PAPER – 2: BUSINESS LAW & BUSINESS CORRESPONDENCE AND REPORTING

SECTION A – BUSINESS LAW

Question No. 1 is compulsory.
Attempt any four questions from the remaining five questions.

Question 1
(a) X, Y and Z are partners in a firm. They jointly promised to pay ` 3,00,000 to D. Y become
insolvent and his private assets are sufficient to pay 1/5 of his share of debts. X is
compelled to pay the whole amount to D. Examining the provisions of the Indian Contract
Act, 1872, decide the extent to which X can recover the amount from Z.
(4 Marks)
(b) 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.? (4 Marks)
(c) What is meant by delivery of goods under the Sale of Goods Act, 1930? State various
modes of delivery. (4 Marks)
Answer
(a) As per section 43 of the Indian Contract Act, 1872, when two or more persons make a
joint promise, the promisee may, in the absence of express agreement to the contrary,
compel any one or more of such joint promisors to perform the whole of the promise.
Each of two or more joint promisors may compel every other joint promisor to contribute
equally with himself to the performance of the promise, unless a contrary intention
appears from the contract.
If any one of two or more joint promisors makes default in such contribution, the
remaining joint promisors must bear the loss arising from such default in equal shares.
In the instant case, X, Y and Z jointly promised to pay ` 3,00,000. Y become insolvent
and his private assets are sufficient to pay 1/5 of his share of debts. X is compelled to
pay the whole amount. X is entitled to receive ` 20,000 from Y’s estate, and ` 1,40,000
from Z.
(b) As per the facts given, Ravi Private Limited borrowed ` 5 crore from Mudra Finance Ltd.
This debt is ultra vires to the company, which signifies that Ravi Private Limited has
borrowed the amount beyond the expressed limit prescribed in its memorandum. This act
of the company can be said to be null and void.
In consequence, any act done or a contract made by the company which travels beyond
the powers not only of the directors but also of the company is wholly void and
inoperative in law and is therefore not binding on the company.

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 2 FOUNDATION EXAMINATION: MAY, 2018

So is being the act void in nature, there being no existence of the contract between the
Ravi Private Ltd. and Mudra Finance Ltd. Therefore, the company Ravi Private Ltd. is
liable to pay this debt amount upto the limit prescribed in the memorandum.
Remedy available to the Mudra Finance Ltd.: The impact of the doctrine of ultra vires
is that a company can neither be sued on an ultra vires transaction, nor can it sue on it.
Since the memorandum is a “public document”, it is open to public inspection. Therefore,
a company which deals with the other, is deemed to know about the powers of the
company.
So, Mudra Finance Ltd. can claim for the amount within the expressed limit prescribed in
its memorandum.
(c) Delivery of goods [section 2(2) of the Sale of Goods Act, 1930]: Delivery means
voluntary transfer of possession from one person to another. 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 authorized to hold them on his behalf.
Modes of delivery: Following are the modes of delivery for transfer of possession:
(i) Actual delivery: When the goods are physically delivered to the buyer.
(ii) 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
(acknowledgement) e.g., where a warehouseman holding the goods of A agrees to
hold them on behalf of B, at A’s request.
(iii) Symbolic delivery: When there is a delivery of a thing in token of a transfer of
something else, i.e., delivery of goods in the course of transit may be made by
handing over documents of title to goods, like bill of lading or railway receipt or
delivery orders or the key of a warehouse containing the goods is handed over to
buyer.
Question 2
(a) State the exceptions to the rule "An agreement without consideration is void". (5 Marks)
(b) What are the essential elements to form a LLP in India as per the LLP Act, 2008?
(5 Marks)
(c) (i) Distinguish between wagering agreement and contract of insurance. (2 Marks)
OR
(ii) Examine with reason that the given statement is correct or incorrect "Minor is liable
to pay for the necessaries supplied to him". (2 Marks)

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 PAPER – 2 : BUSINESS LAW & BUSINESS CORRESPONDENCE AND REPORTING 3

Answer
(a) The general rule is that an agreement made without consideration is void (Section 25 of
the Indian Contract Act, 1872). However, the Indian Contract Act contains certain
exceptions to this rule. In the following cases, the agreement though made even without
consideration, will be valid and enforceable.
1. Natural Love and Affection: Any written and registered agreement made on
account of love and affection between the parties standing in near relationship to
each other.
2. Compensation for past voluntary services: A promise to compensate, wholly or
in part, a person who has already voluntarily done something for the promisor.
3. Promise to pay time barred debt: A promise in writing signed by the person
making it or by his authorized agent, made to pay a debt barred by limitation.
4. Agency: According to Section 185 of the Indian Contract Act, 1872, no
consideration is necessary to create an agency.
5. Completed gift: In case of completed gifts, the rule no consideration no contract
does not apply. Explanation (1) to Section 25 states “nothing in this section shall
affect the validity as between the donor and donee, of any gift actually made.” Thus,
gifts do not require any consideration.
6. Bailment: No consideration is required to effect the contract of bailment (Sectio n
148).
7. Charity: If a promisee undertakes the liability on the promise of the person to
contribute to charity, there the contract shall be valid.
(b) Essential elements to incorporate LLP- Under the LLP Act, 2008, the following
elements are very essential to form a LLP in India:
(i) To complete and submit incorporation document in the form prescribed with the
Registrar electronically;
(ii) To have at least two partners for incorporation of LLP [Individual or body corporate];
(iii) To have registered office in India to which all communications will be made and
received;
(iv) To appoint minimum two individuals as designated partners who will be responsible
for number of duties including doing of all acts, matters and things as are required
to be done by the LLP. Atleast one of them should be resident in India.
(v) A person or nominee of body corporate intending to be appointed as designated
partner of LLP should hold a Designated Partner Identification Number (DPIN)
allotted by MCA.

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 4 FOUNDATION EXAMINATION: MAY, 2018

(vi) To execute a partnership agreement between the partners inter se or between the
LLP and its partners. In the absence of any agreement the provisions as set out in
First Schedule of LLP Act, 2008 will be applied.
(vii) LLP Name.
(c) (i) Distinction between Wagering Agreement and Contract of Insurance
Basis Wagering Agreement Contracts of Insurance
1. Meaning It is a promise to pay It is a contract to
money or money’s worth indemnify the loss.
on the happening or non
happening of an uncertain
event.
2. Consideration There is no consideration The crux of insurance
between the two parties. contract is the mutual
There is just gambling for consideration (premium
money. and compensation
amount).
3. Insurable Interest There is no property in Insured party has
case of wagering insurable interest in the
agreement. life or property sought to
There is betting on other’s be insured.
life and properties.
4. Contract of Loser has to pay the fixed Except life insurance, the
Indemnity amount on the happening contract of insurance
of uncertain event. indemnifies the insured
person against loss
5. Enforceability It is void and It is valid and enforceable
unenforceable agreement.
6. Premium No such logical Calculation of premium is
calculations are required based on scientific and
in case of wagering actuarial calculation of
agreement. risks.
7. Public Welfare They have been regarded They are beneficial to the
as against the public society.
welfare.
OR
(ii) Minor is liable to pay for the necessaries supplied to him: This statement is
incorrect. The case of necessaries supplied to a minor or to any other person whom

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 PAPER – 2 : BUSINESS LAW & BUSINESS CORRESPONDENCE AND REPORTING 5

such minor is legally bound to support is governed by section 68 of the Indian

Contract Act, 1872. A claim for necessaries supplied to a minor is enforceable by
law, only against minor’s estate, if he possesses. But a minor is not liable for any
price that he may promise and never for more than the value of the necessaries.
There is no personal liability of the minor, but only his property is liable.
Question 3
(a) Distinguish between dissolution of firm and dissolution of partnership. (2 Marks)
(b) What are the consequences of Non-Registration of a Partnership Firm? Discuss.
(4 Marks)
(c) M Ltd., contract with Shanti Traders to make and deliver certain machinery to them by
30.6.2017 for ` 11.50 lakhs. Due to labour strike, M Ltd. could not manufacture and
deliver the machinery to Shanti Traders. Later, Shanti Traders procured the machinery
from another manufacturer for ` 12.75 lakhs. Due to this Shanti Traders was also
prevented from performing a contract which it had made with Zenith Traders at the time
of their contract with M Ltd. and were compelled to pay compensation for breach of
contract. Advise Shanti Traders the amount of compensation which it can claim from M
Ltd., referring to the legal provisions of the Indian Contract Act, 1872. (6 Marks)
Answer
(a) DISSOLUTION OF FIRM VS. DISSOLUTION OF PARTNERSHIP
S. Basis of Dissolution of Firm Dissolution of Partnership
No. Difference
1. Continuation of It involves discontinuation It does not affect
business of business in partnership. continuation of business. It
involves only reconstitution
of the firm.
2. Winding up It involves winding up of It involves only
the firm and requires reconstitution and requires
realization of assets and only revaluation of assets
settlement of liabilities. and liabilities of the firm.
3. Order of court A firm may be dissolved by Dissolution of partnership is
the order of the court. not ordered by the court.

4. Scope It necessarily involves It may or may not involve

dissolution of partnership. dissolution of firm.
5. Final closure of It involves final closure of It does not involve final
books books of the firm. closure of the books.

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 6 FOUNDATION EXAMINATION: MAY, 2018

(b) Consequences of Non-Registration of a Partnership Firm [Section 69 of the Indian

Partnership Act, 1932]: 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:
(i) No suit in a civil court by firm or other co-partners against third party: The firm
or any other person on its behalf cannot bring an action against the third party for
breach of contract entered into by the firm, unless the firm is registered and the
persons suing are or have been shown in the register of firms as partners in the
firm.
(ii) No relief to partners for set-off of claim: If an action is brought against the firm by
a third party, then neither the firm nor the partner can claim any set-off, if the suit be
valued for more than `100 or pursue other proceedings to enforce the rights arising
from any contract.
(iii) 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 or
for accounts and realization of his share in the firm’s property where the firm is
dissolved.
(iv) Third party can sue the firm: In case of an unregistered firm, an action can be
brought against the firm by a third party.
(c) Section 73 of the Indian Contract Act, 1872 provides for consequences of breach of
contract. According to it, when a contract has been broken, the party who suffers by such
breach is entitled to receive from the party who has broken the contract, compensation
for any loss or damage caused to him thereby which naturally arose in the usual course
of things from such breach or which the parties knew when they made the contract, to be
likely to result from the breach of it. Such compensation is not given for any remote and
indirect loss or damage sustained by reason of the breach. It is further provided in the
explanation to the section that in estimating the loss or damage from a breach of
contract, the means which existed of remedying the inconvenience caused by the non -
performance of the contract must be taken into account.
Applying the above principle of law to the given case, M Ltd. is obliged to compensate for
the loss of ` 1.25 lakh (i.e. ` 12.75 minus ` 11.50 = ` 1.25 lakh) which had naturally
arisen due to default in performing the contract by the specified date.
Regarding the amount of compensation which Shanti Traders were compelled to make to
Zenith Traders, it depends upon the fact whether M Ltd., knew about the contract of
Shanti Traders for supply of the contracted machinery to Zenith Traders on the specified
date. If so, M Ltd is also obliged to reimburse the compensation which Shanti Traders
had to pay to Zenith Traders for breach of contract. Otherwise M Ltd is not liable.

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 PAPER – 2 : BUSINESS LAW & BUSINESS CORRESPONDENCE AND REPORTING 7

Question 4
(a) What is appropriation of goods under the Sale of Goods Act, 1930? State the essentials
regarding appropriation of unascertained goods. (6 Marks)
(b) X, Y and Z are partners in a Partnership Firm. They were carrying their business
successfully for the past several years. Spouses of X and Y fought in ladies club on their
personal issue and X's wife was hurt badly. X got angry on the incident and he convi nced
Z to expel Y from their partnership firm. Y was expelled from 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 test of good faith
in such circumstances? (6 Marks)
Answer
(a) Appropriation of goods: Appropriation of goods involves selection of goods with the
intention of using them in performance of the contract and with the mutual consent of the
seller and the buyer.
The essentials regarding appropriation of unascertained goods are:
(a) There is a contract for the sale of unascertained or future goods.
(b) The goods should conform to the description and quality stated in the contract.
(c) The goods must be in a deliverable state.
(d) 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.
(e) The appropriation must be made by:
(i) the seller with the assent of the buyer; or
(ii) the buyer with the assent of the seller.
(f) The assent may be express or implied.
(g) The assent may be given either before or after appropriation.
(b) 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:
(i) the power of expulsion must have existed in a contract between the partners;
(ii) the power has been exercised by a majority of the partners; and
(iii) it has been exercised in good faith.
If all these conditions are not present, the expulsion is not deemed to be in bonafide
interest of the business of the firm.

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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 of being heard.
If a partner is otherwise expelled, the expulsion is null and void.
Thus, according to the test of good faith as required under Section 33(1), expulsion of
Partner Y is not valid.
Question 5
(a) Mr. D sold some goods to Mr. E for ` 5,00,000 on 15 days credit. Mr. D delivered the
goods. On due date Mr. E refused to pay for it. State the position and rights of Mr. D as
per the Sale of Goods Act, 1930. (6 Marks)
(b) 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? (6 Marks)
Answer
(a) Position of Mr. D: Mr. D sold some goods to Mr. E for ` 5,00,000 on 15 days credit.
Mr. D delivered the goods. On due date Mr. E refused to pay for it. So, Mr. D is an unpaid
seller as according to section 45(1) of the Sale of Goods Act,1930 the seller of goods is
deemed to be an ‘Unpaid Seller’ when the whole of the price has not been paid or
tendered and the seller had an immediate right of action for the price.
Rights of Mr. D: As the goods have parted away from Mr. D, therefore, Mr. D cannot
exercise the right against the goods, he can only exercise his rights against the buyer i.e.
Mr. E which are as under:
(i) Suit for price (Section 55)
In the mentioned contract of sale, the price is payable after 15 days and Mr. E
refuses to pay such price, Mr. D may sue Mr. E for the price.
(ii) Suit for damages for non-acceptance (Section 56): Mr. D may sue Mr. E for
damages for non-acceptance if Mr. E wrongfully neglects or refuses to accept and
pay for the goods. As regards measure of damages, Section 73 of the Indian
Contract Act, 1872 applies.
(iii) Suit for interest [Section 61]: If there is no specific agreement between the Mr. D
and Mr. E as to interest on the price of the goods from the date on which payment
becomes due, Mr. D may charge interest on the price when it becomes due from
such day as he may notify to Mr. E.

