INDEX

CHAPTERS PAGE NUMBERS

MODULE - 1
2. Incorporation of Company and Matters Incidental thereto 1–6
3. Prospectus and Allotment of Securities 7 – 15
4. Share Capital and Debentures 16 – 22
5. Acceptance of Deposits by Companies 23 – 26
6. Registration of Charges 27 – 30
7. Management and Administration 31 – 38
8. Declaration and payment of Dividend 39 – 43
9. Accounts of Companies 44 – 49
10.Audit and Auditors 50 – 55
MODULE - 2
1. The Indian Contract Act, 1872
Unit – 1: Contract of Indemnity and Guarantee 56 – 58
Unit – 2: Bailment and Pledge 59 – 61
Unit – 3: Agency 62 – 64
2. The Negotiable Instruments Act, 1881 65 – 72
3. The General Clauses Act, 1897 73 – 76
4. Interpretation of Statutes 77 – 81
 MODULE – 1
Chapter-2: Incorporation of Company and Matters Incidental thereto

I. Types of Company based on Formation (Sec 3)

Private Limited Company 2(68) Public Company 2(71) OPC 2(62)

A company which by its articles: A company which is not a private company; provided, subsidiary
1. Restricts the right to transfer its shares. of public company, which is a private company shall be deemed
2. Limits number of members to 200 except in case of OPC; provided: to be public company.
a) Joint Shareholders to be treated as one
b) Past and Present employees being members are to be excluded.
3. Prohibits invitation to public to subscribe.

II. Definitions

Small Company [Sec 2(85)] Subsidiary Company [Sec 2(87)]

A company other than Public Company having A company in which holding company

Paid up share capital not and Turnover of preceding (i) Controls (OR) (ii) Controls more (OR) Deemed Subsidiary
exceeding Rs. 50 lakh or financial year does not composition of BOD than one-half of
such higher amount as may exceed Rs. 2 crore or such total voting power When (i) or (ii) is of
be prescribed Rs. 10 crore higher amount as may be Power to appoint or another subsidiary of
prescribed Rs. 100 crore remove majority of (Singly or together holding company
directors with its substitutes)

1
 III. Memorandum of Association (Sec 4)
It consists 6 clauses

Name Clause Registered Office Clause Object Clause Liability Clause Capital Clause Subscription Clause

Indicates ltd. The state where Indicates if company is The total authorized capital The number of shares
(or) pvt. ltd. registered office is - Limited by share & number of shares & face subscribed by initial
- Sec 8 exception situated - Limited by guarantee value of shares shareholders & their
- Unlimited company signatures

Doctrines

Ultra Vires Constructive Notice Indoor Management

- A company cannot depart from its MOA. - If a person fails to read the public - Outsiders need not enquire whether internal
- Such departure is called as ultra vires transaction. documents, the law assumes he is proceedings are followed correctly.
- It is void & hence not enforceable. aware of it. - It protects outsiders from the company.
- Cannot be ratified. - It protects company against outsiders Exceptions
Case – Law: Ashbury Railway Carriage and Iron Case – Law: Kotla Venkataswamy vs C
Company Limited vs Riche Rammurthi Knowledge of Negligence Forgery
Irregularity

IV. Articles of Association (Sec 5)

It contains regulation The company may adopt all This section shall not apply to Entrenchment
for management of clauses or modify the clauses company registered under previous Making the law more stricter
the company of Model article company law, unless amended
Procedure

Private Company Public Company

All members should agree Special Resolution

2
 V. Effect of Registered MOA & AOA (Sec 10)

Company is liable to members Members are liable to company Members not liable to each other Money payable by any member
under MOA/AOA shall be a debt
due to company

VI. Commencement of Business [Sec 10(A)]

Declaration to be filed by director within 180 days of incorporation, that Failure to file may lead to
- Penalty
every subscriber of share has paid the company has file with ROC its registered - Removal of name from Register of Companies by ROC
value agreed by him office address

To be certified by PCA / PCS / PCMA

VII. Incorporation of Company (Sec 7)

Stage – I Stage – II
Reservation of Name
Care to be taken while
choosing name of company Application to
Rule 8, 8A, 8B
Reserve name of proposed company (OR) Change of Name

It shall be reserved for 20 days It shall be reserved for 60 days

If it is found that name was reserved by giving wrong information; then

If company is not Incorporated If company is Incorporated

a) Reserved name shall be cancelled a) Direct for change of name; (or)

b) Penalty of Rs. 1 lakh b) Action for strike off; (or)
c) Winding up

3
 Stage – III Stage – IV Stage – V

Documents & Information to be prepared If all the information is correct, Order of Tribunal
(Documents to be preserved until Dissolution) the ROC shall issue
1) MOA & AOA duly signed by all subscribers. If company is incorporated by furnishing false
2) Declaration by subscribers & 1st Directors; that Certificate of Incorporationinformation, an application made to Tribunal in this
- not convicted of any offence in formation of company regard, Tribunal may pass such order
- not found guilty of any fraud during last 5 years It shall have a) For regulation of management of company
- All documents filed is correct & complete a) CIN b) Changes in MOA & AOA
3) Certificate from a professional (Advocate / PCS / CA / CMA) b) Date of Incorporation c) Liability is unlimited
4) Subscriber & Director details d) Removal of name from register
5) Correspondence Address of the office The name of the company shall e) Order for winding up
be entered in Register of
All the information is filed with ROC in Form SPICE (+) Companies

VIII. Alteration of Name of Company

Suo – Moto Rectification of Name of Company (Sec 16)

[Sec 13(2)] If the name of registered company is identical or nearly resembles the name of already existing company

Central Government Application by proprietor of Trade Mark

(Suo – Moto)
He should approach Central Government within 3 years of incorporation /
It shall direct the company to rectify its name within change of name of such company
3 months of such direction by passing ordinary
resolution If Central Government is satisfied, then it may direct to change the name in 3
months [#Amended]
Note: If company obtains new name → Intimate ROC within 15 days
If company fails to comply with Central Government (#Amended)

The Central Government shall allot a new name to company & ROC shall enter the new name in Register of Companies in place of old
name & issue fresh Certificate of Incorporation
Note: A company shall change its name at its discretion

4
 IX. Incorporation of One Person Company

Who can Incorporate? Nominee One Person MISC

- MOA to indicate nominee’s name can be - It cannot be converted to Sec 8
Natural & Indian & Resident - He shall become member on death of company
Person Citizen in India subscriber Member & Nominee - It cannot carry NBFC or Invest in
or - He shall give his written consent & has a Body Corporate
otherwise right to withdraw his consent of not more than 1 OPC - It can convert at its discretion
(Person stayed for 120 days in - Member may anytime change the nominee (#Amended)
previous financial year) - Minor cannot be a nominee If he does not meet
(#Amended) above criteria, he shall
Shall be eligible to form OPC (or) be satisfy the same in 180
nominee of OPC days
X. Section 8 Company

