer of goods does not pay his dues to the seller, the seller becomes an unpaid seller. And now the seller has
certain rights against the buyer. Such rights are the seller remedies against the breach of contract by the buyer. Such rights of
the unpaid seller are additional to the rights against the goods he sold.

1. Suit for Price

Under the contract of sale if the property of the goods is already passed but he refuses to pay for the goods the seller
becomes an unpaid seller. In such a case. The seller can sue the buyer for wrongfully refusing to pay him his due.
But say the sales contract says that the price will be paid at a later date irrespective of the delivery of goods, And on such a
day the if the buyer refuses to pay, the unpaid seller may sue for the price of these goods. The actual delivery of the goods is
not of importance according to the law.

1. Suit for Damages for Non-Acceptance

If the buyer wrongfully refuses or neglects to accept and pay the unpaid seller, the seller can sue the buyer for damages caused
due to his non-acceptance of goods. Since the buyer refused to buy the goods without any just cause, the seller may face certain
damages.
The measure of such damages is decided by the Section 73 of the Indian Contract Act 1872, which deals with damages and
penalties. Take for example the case of seller A. He agrees to sell to B 100 liters of milk for a decided price. On the day, B
refuses to accept the goods for no justifiable reason. A is not able to find another buyer and the milk goes bad. In such a
case, A can sue B for damages.

1. Repudiation of Contract before Due Date

If the buyer repudiates the contract before the delivery date of the goods the seller can still sue for damages. Such a contract
is considered as a rescinded contract, and so the seller can sue for breach of contract. This is covered in the Indian Contract
Act and is known as Anticipatory Breach of Contract

1. Suit for Interest

If there is a specific agreement between the parties the seller can sue for the interest amount due to him from the buyer. This
is when both parties have specifically agreed on the interest rate to be paid to seller from the date on which the payment
becomes due.
But if the parties do not have such specific terms, still the court may award the seller with the interest amount due to him at a
rate which it sees fit.

Remedies of Buyer against the Seller

 Just as the seller can rescind the contract, then so can the seller. When the seller breaches the contract the buyer also has
certain remedies against the seller. Let us take a look at some remedies that the Sales Act prescribes for the buyer.

1. Damages of Non-Delivery

If the seller wrongfully or neglectfully refuses to deliver the goods to the buyer, then the buyer can sue for non-delivery of
the goods. According to Section 57 of the Sale of Goods Act, if the buyer faces losses due to the wrongful actions of the
seller (non-delivery) he can sue for damages caused due to this.
Let’s take for example A whose agrees to sell to B 10 pair of shoes for 1000/- each. B was going to sell the same shoes to C
for 1100/- a pair. A neglects to deliver the goods to B. Now, B can sue A for non-delivery. He can sue for the amount of
100/- per pair, i.e. 1000/- (the difference between B’s cost price and sale price)

1. Suit for Specific Performance

If the seller commits a breach of contract, the buyer can approach the court to ask the seller for specific performance. The
court after deliberation can command the seller for specific
performance. One important point to keep in mind is that this remedy is only available if the goods are ascertained or specific.

1. Suit for Breach of Warranty

When the seller breaches the warranty of the goods, the buyer cannot simply reject the goods on such basis. The buyer has
two options in such a case,

● Set up against the buyer the said breach of warranty in the extinction of the price
● or Sue the seller for breach of warranty
1. Repudiation of Contract

If the seller repudiates the contract, the buyer does not have to wait until the date of the contract. He can treat the contract as
rescinded and sue for damages immediately. This will be an anticipatory breach of contract.

1. Sue for Interest

The Act specifically states that nothing in the act will affect the right of the seller or the buyer to recover interest or special
damages due to him by the contract. And if there is no specific clause in the contract, the court can come to the rescue of the
affected party.

Remedies for Breach of Contract

The Indian Contract Act lays out all the provisions for the performance of a contract. It also contains the provisions in case
of breach of contract by either party. Let us take a detailed look at the available remedies for breach of contract.
When a promise or agreement is broken by any of the parties we call it a breach of contract. So when either of the parties
does not keep their end of the agreement or does not fulfill their obligation as per the terms of the contract, it is a breach of
contract. There are a few remedies for breach of contract available to the wronged party. Let us take a look.

1. Recession of Contract

When one of the parties to a contract does not fulfill his obligations, then the other party can rescind the contract and refuse
the performance of his obligations.
As per section 65 of the Indian Contract Act, the party that rescinds the contract must restore any benefits he got under the
said agreement. And section 75 states that the party that rescinds the contract is entitled to receive damages and/or
compensation for such a recession.
 2) Sue for Damages
Section 73 clearly states that the party who has suffered, since the other party has broken promises, can claim compensation
for loss or damages caused to them in the normal course of business.
Such damages will not be payable if the loss is abnormal in nature, i.e. not in the ordinary course of business. There are two
types of damages according to the Act,

● Liquidated Damages: Sometimes the parties to a contract will agree to the amount payable in case of a breach. This is
known as liquidated damages.
● Unliquidated Damages: Here the amount payable due to the breach of contract is assessed by the courts or any
appropriate authorities.
1. Sue for Specific Performance

This means the party in breach will actually have to carry out his duties according to the contract. In certain cases, the courts
may insist that the party carry out the agreement.
So if any of the parties fails to perform the contract, the court may order them to do so. This is a decree of specific
performance and is granted instead of damages.