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(b) One Person Company (OPC) [Section 2(62) of the Companies Act, 2013]: The Act
defines one person company (OPC) as a company which has only one person as a
member.
Rules regarding its membership:
• Only one person as member.
• The memorandum of OPC shall indicate the name of the other person, who shall, in
the event of the subscriber’s death or his incapacity to contract, become the member
of the company.
• The other person whose name is given in the memorandum shall give his prior
written consent in prescribed form and the same shall be filed with Registrar of
companies at the time of incorporation.
• Such other person may be given the right to withdraw his consent.
• The member of OPC may at any time change the name of such other person by
giving notice to the company and the company shall intimate the same to the
Registrar.
• Any such change in the name of the person shall not be deemed to be an alteration
of the memorandum.
• Only a natural person who is an Indian citizen and resident in India (person who has
stayed in India for a period of not less than 182 days during the immediately
preceding one calendar year)-
➢ shall be eligible to incorporate a OPC;
➢ shall be a nominee for the sole member of a OPC.
• No person shall be eligible to incorporate more than one OPC or become nominee in
more than one such company.
• No minor shall become member or nominee of the OPC or can hold share with
beneficial interest.
OPC cannot be incorporated or converted into a company under section 8 of the Act.
Though it may be converted to private or public companies in certain cases. 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.
Question 6
(a) Define Fraud. Whether "mere silence will amount to fraud" as per the Indian Contract Act,
1872? (5 Marks)

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 10 FOUNDATION EXAMINATION: MAY, 2018

(b) What is the conclusive evidence of partnership? State the circumstances when
partnership is not considered between two or more parties. (4 Marks)
(c) State the limitations of the doctrine of indoor management under the Companies Act,
2013. (3 Marks)
Answer
(a) Definition of Fraud under Section 17: 'Fraud' means and includes any of the
following acts committed by a party to a contract, or with his connivance, or by his agent,
with an intent to deceive another party thereto or his agent, or to induce him to enter into
the contract:
(1) the suggestion, as a fact, of that which is not true, by one who does not believe it to
be true;
(2) the active concealment of a fact by one having knowledge or belief of the fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specially declares to be fraudulent.
Mere silence will amount to fraud: This statement is incorrect as per the Indian
Contract Act, 1872. A party to the contract is under no obligation to disclose the whole
truth to the other party. ‘Caveat Emptor’ i.e. let the purchaser beware is the rule
applicable to contracts. There is no duty to speak in such cases and silence does not
amount to fraud. Similarly, there is no duty to disclose facts which are within the
knowledge of both the parties.
(b) Conclusive evidence of partnership: Existence of Mutual Agency which is the cardinal
principle of partnership law is very much helpful in reaching a conclusion with respect to
determination of existence of partnership. Each partner carrying on the business is the
principal as well as an agent of other partners. So, the act of one partner done on behalf
of firm, binds all the partners. If the element of mutual agency relationship exists between
the parties constituting a group formed with a view to earn profits by running a business,
a partnership may be deemed to exist.
Circumstances when partnership is not considered between two or more parties:
Various judicial pronouncements have laid to the following factors leading to no
partnership between the parties:
(i) Parties have not retained any record of terms and conditions of partnership.
(ii) Partnership business has maintained no accounts of its own, which would be open
to inspection by both parties
(iii) No account of the partnership was opened with any bank

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(iv) No written intimation was conveyed to the Deputy Director of Procurement with
respect to the newly created partnership.
(c) The doctrine of Indoor Management has limitations of its own. That is to say, it is
inapplicable to the following cases, namely:
(i) 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.
(ii) 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,
it is the duty of the outsider to make the necessary enquiry.
(iii) Forgery: The doctrine of indoor management applies only to irregularities which
might otherwise affect a transaction, but it cannot apply to forgery which must be
regarded as nullity.

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Answer Key Business Law and Business Correspondence and Reporting

Answer 1 (a)
This question is based on the provisions of Section 56(2) & 65, as per the provisions of section 56(2) When
performance of promise become impossible or illegal by occurrence of an unexpected event or a change of
circumstances beyond the contemplation of parties, the contract becomes void e.g. change in law etc. In other
words, sometimes, the performance of a contract is quite possible when it is made. But subsequently, some
event happens which renders the performance impossible or unlawful. Such impossibility is called the
subsequent or supervening. It is also called the post- contractual impossibility. The effect of such impossibility
is that it makes the contract void, and the parties are discharged from further performance of the contract.
As per the provisions of section 65 When an agreement is discovered to be void or when a contract becomes
void, any person who has received any advantage under such agreement or contract is bound to restore it, or to
make compensation for it to the person from whom he received it.

So based on the abovementioned two provisions Contract made between Mr. X and Mr. Y becomes void on 2nd
Aug. 2018 due to severe flood or in other words subsequent impossibility and both the parties are discharged.
So claim of Mr. X is not tenable and contention of Mr. Y is valid. Also as per the provisions of section 65 Mr. Y
is entitled to claim Rs. 50,000 from Mr. X..

Answer 1 (b)
This question is based on the provisions of Section 8 of the Companies Act, 2013 deals with the formation of
companies which are formed to
promote the charitable objects of commerce, art, science, sports, education, research, social welfare,
religion, charity, protection of environment etc.
Such company intends to apply its profit in
promoting its objects and
prohibiting the payment of any dividend to its members.
So based on the abovementioned provisions a company registered under Section 8 is prohibited to pay any
dividend to its members even in the cases of huge profits, thus members are not entitled for any dividend.

Answer 1(c)
Ascertained Goods are those goods which are identified in accordance with 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 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 agrees to sell 50 bales and these bales were
selected and set aside. On selection the goods becomes ascertained. In this case, the contract is for the sale of
ascertained goods, as the cotton bales to be sold are identified and agreed after the formation of the contract. It
may be noted that before the ascertainment of the goods, the contract was for the sale of unascertained goods.
Unascertained goods are the goods which are not specifically identified or ascertained at the time of making of
the contract. They are indicated or defined only by description or sample.
Example: 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 unascertained 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.
Answer 2 (a)
Definition of „Contingent Contract‟ (Section 31)
“A contract to do or not to do something, if some event, collateral to such contract, does or does not
happen”.

Contracts of Insurance, indemnity and guarantee fall under this category.

Example: A contracts to pay B ` 1,00,000 if B‟s house is burnt. This is a contingent contract.
Meaning of collateral Event: Pollock and Mulla defined collateral event as “an event which is neither a
performance directly promised as part of the contract, nor the whole of the consideration for a promise”.

Example: A contracts to pay B ` 100,000 if B‟s house is burnt. This is a contingent contract. Here the burning
of the B‟s house is neither a performance promised as part of the contract nor it is the consideration obtained
from B. The liability of A arises only on the happening of the collateral event.

Essentials of a contingent contract

(a) The performance of a contingent contract would depend upon the happening or non-happening of
some event or condition. The condition may be precedent or subsequent.
Example: „A‟ promises to pay ` 50,000 to „B‟ if it rains on first of the next month.
(b) The event referred to is collateral to the contract. The event is not part of the contract. The event
should be neither performance promised nor a consideration for a promise.
Thus (i) where A agrees to deliver 100 bags of wheat and B agrees to pay the price only afterwards, the
contract is a conditional contract and not contingent; because the event on which B‟s obligation is made
to depend is part of the promise itself and not a collateral event. (ii) Similarly, where A promises to pay B
` 1,00,000 if he marries C, it is not a contingent contract. (iii) „A‟ agreed to construct a swimming pool
for „B‟ for ` 200,000. And„B‟ agreed to make the payment only on the completion of the swimming pool.
It is not a contingent contract as the event (i.e. construction of the swimming pool) is directly connected
with the contract.
(c) The contingent event should not be a mere „will‟ of the promisor. The event should be contingent in
addition to being the will of the promisor.
Example 1: If A promises to pay B ` 100,000, if he so chooses, it is not a contingent contract. (In fact, it
is not a contract at all). However, where the event is within the promisor‟s will but not merely his will, it
may be contingent contract.
Example 2: If A promises to pay B `100,000 if A left Delhi for Mumbai on a particular day, it is a
contingent contract, because going to Mumbai is an event no doubt within A‟s will, but is not merely his
will.
(d) The event must be uncertain. Where the event is certain or bound to happen, the contract is due to be
performed, then it is a not contingent contract.
Example: „A‟ agreed to sell his agricultural land to „B‟ after obtaining the necessary permission from the
collector. As a matter of course, the permission was generally granted on the fulfillment of certain
formalities. It was held that the contract was not a contingent contract as the grant of permission by the
collector was almost a certainty.

Answer 2 (b)
Essential elements to incorporate LLP - Under the LLP Act, 2008, the following elements are very essential
to form a LLP in India:

(i) Tocompleteandsubmitincorporationdocumentintheformprescribedwiththe Registrar electronically;

(ii) To have at least two partners for incorporation of LLP [Individual or body corporate];
(iii) To have registered office in India to which all communications will be made and received;
(iv) To appoint minimum two individuals as designated partners who will be responsible for number of duties
including doing of all acts, matters and things as are required to be done by the LLP. At least one of them
should be resident in India.
(v) A person or nominee of body corporate intending to be appointed as designated partner of LLP should
hold a Designated Partner Identification Number (DPIN) allotted by MCA.
(vi) To execute a partnership agreement between the partners inter se or between the LLP and its partners. In
the absence of any agreement the provisions as set out in First Schedule of LLP Act, 2008 will be applied.
(vii) LLP Name.
Steps to incorporate LLP-

• The first step to incorporate Limited Liability Partnership (LLP) is reservation of name of
LLP.
• Applicant has to file e-Form 1, for ascertaining availability and reservation of the name of
Name a LLP business.
Reservation

• After reserving a name, user has to file e- Form 2 for incorporating a new Limited Liability
Partnership (LLP).
• e-Form 2 contains the details of LLP proposed to be incorporated, partners’/ designated
Incorporate partners’ details and consent of the partners/designated partners to act as partners/
designated partners.
LLP

• Execution of LLP Agreement is mandatory as per Section 23 of the Act.

• LLP Agreement is required to be filed with the registrar in e-Form 3 within 30 days of
LLP incorporation of LLP.
Agreement

Answer 3 (a)
(I) Rights:
(i) A minor partner has a right to his agreed share of the profits and of the firm.
(ii) He can have access to, inspect and copy the accounts of the firm.
(iii) He can sue the partners for accounts or for payment of his share but only when severing his
connection with the firm, and not otherwise.
(iv) On attaining majority he may within 6 months elect to become a partner or not to become a partner.
If he elects to become a partner, then he is entitled to the share to which he was entitled as a minor.
If he does not, then his share is not liable for any acts of the firm after the date of the public notice
served to that effect.
(II) Liabilities:
(A)
(i) Before attaining majority:
(a) The liability of the minor is confined only to the extent of his share in the profits and the
property of the firm.
(b) Minor has no personal liability for the debts of the firm incurred during his minority.
(c) Minor cannot be declared insolvent, but if the firm is declared insolvent his share in the firm
vests in the Official Receiver/Assignee.
(ii) 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
II (B)
(i) When he becomes partner: If the minor becomes a partner on his own willingness or by his failure
to give the public notice within specified time, his rights and liabilities as given in Section 30(7) are
as follows:
(i) He becomes personally liable to third parties for all acts of the firm done since he was admitted
to the benefits of partnership.
(ii) His share in the property and the profits of the firm remains the same to which he was entitled as
a minor.
(ii) When he elects not to become a partner:
(i) His rights and liabilities continue to be those of a minor up to the date of giving public notice.
(ii) His share shall not be liable for any acts of the firm done after the date of the notice.
(iii) He shall be entitled to sue the partners for his share of the property and profits. It may be noted
that such minor shall give notice to the Registrar that he has or has not become a partner.

Answer 3 (b)(i)
The general rule is that an agreement made without consideration is void (Section 25). In every valid contract,
consideration is very important. A contract may only be enforceable when consideration is there. However, the
Indian Contract Act contains certain exceptions to this rule. In the following cases, the agreement though made
without consideration, will be valid and enforceable.

Natural Love and Affection: Conditions to be fulfilled under section 25(1)

(i) It must be made out of natural love and affection between the parties.
(ii) Parties must stand in near relationship to each other.
(iii) It must be in writing.
(iv) It must also be registered under the law.
A written and registered agreement based on natural love and affection between the parties standing in near
relation (e.g., husband and wife) to each other is enforceable even without consideration.
Example: A husband, by a registered agreement promised to pay his earnings to his wife. Held the agreement
though without consideration, was valid.
So based on the abovementioned provisions of Section 25 Agreement made between Mr. Ramesh
(Husband) and Mrs. Lali (Wife) is valid, thus Mrs. Lali will succeed.

Answer 3 (b)(ii)
Invitation to offer
An offer should be distinguished from an invitation to offer. An offer is definite and capable of converting an
intention into a contract. Whereas an invitation to an offer is only a circulation of an offer, it is an attempt to
induce offers and precedes a definite offer. An invitation to offer is an act precedent to making an offer.
Acceptance of an invitation to an offer does not result in the contract and only an offer emerges in the process of
negotiation.
The price list of goods does not constitute an offer for sale of certain goods on the listed prices. It is an invitation
to offer.

Difference between offer and invitation to make an offer:

In terms of Section 2(a) of the Act, an offer is the final expression of willingness by the offeror to be bound by
the offer should the other party chooses to accept it. On the other hand, offers made with the intention to
negotiate or offers to receive offers are known as invitation to offer. Thus where a party without expressing his
final willingness proposes certain terms on which he is willing to negotiate he does not make an offer, but only
invites the other party to make an offer on those terms. Hence the only thing that is required is the willingness
of the offeree to abide by the terms of offer.
In order to ascertain whether a particular statement amounts to an offer or an invitation to offer, the test would
be intention with which such statement is made. The mere statement of the lowest price which the vendor would
sell contains no implied contract to sell at that price to the person making the inquiry.
Following are instances of invitation to offer to buy or sell:
(i) An invitation by a company to the public to subscribe for its shares.
(ii) Display of goods for sale in shop windows.
(iii) Advertising auction sales and
(iv) Quotation of prices sent in reply to a query regarding price.
So based on the abovementioned provisions pair of dress in the show-room with price tag is just an invitation
to offer and Ms. Lovely made an offer which was not accepted by shopkeeper so no binding contract is come
into force between her and shopkeeper, thus she cannot sue the shopkeeper otherwise she cannot succeed.

Answer 4 (a)
Caveat emptor‟ means “let the buyer beware”, i.e. in 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 excepting 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 or fitness for any particular purpose of goods supplied under a contract
of sale”
The rule of caveat emptor does not apply in the following cases:
(i) Fitness for buyer‟s purpose: Where the buyer, expressly or by implication, makes know 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. (Section16(1).
(ii) 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 (Section 16(1).
(iii) 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 seller is responsible.
(iv) 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. But where the buyer has examined the goods this rule shall
apply if the defects were such which ought to have not been revealed by ordinary examination [Section
16(2)].
(v) 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].
(vi) 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 in case the goods do not correspond with both the
sample and description or either of the condition [Section 15].
(vii) 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)].
Example: In readymade garment business, there is an implied condition by usage of trade that the
garments shall be reasonably fit on the buyer.
(viii) 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. In such a case the buyer has a right to avoid the contract and
claim damages.
Answer 4 (b)(i)
Liabilities of Estate of deceased 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.
Analysis of section 35:
Ordinarily, the effect of the death of a partner is the dissolution of the partnership, but the rule in regard to the
dissolution of the partnership, by death of 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. In order 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.

Example:
X was a partner in a firm. The firm ordered goods in X‟s lifetime; but the delivery of the goods was made after
X‟s death. In such a case, X‟s estate would not be liable for the debt; a creditor can have only a personal decree
against the surviving partners and a decree against the partnership assets in the hands of those partners. A suit
for goods sold and delivered would not lie against the representatives of the deceased partner. This is because
there was no debt due in respect of the goods in X‟s lifetime.
So based on the abovementioned provisions Mr. X may recover the amount from M/s ABC & Co. but not from
the legal heirs of Mr. C, because C‟s estate was not liable for the transactions of firm made after his death i.e.
1st October, 2018.

Answer 4 (b)(ii)
This question is based on the provisions of Section 28, as per section 28 Partnership by holding out is also
known as partnership by estoppel. Where a man holds himself out as a partner, or allows others to do it, he is
then stopped from denying the character he has assumed and upon the faith of which creditors may be
presumed to have acted.