OBJECTS LICENSE ALTERATION of EXCEPTIONS

- Incorporate for promoting MOA & AOA a) 14 days notice for general
a) Commerce - Central Government Revoke with approval of meeting
b) Education issues to carry on such 1) Central Government shall revoke license Central b) Requirement of minimum
c) Charity activities for conducting affairs fraudulently (or) Government directors / independent
- It shall apply profits in - A Section – 8 company violating the objects of company (or) directors does not apply
promoting its objects need not add words contravenes any section of this act c) Need not constitute NRC
- Prohibits payment of ‘pvt.ltd’ or ‘ltd’ to its 2) On revocation Central Government may & SRC (committee)
dividend name direct to

Convert to Wind Amalgamate with

other firm up company having
similar objects
On winding up after paying liabilities
Assets remaining shall be transferred to

Another company registered (OR) Sold & proceeds to be

under this section & having credited to Insolvency &
similar objects Bankruptcy fund

5
 XI. Registered Office of Company (Sec 12)
Company shall have registered office within 30 days of Incorporation
Shifting of Registered Office

Within the local limit of city / Outside the city / town / village Within same state from Jurisdiction of one From one state to another
town / village (CTV) but within the state ROC to another (Involve alteration of MOA)

Pass Board Resolution Special Resolution Special Resolution (+) Regional Director Special Resolution (+) Central
Approval Government Approval

The approval to be given within 30 days The Central Government may after
from date of filing being satisfied that
a) Consent of creditors, debenture
Note: 12(9) : If ROC feels company within 60 days holders & other persons
not carrying any Business, he may concerned (OR)
cause a physical verification of Company to file confirmation with ROC b) Sufficient Provision / Security has
registered office if any defaults is been made for their discharge
found, he may order for removal within 30 days
of name of the company. Central Government shall approve
Registrar shall confirm the registration to the transfer within 60 days of
company through a certificate which shall application
be conclusive evidence

6
 Chapter-3: Prospectus and Allotment of Securities

Laws applicable with respect to Issue of Securities

Listed Public Company Private Company

Companies Act, 2013 Companies Act, 2013

(+)
SEBI

I. Public Offer and Private Placement (Sec 23)

Issue of Securities

By Public Company 23(1) By Private Company 23(2)

May issue securities through Rights Issue Bonus Issue Private Placement

Prospectus / Public Offer Private Rights Bonus

Placement Issue Issue Note: Issue of Securities to the public without issuing prospectus is void.
IPO FPO OFS

Prospectus [Sec 2(70)]

Any document issued as prospectus Includes NOTICE / Circular / Advertisement / any other document

Shelf Prospectus Red herring prospectus Inviting offers from public

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 II. Shelf Prospectus (Sec 31)

It is a prospectus in which, Such issue can be done for not more Prior to the issue of 2nd or Information Memorandum contains
securities are issued for than 1 year, without further issue of subsequent offer of securities, all material facts relating to
subscription in one or more issues prospectus company shall file Information - New charges created
Memorandum (Form PAS-2) with - Change in financial position
It is filed with registrar at the stage ROC between 1st or previous offer &
of 1st offer of securities succeeding offer of securities
Maximum 1 year

1st offer 2nd 3rd 4th 5th …… Last offer

(File SP with ROC)
Information Memorandum (PAS – 2)

III. Deemed Prospectus (Sec 25)

Any Company

Allots Securities (OR) Agrees to Allot Securities

To a Company / Firm / Any other Person (3rd Party)

Such deemed prospectus Intention to further offer the shares to Public

shall be signed by
Through Document Then such document shall be
In case of In case of Deemed to be Prospectus
Firm Company Provided following conditions are satisfied
Then the following shall be applicable
Not less 2 Such offer of shares was (OR) On date of offer, the whole
than ½ of Directors made to public, within 6 consideration in respect of Sec 26 Sec 34, 35
the months of allotment or securities had not yet been (Matters to be (Mis-statement in
Partners agreement received by it included in prospectus) Prospectus)

8
 IV. Matters to be stated in Prospectus(Sec 26)

26(1) 26(2) 26(3) 26(4) 26(5)

Property to be dated, signed & to be 26(1) shall not apply to Date indicated Prospectus shall Prospectus not to include
state in prospectus not be issued expert statement, unless
(Specified Information) Issue made to (OR) Issue of shall be until it is filed - He is a person not engaged
existing Prospectus deemed to be with ROC, signed in formation, promotion /
as specified by the SEBI in members or relating to shares date of by Director / management of company
consultation with Central debenture / debentures is publication Proposed - Gives his written consent
Government holder as a in all aspects Director / - Not withdrawn such
Right Issue uniform with Attorney consent before delivery of
until SEBI specifies, The SEBI Act, previous issue on prospectus with ROC
1992 in respect of Financial recognised stock - A statement to that effect
Information & reports on Financial exchange shall include in prospectus
Information shall apply
Note: 26(8): Prospectus shall not be valid if it is issued after 90 days from date of filing with ROC.

V. Mis – Statements in Prospectus

Any information provided in prospectus is:

a) Misleading (OR) b) Untrue (OR) c) False (OR) d) Failure to disclose material fact (omission)

Which would attract

1. Criminal Liability (Sec 34)
Every person who authorizes such issue, shall be liable under Sec 447

Exceptions:
1) If the person proves that such statement/ omission was Immaterial; (OR)
2) He had reasonable grounds to believe up to time of issue that statements was true (or) such inclusion / omission was necessary

9
 2. Civil Liability (Sec 35)
Where a person has subscribed to securities relying on any statement included / omission of any matter in prospectus which is misleading & suffered
loss; then company & every person who
a) is a director of company during issue
b) has authorised himself or has agreed to become director
c) is Promoter of company
d) has authorised issue of prospectus
e) is an expert as per Sec 26(5)

And

It is proved that it has been issued to defraud the applicant, then every person mentioned above shall be personally & unlimitedly liable

Exceptions: To pay compensation to every person

No person shall be liable, if he proves who has suffered loss / damage

that he withdrew his consent to become (OR) that prospectus was issued without his knowledge / (OR) that the statement made by
director before issue of prospectus consent, on becoming aware he forth with gave public expert was correct & fair to his
notice that issue was without his consent knowledge

VI. Punishment of Fraud (Sec 447)

(This is in addition to returning of the liability or repayment)

Amount involved is more than Amount involved is less than

Rs. 10 lakhs (OR) 1% of turn-over of company, Rs. 10 lakhs (OR) 1% of turn-over of company,
which ever is less which ever is less & does not involve public interest
Punishable with
Punishable with
Imprisonment & Fine
Imprisonment up to (OR) Fine up to 50,00,000
Minimum of Maximum up to Minimum Maximum 5 years (fifty lakhs)
6 months 10 years Amount involved in the fraud 3 times amount of (OR)
fraud Both
If fraud involved Public Interest,
minimum imprisonment shall be not less than 3 years

10
 VII. Offer of Sale of Shares by Certain Members (Sec 28)
Where certain members of a company propose in consultation with BOD offer their shares to public

Such members shall authorise the company whose shares are offered for sale,
to take all actions in respect of offer of sale & reimburse the company all expenses