1. Injunction

An injunction is basically like a decree for specific performance but for a negative contract. An injunction is a court order
restraining a person from doing a particular act.
So a court may grant an injunction to stop a party of a contract from doing something he promised not to do. In a prohibitory
injunction, the court stops the commision of an act and in a mandatory injunction, it will stop the continuance of an act that
is unlawful.

1. Quantum Meruit

Quantum meruit literally translates to “as much is earned”. At times when one party of the contract is prevented from
finishing his performance of the contract by the other party, he can claim quantum meruit.
So he must be paid a reasonable remuneration for the part of the contract he has already performed. This could be the
remuneration of the services he has provided or the value of the work he has already done.
Negotiable instrument Act – Meaning and essential elements of a
Negotiable instruments
Definition:
The word negotiable means ‘transferable by delivery,’ and the word instrument means ‘a written document by which a right
is created in favour of some person.’
Thus, the term “negotiable instrument” literally means ‘a written document transferable by delivery.’
According to Section 13 of the Negotiable Instruments Act, “a negotiable instrument means a promissory note, bill of
exchange or cheque payable either to order or to bearer.” “A negotiable instrument may be made payable to two or more
payees jointly, or it may be made payable in the alternative to one of two, or one or some of several payees”

a. Payable to order:

A note, bill or cheque is payable to order which is expressed to be ‘payable to a particular person or his order.’ For example,
(i) Pay A, (ii) Pay A or order, (iii) Pay to the order of A, (iv) Pay A and B, and (v) Pay A or Bare various forms in which an
instrument may be made payable to order.
But it should not contain any words prohibiting transfer, e.g., ‘Pay to A only’ or ‘Pay to A and none else’ is not treated as
‘payable to order’ and therefore such a document shall not be treated as negotiable instrument because its negotiability has
been restricted.
 It may be noted that documents containing express words prohibiting negotiability remain valid as a document (i.e., as an
agreement) but they are not negotiable instruments as they cannot be negotiated further.

a. Payable to bearer:

‘Payable to bearer’ means ‘payable to any person whosoever bears it.’ A note, bill or cheque is payable to bearer which is
expressed to be so payable or on which the only or last endorsement is an endorsement in blank.
Thus, a note, bill or cheque in the form “Pay to A or bearer,” or “Pay A, B or bearer,” or “Pay bearer” is payable to bearer. Also,
where an instrument is originally ‘payable to order,’ it may become ‘payable to bearer’ if endorsed in blank by the payee.
Essential Features of Negotiable Instruments are given below:
1. Writing and Signature:

Negotiable Instruments must be written and signed by the parties according to the rules relating to Promissory Notes, Bills of
Exchange and Cheques. Demand Drafts are also construel as Negotiable Instruments in the limiting case as they have the
same property as N.I. Instrumes.

1. Money:

Negotiable instruments are payable by legal tender money of India. The liabilities of the parties of Negotiable Instruments
are fixed and determined in terms of legal tender money.

1. Negotiability:

Negotiable Instruments can be transferred from one person to another by a simple process. In the case of bearer instruments,
delivery to the transferee is sufficient. In the case of order instruments two things are required for a valid transfer:
endorsement (i.e., signature of the holder) and delivery. Any instrument may be made non-transferable by using suitable
words, e.g., “pay to X only.”

1. Title:

The transferee of a negotiable instrument, when he fulfils certain conditions, is called the holder in due course. The holder in
due course gets a good title to the instrument even in cases where the title of the transferrer is defective.

1. Notice:

It is not necessary to give notice of transfer of a negotiable instrument to the party liable to pay. The transferee can sue in his
own name.
6. Presumptions:
Certain presumptions apply to all negotiable instruments. Example: It is presumed that there is consideration. It is not
necessary to write in a promissory note the words “for value received” or similar expressions because the payment of
consideration is presumed. The words are usually included to create additional evidence of consideration.

1. Special Procedure:

A special procedure is provided for suits on promissory notes and bills of exchange (The procedure is prescribed in the Civil
Procedure Code). A decree can be obtained much more quickly than it can be in ordinary suits.

1. Popularity:

Negotiable instruments are popular in commercial transactions because of their easy negotiability and quick remedies.

1. Evidence:
A document which fails to qualify as a negotiable instrument may nevertheless be used as evidence of the fact of
indebtedness.