When a person knowingly permits

to be represented as a he is liable, like a
represent himself, or himself, partner in a firm (when
in fact he is not)
partner in the firm

to anyone who on
the faith of such
representation has
given credit to the firm.

A person may himself, by his words or conduct have induced others to believe that he is a partner or he may
have allowed others to represent him as a partner. The result in both the cases is identical.
The rule given in Section 28 is also applicable to a former partner who has retired from the firm without giving
proper public notice of his retirement. In such cases a person who, even subsequent to the retirement, give
credit to the firm on the belief that he was a partner, will be entitled to hold him liable.
Example: A partnership firm consisting of P, Q, R and S. S retires from the firm without giving public notice
and his name continues to be used on letterheads. Here, S is liable as a partner by holding out to creditors who
have lent on the faith of his being a partner.
So based on the abovementioned provisions Mr. P becomes a partner by holding out/estoppels because he
failed to give notice of his retirement and made representation on behalf of firm, thus Mr. X can recover the
amount not only from the Firm but also from Mr. P. So Mr. P is liable in this situation.

Answer 5 (a)
This question is based on the provisions of Section 26, According to section 26, unless otherwise
agreed, the goods remain at the seller‟s risk until the property therein is transferred to the buyer, but when the
property therein is transferred to the buyer, the goods are at the buyer‟s risk whether delivery has been made or
not:
Provided that, where delivery has been delayed through the fault of either buyer or seller, the goods are at the
risk of the party in fault as regards any loss which might not have occurred but for such fault.
Provided also that nothing in this section shall affect the duties or liabilities of either seller or buyer as bailee of
the goods of the other party.
So based on the abovementioned provisions ownership of goods was transferred to Mr. H on the date of
examination of goods by his agent which were found to be in order and also the risk of goods because as per
section 26 risk prima facie passes with ownership, but Mr.G failed to perform his duties as a bailee so Mr. G
shall be liable for the above damage. Our answer will not be different if the dues were not settled in cash and
still pending.

Answer 5 (b)
Corporate Veil refers to a legal concept whereby the company is identified separately from the members of
the company. Whereas meaning of the phrase “lifting the veil”, It means looking behind the company as a legal
person, i.e., disregarding the corporate entity and paying re¬gard, instead, to the realities behind the legal
facade. Where the Courts ignore the company and concern themselves directly with the members or managers,
the corporate veil may be said to have been lifted. Only in appropriate circumstances, the Courts are willing to
lift the corporate veil and that too, when questions of control are involved rather than merely a question of
ownership.
The following are the cases where company law disregards the principle of corporate personality or the
principle that the company is a legal entity distinct and separate from its shareholders or members:
(1) To determine the character of the company i.e. to find out whether co-enemy or friend: In the law
relating to trading with the enemy where the test of control is adopted. The leading case in this point is
Daimler Co. Ltd. vs. Continental Tyre & Rubber Co., if the public interest is not likely to be in
jeopardy, the Court may not be willing to crack the corporate shell. But it may rend the veil for
ascertaining whether a company is an enemy company. It is true that, unlike a natural person, a company
does not have 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 people of an enemy country.
For this purpose, the Court may examine the character of the persons who are really at the helm of affairs
of the company.
(2) To protect revenue/tax: In certain matters concerning the law of taxes, duties and stamps particularly
where question of the controlling interest is in issue. [S. Berendsen Ltd. vs. Commissioner of Inland
Revenue]
(i) Where corporate entity is used to evade or circumvent tax, the Court can disregard the corporate
entity [Juggilal vs. Commissioner of Income Tax AIR (SC)].
(ii) In [Dinshaw Maneckjee Petit], it was held that the company was not a genuine company at all but
merely the assessee himself disguised under the legal entity of a limited company. The assessee
earned huge income by way of dividends and interest. So, he opened some companies and
purchased their shares in exchange of his income by way of dividend and interest. This income was
transferred back to assessee by way of loan. The Court decided that the private companies were a
sham and the corporate veil was lifted to decide the real owner of the income.
(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 bonus to workmen, the Supreme
Court upheld the piercing of the veil to look at the real transaction (The Workmen Employed in
Associated Rubber Industries Limited, Bhavnagar vs. The Associated Rubber Industries Ltd.,
Bhavnagar and another).

Workmen of Associated Rubber Industry ltd., v. Associated Rubber Industry Ltd.: The facts of the
case are that “A Limited” purchased shares of “B Limited” by investing a sum of ` 4,50,000. The
dividend in respect of these shares was shown in the profit and loss account of the company, year after
year. It was taken into account for the purpose of calculating the bonus payable to workmen of the
company. Sometime in 1968, the company transferred the shares of B Limited, to C Limited a
subsidiary, wholly owned by it. Thus, the dividend income did not find place in the Profit & Loss
Account of A Ltd., with the result that the surplus available for the purpose for payment of bonus to the
workmen got reduced.
Here a company created a subsidiary and transferred to it, its investment holdings in a bid to reduce its
liability to pay bonus to its workers. Thus, the Supreme Court brushed aside the separate existence of the
subsidiary company. The new company so formed had no assets of its own except those transferred to it
by the principal company, with no business or income of its own except receiving dividends from shares
transferred to it by the principal company and serving no purpose except to reduce the gross profit of the
principal company so as to reduce the amount paid as bonus to workmen.

(4) Formation of subsidiaries to act as agents: A company may sometimes be regarded as an agent or
trustee of its members, or of another company, and may therefore be deemed to have lost its
individuality in favour of its principal. Here the principal will be held liable for the acts of that company.
In the case of Merchandise Transport Limited vs. British Transport Commission (1982), a transport
 company wanted to obtain licences for its vehicles, but could not do so if applied in its own name. It,
therefore, formed a subsidiary company, and the application for licence was made in the name of the
subsidiary. The vehicles were to be transferred to the subsidiary company. Held, the parent and the
subsidiary were one commercial unit and the application for licences was rejected.

(5) Company formed for fraud/improper conduct or to defeat law: Where the device of incorporation is
adopted for some illegal or improper purpose, e.g., to defeat or circumvent law, to defraud creditors or to
avoid legal obligations. [Gilford Motor Co. vs. Horne]

Answer 6 (a)
This question is made on the provisions of Section 6, as per the provisions of section 6 there are various Modes
of revocation of offer :
(i) By notice of revocation
(ii) By lapse of time: The time for acceptance can lapse if the acceptance is not given within the specified
time and where no time is specified, then within a reasonable time. This is for the reason that proposer
should not be made to wait indefinitely. It was held in Ramsgate Victoria Hotel Co. Vs Montefiore
(1866 L.R.Z. Ex 109), that a person who applied for shares in June was not bound by an allotment made
in November. This decision was also followed in India Cooperative Navigation and Trading Co. Ltd.
Vs Padamsey PremJi. However these decisions now will have no relevance in the context of allotment
of shares since the Companies Act, 2013 has several provisions specifically covering these issues.
(iii) By non fulfillment of condition precedent: Where the acceptor fails to fulfill a condition precedent to
acceptance the proposal gets revoked. This principle is laid down in Section 6 of the Act. The offeror for
instance may impose certain conditions such as executing a certain document or depositing certain
amount as earnest money. Failure to satisfy any condition will result in lapse of the proposal. As stated
earlier „condition precedent‟ to acceptance prevents an obligation from coming into existence until the
condition is satisfied. Suppose where „A‟ proposes to sell his house to be „B‟ for ` 5 lakhs provided „B‟
leases his land to „A‟. If „B‟ refuses to lease the land, the offer of „A‟ is revoked automatically.
(iv) By death or insanity: Death or insanity of the proposer would result in automatic revocation of the
proposal but only if the fact of death or insanity comes to the knowledge of the acceptor.
(v) By counter offer
(vi) By the non acceptance of the offer according to the prescribed or usual mode
(vii) By subsequent illegality

Answer 6 (b)
DISSOLUTION BY THE COURT (SECTION 44):
Court may, at the suit of the partner, dissolve a firm on any of the following ground:
(a) Insanity/unsound mind: Where a partner (not a sleeping partner) has become of unsound mind, the court
may dissolve the firm on a suit of the other partners or by the next friend of the insane partner. Temporary
sickness is no ground for dissolution of firm.
(b) Permanent incapacity: When a partner, other than the partner suing, has become in any way permanently
incapable of performing his duties as partner, then the court may dissolve the firm. Such permanent
incapacity may result from physical disability or illness etc.
(c) Misconduct: Where a partner, other than the partner 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. It is not necessary that misconduct must relate to the conduct of the business.
The important point is the adverse eff ect of misconduct on the business. In each case nature of business
will decide whether an act is misconduct or not.
(d) Persistent breach of agreement: Where a partner other than the partner suing, wilfully or persistently
commits breach of agreements relating to the management of the aff airs of the firm or the conduct of its
business, or otherwise so conduct 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, then the court may dissolve
the firm at the instance of any of the partners. Following comes in to category of breach of contract:
Embezzlement,
Keeping erroneous accounts
Holding more cash than allowed
Refusal to show accounts despite repeated request etc.
Example: If one of the partners keeps erroneous accounts and omits to enter receipts or if there is
continued quarrels between the partners or there is such a state of things that destroys the mutual
confidence of partners, the court may order for dissolution of the firm.
(e) Transfer of interest: Where a partner other than the partner suing, has transferred the whole of his interest
in the firm to a third party or has allowed his share to be charged or sold by the court, in the recovery of
arrears of land revenue, the court may dissolve the firm at the instance of any other partner.
(f) Continuous/Perpetual losses: Where the business of the firm cannot be carried on except at a loss in future
also, the court may order for its dissolution.
(g) Just and equitable grounds: Where the court considers any other ground to be just and equitable for the
dissolution of the firm, it may dissolve a firm. The following are the cases for the just and equitable
grounds-
(i ) Deadlock in the management.
(ii) Where the partners are not in talking terms between them.
(iii) Loss of substratum.
(iv) Gambling by a partner on a stock exchange.

Answer 6 (c)
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 authorised 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 Turquand Rule.
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 case :
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, it is the duty of the outsider to make the necessary enquiry.
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 matter, which is apparently outside the scope of his authority. Where, for
example, as in the case of Anand Bihari Lal vs. Dinshaw & 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 absence of a power of attorney that the accountant had authority to effect transfer of the company’s
property.
So based on the abovementioned provision Mr. X is not free from his liability because he is under a liability to
check whether actually Mr. Z has the authority/ charge of receiving money on behalf of company and
contention of Mr. X is not valid.

********************
 PAPER – 2: BUSINESS LAW & BUSINESS CORRESPONDENCE AND REPORTING

SECTION A – BUSINESS LAW

Question No. 1 is compulsory.
Attempt any four questions from the remaining five questions.

Question 1
(a) Mr. Sohanlal sold 10 acres of his agricultural land to Mr. Mohanlal on 25th September
2018 for ` 25 Lakhs. The Property papers mentioned a condition, amongst other details,
that whosoever purchases the land is free to use 9 acres as per his choice but the
remaining 1 acre has to be allowed to be used by Mr. Chotelal, son of the seller for
carrying out farming or other activity of his choice. On 12 th October, 2018, Mr. Sohanlal
died leaving behind his son and life. On 15th October, 2018 purchaser started
construction of an auditorium on the whole 10 acres of land and denied any land to the
son.
Now Mr. Chotelal wants to file a case against the purchaser and get a suitable
redressed. Discuss the above in light of provisions of Indian Contract Act, 1872 and
decide upon Mr. Chotelal's plan of action? (4 Marks)
(b) Sound Syndicate Ltd., a public company, its articles of association empowers 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 non banking
finance company for a loan of ` 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
loan have been actually passed by the company and the lender should have enquired
about the same prior providing such loan hence company 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? (4 Marks)
(c) Discuss the various types of implied warranties as per the Sales of Goods Act, 1930?
(4 Marks)
Answer
(a) Problem as asked in the question is based on the provisions of the Indian Contract Act,
1872 as contained in section 2(d) and on the principle ‘privity of consideration’.
Consideration is one of the essential elements to make a contract valid and it can fl ow
from the promisee or any other person. In view of the clear language used in definition of
‘consideration’ in Section 2(d), it is not necessary that consideration should be furnished
by the promisee only. A promise is enforceable if there is some consideration for it and it

© The Institute of Chartered Accountants of India

 2 FOUNDATION EXAMINATION: MAY, 2019

is quite immaterial whether it moves from the promisee or any other person. The leading
authority in the decision of the Chinnaya Vs. Ramayya, held that the consideration can
legitimately move from a third party and it is an accepted principle of law in India.
In the given problem, Mr. Sohanlal has entered into a contract with Mr. Mohanlal, but Mr.
Chotelal has not given any consideration to Mr. Mohanlal but the consideration did flow
from Mr. Sohanlal to Mr. Mohanlal on the behalf of Mr. Chotelal and such consideration
from third party is sufficient to enforce the promise of Mr. Mohanlal to allow Mr. Chotelal
to use 1 acre of land. Further the deed of sale and the promise made by Mr. Mohanlal to
Mr. Chotelal to allow the use of 1 acre of land were executed simultaneously and
therefore they should be regarded as one transaction and there was sufficient
consideration for it.
Moreover, it is provided in the law that “in case covenant running with the land, where a
person purchases land with notice that the owner of the land is bound by certain duties
affecting land, the covenant affecting the land may be enforced by the successor of the
seller.”
In such a case, third party to a contract can file the suit although it has not moved the
consideration.
Hence, Mr. Chotelal is entitled to file a petition against Mr. Mohanlal for execution of
contract.
(b) Doctrine of Indoor Management
According to this doctrine, persons dealing with the company need not inquire whether
internal proceedings relating to the contract are followed correctly, once they are
satisfied that the transaction is in accordance with the memorandum and articles of
association.
Stakeholders need not enquire whether the necessary meeting was convened and held
properly or whether necessary resolution was passed properly. They are entitled to take
it for granted that the company had gone through all these proceedings in a regular
manner.
The doctrine helps protect external members from the company and states that the
people are entitled to presume that internal proceedings are as per documents submitted
with the Registrar of Companies.
Thus,
1. What happens internal to a company is not a matter of public knowledge. An
outsider can only presume the intentions of a company, but do not know the
information he/she is not privy to.
2. If not for the doctrine, the company could escape creditors by denying the authority
of officials to act on its behalf.

© The Institute of Chartered Accountants of India

 PAPER – 2 : BUSINESS LAW & BUSINESS CORRESPONDENCE AND REPORTING 3

In the given question, Easy Finance Ltd. being external to the company, need not
enquire whether the necessary resolution was passed properly. Even if the
company claim that no resolution authorizing the loan was passed, the company is
bound to pay the loan to Easy Finance Ltd.
(c) Various types of implied warranties
1. Warranty as to undisturbed possession [Section 14(b) of the Sales of Goods
Act, 1930]: An implied warranty that the buyer shall have and enjoy quiet
possession of the goods. That is to say, if the buyer having got possession of the
goods, is later on 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 [Section 14(c)]: An implied
warranty that the goods shall be free from any charge or encumbrance in favour of
any third party not declared or known to the buyer before or at the time the contract
is entered into.
3. Warranty as to quality or fitness by usage of trade [Section 16(3)]: An implied warranty
as to quality or fitness for a particular purpose may be annexed or attached by the
usage of trade.
4. Disclosure of dangerous nature of goods: Where the goods are dangerous in
nature 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 in
damages.
Question 2
(a) "Mere silence is not fraud" but there are some circumstances where the "silence is
fraud". Explain the circumstances as per the provision of Indian Contract Act, 1872?
(7 Marks)
(b) "LLP is an alternative corporate business form that gives the benefits of limited liability of
a company and the flexibility of a partnership". Explain. (5 Marks)
Answer
(a) Mere silence is not fraud
Mere silence as to facts likely to affect the willingness of a person to enter into a contract
is not fraud, unless the circumstances of the case are such that, regard being had to
them, it is the duty of the person keeping silence to speak, or unless his silence is, in
itself, equivalent to speech.
It is a rule of law that mere silence does not amount to fraud. A contracting party is not
duty bound to disclose the whole truth to the other party or to give him the whole
information in his possession affecting the subject matter of the contract.