Any document by which offer of sale to public is made shall be deemed to be Prospectus → (Contents & Mis – Statements shall apply)

Rule 8 of Companies (PAS) Rules, 2014

All the provisions of this chapter is applicable to offer of sale
Except

Minimum Subscription Minimum Application Value Statement to be made by BOD in Any other information which cannot
respect of utilization of money be compelled & justification

VIII. Public Offer of Securities to be in Dematerialised Form (Sec 29)

29(1) 29(1A)
Every company making public offer & such other companies shall issue securities only Such class of unlisted companies as may be prescribed, the
in De-materialised form by complying with Depositories Act, 1996 securities shall be held (or) transferred only in De-mat form
&
Promoters of public company making public offer of convertible securities may hold Rule 9A of (PAS) Rules, 2014
securities only in De-mat form

11
 IX. Rule 9A

1. Every unlisted public company 2. Every unlisted pubic 3. Every security holder of unlisted public 4. Every unlisted public
shall company making company company shall facilitate
- an offer for issue of dematerialisation of all its
Issue & Facilitate securities Wants to Transfer Wants to subscribe to existing securities
securities dematerialisation - Buy-back of securities securities on or securities of unlisted
only in of all existing - Issue of Bonus Shares after 2nd October, public company on or Application to Depository &
De-mat securities - Rights offer 2018 after 2nd October, 2018 secure International Security
form Identification Number (ISIN)
Before such offer, ensure Gets shares / Shall ensure all his
dematerialisation of securities existing securities are Inform all existing security
promoters, KMP, Director dematerialised held in De-mat form holders about such facility
holding before transfer before subscription

5. Every unlisted public company to 6. No Unlisted Public 7. Unlisted Public Company to 8. Security holders shall file their grievances
ensure that Company shall make submit Form PAS – 6 to ROC of Unlisted Public Company before IEPF
- Timely payment of fees to Depositors, - Offer of securities within 60 days from closure of Authority
Registrar to issue, share transfer agent - Buy Back each half year
- Maintain Security Deposit of - Bonus
minimum 2 years fees with - Rights Issue
Depositors, Registrar to issue, share Till 9A(5) Payments are made
transfer agent
- Complies with regulation issued by
SEBI or Depository

12
 X. Allotment of Securities (Sec 39)
by Company

of a Public Offer

Minimum Subscription Minimum Application Return of Allotment Penalty

- To be stated in the prospectus Money
- No allotment shall be made if minimum On every allotment made by Company & its officer shall be liable
subscription is not received It shall not be less than 5% company, it shall file Form PAS – 3
of nominal amount (Face within 30 days of allotment Rs. 1,000 Maximum of
The received amount shall be refunded if Value) or % of amount for each day Rs. 1 lakh
not subscribed with in 30 days prescribed by SEBI Attachments:
a) List of allottees
To be refunded within 15 days from closure b) Registered Valuer’s Report
c) Consideration other than cash :
Failure = 15% interest to be paid by a copy of contract duly signed
Directors

XI. Securities to be dealt within Stock Exchange (Sec 40)

Every Company making All monies received from Public Offer Rate of Commission
Public Offer shall make an shall be kept in a separate scheduled
application to one or Bank Account In case of Shares In case of Debentures
more recognised stock
exchange Shall be used for Maximum 5% (OR) Rate as per Maximum 2.5% (OR) Rate as per
of Issue Price AOA of Issue Price AOA
Allotment of Repayment of
Securities Monies which ever is less which ever is less

13
 XII. Private Placement (Sec 42)

Offer made to selected group of people This provision shall Special Resolution to be Private Placement Offer Return of Allotment
not apply to passed Letter
Maximum to 200 in a Financial Year a) NBFC registered To be filed with ROC in
with RBI Explanatory Statement To be in Form PAS – 3 within 15
QIB & ESOP b) HFC registered to indicate - Form PAS – 4 days from allotment
not included in the limit with NHB a) Particulars of Offer - Serially numbered
b) Kind of Securities - Addressed specifically Company shall not utilise
If limit exceeds, to be treated as Public Offer c) Price & Basis the money unless
d) Amount to be raised To be sent within 30 days allotment is made 7
It shall be subscribed by of recording names return is filed
Offer made to QIB’s:
Cheque Demand Banking & Not by Special Resolution to be Company to maintain No fresh allotment until
Draft Channel cash valid for allotments complete record of private existing ones are
during the 1st year placement offers in Form completed
PAS – 5
In case of Joint Shareholders person’s name
appearing 1st shall pay for the subscription Time Limit

A company shall allot

within 60 days from
Penalty: receipt of application
Company, Promoters, Directors money

Minimum Maximum If not, then refund within

Amount raised in Rs. 2 crores 15 days
private placements
If not, then interest of
which ever is less 12% per annum from 60th
(+) day
Refund all monies (+) Interest
Additionally, No Public
Advertisements shall be
made

14
 XIII. Procedure

Board Resolution Open a PPOL – PAS – 4 Receive within 60 days Board within 7 days Enter within 15 days File
(+) Scheduled & the Meeting name in PAS – 3
Special Resolution Bank Account Complete application Register to ROC
record of Offer money To decide
Identify the Letters Allotment
names to send Sent – PAS – 5
Private Placement
Offer Letter

15
 Chapter-4: Share Capital and Debentures

I. Types of Share Capital (Sec 43)

Equity Preference
Carries preferential rights with regards to
With Voting Rights Differential Voting Rights
Dividend Repayment of capital at winding up
Rule 4 of companies (Share Capital & Debentures) Rules

II. Conditions

Authorised Ordinary Maximum issue Not Defaulted Not Penalized No Conversion

by Resolution of DVR shall not during last 3
AOA exceed 74% of Filing Financials No Subsisting Default years under Existing shares shall
In case of listed total voting & - Payment of declared dividend - RBI not be converted to
company by power at any Annual Returns - Repayment of deposits - SEBI DVR or Vice – Versa
Postal Ballots time in 3 preceding - Redemption of preference / - SCRA &
financial years debentures - FEMA They are entitled to
- Payment of Interest on Deposits & all other rights
Debentures
- Repayment of any Loan, Statutory
Payments, crediting to IEPF

DVR can be issued after 5 years of making good the default

16
 III. Sweat Equity Shares (Sec 54)
Rank PARI PASSU
(Special Resolution)
valid for 12 months to make allotment

Limit on Issue Lock in Period Price of issue Treatment for non-cash Register
3 years from is determined consideration In Form SH – 3
It shall not exceed allotment by Registered
(Non-Transferrable) Valuer (a) If it takes form If it is not
One time Life time of depreciable (a) it
amortizable shall be
15% of paid (OR) Issue It shall not exceed 25% asset expensed
up equity Value of of paid up equity
capital in a Rs. 5 capital at any time It shall be carried
year crore to Balance Sheet
Exception:
which ever is higher For Start-up’s As per Accounting Standards