Negotiation of negotiable instruments

The negotiation has been defined under section 34 of The Negotiable Instrument Act as follows:
‘When a promissory note, bill of exchange or cheque is transferred to any person so as to constitute that person the holder
thereof, the instrument is said to be negotiated”.
Conditions of Negotiation
When we analyze this definition we find that following conditions must be fulfilled for the negotiations of the instrument;

1. There must be transfer of the promissory note, bill of exchange or cheque from one person to another.
2. The person to whom an instrument is transferred must constitute as the holder of the instrument.
3. He must have all the rights of the holder of the instrument.

So by negotiation means the transfer of negotiable instrument from one person to another in such a way that the transferee
must become the holder of the instrument.
Modes of Negotiation
The following are the methods of negotiations:
Negotiation by Delivery
A promissory note, bill of exchange or cheque payable to bearer is negotiated by delivery thereof. Sec, 47.
According to section 47 when an instrument is payable to bearer can be negotiated simply by transferring the possession of
instrument by one person to another.
Negotiation by Endorsement
“A promissory note, bill of exchange or cheque payable to order is negotiable by the holder by endorsement and delivery
thereof’. Sec. 43. This section provides that when an instrument is payable to order is transferable only by endorsement and
delivery thereof. Without the endorsement, the transferee cannot be constituted as the holder of the Instrument.
Dishonour of a Negotiable Instrument
Recollect that a negotiable instrument is a document that guarantees the payment of a sum of money, either on demand or at
a set time, with the payer usually named on the document.
The Negotiable Instruments Act came into existence to regulate and resolve disputes relating to the negotiable instruments in
use. Appropriately, the accepted negotiable instruments include- a promissory note, bill of exchange or cheques, drafts, and
certificates of deposit.
Dishonour of a negotiable instrument means the loss of honour for the instrument on the part of the maker, drawee or
acceptor, which renders the instrument unsuitable for the realization of the payment.
Dishonour by Non-Payment
A promissory note, bill or cheque is dishonoured if the maker, drawee or acceptor of the cheque commits default in payment
upon being required to do the same.
Furthermore, a holder of a promissory note or bill may call it dishonoured if the maker or the acceptor expressly excuses the
presentment of payment when payment remains overdue.
Dishonour by Non-Acceptance
Dishonour by non-acceptance is a situation of refusal to accept a negotiable instrument. Further, we generally observe
dishonour by non-acceptance in the case of a bill of exchange.
This is because it is the only kind of negotiable instrument that requires presentment for acceptance or non-acceptance.
Also, in case of dishonour by non-acceptance, only the makers and endorsers are liable to the holder of the bill, provided the
holder issues a notice of dishonour. Some circumstances that lead to the dishonour of a bill by non-acceptance are:
Notice of Dishonour
In the case of dishonour of a negotiable instrument by non-acceptance or non-payment, a liable holder should notify all the
parties of his liability by issuing a notice of dishonour.
Upon receiving a notice of dishonour, a party must issue a notice of dishonour to other parties rendering them liable to
himself, within a reasonable amount of time.
Unnecessary Situations For A Notice Of Dishonour
There are certain situations where we do not require a notice of dishonour, which are:

● When it is dispensed or waived by the entitled party. For e.g., if the endorser writes along with the instrument- ‘notice of
dishonour waived’.
● When the drawer himself cancels(countermands) the payment.
● In a situation where the charged party would not suffer damages for the want of notice.
● When we cannot find the party entitled to notice after a due search.
● When omission is a result of unavoidable circumstances. For example, in the case of the holder being critically ill.

Types of negotiable instrument; Holder and Holder in due course

Types of Negotiable Instruments
Promissory Note: In this case, the debtor is the one who makes the instrument. And he promises unconditionally to the
creditor (or the bearer of the document) a certain sum of money on a specific date.
Bills of Exchange: This is an order from the creditor to the debtor. This instrument instructs the drawee (debtor) to pay the
payee a certain amount of money. The bill will be made by the drawer (creditor)
Cheque: This is just another form of a bill of exchange. Here the drawer is a bank. And such a cheque is only payable on
demand. It is basically the depositor instructing the bank to pay a certain amount of money to the payee or the bearer of the
cheque.
Others: There are other instruments such as government promissory notes, railway receipts, delivery orders, etc. These can
be negotiable instruments by custom or practice of the trade.

UNIT-3
Companies Act 2013: Meaning and Essential Feature of Company
Meaning and definition
A company is a voluntary association of persons formed for some common purpose with capital divisible into parts known as shares.
Justice Lindlay defines company “as an association of many persons who contribute money or money’s worth to a common stock and
employ it in some trade or business and who share the profits arising there from”
Features of a Registered company

1. Voluntary Association

A company is voluntary association of persons who have come together for a common object which generally is to earn profit.
The activities of this association are governed by the law and are limited by its memorandum of association

1. Incorporated association

A company comes into existence on incorporation or registration under the companies act. Minimum number of persons required for the
purpose of incorporation is seven in case of a public company and two in case of a private company.

1. Separate legal entity

On incorporation company gets personality which is separate and distinct from those of its members. Company is an artificial person
created by law.