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The rule is contained in explanation to Section 17 of the Indian Contract Act which clearly
states the position that mere silence as to facts likely to affect the willingness of a person
to enter into a contract is not fraud.
Silence is fraud:
1. Duty of person to speak: Where the circumstances of the case are such that it is
the duty of the person observing silence to speak.
Following contracts come within this category:
(a) Fiduciary Relationship: Here, the person in whom confidence is reposed is
under a duty to act with utmost good faith and make full disclosure of all
material facts concerning the agreement, known to him.
(b) Contracts of Insurance: In contracts of marine, fire and life insurance, there
is an implied condition that full disclosure of material facts shall be made,
otherwise the insurer is entitled to avoid the contract.
(c) Contracts of marriage: Every material fact must be disclosed by the parties to
a contract of marriage.
(d) Contracts of family settlement: These contracts also require full disclosure
of material facts within the knowledge of the parties.
(e) Share Allotment contracts: Persons issuing ‘Prospectus’ at the time of public
issue of shares/debentures by a joint stock company have to disclose all
material facts within their knowledge.
2. Where the silence itself is equivalent to speech: For example, A says to B “If you
do not deny it, I shall assume that the horse is sound.” A says nothing. His silence
amounts to speech.
(b) LLP is an alternative corporate business form that gives the benefits of limited
liability of a company and the flexibility of a partnership
Limited Liability: Every partner of a LLP is, for the purpose of the business of LLP, the
agent of the LLP, but not of other partners (Section 26 of the LLP Act, 2008). The liability
of the partners will be limited to their agreed contribution in the LLP, while the LLP itself
will be liable for the full extent of its assets.
Flexibility of a partnership: The LLP allows its members the flexibility of organizing
their internal structure as a partnership based on a mutually arrived agreement. The LLP
form enables entrepreneurs, professionals and enterprises providing services of any kind
or engaged in scientific and technical disciplines, to form commercially efficient vehicles
suited to their requirements. Owing to flexibility in its structure and operation, the LLP is
a suitable vehicle for small enterprises and for investment by venture capital.

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Question 3
(a) (i) What is the provision related to the effect of notice to an acting partner of the firm as per
the Indian Partnership Act, 1932? (2 Marks)
OR
(ii) Discuss the provisions regarding personal profits earned by a partner under the
Indian Partnership Act, 1932? (2 Marks)
(b) "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 partnership as per the Indian
Partnership Act, 1932? (4 Marks)
(c) Mr. Rich aspired to get a self-portrait made by an artist. He went to the workshop of Mr.
C an artist and asked whether he could sketch the former's portrait on oil painting
canvass. Mr. C agreed to the offer and asked for ` 50,000 as full advance payment for
the above creative work. Mr. C clarified that the painting shall be completed in 10 sittings
and shall take 3 months.
On reaching to the workshop for the 6 th sitting, Mr. Rich was informed that Mr. C became
paralyzed and would not be able to paint for near future. Mr. C had a son Mr. K who was
still pursuing his studies and had not taken up his father’s profession yet?
Discuss in light of the Indian Contract Act, 1872?
(i) Can Mr. Rich ask Mr. K to complete the artistic work in lieu of his father?
(ii) Could Mr. Rich ask Mr. K for refund of money paid in advance to his father?
(6 Marks)
Answer
(a) (i) Effect of notice to an acting partner of the firm
According to Section 24 of the Indian Partnership Act, 1932, 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.
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 notice to his principal. This notice must be actual
and not constructive. It must further relate to the firm’s business. Only then it would
constitute a notice to the firm.
OR
(ii) Personal Profit earned by Partners (Section 16 of the Indian Partnership Act,
1932)
According to section 16, subject to contract between the partners:

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(a) If a partner derives any profit for himself from any transaction of the firm, or from the
use of the property or business connection of the firm or the firm name, he shall
account for that profit and pay it to the firm;
(b) If a partner carries on any business of the same nature and competing with that of
the firm, he shall account for and pay to the firm all profits made by him in that
business.
(b) Mode of determining existence of partnership (Section 6 of the Indian Partnership
Act, 1932): In determining whether a group of persons is or is not a firm, or whether a
person is or not a partner in a firm, regard shall be had to the real relation between the
parties, as shown by all relevant facts taken together.
For determining the existence of partnership, it must be proved.
1. There was an agreement between all the persons concerned
2. The agreement was to share the profits of a business and
3. 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 (Section 5). The
relation of partnership arises from contract and not from status; and in particular,
the members of a Hindu Undivided family carrying on a family business as such are
not partners in such business.
2. Sharing of Profit: Sharing of profit is an essential element to constitute a
partnership. But, it is only a prima facie evidence and not conclusive evidence, in
that regard. The sharing of profits or of gross returns accruing from property by
persons holding joint or common interest in the property would not by itself make
such persons partners. Although the right to participate in profits is a strong test of
partnership, and there may be cases where, upon a simple participation in profits,
there is a partnership, yet whether the relation does or does not exist must depend
upon the whole contract between the parties.
3. Agency: Existence of Mutual Agency which is the cardinal principle of partnership
law, is very much helpful in reaching a conclusion 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 firm, binds all the partners. If the elements
of mutual agency relationship exist between the parties constituting a group formed
with a view to earn profits by running a business, a partnership may be deemed to
exist.
(c) A contract which involves the use of personal skill or is founded on personal
consideration comes to an end on the death of the promisor. As regards any other
contract the legal representatives of the deceased promisor are bound to perform it
unless a contrary intention appears from the contract (Section 37 of the Indian Contract

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Act, 1872). But their liability under a contract is limited to the value of the property they
inherit from the deceased.
(i) In the instant case, since painting involves the use of personal skill and on
becoming Mr. C paralyzed, Mr. Rich cannot ask Mr. K to complete the artistic work
in lieu of his father Mr. C.
(ii) According to section 65 of the Indian Contract Act, 1872, when an agreement is
discovered to be void or when a contract becomes void, any person who has
received any advantage under such agreement or contract is bound to restore it, or
to make compensation for it to the person from whom he received it.
Hence, in the instant case, the agreement between Mr. Rich and Mr. C has become
void because of paralysis to Mr. C. So, Mr. Rich can ask Mr. K for refund of money
paid in advance to his father, Mr. C.
Question 4
(a) “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? (6 Marks)
(b) M/s XYZ & Associates, a partnership firm with X, Y, Z as senior partners were engaged
in the business of carpet manufacturing and exporting to foreign countries. On 25 th
August, 2016, they inducted Mr. G, an expert in the field of carpet manufacturing as their
partner. On 10th January 2018, Mr. G was blamed for unauthorized activities and thus
expelled from the partnership by united approval of rest of the partners.
(i) Examine whether action by the partners was justified or not?
(ii) What should have the factors to be kept in mind prior expelling a partner from the
firm by other partners according to the provisions of the Indian Partnership Act,
1932? (6 Marks)
Answer
(a) In the following cases, a non-owner can convey better title to the bona fide purchaser of
goods for value:
(1) Sale by a Mercantile Agent: A sale made by a mercantile agent of the goods for
document of title to goods would pass a good title to the buyer in the following
circumstances; namely;
(a) If he was in possession of the goods or documents with the consent of the
owner;
(b) If the sale was made by him when acting in the ordinary course of
business as a mercantile agent; and

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(c) If the buyer had acted in good faith and has at the time of the contract of sale, no
notice of the fact that the seller had no authority to sell (Proviso to Section 27
of the Sale of Goods Act, 1930).
(2) Sale by one of the joint owners (Section 28): If one of several joint owners of
goods has the sole possession of them by permission of the co-owners, the
property in the goods is transferred to any person who buys them of such joint
owner in good faith and has not at the time of the contract of sale notice that the
seller has no authority to sell.
(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, misrepresentation
or undue influence provided that the contract had not been rescinded until the time
of the sale (Section 29).
(4) Sale by one who has already sold the goods but continues in possession
thereof: If a person has sold goods but continues to be in possession of 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 the property in the goods had passed to the
first buyer earlier. [Section 30(1)]
(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 or other right of the
original seller in respect of the goods, he would get a good title to them [Section
30(2)].
(6) Effect of Estoppel: Where the owner is estopped by the conduct from denying the
seller’s authority to sell, the transferee will get a good title as against the true
owner. But before a good title by estoppel can be made, it must be shown that the
true owner had actively suffered or held out the other person in question as the true
owner or as a person authorized to sell the goods.
(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 [Section 54 (3)].
(8) Sale under the provisions of other Acts:
(i) Sale by an Official Receiver or Liquidator of the Company will give the
purchaser a valid title.
(ii) Purchase of goods from a finder of goods will get a valid title under
circumstances [Section 169 of the Indian Contract Act, 1872]

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(iii) A sale by pawnee can convey a good title to the buyer [Section 176 of the
Indian Contract Act, 1872]
(b) Expulsion of a Partner (Section 33 of the Indian Partnership Act, 1932):
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.
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 of being heard.
If a partner is otherwise expelled, the expulsion is null and void.
(i) Action by the partners of M/s XYZ & Associates, a partnership firm to expel Mr. G
from the partnership was justified as he was expelled by united approval of the
partners exercised in good faith to protect the interest of the partnership against the
unauthorized activities charged against Mr. G. A proper notice and opportunity of
being heard has to be given to Mr. G.
(ii) The following are the factors to be kept in mind prior expelling a partner from the
firm by other partners:
(a) the power of expulsion must have existed in a contract between the partners;
(b) the power has been exercised by a majority of the partners; and
(c) it has been exercised in good faith.
Question 5
(a) M/s Woodworth & 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 which would be best suited for the purpose of making
wooden doors and window frames. The Shop owner agreed and arranged the wooden
pieces cut into as per the buyers requirements.
The carpenter visited Mr. Das's house next day, and he found that the seller has
supplied Mango Tree wood which would most unsuitable for the purpose. The:
carpenter asked Mr. Das to return the wooden logs as it 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.

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(i) Explain the duty of the buyer as well as the seller according to the doctrine of
“Caveat Emptor”.
(ii) Whether Mr. Das would be able to get the money back or the right kind of wood as
required serving his purpose? (6 Marks)
(b) 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 licence
of such company by the government. (6 Marks)
Answer
(a) (i) Duty of the buyer according to the doctrine of “Caveat Emptor”: In case of 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.
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 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
(ii) As Mr. Das has specifically mentioned that he required the wood which would be
best suited for the purpose of making wooden doors and window frames but the
seller supplied Mango tree wood which is most unsuitable for the purpose. Mr. Das
is entitled to get the money back or the right kind of wood as required serving his
purpose. It is the duty of the seller to supply such goods as are reasonably fit for the
purpose mentioned by buyer. [Section 16(1) of the Sale of Goods Act, 1930]
(b) Formation of companies with charitable purpose etc. (Section 8 company):
Section 8 of the Companies Act, 2013 deals with the formation of companies which are
formed to
• promote the charitable objects of commerce, art, science, sports, education,
research, social welfare, religion, charity, protection of environment etc.

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Such company intends to apply its profit in

• promoting its objects and
• prohibiting the payment of any dividend to its members.
Examples of section 8 companies are FICCI, ASSOCHAM, National Sports Club of India,
CII etc.
Power of Central government to issue the license–
(i) Section 8 allows the Central Government to register such person or association of
persons as a company with limited liability without the addition of words ‘Limited’ or
‘Private limited’ to its name, by issuing licence on such conditions as it deems fit.
(ii) The registrar shall on application register such person or association of persons as
a company under this section.
(iii) On registration the company shall enjoy same privileges and obligations as of a
limited company.
Revocation of license: The Central Government may by order revoke the licence of the
company where the company contravenes any of the requirements or the conditions of
this sections subject to which a licence is issued or where the affairs of the company are
conducted fraudulently, or violative of the objects of the company or prejudicial to public
interest, and on revocation the Registrar shall put ‘Limited’ or ‘Private Limited’ against
the company’s name in the register. But before such revocation, the Central Government
must give it a written notice of its intention to revoke the licence and opportunity to be
heard in the matter.
Question 6
(a) Discuss the essentials of Undue Influence as per the Indian Contract Act, 1872. (5 Marks)
(b) “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 non-registered partnership firm can face in brief? (4 Marks)
(c) Popular Products Ltd. is company incorporated in India, having a total Share Capital of
` 20 Crores. The Share capital comprises of 12 Lakh equity shares of ` 100 each and 8
Lakhs 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 above three companies namely Delight Products Ltd;
Happy Products Ltd.; Cheerful Products Ltd. Can Jovial Ltd. be termed as subsidiary
company of Popular products. Ltd., if it. Controls composition of directors of Popular
Products Ltd. State the related provision in the favour of your answer. (3 Marks)

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Answer
(a) The essentials of Undue Influence as per the Indian Contract Act, 1872 are the following:
(1) Relation between the parties: A person can be influenced by the other when a
near relation between the two exists.
(2) Position to dominate the will: Relation between the parties exist in such a manner
that one of them is in a position to dominate the will of the other. A person is
deemed to be in such position in the following circumstances:
(a) Real and apparent authority: Where a person holds a real authority over the
other as in the case of master and servant, doctor and patient and etc.
(b) Fiduciary relationship: Where relation of trust and confidence exists between
the parties to a contract. Such type of relationship exists between father and
son, solicitor and client, husband and wife, creditor and debtor, etc.
(c) Mental distress: An undue influence can be used against a person to get his
consent on a contract where the mental capacity of the person is temporarily
or permanently affected by the reason of mental or bodily distress, illness or of
old age.
(d) Unconscionable bargains: Where one of the parties to a contract is in a
position to dominate the will of the other and the contract is apparently
unconscionable i.e., unfair, it is presumed by law that consent must have been
obtained by undue influence. Unconscionable bargains are witnessed mostly in
money lending transactions and in gifts.
(3) The object must be to take undue advantage: Where the person is in a position
to influence the will of the other in getting consent, must have the object to take
advantage of the other.
(4) Burden of proof: The burden of proving the absence of the use of the dominant
position to obtain the unfair advantage will lie on the party who is in a position to
dominate the will of the other.
(b) Under the English Law, the registration of firms is compulsory. Therefore, there is a
penalty for non-registration of firms. But the Indian Partnership Act, 1932 does not make
the registration of firms compulsory nor does it impose any penalty for non-registration.
The registration of a partnership is optional and one partner cannot compel another
partner to join in the registration of the firm. It is not essential that the firm should be
registered from the very beginning.
However, under Section 69, non-registration of partnership gives rise to a number of
disabilities which are as follows:
(i) No suit in a civil court by firm or other co-partners against third party: The firm or
any other person on its behalf cannot bring an action against the third party for

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breach of contract entered into by the firm, unless the firm is registered and the
persons suing are or have been shown in the register of firms as partners in the firm.
(ii) No relief to partners for set-off of claim: If an action is brought against the firm
by a third party, then neither the firm nor the partner can claim any set-off, if the suit be
valued for more than ` 100 or pursue other proceedings to enforce the rights arising
from any contract.
(iii) 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.
(iv) Third party can sue the firm: In case of an unregistered firm, an action can be
brought against the firm by a third party.
(c) In the present case, the total share capital of Popular Products Ltd. is ` 20 crores
comprised of 12 Lakh equity shares and 8 Lakhs preference shares.
Delight Products Ltd., Happy Products Ltd. and Cheerful Products Ltd together hold
8,50,000 shares (2,50,000+3,50,000+2,50,000) in Popular Products Ltd. Jovial Ltd. is the
holding company of all above three companies. So, Jovial Ltd. along with its subsidiaries
hold 8,50,000 shares in Popular Products Ltd. which amounts to less than one-half of its
total share capital. Hence, Jovial Ltd. by virtue of share holding is not a holding company
of Popular Products Ltd.
Secondly, it is given that Jovial Ltd. controls the composition of directors of Popular
Products Ltd., hence, Jovial Ltd. is a holding company of Popular Products Ltd. and not a
subsidiary company. [Section 2(87) of the Companies Act, 2013]

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SECTION A – BUSINESS LAWS

Question No. 1 is compulsory.
Attempt any four questions from the remaining five questions.