Up to 50% of paid up
capital up to 10 years
from incorporation

Sec 2(88)
Sweat Equity Shares are shares issued
TO Director or employees

AT Discount or For Consideration other than cash

FOR Providing
a) Know how (OR)
b)IPR (OR)
c) Value Additions

17
 IV. Transfer and Transmission of Securities (Sec 56)

Transferor Transfer Shares Transferee

If Transfer Deed is lost, company may register By signing Transfer Deed (SH – 4) by both which Which shall be submitted to company for
such deed after obtaining Indemnity shall be dated & stamped registration within 60 days of execution
(+)
Share Certificate (or) Letter of Allotment

Note:
1) In case of partly paid shares, company shall
send notice (Form SH – 5) to Transferee for
any objection in 2 weeks
2) Transfer Deed is not required in case of
De – Mat Shares

V. Refusal of Registration and Appeal Against Refusal

Private Company refuses to Register the Transfer / Transmission

within 30 days of delivery of Instrument

The company shall give notice to Transferor, Transferee & Person giving Intimation If no notice sent, then

within 30 days of receipt of notice within 60 days of delivery of Instrument with company

The transferee may appeal to Tribunal against the refusal

The Tribunal may order for the following:

a) Dismiss the appeal
b) Direct to Register the Transfer / Transmission within 10 days of order
c) Rectification of Registrar (+) Damages to be paid to aggrieved party

[Note: For public company the days will be constituted as 60 & 90]

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 VI. ESOP [Sec 62(1)(b)]

Minimum 1 year Points:

(a) Public Company (Special Resolution) & Private Company (Ordinary Resolution)
Grant of Option gets (b) Restriction:
Option Vesting Period Vested - No Vote
Also called as - No Dividend
Number Price Gestation / waiting Once the options - No Sale / Transfer
of of period are vested it shall be - No Pledge / Hypothecation
Shares Shares exercised in the (c) Right:
given time called as - On Death / Disablement it shall immediately vest
Exercise Exercise Period (d) Register of ESOP: SH – 6
Price

VII. Reduction of Share Capital (Sec 66)

[Board Resolution (+) Special Resolution (+) Tribunal Approval]

Reduction can be done by Apply to Tribunal for Confirmation Tribunal after being satisfied
-Every creditor discharged (or) consent is obtained
Extinguish (OR) a) Cancel paid up capital It shall forward application to -Accounting Standards are followed
the share which is lost (or) - Central Government
capital not unpresented by - SEBI (listed) Order shall be published in News Paper & File with ROC
paid up available assets - ROC
(Uncalled) (OR) - Creditors Liability of members come to an end on reduced capital
b) Pay off paid up capital
which is in excess of To send their representation in 3 months If a creditor is excluded from the list of creditors, every
wants of company member shall be liable to pay the claim of creditor to
If No Representation = No Objection extent of his prior liability

19
 VIII. Buy Back of Security (Sec 68)

1. Sources of Buy Back 2. Post Debt 3. All 4. No further Buy 5. Company shall not issue same kind 6. Register of Buy Back
- Free Reserve Equity Ratio securities shall Back shall be made of securities within next six months (SH – 10)
- Securities Premium be fully paid within 1 year - Bonus Issue
- Proceeds of fresh issue Not to be more up - Conversion of debenture / preference
(not of same kind) than 2:1 into equity
- Sweat Equity

7. Extent of Buy Back 8. Declaration of Solvency 9. Return of Buy Back 10. Extinguishment of
Securities
Board Special Resolution By Company Form Unlisted Listed The bought back shares shall
Resolution Director will not be SH – 9 company Company be destroyed in 7 days
BB of equity Any other insolvent in to file it
10% of paid up share capital security 1 year with ROC ROC (+) SEBI
equity share
capital 25% of paid up 25% of paid up Form SH -11
(+) equity share share capital
Free Reserve capital (+)
Free Reserve

20
 IX. Debentures (Sec 71)

If convertible debentures to be issued Secured Debenture can be issued Debentures with Voting Rights cannot be issued

Pass Special Resolution Can be issued if following conditions are fulfilled

Redemption period shall not exceed Secured by creation of charge on Appoint Debenture Trustee before Charge not required for government
10 years properties of company / subsidiary issue of prospectus / Letter of offer company, where amount is
company / holding company in & guaranteed by central government
Exceptions (Up to 30 years) favour of Debenture Trustee within 60 days offer allotment (or) state government
1) Infrastructure Project Company execute a debenture Trust Deed
2) Infrastructure Finance Company (Form SH – 12)
3) Infrastructure debt fund NBFC
4) Any company permitted by
- RBI
- National Housing Bank
- Statutory Authority

X. Debenture Redemption Fund / Investment

Every company required to create DRF is required to deposit 15% of amount of debentures maturing on 31st March of next year.
E.g.: 01/04/2020 – 31/03/2021 It shall be deposited by 30th April of each year.
It shall be deposited in,
to be deposited by 30/04/2020 - Scheduled Bank Such money shall
- Unencumbered Securities of Government not be used for
- Unencumbered Securities mentioned in Indian Trust Act, 1882 any purpose other
- Unencumbered Bonds issued by company under Indian Trust Act than Redemption

21
 Companies DRR Required or Not DRF Required or Not
I. Listed Company:
1. All India Financial Institutions (AIFI) (+) Banks NO NO
2. Other Financial Institutions (PFI) NO NO
3. Other Listed Companies:
a) Private Placement NO NO
b) Public Issue:
(i) NBFC & HFC NO YES = 15%
(ii) Remaining Listed Companies NO YES = 15%
II. Unlisted Company:
1. All India Financial Institutions (AIFI) (+) Banks NO NO
2. Other Financial Institutions (PFI) NO NO
3. Other Unlisted Companies:
a) NBFC & HFC NO NO
b) Remaining Unlisted Companies YES = 10% YES = 15%

22
 Chapter-5: Acceptance of Deposits by Companies
I. Deposits [Sec 2(31)]

What is Deposit? What is not a Deposit?

It includes any receipt of money by way of deposit (or) loan (or) in any
other form by a company, but does not include If considered as deposit If not, company shall receive
money without having to follow
Deposits It shall comply with provision of deposit provisions
Companies Act
From Members (Sec 73) From Public (Sec 76)

II. Prohibition on Acceptance of Deposit from Public (Sec 73)

This Restriction shall not apply to

Banking Companies NBFC HFC Other Companies specified by Central Government

However, any company may accept deposits from its members, subject to

Resolution in Circular (DPT – 1)

General Meeting
approving such 73(2)(a) 73(2)(b)
acceptance is Issue circular to members inviting deposits from them & include a statement containing Circular (+) Statement
passed a) Financial Position
b) Credit rating 30 days prior to issue to
c) Total number of outstanding deposits members

Such circulars to be published in News Paper (English + Vernacular) ROC

[Offer to Members = News Paper is optional (&) Offer to Public = News Paper is Mandatory]

Such Advertisement shall remain valid till, the earliest of the following

6 months from closure (OR) Date of Annual General Meeting (or) Due date of Annual General
of Financial Year Meeting