1. Separate property
The company can own , enjoy and dispose off its property in its own name.

1. Legal restrictions

The formation, working and winding up of a company are strictly governed by laws, rules and regulations

1. Perpetual succession

unlike a person a company never dies. Its existence is not affected in any way by the death or insolvency of any shareholder. Members may
come and members may go , but the company continues its operations until it is wound up.

1. Common seal

As a company is an artificial person it cannot sign its name on a contract. So it function with the help of seal. All contract entered into by the
members will be under the common seal of the company.

1. Share capital

A company mobilizes its capital by selling its shares. Those persons who buy these shares become its share holders and thereby become
members in it

1. Limited Liability

In case of limited companies liability of members will be limited to the amount unpaid on the shares.

1. Transferability of shares

Members can freely transfer and sell their shares .The right to transfer share is a statutory right of members.

Types of Company
Companies can be classified on the basis of ;

A. Incorporation
A. Liability of members
A. Number of members
A. Ownership
A. Incorporation
1. Chartered company
2. Statutory company
3. Registered company
1. Chartered company

The company which have formed and incorporated under a special charter granted by the king or queen. Eg East India company. Bank of
England.

1. Statutory company

These are companies which are created by means of a special Act of Parliament or any state legislature. Eg RBI, Railway

1. Registered company

Company formed and registered under companies Act 1956 is called Registered companies.

A. Liability of members
1. Limited company
2. Company limited by guarantee
3. Unlimited company
 1. Limited company or company limited by share

Majority of registered companies will be company limited by shares. In case of limited companies liability of members will be limited to the
amount unpaid on the shares.

1. Company limited by guarantee

Here liability of each member is limited by the memorandum to such amount as he may guarantee by the memorandum to contribute to the
assets of the company in the event of its winding up.
Such companies are formed for the promotion of art science, culture, sports etc.

1. Unlimited company

A company not having any limit on the liability of its members is termed as unlimited company. The members are liable for the debts of the
company at the time of winding up.

A. Number of members
1. Private company
2. Public company
1. Private company

A private company is a company

-which restricts the right to transfer its shares.
-limits the number of its members to 50.
-prohibits any invitation to public to subscribe its shares.

1. Public company

A public company means a company which is not a private company

E. Ownership

1. Government Company
2. Foreign company
3. Holding and subsidiary company
1. Government company

A company is said to be Government Company when 51% of the paid up capital is held by the central government or by any state
government or partly by central govt or partly by one or more state govt.

1. Foreign company

A foreign company is a company incorporated outside India and having a place of business in India.

1. Holding and subsidiary company

À Company which controls another company is known as the holding company and the so controlled company is known as subsidiary company.
One Man Company
This is a company in which one man holds practically the whole of the share capital of the company, and in order to meet the statutory
requirement of minimum number of members some dummy members like his wife and son holds one or two shares each.
Distinction between public company & private company.

Private Company Public Company

1. Minimum no of members is 2 Minimum no of members is 7

2. Maximum no members is 50 No maximum limit

3. Minimum paid up capital is Rs 1 lakh Minimum paid up capital is 5 lakh

4. Name must end with the word ‘Pvt Ltd’ Name must end with the word ‘Ltd’

5. Can commence business immediately after It shall have to wait until it receive
incorporation the certificate for commencement of
business.

6. It cannot invite public to subscribe its It can invite public to subscribe its
shares and debentures shares and debentures

7. Minimum subscription is not required for Minimum subscription is required

allotment of shares. for allotment of shares.
9

8. Need not hold statutory meeting of the It has to hold a statutory meeting
members. and file a stat: report.

9. Quorum required for a meeting is 2. Quorum required for a meeting is 5

10. There is restriction of transfer of shares Shares can be freely transferred.

Formation of Company
The procedure or formation of a company may be divided into four stages;

1. Promotion
2. Incorporation
3. Raising of capital
4. Commencement of business

Promotion

It is the first stage in the formation of a company.

In this stage the idea of carrying on a business is conceived by a person or a group of persons called promoters. They make detailed
investigation about the workability of the idea, amt of capital required, operating expense etc etc..
Before a company an be formed, there must be some persons who have an intention to form a company and who take the necessary
steps to carry that intention into operation. Such persons are called promoters.
The promoter is the person who brings a company into existence.
 1. Incorporation

A company is said to be incorporated when it is registered with the registrar under the companies act. The certificate of
incorporation is the birth certificate of the company. A company comes into existence from the date mentioned in the certificate.
Procedure for registration
The promoter has to first decide the proposed form of company as whether it is to be a public company or a private company.
They may form the company with limited liability , unlimited liability or limited by guarantee.
They have to decide the name of the company agreeable and desirable to all. For eg if the name proposed is identical with or closely
resembles the name of an existing company , it is undesirable.
Advantages of incorporation

1. Transferability of shares
2. Separate legal entity
3. Perpetual succession
4. Common seal
5. Separate property
6. Capacity to sue

Raising of capital

After incorporation a company can raise capital by issuing shares. A private company cannot issue shares to public.
In case of public company a copy of prospectus is filed with the registrar and it will be issued to the public. Those who are intended
in purchasing share are required to send their application money to company’s banker.
On the last date fixed for the receipt of application if the company has received application equal to minimum subscription the
directors will start with allotment of shares.