Question 1
(a) X found a wallet in a restaurant. He enquired of all the customers present there but the
true owner could not be found. He handed over the same to the manager of the
restaurant to keep till the true owner is found. After a week he went back to the
restaurant to enquire about the wallet. The manager refused to return it back to X, saying
that it did not belong to him.
In the light of the Indian Contract Act, 1872, can X recover it from the Manager?
(4 Marks)
(b) Mr. Anil formed a One Person Company (OPC) on 16 th
April, 2018 for manufacturing
electric cars. The turnover of the OPC for the financial year ended 31st 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? (4 Marks)
(c) State the various essential elements involved in the sale of unascertained goods and its
appropriation as per the Sale of Goods Act, 1930. (4 Marks)
Answer
(a) Responsibility of finder of goods (Section 71 of the Indian Contract Act, 1872): A
person who finds goods belonging to another and takes them into his custody is subject
to same responsibility as if he were a bailee.
Thus, a finder of lost goods has:
(i) to take proper care of the property as man of ordinary prudence would take
(ii) no right to appropriate the goods and
(iii) to restore the goods if the owner is found.
In the light of the above provisions, the manager must return the wallet to X, since X is
entitled to retain the wallet found against everybody except the true owner.
(b) As per the provisions of Sub-Rule (7) of Rule 3 of the Companies (Incorporation) Rules,
2014, an OPC cannot convert voluntarily into any kind of company unless two years have
expired from the date of its incorporation, except threshold limit (paid up share capital) is
increased beyond fifty lakh rupees or its average annual turnover during the relevant
period exceeds two crore rupees.

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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 Rs. 2.25 Crores. Even though two years have
not expired from the date of its incorporation, since its average annual turnover during
the period starting from 16th April, 2018 to 31st March, 2019 has exceeded Rs. 2 Crores,
Mr. Anil can convert the OPC into a private limited company along with Sunil.
(c) Sale of unascertained goods and Appropriation (Section 23 of the Sale of Goods
Act, 1930): Appropriation of goods involves selection of goods with the intention of using
them in performance of the contract and with the mutual consent of the seller and the
buyer.
The essentials are:
(a) There is a contract for the sale of unascertained or future goods.
(b) The goods should conform to the description and quality stated in the contract.
(c) The goods must be in a deliverable state.
(d) The goods must be unconditionally appropriated to the contract either by delivery to
the buyer or his agent or the carrier.
(e) The appropriation must be made by:
(i) the seller with the assent of the buyer; or
(ii) the buyer with the assent of the seller.
(f) The assent may be express or implied.
(g) The assent may be given either before or after appropriation.
Question 2
(a) Define consideration. What are the legal rules regarding consideration under the Indian
Contract Act, 1872? (7 Marks)
(b) Discuss the conditions under which LLP will be liable and not liable for the acts of the
partner. (5 Marks)
Answer
(a) Consideration [Section 2(d) of the Indian Contract Act, 1872]: When at the desire of
the promisor, the promisee or any other person has done or abstained from doing, or
does or abstains from doing or promises to do or abstain from doing something, such an
act or abstinence or promise is called consideration for the promise.
Legal Rules Regarding Consideration
(i) Consideration must move at the desire of the promisor: Consideration must be
offered by the promisee or the third party at the desire or request of the promisor.
This implies “return” element of consideration.

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(ii) Consideration may move from promisee or any other person: In India,
consideration may proceed from the promisee or any other person who is not a
party to the contract. In other words, there can be a stranger to a consideration but
not stranger to a contract.
(iii) Executed and executory consideration: A consideration which consists in the
performance of an act is said to be executed. When it consists in a promise, it is
said to be executory. The promise by one party may be the consideration for an act
by some other party, and vice versa.
(iv) Consideration may be past, present or future: It is a general principle that
consideration is given and accepted in exchange for the promise. The
consideration, if past, may be the motive but cannot be the real consideration of a
subsequent promise. But in the event of the services being rendered in the past at
the request or the desire of the promisor, the subsequent promise is regarded as an
admission that the past consideration was not gratuitous.
(v) Consideration need not be adequate: Consideration need not to be of any
particular value. It need not be approximately of equal value with the promise for
which it is exchanged but it must be something which the law would regard as
having some value.
(vi) Performance of what one is legally bound to perform: The performance of an
act by a person who is legally bound to perform the same cannot be consideration
for a contract. Hence, a promise to pay money to a witness is void, for it is without
consideration. Hence such a contract is void for want of consideration.
But where a person promises to do more that he is legally bound to do, such a
promise provided it is not opposed to public policy, is a good consideration. It
should not be vague or uncertain.
(vii) Consideration must be real and not illusory: Consideration must be real and
must not be illusory. It must be something to which the law attaches some value. If
it is legally or physically impossible it is not considered valid consideration.
(viii) Consideration must not be unlawful, immoral, or opposed to public policy.
Only presence of consideration is not sufficient it must be lawful. Anything which is
immoral or opposed to public policy also cannot be valued as valid consideration.
(b) Conditions under which LLP will be liable [Section 27(2) of the LLP Act, 2008]
The LLP is liable if a partner of a LLP is liable to any person as a result of a wrongful act
or omission on his part in the course of the business of the LLP or with its authority.
Conditions under which LLP will not be liable [Section 27(1) of the LLP Act, 2008]
A LLP is not bound by anything done by a partner in dealing with a person if—
(a) the partner in fact has no authority to act for the LLP in doing a particular act; and

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(b) the person knows that he has no authority or does not know or believe him to be a
partner of the LLP.
Question 3
(a) (i) When the continuing guarantee can be revoked under the Indian Partnership Act, 1932?
(2 Marks)
OR
(ii) What do you mean by Goodwill as per the provisions of Indian Partnership
Act,1932? (2 Marks)
(b) With reference to the provisions of Indian partnership Act, 1932 explain the various
effects of insolvency of a partner. (4 Marks)
(c) Mr. Sonumal a wealthy individual provided a loan of ` 80,000 to Mr. Datumal on
26.02.2019. The borrower Mr. Datumal asked for a further loan of ` 1,50,000.
Mr. Sonumal agreed but provided the loan in parts at different dates. He provided
` 1,00,000 on 28.02.2019 and remaining ` 50,000 on 03.03.2019.
On 10.03.2019 Mr. Datumal while paying off part ` 75,000 to Mr. Sonumal insisted that
the lender should adjusted ` 50,000 towards the loan taken on·03.03.2019 and balance
as against the loan on 26.02.2019.
Mr. Sonumal objected to this arrangement and asked the borrower to adjust in the order
of date of borrowal of funds.
Now you decide:
(i) Whether the contention of Mr. Datumal correct or otherwise as per the provisions of
the Indian Contract Act, 1872?
(ii) What would be the answer in case the borrower does not insist on such order of
adjustment of repayment?
(iii) What would the mode of adjustment/appropriation of such part payment in case
neither Mr. Sonumal nor Mr. Datumal insist any order of adjustment on their part?
(6 Marks)
Answer
(a) (i) Revocation of continuing guarantee (Section 38 of the Indian Partnership Act,
1932)
According to section 38, a continuing guarantee given to a firm or to 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. Such change may occur by the death, or retirement of a
partner, or by introduction of a new partner.

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OR
(ii) Goodwill: The term “Goodwill” has not been defined under the Indian Partnership
Act, 1932. Section 14 of the Act lays down that goodwill of a business is to be
regarded as a property of the firm.
Goodwill may be defined as the value of the reputation of a business house in
respect of profits expected in future over and above the normal level of profits
earned by undertaking belonging to the same class of business.
(b) Effects of insolvency of a partner (Section 34 of the Indian Partnership Act, 1932):
(i) The insolvent partner cannot be continued as a partner.
(ii) He will be ceased to be a partner from the very date on which the order of
adjudication is made.
(iii) The estate of the insolvent partner is not liable for the acts of the firm done after the
date of order of adjudication.
(iv) The firm is also not liable for any act of the insolvent partner after the date of the
order of adjudication,
(v) Ordinarily, the insolvency of a partner results in dissolution of a firm; but the
partners are competent to agree among themselves that the adjudication of a
partner as an insolvent will not give rise to dissolution of the firm.
(c) Appropriation of Payments: In case where a debtor owes several debts to the same
creditor and makes payment which is not sufficient to discharge all the debts, the
payment shall be appropriated (i.e. adjusted against the debts) as per the provisions of
Section 59 to 61 of the Indian Contract Act, 1872.
(i) As per the provisions of 59 of the Act, where a debtor owing several distinct debts
to one person, makes a payment to him either with express intimation or under
circumstances implying that the payment is to be applied to the discharge of some
particular debt, the payment, if accepted, must be applied accordingly.
Therefore, the contention of Mr. Datumal is correct and he can specify the manner
of appropriation of repayment of debt.
(ii) As per the provisions of 60 of the Act, where the debtor has omitted to intimate and
there are no other circumstances indicating to which debt the payment is to be
applied, the creditor may apply it at his discretion to any lawful debt actually due
and payable to him from the debtor, where its recovery is or is not barred by the law
in force for the time being as to the limitation of suits.

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Hence in case where Mr. Datumal fails to specify the manner of appropriation of
debt on part repayment, Mr. Sonumal the creditor, can appropriate the payment as
per his choice.
(iii) As per the provisions of 61 of the Act, where neither party makes any appropriation,
the payment shall be applied in discharge of the debts in order of time, whether they
are or are not barred by the law in force for the time being as to the limitation of
suits. If the debts are of equal standing, the payments shall be applied in discharge
of each proportionately.
Hence in case where neither Mr. Datumal nor Mr. Sonumal specifies the manner of
appropriation of debt on part repayment, the appropriation can be made in
proportion of debts.
Question 4
(a) What are the rights of an unpaid seller against goods under the Sale of Goods Act,
1930? (6 Marks)
(b) Master X was introduced to the benefits of partnership of M/s ABC & 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 & Co., filed a suit
against M/s ABC & Co. for recovery of the debt due.
In the light of the Indian Partnership Act, 1932, explain:
(i) To what extent X will be liable if he failed to give public notice after attaining
majority?
(ii) Can Mr. L recover his debt from X? (6 Marks)
Answer
(a) Rights of an unpaid seller against the goods: As per the provisions of Section 46 of
the Sale of Goods Act, 1930, notwithstanding that the property in the goods may have
passed to the buyer, the unpaid seller of goods, as such, has by implication of law-
(a) a lien on the goods for the price while he is in possession of them;
(b) in case of the insolvency of the buyer, a right of stopping the goods in transit after
he has parted with the possession of them;
(c) a right of re-sale as limited by this Act. [Sub-section (1)]
Where the property in goods has not passed to the buyer, the unpaid seller has, in
addition to his other remedies, a right of withholding delivery similar to and co-extensive
with his rights of lien and stoppage in transit where the property has passed to the buyer.
[Sub-section (2)]

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These rights can be exercised by the unpaid seller in the following circumstances:
(i) Right of lien (Section 47): According to sub-section (1), the unpaid seller of goods
who is in possession of them is entitled to retain possession of them until payment
or tender of the price in the following cases, namely:-
(a) where the goods have been sold without any stipulation as to credit;
(b) where the goods have been sold on credit, but the term of credit has expired;
(c) where the buyer becomes insolvent.
(ii) Right of stoppage in transit (Section 50): When the buyer of goods becomes
insolvent, the unpaid seller who has parted with the possession of the goods has
the right of stopping them in transit, that is to say, he may resume possession of the
goods as long as they are in the course of transit, and may retain them until paid or
tendered price of the goods.
(iii) Right to re-sell the goods (Section 54): The unpaid seller can exercise the right to
re-sell the goods under the following conditions:
1. Where the goods are of a perishable nature
2. Where he gives notice to the buyer of his intention to re-sell the goods
3. Where an unpaid seller who has exercised his right of lien or stoppage in
transit resells the goods
4. A re-sale by the seller where a right of re-sale is expressly reserved in a
contract of sale
5. Where the property in goods has not passed to the buyer
(b) As per the provisions of Section 30(5) of the Indian Partnership Act, 1932, at any time
within six months of his attaining majority, or of his obtaining knowledge that he had been
admitted to the benefits of partnership, whichever date is later, such person may give
public notice that he has elected to become or that he has elected not to become a
partner in the firm, and such notice shall determine his position as regards the firm.
However, 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 by his failure to give the public notice within specified
time, his rights and liabilities as given in Section 30(7) are as follows:
(A) He becomes personally liable to third parties for all acts of the firm done since he
was admitted to the benefits of partnership.
(B) His share in the property and the profits of the firm remains the same to which he
was entitled as a minor.

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(i) In the instant case, since, X has failed to give a public notice, he shall become
a partner in the M/s ABC & Co. and becomes personally liable to Mr. L, a third
party.
(ii) In the light of the provisions of Section 30(7) read with Section 30(5) of the
Indian Partnership Act, 1932, since X has failed to give public notice that he
has not elected to not to become a partner within six months, he will be
deemed to be a partner after the period of the above six months and therefore,
Mr. L can recover his debt from him also in the same way as he can recover
from any other partner.
Question 5
(a) 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 will be
provided to her by the shopkeeper before she agreed upon such purchase.
The shopkeeper showed her a bowl of rice as 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 but 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 rice was not as per requirement of the dish.
Now Mrs. Geeta wants to file a suit of fraud against the seller alleging him of selling mix
of good and cheap quality rice. Will she be successful?
Explain the basic law on sale by sample under Sale of Goods Act 1930?
Decide the fate of the case and options open to the buyer for grievance redressal as per
the provisions of Sale of Goods Act 1930?
What would be your answer in case Mrs. Geeta specified her exact requirement as to
length of rice? (6 Marks)
(b) "The Memorandum of Association is a charter of a company". Discuss. Also explain in
brief the contents of Memorandum of Association. (6 Marks)
Answer
(a) (i) As per the provisions of Sub-Section (2) of Section 17 of the Sale of Goods Act,
1930, in a contract of sale by sample, there is an implied condition that:
(a) the bulk shall correspond with the sample in quality;
(b) the buyer shall have a reasonable opportunity of comparing the bulk with the
sample.