23
 73(2)(c) 73(2)(e)
Deposit Repayment Reserve - Company not defaulted in repayment of any deposit
- At 20% of deposits maturing during the financial year - If any default, company shall certify that it has made good the default & 5 years has
- To be deposited by 30th day of April each year elapsed

Exemptions:
73(2)(a) to 73(2)(e)
Shall not apply to private company

Which accepts from members money not exceeding 100% of (OR) Registered Start – Up (OR) Which fulfils following (all)
Paid Up Share Capital for 5 years - Not a associate or subsidiary of another company
(+) - Borrowing is less than twice of Paid Up Share
Free Reserves Capital (or) Rs. 50 crore whichever is less
(+) - Not defaulted in Repayment
Securities Premium

III. Procedure for Acceptance of Deposit from Members

1. Board Meeting (+) 2. Draft Circular 3. DPT – 1 (Circular) to be 4. Collect the application 5. Deposit receipt to be
General Meeting DPT – 1 issued to members along form from and Declaration issued with in 21 days of
(Pass Resolution depends on File with ROC with application form also to be given that money receipt of money
AOA) is not borrowed from
anyone

6. Entry to be made in 7. Maintain Deposit 8. Submit return of deposit 9. If company fails 10. Maximum amount of
Register of Deposits within 7 Repayment Reserve at 20% in form DPT – 3 periodically repayment, the depositor deposits that can be
days from issue of receipt before 30th June every year may apply to the Tribunal accepted by non – eligible
company

Maximum up to 35% of
Paid Up Share Capital (+)
Free Reserves (+) Securities
Premium

24
 Exceptions: The maximum limit shall not apply to the following clauses of Private Company

Private Company, which a start (OR) Private Company which fulfils all of the conditions
up for 10 years from
Incorporation Which is not an Borrowings is less than Company has not
associate or subsidiary defaulted in
company of any Twice of paid up share capital (OR) Rs. 50 crore repayment of
company Borrowing
whichever is less

IV. Provision regarding Acceptance of Deposits from Public by Eligible Companies

1. Board Meeting (+) General 2. Appointment of Deposit 3. Obtain Credit Rating Only a Eligible Company &
Meeting Trustee & execute Deposit - Shall get it from recognised agency Government Company can raise
Trust Deed (Form DPT – 2) 7 - Credit Rating shall be informed to public deposits from Public in addition to its
Special (OR) Ordinary days before issuing circular - Needs to be obtained every year during member
Resolution Resolution (Disqualification for tenure & shall be filed with ROC
File MGT – 4 with ROC appointment of Deposit - Credit Rating shall not be below Eligible Company
Trustee to be kept in mind) Rule 2(1)(e)
Minimum (OR) Other Specified It is a public company having
Investment Credit Rating for
Grade Rating Fixed Deposits Net Worth (OR) Turnover

Minimum Minimum
4. Charge Creation 5. Issuance of Circular (DPT – 1) 6. Collect Signed Application Rs. 100 crore Rs. 500 crore
To be created on - Published in News Paper (English + Vernacular) or more or more
Tangible Assets only - Website (if any)
- To be filed with ROC, 30 days before issue (+)
Pass Special Resolution
If within limits of Sec 180(1)(c), then
7. Issue Deposit Receipt within 21 days 8. Update Register of Deposits 9. Maintain DRR 10. File DPT – 3 ordinary resolution

25
 V. Companies (Acceptance of Deposit) rules, 2014
(Common rules applicable to Section 73 & 76)

1. Tenure of Deposits 2. Premature Repayment of Deposits 3. Higher Rate of Interest

Repayment on Minimum Maximum Reduction of Rate of No Reduction of Rate of Interest If the depositor renews
Demand Tenure Tenure Interest Payable the deposit for a period
- Should be after 6 months It is repaid (OR) It is repaid to provide longer than the
Not permissible 6 months 36 months but before maturity to comply for war risk to unexpired period of
- Rate of interest shall be with limits - Naval deposit, but before its
Exceptions: 1% less than what would in Rule – 3 - Military maturity date
- It shall not exceed 10% of Paid Up Share be payable - Air Forces
Capital (+) Free Reserves (+) Securities (less than 6 months to be or their family during
Premium ignored, 6 months or more emergency
- It can be accepted to meet short term to be considered as 1 year)
requirements, provided
- Repayment on or after 3 months

4. The Quantum of Deposits 5. If company fails to repay the deposits

Maximum Amount of Deposits that can be raised by companies (Old + New) They shall pay interest of 18% per annum

Other than Eligible Company Eligible Company Government Company

Maximum 35% from members Members Public Maximum 35% from

public
Exception of Private Company Maximum Maximum
10% 25%
From members % is on [Paid Up Share Capital (+)
Free Reserves (+) Securities Premium Account]

26
 Chapter-6: Registration of Charges
Charge [Sec 2(16)]
It means an ‘Interest’ (or) ‘Lien’ created on property / assets of company or its undertaking as security & includes a mortgage

Charges has following essential features

Minimum 2 Parties It arises from an agreement entered

in favour of lender
Creator of charge Charge holder

Why Charge?

To ensure all encumbrances made by company To protect the Interest of the Lenders
on its assets are made public

I. Kinds of Charge

Fixed Charge Floating Charge

1) It is a charge created on specific assets of borrowing company 1) It is created on assets which are fluctuating
2) It is identified at the time of creation 2) It is not attached to any definite property
3) Borrowing company cannot sell such asset, but it may be used 3) Company may sell such property without any approval
4) Example: Fixed Assets, Land & Building, Plant & Machinery, etc. 4) Example: Stock in Trade, Debtors, etc.
5) Until the change gets crystallised, the security remains dormant

II. When does Floating Charge gets Crystallised?

When company goes into Company ceases to carry on Creditors / Debenture Holders takes Happening of event specified in
Liquidation Business steps to enforce security deed

27
 III. Consequences of Non – Registration of Charge
Where a charge created by the company but not filed with ROC leads to

Void Against Liquidator Void Against Creditor

The liquidator can ignore the charge & can treat the creditor as unsecured If any subsequent charge is created on same property, the earlier charge
creditor will have no right & later charge will enjoy priority

However, it does not discharge the company from its liability

IV. Duty to register Charge (Sec 77)

Where a company creates charge on any property (Movable / Immovable , Tangible / Intangible) whether in (or) outside India

To be verified by

Property situated outside India Property situated in India

(Whole / Part)
1. Company (OR) 2. Director (or) Company Secretary (or) (OR) 3. Some person other than company
Seal Authorised officer of charge holder who is interested in Mortgage (1) or (2)

28
 Charge shall be registered with Registrar within 30 days of creation
The same provision
Failure to register in 30 days shall apply to
Modification of
Date of creation of Charge Charge as well

Before Commencement of Companies (Amendment) Second On or After Commencement of Companies (Amendment)

Ordinance, 2019 Second Ordinance, 2019
Effective date is 02/11/2018
Company to apply for condonation of delay Company to apply for condonation of delay

within 300 days of creation of charge After 30 days, but within 60 days of creation of charge

To be filed with ROC by paying such additional fees To be filed with ROC by paying such additional fees

Failure to register within 300 days, it shall be done within 6 If not registered within 60 days (+) 60 days time subject to
months from 02/11/2018 Advalorem Fees

Registrar shall issue a Certificate of Registration of Charge (CHG – 2 )

Form to be Filed to
In case of modification
CHG – 1 CHG – 9 Company Charge Holder CHG – 3

In case of
Debentures

V. Application for Registration of Charge by Charge Holder (Sec 78)

As per Sec 77, if the company fails to register charge within 30 days, charge holder may apply to ROC for Registration.