Commencement of business

A private company may commence its business immediately after incorporation.

But a public company cannot commence business immediately after incorporation but it has to obtain a certificate of
commencement from the registrar.

Shares, Share Capital

SHARES
The capital of a company is divided into a number of equal parts known as shares.
“The interest of a shareholder in the company, measured by a sum of money, for the purpose of liability in the first place and of
interest in the second, but also consisting of a series of mutual covenants entered into by all shareholders.”
Kinds of Shares
Companies issue different types of shares to mop up funds from various investors. Before Companies Act 1956, public companies
used to issue three types of shares, i.e., Preference Shares, Ordinary Shares and Deferred Shares. The Companies Act, 1956 has
limited fie type of shares to only two— Preference shares and Equity Shares.
Different types of shares are issued to suit the requirements of investors. Some investors prefer regular income, though it may be
low, others may prefer higher returns and they will be prepared to take risk. So, different types of shares suit different types of
investors. If only one type of shares are issued, the company may not be able to mop up sufficient funds.
SHARE CAPITAL
The amount of capital which a company may raise in future is mentioned in capital clause of the Memorandum of Association. The
capital is fixed after making careful analysis of present and future requirements of the company.
The company’s capital may be divided into following categories:

a. Authorized or Nominal Capital

This is the maximum amount of capital which a company can issue. The company, in no case, can issue more capital than
authorized by its Memorandum. It is called Authorized Capital because the company has an authority to issue this much capital.
 The maximum limit of capital to be issued is fixed at the time of registration of the company that is why it is called Registered
Capital also. While deciding about authorized capital, present and future needs of the concern should be taken into consideration.
The company can fix any amount as authorized capital. In case a company wants to issue more capital than authorized, it will have
to alter capital clause in the Memorandum. The alteration of this clause involves lot of formalities. The authorized capital is divided
into a number of shares. It may be written as the authorized capital of the company will be Rs. 10 lakhs, divided into 10,000 shares
of Rs. 100 each. It is not necessary that the whole of authorized capital be issued for subscription. The company can issue shares as
per its requirements. The authorised capital fixes only the maximum limits beyond which it cannot go.

a. Issued Capital

The company will issue shares according to its requirements. It may not need the entire capital at one time. Rather, capital needs go
along with its development stages. The capital which is offered to the public for subscription is known as Issued Capital. The part of
capital which is not issued is known as unissued capital. If out of 10,000 shares of Rs. 100 each, the company issues 8,000 shares for
public subscription, then Rs. 8 lakhs will be issued capital and Rs. 2 lakhs will be unissued capital.

a. Subscribed Capital

The shares issued by the company for public subscription may not be applied for in full. Subscribed capital denotes the share
capital taken up by the public. Continuing the earlier example, suppose the public subscribed for only 5,000 shares out of 8,000
shares issued ; then subscribed capital will be Rs. 5 lakhs. The issued and subscribed capitals can be same also.
If all the 8,000 shares are subscribed for by the public then issued and subscribed capital will be Rs. 8 lakhs. The subscription of
share capital depends upon reputation of the company. If the company carries a sound reputation, it will have no problem in selling
the shares.
The applications for shares may be more or less than the number of shares offered by the company. If the applications are for more
shares than the issued, it is known as Over subscription. On the other hand, if applications are far less shares than offered for
subscription, it is known as under subscription.

a. Called-up Capital

After the receipt of share applications, the Board of Directors makes allotment of shares to the applicants. Certain amount is
payable on application and the balance is called at the time of allotment and calls. The capital is called up as per requirements for
funds. The amount of capital is called called- up capital.
Taking the earlier example, suppose the company calls for Rs. 50 per share out of Rs. 100; then called up capital will be Rs. 4 lakhs,
if all the 8,000 shares have been subscribed for. The part of capital which has not been called-up is known as Un-called capital. The
shareholders are under obligation to pay the money whenever it is called-up.

a. Paid-up Capital

The amount of capital actually received is termed as Paid-up Capital. The shareholders are asked to pay the calls within a certain period.
In case whole of the called-up money has been received from the shareholders, called-up and paid-up capital will be the same. There may
be some defaulters and the money which has not been received is called calls-in-arrears. Continuing with the earlier example, if Rs. 3,
75,000 have been received out of Rs. 4 lakhs, then paid-up capital will be Rs. 3, 75,000 and Rs. 25,000 will be calls in-arrears.

a. Reserved Capital

A limited company may earmark a part of uncalled capital as Reserved Capital. The reserved capital is called-up only in case of
winding up of the company. This is done in order to create confidence in the minds of the creditors. Capital can be reserved by
passing a special resolution by the shareholders.