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In the instant case, in the light of the provisions of Sub-Clause (b) of Sub-Section
(2) of Section 17 of the Act, Mrs. Geeta will not be successful as she casually
examined the sample of rice (which exactly corresponded to the entire lot) without
noticing the fact that even though the sample was that of Basmati Rice but it
contained a mix of long and short grains.
(ii) Sale by Sample: (Section 17 of the Sale of Goods Act, 1930): As per the
provisions of Sub-Section (1) of section 17 of the Sale of Goods Act, 1930, a
contract of sale is a contract for sale by sample where there is a term in the
contract, express or implied, to that effect.
As per the provisions of Sub-Section (2) of section 17 of the Sale of Goods Act,
1930, in a contract of sale by sample, there is an implied condition that:
(a) that the bulk shall correspond with the sample in quality;
(b) that the buyer shall have a reasonable opportunity of comparing the bulk with
the sample.
(c) that the goods shall be free from any defect, rendering them unmerchantable,
which would not be apparent on reasonable examination of the sample.
(iii) In the instant case, the buyer does not have any option available to him for
grievance redressal.
(iv) In case Mrs. Geeta specified her exact requirement as to length of rice, then there
is an implied condition that the goods shall correspond with the description. If it is
not so, the seller will be held liable.
(b) The Memorandum of Association of company is in fact 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.
Object of registering a memorandum of association:
• It contains the object for which the company is formed and therefore identifies the
possible scope of its operations beyond which its actions cannot go.
• It enables shareholders, creditors and all those who deal with company to know
what its powers are and what activities it can engage in.
A memorandum is a public document under Section 399 of the Companies Act,
2013. Consequently, every person entering into a contract with the company is
presumed to have the knowledge of the conditions contained therein.
• The shareholders must know the purposes for which his money can be used by the
company and what risks he is taking in making the investment.

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A company cannot depart from the provisions contained in the memorandum however
imperative may be the necessity for the departure. It cannot enter into a contract or
engage in any trade or business, which is beyond the power confessed on it by the
memorandum. If it does so, it would be ultra vires the company and void.
Contents of the memorandum: The memorandum of a company shall state—
(a) the name of the company (Name Clause) with the last word “Limited” in the case of
a public limited company, or the last words “Private Limited” in the case of a private
limited company. This clause is not applicable on the companies formed under
section 8 of the Act.
(b) the State in which the registered office of the company (Registered Office clause) is
to be situated;
(c) the objects for which the company is proposed to be incorporated and any matter
considered necessary in furtherance thereof (Object clause);
(d) the liability of members of the company (Liability clause), whether limited or
unlimited
(e) the amount of authorized capital (Capital Clause) divided into share of fixed
amounts and the number of shares with the subscribers to the memorandum have
agreed to take, indicated opposite their names, which shall not be less than one
share. A company not having share capital need not have this clause.
(f) the desire of the subscribers to be formed into a company. The Memorandum shall
conclude with the association clause. Every subscriber to the Memorandum shall
take at least one share, and shall write against his name, the number of shares
taken by him.
Question 6
(a) Explain the term 'Coercion" and what are the effects of coercion under Indian Contract
Act, 1872. (5 Marks)
(b) "Dissolution of a firm is different from dissolution of Partnership". Discuss. (4 Marks)
(c) A, an assessee, had large income in the form of dividend and interest. In order to reduce
his tax liability, he formed four private limited company and transferred his investments to
them in exchange of their shares. The income earned by the companies was taken back
by him as pretended loan. Can A be regarded as separate from the private limited
company he formed? (3 Marks)
Answer
(a) Coercion (Section 15 of the Indian Contract Act, 1872): “Coercion’ is the committing,
or threatening to commit, any act forbidden by the Indian Penal Code or the unlawful
detaining, or threatening to detain any property, to the prejudice of any person whatever,
with the intention of causing any person to enter into an agreement.”

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Effects of coercion under section 19 of Indian Contract Act, 1872

(i) Contract induced by coercion is voidable at the option of the party whose consent
was so obtained.
(ii) As to the consequences of the rescission of voidable contract, the party rescinding
a void contract should, if he has received any benefit, thereunder from the other
party to the contract, restore such benefit so far as may be applicable, to the person
from whom it was received.
(iii) A person to whom money has been paid or anything delivered under coercion must
repay or return it.
(b) DISSOLUTION OF FIRM VS. DISSOLUTION OF PARTNERSHIP
S. BASIS OF DISSOLUTION OF DISSOLUTION OF PARTNERSHIP
NO. DIFFERENCE FIRM
1. Continuation of It involves It does not affect continuation of
business discontinuation of business. It involves only
business in reconstitution of the firm.
partnership.
2. Winding up It involves winding up It involves only reconstitution and
of the firm and requires only revaluation of assets
requires realization of and liabilities of the firm.
assets and
settlement of
liabilities.
3. Order of court A firm may be Dissolution of partnership is not
dissolved by the ordered by the court.
order of the court.
4. Scope It necessarily It may or may not involve dissolution
involves dissolution of firm.
of partnership.
5. Final closure of It involves final It does not involve final closure of the
books closure of books of books.
the firm.
(c) The House of Lords in Salomon Vs Salomon & Co. Ltd. laid down that a company is a
person distinct and separate from its members, and therefore, has an independent
separate legal existence from its members who have constituted the company. But under
certain circumstances the separate entity of the company may be ignored by the courts.
When that happens, the courts ignore the corporate entity of the company and look
behind the corporate façade and hold the persons in control of the management of its

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affairs liable for the acts of the company. Where a company is incorporated and formed
by certain persons only for the purpose of evading taxes, the courts have discretion to
disregard the corporate entity and tax the income in the hands of the appropriate
assesse.
In Dinshaw Maneckjee Petit case it was held that the company was not a genuine
company at all but merely the assessee himself disguised that 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 of his income by way
of dividend and interest. This income was transferred back to assessee by way of loan.
The court decided that the private companies were a sham and the corporate veil was
lifted to decide the real owner of the income.
In the instant case, the four private limited companies were formed by A, the assesse,
purely and simply as a means of avoiding tax and the companies were nothing more than
the façade of the assesse himself. Therefore, the whole idea of Mr. A was simply to split
his income into four parts with a view to evade tax. No other business was done by the
company.
Hence, A cannot be regarded as separate from the private limited companies he formed.

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SECTION A – BUSINESS LAW

Question No. 1 is compulsory.
Attempt any four questions from the remaining five questions.

Question 1
(a) Mr. X a businessman has been fighting a long drawn litigation with Mr. Y an industrialist.
To support his legal campaign he enlists the services of Mr. C a Judicial officer stating
that the amount of `10 lakhs would be paid to him if he does not take up the brief of
Mr. Y.
Mr. C agrees but, at the end of the litigation Mr. X refuses to pay to Mr. C. Decide
whether Mr. C can recover the amount promised by Mr. X under the provisions of the
Indian Contract Act, 1872? (4 Marks)
(b) 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 stands 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? (4 Marks)
(c) Write any four exceptions to the doctrine of Caveat Emptor as per the Sale of Goods Act,
1930. (4 Marks)
Answer
(a) The problem as asked in the question is based on Section 10 of the Indian Contract Act,
1872. This Section says that all agreements are contracts if they are made by the free
consent of the parties competent to contract, for a lawful consideration and with a lawful
object and are not expressly declared to be void. Further, Section 23 also states that
every agreement of which the object is unlawful is void.
Accordingly, one of the essential elements of a valid contract in the light of the said
provision is that the agreement entered into must not be which the law declares to be
either illegal or void. An illegal agreement is an agreement expressly or impliedly
prohibited by law. A void agreement is one without any legal effects.
The given instance is a case of interference with the course of justice and results as
opposed to public policy. This can also be called as an agreement in restraint of legal
proceedings. This agreement restricts one’s right to enforce his legal rights. Such an
agreement has been expressly declared to be void under section 28 of the Indian

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Contract Act, 1872. Hence, Mr. C in the given case cannot recover the amount of ` 10
lakh promised by Mr. X because it is a void agreement and cannot be enforced by law.
(b) As per Section 2(6) of the Companies Act, 2013, an 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.
The term “significant influence” means control of at least 20% of total share capital, or
control of business decisions under an agreement.
The term “Total Share Capital”, means the aggregate of the -
(a) Paid-up equity share capital; and
(b) Convertible preference share capital.
In the given case, as ABC Ltd. has allotted equity shares with voting rights to XYZ
Limited of ` 15 crore, which is less than requisite control of 20% of total share capital
(i.e. 100 crore) to have a significant influence of XYZ Ltd. Since the said requirement is
not complied, therefore ABC Ltd. and XYZ Ltd. are not associate companies as per the
Companies Act, 2013. Holding/allotment of non-convertible debentures has no relevance
for ascertaining significant influence.
(c) The doctrine of Caveat Emptor given under the Sale of Goods Act, 1930 is subject to the
following exceptions:
1. Fitness as to quality or use: Where the buyer makes known to the seller the
particular purpose for which the goods are required, 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 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. 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 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.
[Section 16(2)].
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 in case the goods

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do not correspond with both the sample and description or either of the condition
[Section 15].
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 2
(a) Define Misrepresentation and Fraud. Explain the difference between Fraud and
Misrepresentation as per the Indian Contract Act, 1872. (7 Marks)
(b) State the circumstances under which LLP may be wound up by the Tribunal under the
Limited Liability Partnership Act, 2008. (5 Marks)
Answer
(a) Definition of Fraud under Section 17 of the Indian Contract Act, 1872:
'Fraud' means and includes any of the following acts committed by a party to a contract,
or with his connivance, or by his agent, with an intent to deceive another party thereto or
his agent, or to induce him to enter into the contract:
(1) the suggestion, as a fact, of that which is not true, by one who does not believe it to
be true;
(2) the active concealment of a fact by one having knowledge or belief of the fact ;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specially declares to be fraudulent.
As per Section 18 of the Indian Contract Act, 1872, misrepresentation means and
includes-
(1) the positive assertion, in a manner not warranted by the information of the person
making it, of that which is not true, though he believes it to be true;
(2) any breach of duty which, without an intent to deceive, gains an advantage to the
person committing it, or anyone claiming under him; by misleading another to his
prejudice or to the prejudice of anyone claiming under him;
(3) causing, however, innocently, a party to an agreement to make a mistake as to the
substance of the thing which is the subject of the agreement.

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Distinction between fraud and misrepresentation:

Basis of difference Fraud Misrepresentation
Intention To deceive the other There is no such intention to
party by hiding the truth. deceive the other party.
Knowledge of truth The person making the The person making the
suggestion believes that statement believes it to be true,
the statement as untrue. although it is not true.
Rescission of the The injured party can The injured party is entitled to
contract and claim repudiate the contract repudiate the contract or sue
for damages and claim damages. for restitution but cannot claim
the damages.
Means to discover The party using the Party can always plead that the
the truth fraudulent act cannot injured party had the means to
secure or protect himself discover the truth.
by saying that the injured
party had means to
discover the truth.
(b) Section 64 of the Limited Liability Partnership Act, 2008 states circumstances in which
limited liability partnership (LLP) may be wound up by Tribunal.
(a) if the limited liability partnership decides that limited liability partnership be wound
up by the Tribunal;
(b) if, for a period of more than six months, the number of partners of the limited liability
partnership is reduced below two;
(c) if the LLP is unable to pay its debts;
(d) if the limited liability partnership has acted against the interests of the sovereig nty
and integrity of India, the security of the State or public order;
(e) if the limited liability partnership has made a default in filing with the Registrar the
Statement of Account and Solvency or annual return for any five consecutive
financial years; or
(f) if the Tribunal is of the opinion that it is just and equitable that the limited liability
partnership be wound up.
Question 3
(a) (i) What do you mean by 'Partnership at will' as per the Indian Partnership Act, 1932?
(2 Marks)
OR

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(ii) Comment on 'the right to expel partner must be exercised in good faith' under the
Indian Partnership Act, 1932. (2 Marks)
(b) Referring to the Provisions of the Indian Partnership Act, 1932, answer the following:
(i) What are the consequences of Non-Registration of Partnership firm?
(ii) What are the rights which won't be affected by Non-Registration of Partnership firm?
(4 Marks)
(c) In light of provisions of the Indian Contract Act, 1872 answer the following:
(i) Mr. S and Mr. R made contract wherein Mr. S agreed to deliver paper cup
manufacture machine to Mr. R and to receive payment on delivery. On the delivery
date, Mr. R didn't pay the agreed price. Decide whether Mr. S is bound to fulfil his
promise at the time of delivery?
(ii) Mr. Y given loan to Mr. G of INR 30,00,000. Mr. G defaulted the loan on due date
and debt became time barred. After the time barred debt, Mr. G agreed to settle the
full amount to Mr. Y. Whether acceptance of time barred debt Contract is
enforceable in law?
(iii) A & B entered into a contract to supply unique item, alternate of which is not
available in the market. A refused to supply the agreed unique item to B. What
directions could be given by the court for breach of such contract? (6 Marks)
Answer
(a) (i) Partnership at will under the Partnership Act, 1932
According to Section 7 of the Act, partnership at will is a partnership 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.
Where a partnership entered into for a fixed term is continued after the expiry of
such term, it is to be treated as having become a partnership at will.
OR
(ii) 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:
(i) the power of expulsion must have existed in a contract between the partners;
(ii) the power has been exercised by a majority of the partners; and
(iii) it has been exercised in good faith.
If all these conditions are not present, the expulsion is not deemed to be in bona fide
interest of the business of the firm.