ROC shall give notice to company & if no objection is received within 14days, allow such registration.

When application is made by charge holder, he shall have right to recover from company any amount paid as fees / additional fees to register charge.

29
 VI. Company to report Satisfaction of Charge (Sec 82)
When Registered Charge is Repaid / Satisfied

Company shall give intimation to ROC within 30 days

If Notice is given If Notice is not given

1) On Receipt of such intimation, ROC shall issue notice to charge holder requiring him to show cause why satisfaction
should not be recovered Within 300 days of such
Note: Notice to Charge Holder is not required if intimation to ROC is signed by such Charge Holder as well payment
2) Charge Holder shall show cause within 14 days
Company / Charge Holder
Responds Does Not Respond to make application for
condonation of delay
ROC shall ROC shall (+)
a) Record a note to that effect in Register of Charges; a) Record the satisfaction of charge in Register Additional Fees
b) Inform the company about the cause shown b) Inform company about such recording

Registrar shall issue Memorandum of Satisfaction of Charge

Form No. CHG – 5

Note: Instrument creating charge / modification shall be preserved for 8 years from satisfaction

VII. Rectification by Central Government in Register of Charges (Sec 87)

Shall be filed in
An Application can be made to Central Government, in case of
Form CHG – 8
Omission in giving intimation to ROC with respect to (OR) Omission (or) Mis – Statement of any particulars in
payment / satisfaction filing made to ROC

If Central Government is satisfied that it was not intentional

Direct Extension of Time if filing was not made Direct for rectification of any particulars in
within 300 days from payment / satisfaction any filing previously recorder with ROC

30
 Chapter-7: Management and Administration
I. Register of Members (Sec 88)
Applicable to all Companies

Registers Format Preserved Place Index Foreign Register

- Register of Members MGT – 1 Permanently To be kept at registered office - It is optional
(Equity + Preference) (OR) Index of - If company keeps a
- Register of Debenture Holders MGT – 2 8 years from Any other place after Special Resolution names not foreign register outside
- Other Security Holders MGT – 2 redemption required if India, Intimate ROC in
Within city / (OR) Any place in India members MGT – 3 within 30 days
town / village where more than are less of opening or
of registered 1/10th of total number than 50 discontinuance
office of members reside - The details shall also be
transmitted to Indian
Registered office within
15 days of change

II. Closure of Registers (Sec 91)

Reason Maximum Period Notice of Closure

To find cut – off date & decide the eligibility of 45 days 30 days At least 7 days notice to be given prior to 1st day of closure
- Rights in a year at one time
- Bonus News Paper (+) Website
- Dividend (English + Vernacular)

31
 III. Declaration in respect of Beneficial Interest in Shares (Sec 89) Exception to
Declaration to be filed by Government Company

Registered Holder of Shares & Not Beneficial Owners Person Holding Beneficial Interest & Not Registered Owners in MGT – 5
in MGT – 4
within 30 days of acquiring beneficial interest
within 30 days of entering his name
File declaration with company specifying
File declaration with company specifying particulars of
person who holds Beneficial Interest Nature of his interest & Particulars of Registered Owner

Change in Beneficial Interest to be intimated to company within 30 days of change

MGT – 6
Company after making a note of such declaration ROC
within 30 days of receipt of declaration

Consequences of non – filing Penalty

Rights with respect to such shares Person Company: Failure to file return
shall not be enforceable
Minimum Continuous Default Maximum Company & Every Officer
Rs. 50,000 Rs. 200 per day Rs. 5 lakh
Rs. 1,000 per day
Maximum of Maximum of
Rs. 5 lakh Rs. 2 lakh

32
 IV. Register of Significant Beneficial Owner in a Company & Companies (SBO) Rules, 2018 (Sec 90)
(*)Every Individual Acting alone (or) together (or) through one (or) more persons (or) Trust & Person Resident Outside India
Holds

Beneficial Interest of not less than 25% (or) such other % as (OR) Right to exercise significant influence or control as per 2(27) over
prescribed the company

SBO means → In relation to reporting company means individual referred above(*), Posses one (or) more following Rights:

Holds indirectly (or) together (OR) Holds indirectly (or) together (OR) Has Right to receive not less (OR) Right to exercise
with any Direct Holding with any Direct Holding than 10% of total significant influence or
distributable dividend in a control other than
Not less than 10% of the Not less than 10% of voting financial year through through Direct Holdings
shares rights in shares Indirect (+) Direct holdings alone

Every SBO shall make declaration in Form BEN – 1 within

90 days of commencement of these rules i.e., 08/02/2019 30 days of becoming SBO (or) Any changes in his SBO

Based on the information received, the company shall file BEN – 2 within 30 days of receipt with ROC

The company shall maintain a Register of all the details in Form BEN – 3
Details include:
1) Name of SBO
2) Date of becoming SBO
3) Address
4) Details of Ownership

Notice Seeking Information regarding SBO, to be given by company in Form BEN – 4 to any person (whether a member or not) whom company
knows (or) has reasonable cause to believe
a) To be SBO of company
b) To having knowledge of identity of SBO
c) To have been a SBO of company at anytime during preceding 3 years to the date of issue of notice & not registered as SBO

33
 Information shall be given by concerned person within 30 days

In case of failure
Company shall apply to Tribunal within 15 days of expiry of
a) Person fails to respond
b) Information is not satisfactory

In application to Tribunal: Company shall seek shares in question be restricted with respect to Transfer & such other rights attached to it.

within 60 days of application

After giving opportunity of being heard, Tribunal shall pass such order as it deems fit

within 1 year from order

Company / Person may make application to Tribunal for Relaxation (or) Lifting of Restriction

If no application filed within 1 year

Shares shall be transferred to IEPF

Penalty

If person fails to give disclosure Company (Fine)

Fine
Minimum of Continuous Default Maximum of
Minimum of Continuous Default Maximum of Rs. 1 lakh Rs. 500 per day Rs. 5 lakh
Rs. 50,000 Rs. 1,000 per day Rs. 2 lakh &
Officer (Fine)

Minimum of Continuous Default Maximum of

Rs. 25,000 Rs. 200 per day Rs. 1 lakh

Note: Any person wilfully gives false information = liable under section 447

34
 V. Extra – Ordinary General Meeting (Sec 100)

By Board (Suo Moto) By Board on requisition by members By By Tribunal

- Can be held in any place in India Requisitionists Either Suo Moto (or)
- If it is wholly owned subsidiary of a Company having share capital Company not having share capital themselves on application made
foreign company EGM can be held (3rd Scenario) by Director / Member
outside India Members who hold minimum Members holding minimum (Sec 98)
1/10th of paid up share capital 1/10th of total voting power