Shares: Kinds
A share in the share capital of the company, including stock, is the definition of the term ‘Share’. This is in accordance with Section
2(84) of the Companies Act, 2013. In other words, a share is a measure of the interest in the company’s assets held by a shareholder.
In this article, we will look at the different types of shares like preferential and equity shares. Further, we will understand certain
definitions and regulations surrounding them.
the share capital of a company is of two types:

1. Preferential Share Capital

2. Equity Share Capital

Preferential Share Capital

The preferential share capital is that part of the Issued share capital of the company carrying a preferential right for:

● Dividend Payment: A fixed amount or amount calculated at a fixed rate. This might/might not be subject to
income tax.
● Repayment: In case of a winding up or repayment of the amount of paid-up share capital, there is a preferential
right to the payment of any fixed premium or premium on any fixed scale. The Memorandum or Articles of the
company specifies the same.

Equity Share Capital – Equity Shares

All share capital which is NOT preferential share capital is Equity Share Capital. Equity shares are of two types:

1. With voting rights

2. With differential rights to voting, dividends, etc., in accordance with the rules.
In 2008, Tata Motors introduced equity shares with differential voting rights – the ‘A’ equity shares. According to the issue,

● Every 10 ‘A’ equity shares have one voting right

● ‘A’ equity shares get 5 percentage points more dividend than the ordinary shares.

Due to the difference in voting rights, the ‘A’ equity shares traded at a discount to ordinary shares with complete voting rights.
Deeming of Capital as Preferential Capital
In certain cases, capital is deemed as preferential capital even though it is entitled to either or both of the following rights:

1. For dividends, apart from the preferential rights to amounts specified above, it can participate (fully or to a
certain extent) with capital not entitled to the preferential rights.
2. In case of a winding up, apart from the preferential right of the capital amounts specified above, it can
participate (fully or to a certain extent), with capital not entitled to preferential rights in any surplus remaining
after repaying the entire capital.

UNIT-4
Companies Directors: Appointment, Power
Appointment
SECTION 152 OF THE COMPANIES ACT, 2013 – APPOINTMENT OF DIRECTOR
An individual who is appointed or elected as the member of the board of Directors of a Company, who, along with the other
directors, has the responsibility for determining and implementing the policies of the company.
Director is an individual who directs, manages, oversees or controls the affairs of the Company.
A director is a person who is appointed to perform the duties and functions of a company in accordance with the provisions of The
Company Act, 2013.
As per Section 149(1): Every Company shall have a Board of Directors consisting of Individuals as director.
They play a very important role in managing the business and other affairs of Company. Appointment of Directors is very crucial
for the growth and management of Company.

Power
The directors are considered as the head and brain of a company. When the brain functions, the company is said to function. For
the proper functioning, the directors should be properly entrusted with some powers. The directors generally acquire their powers
from the provisions of the Articles of Association and then from the Companies Act.
1. General Powers of a Company Director
As per Sec. 291 of the Act, the Board is entitled to exercise all such powers and to do all such acts and things as the company is
authorized to do. The exceptions are the acts, which can be done by the company only in the general meetings of the members as
required by law.
Specific Powers of a Company Director
 A. As per Sec. 262, in the case of a public company or a private company, which is a subsidiary of a public company,
the power to fill a casual vacancy of directors is to be exercised at a Board meeting.
A. As per Sec. 292, the following powers of the company shall be exercised by the Board by means of resolution passed
at the meeting of the Board:
● To make calls,
● To issue debentures,
● To borrow moneys by other means,
● To invest the funds of the company, and
● To make loans.

The last three powers cannot be delegated to the Manager or to a Committee of Directors but must be exercised only at a Board
meeting.

1. Powers of Director subject to the Consent of the Company

The directors of a public company or of a private company can exercise the following powers, which is a subsidiary of a public
company only with the consent of the company in the general meeting:

● To sell, lease or otherwise dispose of the undertaking of the company.

● To remit or give time for repayment of any debt due to the company by a director.
● To invest the sale proceeds of any property of the company in securities other than trust securities.
● To borrow moneys where the moneys already borrowed (other than temporary) exceeds the total of the paid-up capital
and free reserves of the company.
● To contribute to charities and other funds not directly relating to the business of the company or to the welfare of the
employees in any year in excess of Rs.50,000 or 5% of the average net profits of the three preceding financial years
whichever is greater.
1. Powers of Director subject to the Consent of the Central Government
A. As per Sec. 268, any provision relating to the appointment or reappointment of a Managing Director can be altered
by the Board with the consent of the Central Government.
A. As per Sec. 295, the Board, subject to the Central Government’s consent, has the power to appoint a person for the
first time as a Managing Director.
A. As per Sec. 295, the Board, only with the previous approval of the Central Government, can make any loan or give
any guarantee or provide any security in connection with a loan made by any other person to:
● Any of its directors or any director of its holding company, or
● Any partner or relative of such director, or
● Any firm in which any such director or relative is a partner, or
● Any private company of which any such director is a member or director, or

Meeting and Types

A meeting therefore, can be defined as a lawful association, or assembly of two or more persons by previous notice for transacting
some business. The meeting must be validly summoned and convened. Such gatherings of the members of companies are known as
company meetings.
Essentials of Company Meetings
The essential requirements of a company meeting can be summed up as follows:

● Two or More Persons: To constitute a valid meeting, there must be two or more persons. However, the articles of
association may provide for a larger number of persons to constitute a valid quorum.
● Lawful Assembly: The gathering must be for conducting a lawful business. An unlawful assembly shall not be a
meeting in the eye of law.
● Previous Notice: Previous notice is a condition precedent for a valid meeting. A meeting, which is purely accidental and
not summoned after a due notice, is not at all a valid meeting in the eye of law.
● To Transact a Business: The purpose of the meeting is to transact a business. If the meeting has no definite object or
summoned without any predetermined object, it is not a valid meeting. Some business should be transacted in the
meeting but no decision need be arrived in such meeting.

Kinds of Company Meetings

The meetings of a company can be broadly classified into four kinds.

● Meetings of the Shareholders.

● Meetings of the Board of Directors and their Committees.
● Meetings of the Debenture Holders.
● Meetings of the Creditors.
1. Meeting of the Share Holders

The meetings of the shareholders can be further classified into four kinds namely,

● Statutory Meeting,
● Annual General Meeting,
● Extraordinary General Meeting, and
● Class Meeting.

The chart given below gives a classification of company meetings.

i. Statutory Meeting

Usually, the statutory meeting is the first general meeting of the company. It is conducted only once in the lifetime of the company.
A private company or a public company having no share capital need not conduct a statutory meeting.

i. Annual General Meeting

The Annual General Meeting is one of the important meetings of a company. It is usually held once in a year. AGM should be
conducted by both private and public ltd companies whether limited by shares or by guarantee; having or not having a share capital

i. Extra-ordinary General Meetings (EOGM)

Statutory Meeting and Annual General Meetings are called the ordinary meetings of a company. All other general meetings other
than these two are called Extraordinary General Meetings .EOGMs are generally called for transacting some urgent or special
business, which cannot be postponed till the next Annual General Meeting. Every business transacted at these meetings is called
Special Business.

i. Class Meetings

Class meetings are those meetings, which are held by the shareholders of a particular class of shares e.g. preference shareholders or
debenture holders.Class meetings are generally conducted when it is proposed to alter, vary or affect the rights of a particular class
of shareholders. Thus, for effecting such changes it is necessary that a separate meeting of the holders of those shares is to be held
and the matter is to be approved at the meeting by a special resolution.

1. Meetings of the Directors

Meetings of directors are called Board Meetings. These are the most important as well as the most frequently held meetings of the
company. It is only at these meetings that all important matters relating to the company and its policies are discussed and decided
upon.
Since the administration of the company lies in the hands of the Board, it should meet frequently for the proper conduct of the
business of the company. The Companies Act therefore gives wide discretion to the directors to frame rules and regulations
regarding the holding and conduct of Board meetings.
The directors of most companies frame rules concerning how, where and when they shall meet and how their meetings would be
regulated. These rules are commonly known as Standing Orders.

1. Meetings of Debenture Holders

The debenture holders of a particular class conduct these meeting. They are generally conducted when the company wants to vary
the terms of security or to modify their rights or to vary the rate of interest payable etc. Rules and Regulations regarding the
holding of the meetings of the debenture holders are either entered in the Trust Deed or endorsed on the Debenture Bond so that
they are binding upon the holders of debentures and upon the company.

1. Meetings of the Creditors

Strictly speaking, these are not meetings of a company. They are held when the company proposes to make a scheme of
arrangements with its creditors. Companies like individuals may sometimes find it necessary to compromise or make some
arrangements with their creditors, In these circumstances, a meeting of the creditors is necessary.

Winding up-Kinds and Conduct

Winding up of a company is defined as a process by which the life of a company is brought to an end and its property administered
for the benefit of its members and creditors. In words of Professor Gower, “Winding up of a company is the process whereby its life
is ended and its Property is administered for the benefit of its members & creditors. An Administrator, called a liquidator is
appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the
members in accordance with their rights.”
Modes of Winding up of a Company

a. By the tribunal or,

a. Voluntary

a) Winding up by the tribunal: As per new Companies Act 2013, a company can be wound up by a tribunal in the below mentioned
circumstances:

1. When the company is unable to pay its debts

2. If the company has by special resolution resolved that the company be wound up by the tribunal.
3. If the company has acted against the interest of the integrity or morality of India, security of the state, or has
spoiled any kind of friendly relations with foreign or neighboring countries.
4. If the company has not filled its financial statements or annual returns for preceding 5 consecutive financial
years.
5. If the tribunal by any means finds that it is just & equitable that the company should be wound up.
6. If the company in any way is indulged in fraudulent activities or any other unlawful business, or any person or
management connected with the formation of company is found guilty of fraud, or any kind of misconduct.