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(b) (i) Consequences of Non-registration of partnership firm:

Under Section 69 of the Indian Partnership Act, 1932 non-registration of partnership
gives rise to a number of disabilities. Though registration of firms is not compulsory,
yet the consequences or disabilities of non-registration have a persuasive pressure
for their registration. Following are the consequences:
(a) No suit in a civil court by firm or other co-partners against third party: The
firm or any other person on its behalf cannot bring an action against the third
party for breach of contract entered into by the firm.
(b) No relief to partners for set-off of claim: If an action is brought against the
firm by a third party, then neither the firm nor the partner can claim any set-off, if the
suit be valued for more than ` 100 or pursue other proceedings to enforce the rights
arising from any contract.
(c) 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.
(d) Third-party can sue the firm: In case of an unregistered firm, an action can
be brought against the firm by a third party.
(ii) Non-registration of a firm does not, however, affect the following rights:
1. The right of third parties to sue the firm or any partner.
2. The right of partners to sue for the dissolution of the firm or for the settlement of the
accounts of a dissolved firm, or for realization of the property of a dissolved
firm.
3. The power of an Official Assignees, Receiver of 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 suit does not exceed ` 100 in
value.
(c) (i) As per Section 51 of the Indian Contract Act, 1872, when a contract consists of
reciprocal promises to be simultaneously performed, no promisor needs to perform his
promise unless the promisee is ready and willing to perform his reciprocal promise.
Such promises constitute concurrent conditions and the performance of one of the
promise is conditional on the performance of the other. If one of the promises is not
performed, the other too need not be performed.
Referring to the above provisions, in the given case, Mr. S is not bound to deliver
goods to Mr. R since payment was not made by him at the time of delivery of goods.
(ii) Promise to pay time-barred debts - Section 25 (3): Where there is an agreement,
made in writing and signed by the debtor or by his agent, to pay wholly or in part a

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time barred debt, the agreement is valid and binding even though there is no
consideration.
In the given case, the loan given by Mr. Y to Mr. G has become time barred.
Thereafter, Mr. G agreed to make payment of full amount to Mr. Y.
Referring to above provisions of the Indian Contract Act, 1872 contract entered
between parties post time barred debt is valid so, Mr. G is bound to pay the agreed
amount to Mr. Y provided the above mentioned conditions of section 25 (3) are
fulfilled.
(iii) Where there is a breach of contract for supply of a unique item, mere monetary
damages may not be an adequate remedy for the other party. In such a case , the
court may give order for specific performance and direct the party in breach to ca rry
out his promise according to the terms of contract. Here, in this case, the court may
direct A to supply the item to B because the refusal to supply the agreed unique
item cannot be compensated through money.
Question 4
(a) Explain any six circumstances in detail in which non-owner can convey better title to
Bona fide purchaser of goods for value as per the Sale of Goods Act, 1930. (6 Marks)
(b) P, Q, R and S are the partners in M/S PQRS & Co., a partnership firm which deals in
trading of Washing Machines of various brands.
Due to the conflict of views between partners, P & Q decided to leave the partnership
firm and started competitive business on 31st July, 2019, in the name of M/S PQ & Co.
Meanwhile, R & S have continued using the property in the name of M/S PQRS & Co. in
which P & Q also has a share.
Based on the above facts, explain in detail the rights of outgoing partners as per the
Indian Partnership Act, 1932 and comment on the following:
(i) Rights of P & Q to start a competitive business.
(ii) Rights of P & Q regarding their share in property of M/S PQRS & Co. (6 Marks)
Answer
(a) In the following cases, a non-owner can convey better title to the bona fide purchaser of
goods for value.
(1) Sale by a Mercantile Agent: A sale made by a mercantile agent of the goods for
document of title to goods would pass a good title to the buyer in the following
circumstances; namely;
(a) If he was in possession of the goods or documents with the consent of the
owner;

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(b) If the sale was made by him when acting in the ordinary course of
business as a mercantile agent; and
(c) If the buyer had acted in good faith and has at the time of the contract of sale, no
notice of the fact that the seller had no authority to sell (Proviso to Section 27
of the Sale of Goods Act, 1930).
(2) Sale by one of the joint owners (Section 28): If one of several joint owners of goods
has the sole possession of them by permission of the co-owners, the property in the goods
is transferred to any person who buys them of such joint owner in good faith and has not
at the time of the contract of sale notice that the seller has no authority to sell.
(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, misrepresentation
or undue influence provided that the contract had not been rescinded until the time
of the sale (Section 29).
(4) Sale by one who has already sold the goods but continues in possession
thereof: If a person has sold goods but continues to be in possession of 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 the property in the goods had passed to the
first buyer earlier. A pledge or other disposition of the goods or documents of title by
the seller in possession are equally valid [Section 30(1)].
(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 or other right of the
original seller in respect of the goods, he would get a good title to them [Section
30(2)].
However, a person in possession of goods under a ‘hire-purchase’ agreement which
gives him only an option to buy is not covered within the section unless it amounts
to a sale.
(6) Effect of Estoppel: Where the owner is estopped by the conduct from denying the
seller’s authority to sell, the transferee will get a good title as against the true
owner. But before a good title by estoppel can be made, it must be shown that the
true owner had actively suffered or held out the other person in question as the true
owner or as a person authorized to sell the goods.
(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 [Section 54 (3)].

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(8) Sale under the provisions of other Acts:

(i) Sale by an Official Receiver or Liquidator of the Company will give the
purchaser a valid title.
(ii) Purchase of goods from a finder of goods will get a valid title under
circumstances [Section 169 of the Indian Contract Act, 1872]
(iii) A sale by pawnee can convey a good title to the buyer [Section 176 of the
Indian Contract Act, 1872]
(b) (i) Rights of outgoing partner to carry on competing business (Section 36 of the
Indian Partnership Act, 1932)
(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,-
(a) use the firm name,
(b) represent himself as carrying on the business of the firm or
(c) solicit the custom of persons who were dealing with the firm before he
ceased to be a partner.
(2) Although this provision has imposed some restrictions on an outgoing partner,
it effectively permits him to carry on a business competing with that of the firm.
However, the partner may agree with his partners that on his ceasing to be so,
he will not carry on a business similar to that of the firm within a specified
period or within specified local limits. Such an agreement will not be in restraint
of trade if the restraint is reasonable [Section 36 (2)]
From the above, we can infer that P & Q can start competitive business in the
name of M/S PQ & Co after following above conditions in the absence of any
agreement.
(ii) Right of outgoing partner in certain cases to share subsequent profits
(Section 37 of the Indian Partnership Act, 1932)
According to Section 37, where any member of a firm has died or otherwise ceased
to be partner, and the surviving or 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 or 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 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 f irm
or to interest at the rate of six per cent per annum on the amount of his share in the
property of the firm.

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In the instant case, P & Q can share in property of M/s PQRS & Co. keeping in view
of the above provisions.
Question 5
(a) Ms. R owns a Two Wheeler which she handed over to her friend Ms. K on 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?
(i) Examine with reference to the provisions of the Sale of Goods Act, 1930, what
recourse is available to Ms. R?
(ii) 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? (6 Marks)
(b) What are the significant points of Section 8 Company which are not applicable for
other companies? Briefly explain with reference to provisions of the Companies Act,
2013. (6 Marks)
Answer
(a) As per the provisions of Section 24 of the Sale of Goods Act, 1930, when goods are
delivered to the buyer on approval or “on sale or return" or other similar terms, the
property therein passes to the buyer-
(a) when the buyer signifies his approval or acceptance to the seller or does any other
act adopting the transaction;
(b) if he does not signify his approval or acceptance to the seller but retains the goods
without giving notice of rejection, then, if a time has been fixed for the return of the
goods, on the expiration of such time, and, if no time has been fixed, on the
expiration of a reasonable time; or
(c) he does something to the good which is equivalent to accepting the goods e.g. he
pledges or sells the goods.
Referring to the above provisions, we can analyse the situation given in the question.
(i) In the instant case, Ms. K, who had taken delivery of the two wheeler on Sale or
Return basis pledged the two wheeler to Mr. A, has attracted the third condition that
she has done something to the good which is equivalent to accepting the goods e.g.
she pledges or sells the goods. Therefore, the property therein (Two wheeler)
passes to Mr. A. Now in this situation, Ms. R cannot claim back her two wheeler
from Mr. A, but she can claim the price of the two wheeler from Ms. K only.
(ii) It may be noted that where the goods have been delivered by a person on “sa le or
return” on the terms that the goods were to remain the property of the seller till they

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are paid for, the property therein does not pass to the buyer until the terms are
complied with, i.e., price is paid for.
Hence, in this case, it is held that at the time of pledge, the ownership was not
transferred to Ms. K. Thus, the pledge was not valid and Ms. R could recover the
two wheeler from Mr. A.
(b) Section 8 Company- Significant points
Formed for the promotion of commerce, art, science, religion, charity, protection of
the environment, sports, etc.
Requirement of minimum share capital does not apply.
Uses its profits for the promotion of the objective for which formed.
Does not declare dividend to members.
Operates under a special licence from the Central Government.
Need not use the word Ltd./ Pvt. Ltd. in its name and adopt a more suitable name
such as club, chambers of commerce etc.
Licence revoked if conditions contravened.
On revocation, the Central Government may direct it to
– Converts its status and change its name
– Wind – up
– Amalgamate with another company having similar object.
Can call its general meeting by giving a clear 14 days notice instead of 21 days.
Requirement of minimum number of directors, independent directors etc. does not
apply.
Need not constitute Nomination and Remuneration Committee and Shareholders
Relationship Committee.
A partnership firm can be a member of Section 8 company.
Question 6
(a) Enumerate the differences between 'Wagering Agreements' and 'Contract of Insurance'
with reference to provision of the Indian Contract Act, 1872. (5 Marks)
(b) Explain in detail the circumstances which lead to liability of firm for misappl ication by
partners as per provisions of the Indian Partnership Act, 1932. (4 Marks)
(c) Mike Limited company incorporated in India having Liaison office at Singapore. Explain in
detail meaning of Foreign Company and analysis., on whether Mike Limited would be

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called as Foreign Company as it established a Liaison office at Singapore as per the

provisions of the Companies Act, 2013? (3 Marks)
Answer
(a) Distinction between Wagering Agreement and Contract of Insurance
Basis Wagering Agreement Contract of Insurance
1. Meaning It is a promise to pay It is a contract to indemnify
money or money’s worth the loss.
on the happening or non
happening of an uncertain
event.
2. Consideration There is no consideration The crux of the insurance
between the two parties. contract is the mutual
There is just gambling for consideration (premium and
money. compensation amount).
3. Insurable Interest There is no property in Insured party has an
case of wagering insurable interest in the life
agreement. or property sought to be
There is betting on other’s insured.
life and properties.
4. Contract of Loser has to pay the fixed Except for life insurance,
Indemnity amount on the happening the contract of insurance
of an uncertain event. indemnifies the insured
person against loss
5. Enforceability It is void and It is valid and enforceable
unenforceable agreement.
6. Premium No such logical Calculation of premium is
calculations are required based on scientific and
in case of wagering actuarial calculation of risks.
agreement.
7. Public Welfare They have been regarded They are beneficial to the
as against the public society.
welfare.
(b) Liability of Firm for Misapplication by Partners (Section 27 of Indian Partnership
Act, 1932): Where-
(a) a partner acting within his apparent authority receives money or property from a
third party and misapplies it, or

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(b) a firm in the course of its business receives money or property from a third party,
and the money or property is misapplied by any of the partners while it is in the
custody of the firm, the firm is liable to make good the loss.
Analysis of section 27:
It may be observed that the workings of the two clauses of Section 27 are designed to
bring out clearly an important point of distinction between the two categories of cases of
misapplication of money by partners.
Clause (a) 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 or property. For this provision to be attracted, it is not necessary
that the money should have actually come into the custody of the firm.
On the other hand, the provision of clause (b) 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 the cases.
(c) Foreign Company [Section 2(42) of the Companies Act, 2013]: It means any company
or body corporate incorporated outside India which—
(i) has a place of business in India whether by itself or through an agent, physically or
through electronic mode; and
(ii) conducts any business activity in India in any other manner.
Since Mike Limited is a company incorporated in India, hence, it cannot be called as a
foreign company. Even though, Liaison was officially established at Singapore, it would
not be called as a foreign company as per the provisions of the Companies Act, 2013.

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SECTION A – BUSINESS LAWS

Question No. 1 is compulsory.
Attempt any four questions from the remaining five questions.

Question 1
(a) Mr. S aged 58 years was employed in a Government Department. He was going to retire
after two years. Mr. D made a proposal to Mr. S to apply for voluntary retirement from
his post so that Mr. D can be appointed in his place. Mr. D offered a sum of `10 Lakhs as
consideration to Mr. S in order to induce him to retire.
Mr. S refused at first instance but when he evaluated the amount offered as
consideration is just double of his cumulative remuneration to be received during the
tenure of two years of employment, he agreed to receive the consideration and accepted
the above agreement to receive money to retire from his office.
Whether the above agreement is valid? Explain with reference to provision of Indian
Contract Act, 1872. (4 Marks)
(b) 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 20
(Including 10 joint holders holding shares jointly in the name of father and son)
The Board of directors of the company propose to convert it into a private company.
Advice whether reduction in the number of members is necessary for conversion.
(4 Marks)
(c) What are the rules which regulate the Sale by Auction under the Sale of Goods Act,
1930? (4 Marks)
Answer
(a) Section 10 of the Indian Contract Act, 1872 provides for the legality of consideration and
objects thereto. Section 23 of the said Act also states that every agreement of which the
object or consideration is unlawful is void.

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The given problem talks about entering into an agreement for traffic relating to public
office, which is opposed to public policy. Public policy requires that there should be no
money consideration for the appointment to an office in which the public is interested.
Such consideration paid, being opposed to public policy, is unlawful.
In the given case, Mr. S, who was going to be retired after two years was proposed by
Mr. D, to apply for voluntary retirement from his post, in order that he can be appointed in
his place. In lieu of that Mr. D offered Mr. S a sum of ` 10 lakh as consideration. Mr. S
refused initially but later accepted the said offer to receive money to retire from his office.
Here, Mr. S’s promise of sale for Mr. D, an employment in the public services is the
consideration for Mr. D’s promise to pay `10 lakh. Therefore, in terms of the above
provisions of the Indian Contract Act, the said agreement is not valid. It is void, as the
consideration being opposed to public policy, is unlawful.
(b) In the given case, ABC Limited was having 245 members in the company. The Board of
Directors of said company proposes to convert it into private company. In lines with
Section 2 (68) of the Companies Act, 2013, a private company by its Articles, limits the
number of its members to 200.
Provided that, where two or more persons hold one or more shares in a company jointly,
they shall, for the purposes of this clause, be treated as a single member.
It is further provided that, following persons shall not be included in the number of
members-
(i) Persons who are in the employment of the company; and
(ii) Persons, who, having been formerly in the employment of the company, were
members of the company while in that employment and have continued to be
members after the employment ceased.
As per the facts, ABC Limited has members constituting of Directors & their relatives,
employees, Ex-employees and others including 10 joint holders. In line with the
requirement for being a private company, following shall be restricted to be as members
i.e., Directors & their relatives & joint holders holding shares jointly constituting 200
members (190+10).
Accordingly, ABC Limited when converted to private company shall not be required to
reduce the number of members as the number of members as per requirement of a
private company, is fulfilled that is of maximum 200 members.
(c) Rules of Auction sale: Section 64 of the Sale of Goods Act, 1930 provides following
rules to regulate the sale by auction:
(i) Where goods are sold in lots: Where goods are put up for sale in lots, each lot is
prima facie deemed to be subject of a separate contract of sale.

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(ii) Completion of the contract of sale: The sale is complete when the auctioneer
announces its completion by the fall of hammer or in any other customary manner
and until such announcement is made, any bidder may retract from his bid.
(iii) 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.
(iv) 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 se ller 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.
(v) Reserved price: The reserved price is the lowest price at which a seller is willing to
sell an item. The auction sale may be notified to be subject to a reserve or upset
price; and
(vi) 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 2
(a) Define the term acceptance under the Indian Contract Act, 1872. Explain the legal rules
regarding a valid acceptance. (7 Marks)
(b) State the circumstances under which a LLP and its partners may face unlimited liability
under the Limited Liability Partnership Act, 2008. (5 Marks)
Answer
(a) Definition of Acceptance: In terms of Section 2(b) of the Indian Contract Act, 1872 the
term acceptance is defined as “When the person to whom the proposal is made signifies
his assent thereto, proposal is said to be accepted. The proposal, when accepted,
becomes a promise”.
Legal Rules regarding a valid acceptance
(1) Acceptance can be given only by the person to whom offer is made. In case of
a specific offer, it can be accepted only by the person to whom it is made. In case of
a general offer, it can be accepted by any person who has the knowledge of the
offer.
(2) Acceptance must be absolute and unqualified: As per section 7 of the Act,
acceptance is valid only when it is absolute and unqualified and is also expressed in
some usual and reasonable manner unless the proposal prescribes the manner in
which it must be accepted. If the proposal prescribes the manner in which it must be
accepted, then it must be accepted accordingly.