Board shall proceed to call the meeting within 21 days of Requisition

&
Convene a meeting in 45 days from request

Failure to conduct, then within 3 months from requisition, requisitionists themselves shall conduct the meeting

The company shall hand over all the Expenses shall be reimbursed by If Quorum not present within half It should be held at Registered
details of shareholder to company an hour office (or) within city / town /
requisitionists village
Which shall be deducted from the Meeting shall be cancelled
directors remuneration

Note: Any accidental omission to give notice to any member shall not invalidate the proceedings of meeting

VI. Annual General Meeting (Sec 96)

At least once When? Gap between Extension Place Date Report of AGM
in every year 1st
AGM = within 9 months 2 AGM’s At registered office (or) Any other day (Sec 121)
is mandatory Subsequent = within 6 months should not 3 months within city / town / except national To be filed by listed
(From closure of Financial Year) exceed 15 (apply to ROC) village holiday company with ROC
months between in 30 days of
Not available for Unlisted Company can 9a.m to 6p.m conclusion of AGM
1st AGM do any where in India
with prior consent of all
members

35
 VII. Voting

By Show of Hands E – Voting Poll Postal Ballot

(Sec 107) (Sec 108) (Sec 109) (Sec 110)

One Person = One Vote

One Share = One Vote

VII. Demand for Poll (Sec 109)

Who can demand? When? Poll can be

Before (or) After withdrawn by people
Chairman on his own By chairman on demand made by Company declaration of result by who made it
show of hands
Having share capital Any other company

Any member / proxy holding Any member / proxy holding

- 1/10th of total voting power 1/10th of total voting power
(or)
- Rs. 5 lakh or more paid up capital

Poll to be taken forth with Polling paper shall be in Form Scrutinizer shall count & report on the result
- If it is for Adjournment of meeting MGT – 12
- Appointment of chairman of General meeting The report to be scrutinised in Form MGT – 13

Any other matter, poll shall be taken within 48 hours It shall be submitted to chairman within 7 days of taking poll

36
 IX. Voting Through Electronic Means (Sec 108)

Applicability Notice of meeting Contents of the Notice Time Line Appointment of Scrutinizer
1) Listed Company can be sent - About option available to choose - Who? CA, CS, CMA,
2) Company having 1,000 (or) - Directly e – voting Shall be open for minimum Advocate in practice /
more members - Website of Company - Time Period 3 days & shall close at anyone not in employment
- News Paper - Login ID & Password 5:00p.m on day preceding - He gets the access to all the
Non – Applicability Advertisement - Members who have cast their the meeting details of company
a) Nidhi Company vote can still attend the meeting - Scrutinizer’s Report: To be
b) Institutional Investor but cannot vote again prepared not later than 3
- Cut – off date days of conclusion of
- Details of grievances redressed meeting
officer - Result on website of
company, agency, Stock
exchange (listed)
Note: Proposed Resolution through e – voting shall not be withdrawn

X. Postal Ballot (Sec 110)

Postal Ballot can’t be used for Exemption of Postal Following items shall be discussed only in Scrutinizer’s Appointment
following Business Ballot for any Business Postal Ballot - He shall submit the report not
- Ordinary Business - OPC - Alteration of object clause later than 7 days
- Any Business where Directors (or) - Any company having up - Alteration of private company’s AOA i.e., - Results to be declared on website
Auditors have right to be heard to 200 members Add / Remove 2(68) along with scrutinizer’s report
- Shifting of registered office
(outside local limits)
- Change in objects & having unutilised money
- Issue of DVR
- Variation of Rights of Securities
- Buy Back
- Small shareholder Director
- Sale of undertaking
- Giving loan, guarantee, security exceeding
limits

37
 XI. Circulation of Members Resolution (Sec 111)

Meaning Who can Propose? Special Condition Time Limit

Members can - Such requisition shall be signed
propose resolution Same as EGM by all requisitionists Requisition requiring Notice of Any other requisition (like
for consideration - Sufficient money should be Resolution circulation of statement)
which may be deposited for meeting circular (Proposing Resolution)
circulated to other expenses To be given minimum 2
members if the To be given minimum 6 weeks before weeks before meeting
company deems fit meeting

After depositing, if AGM is called before 6 weeks, it shall be deemed to

have been properly deposited

Exception: Company shall not circulate the resolution if Central Government on an application
made feels rights are being abused to secure needless publicity.

XII. Resolution Requiring Special Notice (Sec 115)

When is it required? Special notice should be signed by Sending Notice to Company Company to give notice to other
- To appoint Auditor other than members individually (or) members
retiring auditor (or) collectively holding To be sent not To be sent at
- Retiring Auditor not to be re - earlier than 3 least 14 days Individual If not Possible
appointed Minimum (OR) Shares on months before meeting notice
- Remove Director before expiry of 1% of which (Clear days) News Paper
tenure total minimum At least 7 days (English +
- Appoint another director in place voting Rs. 5 lakh before meeting Vernacular)
of removed director power is paid up
7 days before
meeting

Clear days

38
 Chapter-8: Declaration and payment of Dividend
I. Types of Dividend

Final Dividend Interim Dividend

Declaration Recommended by It cannot be Shareholders Declared Declared by Articles should Can be revoked
at AGM Board, Approved by revoked once cannot demand between 2 Board permit with consent of
shareholders declared higher dividend AGM’s all shareholders

II. Declaration of Dividend (Sec 123)

1. Sources of Dividend

Out of the profits of the company after deducting depreciation From money provided by Central or State Government

of the current (OR) of previous

Financial Year Financial Year (Free Reserve)
(OR)
Both
(Note: Free Reserve does not include statutory or revaluation reserve)

2. Before declaration of any dividend, the following should be deducted / set – off

a) previous year losses & b) Depreciation of previous year

3. Transfer of money to reserves is not mandatory & its company’s discretion

39
 4. (Rule – 3) Declaration of Dividend out of profits of previous year / when there is inadequacy of profit / absence of profit

All conditions to be satisfied → Government Company Exempted

Maximum Rate Maximum Amount that can be drawn Balance in Reserve

It shall not exceed average of dividend declared 1/10th of [Paid Up Share Capital (+) Free Reserve] After such withdrawal from reserve, the balance
in 3 preceding years shall not fall below 15% (Paid Up Share Capital)
From the amount so drawn, the current year
This condition shall not apply if company has not losses shall 1st be set – off
declared dividend in past 3 financial years

5. Payment of Dividend

Dividend shall be payable only to Dividend can be paid only in cash & not in kind; i.e.,
- Registered Shareholder; (or) → name appearing in register of Members - By Cheque
- To his order; (or) - By Dividend Warrant
- To his Banker - By Electronic Mode

6. Dividend shall not be paid if company has not complied with

Sec 73 Sec 74 Sec 8 Company is prohibited from paying

Prohibition on acceptance of depreciation from Repayment of deposits accepted before dividend
public commencement of Act