Filling up winding up petition: Section 272 provides that a winding up petition is to be filed in the prescribed form no 1, 2 or 3
whichever is applicable and it is to be submitted in 3 sets. The petition for compulsory winding up can be presented by the following
persons:

a. The company
a. The creditors ; or
a. Any contributory or contributories
a. By the central or state govt.
a. By the registrar of any person authorized by central govt. for that purpose

Final Order and its Contents: The tribunal after hearing the petition has the power to dismiss it or to make an interim order as it
think appropriate or it can appoint the provisional liquidator of the company till the passing of winding up order. An order for
winding up is given in form 11

b) Voluntary winding up of a company: The company can be wound up voluntarily by the mutual decision of members of the
company, if:

a. The company passes a Special Resolution stating about the winding up of the company.
a. The company in its general meeting passes a resolution for winding up as a result of expiry of the period of its duration as
fixed by its Articles of Association or at the occurrence of any such event where the articles provide for dissolution of
company.

Procedure for Voluntary Winding Up:

a. 1. Conduct a board meeting with 2 Directors and thereby pass a resolution with a declaration
given by directors that they are of the opinion that company has no debt or it will be able to pay its
debt after utilizing all the proceeds from sale of its assets.
2. Issues notices in writing for calling of a General Meeting proposing the resolution along with the explanatory
statement.
3. In General Meeting pass the ordinary resolution for the purpose of winding up by ordinary majority or special
resolution by 3/4th majority. The winding up shall be started from the date of passing the resolution.
4. Conduct a meeting of creditors after passing the resolution, if majority creditors are of the opinion that winding
up of the company is beneficial for all parties then company can be wound up voluntarily.
 5. Within 10 days of passing the resolution, file a notice with the registrar for appointment of liquidator.
6. Within 14 days of passing such resolution, give a notice of the resolution in the official gazette and also advertise
in a newspaper.
7. Within 30 days of General meeting, file certified copies of ordinary or special resolution passed in general
meeting.
8. Wind up the affairs of the company and prepare the liquidators account and get the same audited.
9. Conduct a General Meeting of the company.
10. In that General Meeting pass a special resolution for disposal of books and all necessary documents of the
company, when the affairs of the company are totally wound up and it is about to dissolve.
11. Within 15 days of final General Meeting of the company, submit a copy of accounts and file an application to the
tribunal for passing an order for dissolution.
12. If the tribunal is of the opinion that the accounts are in order and all the necessary compliances have been
fulfilled, the tribunal shall pass an order for dissolving the company within 60 days of receiving such
application.
13. The appointed liquidator would then file a copy of order with the registrar.
14. After receiving the order passed by tribunal, the registrar then publish a notice in the official Gazette declaring
that the company is dissolved.
Powers of Liquidator
Powers of Liquidator:
Subject to certain legal provisions and adherence to certain procedures the powers of a liquidator are broadly
enumerated as follows:

1. He can exercise the following powers only with court sanction:

i. To institute or defend any suit, prosecution or other legal proceedings, civil or criminal in the name of
the company.
i. To carry on the business of the company.
i. To sell the immovable property and actionable claims of the company by public auction or private
contract with power to transfer the whole thereof to any person or body corporate.
i. To raise the required money as the security of the assets of the company.
i. To appoint an advocate, attorney or pleader entitled to appear before the court to assist him in the
performance of his duties.
i. To compromise call, debts and other pecuniary liabilities with contributories or debtors and take any
security in discharge of any such claim and give a complete discharge in respect thereof.
1. He can exercise the following powers without obtaining court sanction:
i. To do all acts and to execute on behalf of the company all deeds, receipts and other documents and for
the purpose to use, when necessary, the company’s seal.
i. To inspect the records and returns of the company on the files of the Registrar without payment of any
dues.
i. To prove rank and claim in the insolvency of any contributory, for any balance against his estate.

(iv) To receive dividends in the insolvency, in respect of any balance against his estate, as a separate debt
due from the insolvent and rateable with other creditors.

i. To draw, accept, make and endorse any bill of exchange, hundi or promissory note on behalf of the
company.
i. To take out in his official name, letters of administration to any deceased contributory, and to do any
other act necessary for obtaining payment of any money due from a contributory or his estate which
cannot be conveniently done in the name of the company.

Duties of Liquidator:

Some of the important duties are enumerated below:

1. When the liquidator receives the Statement of Affairs from the Directors, he must submit a preliminary report to
the court.
2. On making of the winding up order, the liquidator has to take the properties under his control.
3. He must protect the assets of the company.
4. Within two months from the date of direction of the court, the liquidator must call a meeting of the creditors for
determining the persons who are to be members of the Committees of Inspection.
5. He must keep proper books and cause entries or minutes to be made of all proceedings at meetings.
6. He must, at least twice in each year, present to the court an account of his receipts and payments as liquidator.
7. Official liquidator shall pay all moneys received by him as liquidator of the company into the Public Accounts of
India in Reserve Bank of India.
8. He should realise the assets and distribute the proceeds among the creditors and the surplus, if any, among the
contributories according to their rights.
9. All the papers of the company must clearly indicate that the company is being wound up, i.e., by adding the
words “In liquidation”.