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(3) The acceptance must be communicated: To conclude a contract between the

parties, the acceptance must be communicated in some perceptible form. Further
when a proposal is accepted, the offeree must have the knowledge of the offer
made to him. If he does not have the knowledge, there can be no acceptance. The
acceptance must relate specifically to the offer made. Then only it can materialize
into a contract.
(4) Acceptance must be in the prescribed mode: Where the mode of acceptance is
prescribed in the proposal, it must be accepted in that manner. But if the proposer
does not insist on the proposal being accepted in the manner prescribed after it has
been accepted otherwise, i.e., not in the prescribed manner, the proposer is
presumed to have consented to the acceptance.
(5) Time: Acceptance must be given within the specified time limit, if any, and if no time
is stipulated, acceptance must be given within the reasonable time and before the
offer lapses.
(6) Mere silence is not acceptance: The acceptance of an offer cannot be implied
from the silence of the offeree or his failure to answer, unless the offeree has in any
previous conduct indicated that his silence is the evidence of acceptance.
(7) Acceptance by conduct/ Implied Acceptance: Section 8 of the Act lays down that
“the performance of the conditions of a proposal, or the acceptance of any
consideration for a reciprocal promise which may be offered with a proposal,
constitutes an acceptance of the proposal. This section provides the acceptance of
the proposal by conduct as against other modes of acceptance i.e. verbal or written
communication.
Therefore, when a person performs the act intended by the proposer as the
consideration for the promise offered by him, the performance of the act constitutes
acceptance.
(b) As per Section 30 of the Limited Liability Partnership Act, 2008, LLP and its Par tners may
face unlimited liability in case of fraud. According to this section, the liability arises, 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.

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Where LLP, Partner or employee of LLP has conducted the affairs of the LLP in
fraudulent manner, then without prejudice to any criminal proceedings which may arise
under any law for the time being in force, the LLP and any such partner or employee
shall be liable to pay compensation to any such person who has suffered any loss by
reason of such conduct.
Question 3
(a) (i) What do you mean by "Particular Partnership" under the Indian Partnership Act, 1932?
(2 Marks)
OR
(ii) Who is a nominal partner under the Indian Partnership Act, 1932? What are his
liabilities? (2 Marks)
(b) "Business carried on by all or any of them acting for all." Discuss the statement under the
Indian Partnership Act, 1932. (4 Marks)
(c) Mr. B makes a proposal to Mr. S by post to sell his house for ` 10 lakhs and posted the
letter on 10th April 2020 and the letter reaches to Mr. S on 12th April 2020. He reads the
letter on 13th April 2020.
Mr. S sends his letter of acceptance on 16th April 2020 and the letter reaches Mr. B on
20th April 2020. On 17th April Mr. S changed his mind and sends a telegram withdrawing
his acceptance. Telegram reaches to Mr. B on 19th April 2020.
Examine with reference to the Indian Contract Act, 1872:
(i) On which date, the offer made by Mr. B will complete?
(ii) Discuss the validity of acceptance.
(iii) What would be validity of acceptance if letter of revocation and letter of acceptance
reached together? (6 Marks)
Answer
(a) (i) 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 ‘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.
OR
(ii) Nominal Partner: A person who lends his name to the firm, without having any real
interest in it, is called a nominal partner.

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Liabilities: He is not entitled to share the profits of the firm. Neither he invests in
the firm nor takes part in the conduct of the business. He is, however liable to third
parties for all acts of the firm.
(b) Business carried on by all or any of them acting for all: The business must be carried
on by all the partners or by anyone or more of the partners acting for all. In other words,
there should be a binding contract of mutual agency between the partners.
An act of one partner in the course of the business of the firm is in fact an act of all
partners. Each partner carrying on the business is the principal as well as the agent for
all the other partners. He is an agent in so far as he can bind the other partners by his
acts and he is a principal to the extent that he is bound by the act of other partners.
It may be noted that the true test of partnership is mutual agency. If the element of
mutual agency is absent, then there will be no partnership.
In KD Kamath & Co., the Supreme Court has held that the two essential conditions to be
satisfied are that:
(1) there should be an agreement to share the profits as well as the losses of business;
and
(2) the business must be carried on by all or any of them acting for all, within the
meaning of the definition of ‘partnership’ under section 4.
The fact that the exclusive power and control, by agreement of the parties, is vested in
one partner or the further circumstance that only one partner can operate the bank
accounts or borrow on behalf of the firm are not destructive of the theory of partnership
provided the two essential conditions, mentioned earlier, are satisfied.
(c) (i) According to Section 4 of the Indian Contract Act, 1872, “the communication of offer is
complete when it comes to the knowledge of the person to whom it is made”.
When a proposal is made by post, its communication will be complete when the
letter containing the proposal reaches the person to whom it is made. Further, m ere
receiving of the letter is not sufficient, he must receive or read the message
contained in the letter.
In the given question, Mr. B makes a proposal by post to Mr. S to sell his house.
The letter was posted on 10th April 2020 and the letter reaches to Mr. S on 12 th April
2020 but he reads the letter on 13 th April 2020.
Thus, the offer made by Mr. B will complete on the day when Mr. S reads the letter,
i.e. 13 th April 2020.
(ii) When communication of acceptance is complete: Where a proposal is accepted
by a letter sent by the post, in terms of Section 4 of the Act, the communication of
acceptance will be complete as against the proposer when the letter of acceptance
is posted and as against the acceptor when the letter reaches the proposer.

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Revocation of Acceptance: The acceptor can revoke his acceptance any time
before the letter of acceptance reaches the offeror, if the revocation telegram
arrives before or at the same time with the letter of acceptance, the revocation is
absolute.
In the given question, when Mr. S accepts Mr. B’s proposal and sends his
acceptance by post on 16 th April 2020, the communication of acceptance as against
Mr. B is complete on 16th April 2020, when the letter is posted. As against Mr. S
acceptance will be complete, when the letter reaches Mr. B i.e. 20 th April 2020.
Whereas, acceptor, will be bound by his acceptance only when the letter of
acceptance has reached the proposer.
The telegram for revocation of acceptance reached Mr. B on 19 th April 2020 i.e.
before the letter of acceptance of offer (20 th April 2020). Hence, the revocation is
absolute. Therefore, acceptance to an offer is invalid.
(iii) It will not make any difference even if the telegram of revocation and letter of
acceptance would have reached on the same day, i.e. the revocation then also
would have been absolute. As per law, acceptance can be revoked anytime before
the communication of acceptance is complete. Since revocation was made before
the communication of acceptance was complete and communication can be
considered as complete only when the letter of acceptance reaches the proposer
i.e. Mr. B.
Question 4
(a) What are the differences between a 'Condition' and 'Warranty' in a contract of sale? Also
explain, when shall a 'breach of condition' be treated as 'breach of warranty' under
provisions of the Sale of Goods Act, 1930? (6 Marks)
(b) M, N and P were partners in a firm. The firm ordered JR Limited to supply the furniture. P
dies, and M and N continues the business in the firm's name. The firm did not give any
notice about P's death to the public or the persons dealing with the firm. The furn iture
was delivered to the firm after P's death, fact about his death was known to them at the
time of delivery. Afterwards the firm became insolvent and failed to pay the price of
furniture to JR Limited.
Explain with reasons:
(i) Whether P's private estate is liable for the price of furniture purchased by the firm?
(ii) Whether does it make any difference if JR Limited supplied the furniture to the firm
believing that all the three partners are alive? (6 Marks)

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Answer
(a) Difference between conditions and warranties:
The following are important differences between conditions and warranties.
Point of differences Condition Warranty
Meaning A condition is essential to It is only collateral to the
the main purpose of the main purpose of the
contract. contract.
Right in case of breach The aggrieved party can The aggrieved party can
repudiate the contract or claim only damages in
claim damages or both in case of breach of
the case of breach of warranty.
condition.
Conversion of stipulations A breach of condition may A breach of warranty
be treated as a breach of cannot be treated as a
warranty. breach of condition.
Breach of condition be treated as a breach of warranty
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 for damages only.
In the following cases, a contract is not avoided even on account of a breach of a
condition:
(i) Where the buyer altogether waives the performance of the condition. A party may
for his own benefit, waive a stipulation.
(ii) 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.
(iii) Where the contract is non-severable and the buyer has accepted either the whole
goods or any part thereof.
(iv) Where the fulfilment of any condition or warranty is excused by law by reason of
impossibility or otherwise.
(b) According to Section 35 of the Indian Partnership Act, 1932, 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.
Further, in order 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.

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In the given question, JR Limited has supplied furniture to the partnership firm, after P’s
death. The firm did not give notice about P’s death to public or people dealing with the
firm. Afterwards, the firm became insolvent and could not pay JR Limited.
In the light of the facts of the case and provisions of law:
(i) Since the delivery of furniture was made after P’s death, his estate would not be
liable for the debt of the firm. A suit for goods sold and delivered would not lie
against the representatives of the deceased partner. This is because there was no
debt due in respect of the goods in P’s lifetime.
(ii) It will not make any difference even if JR Limited supplied furniture to the firm
believing that all the three partners are alive, as it is not necessary to give any
notice either to the public or the persons having dealings with the firm, so the estate
of the deceased partner may be absolved from liability for the future obligations of
the firm.
Question 5
(a) Mr. T was a retail trader of fans of various kinds. Mr. M came to his shop and asked for
an exhaust fan for kitchen. Mr. T showed him different brands and Mr. M approved of a
particular brand and paid for it. Fan was delivered at 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 price.
(i) Discuss whether Mr. T is right in refusing to exchange as per provisions of Sale of
Goods Act, 1930?
(ii) What is the remedy available to Mr. M? (6 Marks)
(b) Explain 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'. (6 Marks)
Answer
(a) (i) According to Section 15 of the Sale of Goods Act, 1930, where the goods are sold
by sample as well as by description, the implied condition is that the goods supplied
shall correspond to both with the sample and the description. In case, the goods do not
correspond with the sample or with description or vice versa or both, the buyer can
repudiate the contract.
Further, as per Section 16(l) of the Sales of Goods Act, 1930, when the buyer
makes known to the seller the particular purpose for which the goods are required
and he relies on the judgment or skill of the seller, it is the duty of the seller to
supply such goods as are reasonably fit for that purpose.

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In the given case, Mr. M had revealed Mr. T that he wanted the exhaust fan for the
kitchen. Since the table fan delivered by Mr. T was unfit for the purpose for which
Mr. M wanted the fan, therefore, T cannot refuse to exchange the fan.
(ii) When one party does not fulfill his obligation according to the agreed terms, the
other party may treat the contract as repudiated or can insist for performance as per
the original contract. Accordingly, the remedy available to Mr. M is that he can
either rescind the contract or claim refund of the price paid by him or he may require
Mr. T to replace it with the fan he wanted.
(b) Doctrine of Indoor Management (The Companies Act, 2013): According to the
“doctrine of indoor management” the outsiders, dealing with the company though are
supposed to have satisfied themselves regarding the competence of the company to
enter into the proposed contracts are also entitled to assume that as far as the internal
compliance to procedures and regulations by the company is concerned, everything has
been done properly. They are bound to examine the registered documents of the
company and ensure that the proposed dealing is not inconsistent therewith, but they are
not bound to do more. They are fully entitled to presume regularity and c ompliance by
the company with the internal procedures as required by the Memorandum and the
Articles. This doctrine is a limitation of the doctrine of “constructive notice” and popularly
known as the rule laid down in the celebrated case of Royal British Bank v. Turquand.
Thus, the doctrine of indoor management aims to protect outsiders against the company.
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 cases, namely:
(a) 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.
(b) 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,
it is the duty of the outsider to make the necessary enquiry.
(c) Forgery: The doctrine of indoor management applies only to irregularities which
might otherwise affect a transaction but it cannot apply to forgery which must be
regarded as nullity.
Question 6
(a) The general rule is that an agreement without consideration is void. Discuss the cases
where the agreement though made without consideration will be valid and enforceable as
per Indian Contract Act, 1872. (5 Marks)
(b) Discuss the liability of a partner for the act of the firm and liability of firm for act of a
partner to third parties as per Indian Partnership Act, 1932. (4 Marks)

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(c) 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 Central Government
and 1,20,000 equity shares are held by Government of Maharashtra. Explain with
reference to relevant provisions of the Companies Act, 2013, whether SK Infrastructure
Limited can be treated as Government Company. (3 Marks)
Answer
(a) The general rule is that an agreement made without consideration is void (Section 25 of
the Indian Contract Act, 1872). In every valid contract, consideration is very important. A
contract may only be enforceable when consideration is there. However, the Indian
Contract Act contains certain exceptions to this rule.
In the following cases, the agreement though made without consideration, will be valid
and enforceable.
1. Natural Love and Affection: Conditions to be fulfilled under section 25(1)
(i) It must be made out of natural love and affection between the parties.
(ii) Parties must stand in near relationship to each other.
(iii) It must be in writing.
(iv) It must also be registered under the law.
A written and registered agreement based on natural love and affection between the
parties standing in near relation (e.g., husband and wife) to each other is
enforceable even without consideration.
2. Compensation for past voluntary services: A promise to compensate, wholly or
in part, a person who has already voluntarily done something for the promisor, is
enforceable under Section 25(2). In order that a promise to pay for the past
voluntary services be binding, the following essential factors must exist:
(i) The services should have been rendered voluntarily.
(ii) The services must have been rendered for the promisor.
(iii) The promisor must be in existence at the time when services were rendered.
(iv) The promisor must have intended to compensate the promisee.
3. Promise to pay time barred debt: Where a promise in writing signed by the person
making it or by his authorised agent, is made to pay a debt barred by limitation it is
valid without consideration [Section 25(3)].
4. Agency: According to Section 185 of the Indian Contract Act, 1872, no
consideration is necessary to create an agency.
5. Completed gift: In case of completed gift i.e. when gift is made by a donor and
accepted by the donee, the rule, no consideration no contract does not apply.

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6. Bailment: In case, the delivery of goods is made by one person to another for a
particular purpose, without transfer of ownership, no consideration is required.
7. Charity: If a promisee undertakes the liability on the promise of another person to
contribute to charity, the contract shall be valid without consideration.
(b) Liability of a partner for acts of the firm (Section 25 of the Indian Partnership Act,
1932): Every partner is liable, jointly with all the other partners and also severally, for all
acts of the firm done while he is a partner. The 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 that all the acts done within the scope of authority are
the acts done towards the business of the firm.
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.
Again in order to bring a case under Section 25, it is necessary that the act of the firm, in
respect of which liability is brought to be enforced against a party, must have been done
while he was a partner.
Liability of the firm for wrongful acts of a partner and for misapplication by
partners (Sections 26 & 27 of the Indian Partnership Act, 1932): Where, -
by the wrongful act or omission of a partner in the ordinary course of the business of a
firm, or with the authority of his partners, loss or injury is caused to any third party, or any
penalty is incurred, the firm is liable therefor to the same extent as the partner.
a partner acting within his apparent authority receives money or property from a third
party and misapplies it, or a firm in the course of its business receives money or property
from a third party, and the money or property is misapplied by any of the partners while it
is in the custody of the firm, the firm is liable to make good the lo ss.
(c) Government Company [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-
(i) The Central Government, or
(ii) By any State Government or Governments, or
(iii) 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.
In the instant case, paid up share capital of SK Infrastructure Limited is 6,00,000 equity
shares of ` 100 each. 200,000 equity shares are held by Central government and 1,20,000
equity shares are held by Government of Maharashtra. The holding of equity shares by
both government is 3,20,000 which is more than 51% of total paid up equity shares.
Hence, SK Infrastructure Limited is a Government company.

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