7. Interim Dividend [Sec 123(3) & (4)]

Sources Restriction during loss of current financial year up to end of

immediately preceding quarter
Surplus in (OR) Profits of current (OR) Profits generated in financial year
P&L Account financial year till quarter preceding date of The rate of Interim Dividend shall not exceed average rate of
declaration dividend declared in past 3 financial years

8. Declared dividend to be deposited in a separate Scheduled Bank Account

40
 III. Unpaid Dividend Account (Time Line) [Sec 124]
Illustration
Note: 24/09/2019 Declaration of Dividend
1) While money is in UDA, any person may
apply to company for payment within 15 days

2) Any dividend is claimed in any year during 29/09/2019 Deposit Dividend in Separate Scheduled Bank Account
the 7 years, the shares shall not be
transferred to IEPF within 30 days from declaration

3) Once amount is transferred to IEPF, any 24/10/2019 Payment of Dividend

person may apply to authority for payment
of money within 7 days after expiry of 30 days

4) As per General Clauses Act, the word ‘from’ 31/10/2019 within 90 days of Amount unpaid, transfer to ‘Unpaid Dividend Account’ (UDA)
indicates that, 1st day shall be excluded transfer to UDA
(in this case 24/09/2019) Company shall place on Failure to transfer to UDA = Interest @ 12% per annum
website
31/10/2026 a) Name Remains unclaimed for 7 years
b) Last known addition
Transfer to IEPF
c) Amount of unpaid
What?
dividend
1) Unpaid Money
2) Interest Accrued
3) Shares

41
 IV. Investor Education and Protection fund (Sec 125)
1. It is the fund established by Central Government

Fund is credited with Fund is debited with

1) Grants by Central Government 1) Refund in respect of (7) to (11)
2) Donations by Central Government / State Government / Company / Institution 2) Promotion of awareness among investors
3) General Revenue Account of Central Government 3) Educating investors
4) Amount in IEPF under Companies Act, 1956 4) Protection of interest of investors
5) Interest / Income received from investments made out of fund 5) Distribution of disgorgement amount to persons who
6) Disgorgement order money received suffered loss due to wrong action by any person
7) Unpaid Dividend Amount 6) Reimburse legal expenses under class action suit
8) Security Application Money Remaining
9) Matured Deposits unpaid for 7
10) Matured Debentures
years
11) Redemption Amount of preference shares
12) Interest Accrued (8) to (10)

2. Authority to Administer the Fund

The Secretary, Ministry of Corporate Affairs Constitution CEO, shall be the convenor of the authority
Ex – Officio shall be the chairperson
6 members
(Maximum Limit 7)

3. Power of Authority

Administer the Fund Maintain separate account and records in relation to fund To spend money out of fund

4. Audit

Account of fund to be audited by Comptroller and Audit-General (CAG) Audited Accounts & Annual Report shall be sent to Central Government

42
 5. Annual Report

The authority shall prepare It shall cover activities during financial year Annual Report & Audit Report shall be laid
before both houses of parliament

V. Dividend to be held in Abeyance (Sec 126)

Applicability

Transfer Deed is delivered to the company for registration But Transfer is not registered by company

Dividend of such shares shall be transferred to unpaid dividend account, if the shareholder has not authorised the transferee of such dividend
&
Keep in abeyance in relation to such shares all the rights / bonus if issued

VI. Punishment for Failure to Distribute Dividend within 30 days (Sec 127)
Liable for Punishment
Penalty

Exemption Company = 18% p.a. Director

Due to Shareholders direction Adjusted Dispute in Right Non Payment is Imprisonment Fine
operation of payment could not against sum to receive not due to
of Law be complied & same has due from dividend default of Maximum Rs. 1,000 per day
been communicated shareholder company 2 years of default

Note: Dividend once declared becomes a debt to the company & cannot be revoked

43
 Chapter-9: Accounts of Companies
I. Books of Accounts to be kept by Company (Sec 128)
1. Every company shall maintain for every financial year

Books of Accounts 2(13) Books (or) Paper 2(12) Financial Statements 2(40)
Includes records maintained in respect of Books and Paper It includes:
- All amounts received & expended It includes: - Balance Sheet
- Assets & Liabilities of company - Statutory Registers - Profit & Loss Account
- Sales & Purchases of goods & services - Minutes Income & Expenditure Account
- Items of cost (as per 148) - Books of Accounts in case of NPO
- Deeds, Vouchers - Cash Flow Statement
- Writings, Documents in paper / - Statement of changes in Equity
electronic form - Explanatory Note

2. General Requirements in Preparation of Books of Accounts

It should give True & Fair view Shall be prepared every financial Explain transactions of Registered & Accounts must be kept in Accrual
year Branch Office Basis & Double Entry System

3. Place of Maintenance of Books of Accounts, Books & Paper, Financial Statements

At the registered office of the company (OR) Any other place in India after passing Board Resolution
(+)
Intimate ROC about new address in AOC – 5 in 7 days

Note: Books of Branch Office:

Whether in India or Outside, the books shall be kept at branch office itself,
provided summarized returns shall be sent to Registered Office at Quarterly Intervals

44
 4. Inspection by Directors

Any Director can inspect the He can inspect Books of Subsidiary Financial information maintained outside India, can be requested by
Books during Business Hours only after authorisation by BOD Director to Company & it shall be provided in 15 days

He shall seek information directly & not through any agent

5. Period of Reservation
Books of Accounts (+) Vouchers = Minimum 8 years preceding financial year
If company incorporated newly, than such period of existence

6. Person responsible to maintain Books of Accounts

Managing Director Whole time Director in charge of Finance Chief Financial officer Any other person authorised by BOD

II. Financial Statements (Sec 129)

1. How to maintain Financial Statements

It shall give true & fair view of affairs of company Comply with Accounting Standards Shall be in the format as per Schedule III of
Companies Act, 2013
If Not Complied, then disclose

Deviation of such Reason for such What will be the Financial Effects
Accounting Standard Deviation of Deviation

2. Non – Applicability

Insurance Company Banking Company Company engages in Any other company for which
supply of electricity financial statements are specified

45
 3. Board shall lay full documents in Annual General meeting

Financial statements of Company (+) Consolidated Financial Statements (CFS) of all Subsidiary and Associate Company

To be prepared as per Accounting Standards

Exemption to prepare Consolidated Financial Statements (CFS)

It is a unlisted company (or) not in Its Ultimate (or) Intermediary holding It is a wholly (or) partly owned subsidiary of another company & all its
process of listing in or outside India company files CFS with ROC members have not given NO Objection on Non Presentment of CFS

4. Exemption by Central Government to comply with Section 129

Suo Moto (OR) On application by company & involves public interest

III. Re – Opening of Accounts (Sec 130)

To Re-Open & Re-Cast its Note:
Financial Statements Only Reason for re-opening 1) Books cannot be re-opened for a period earlier
Application to be made by To 1) Accounts were prepared in than 8 financial year’s preceding current
(a) Central Government Competent Court / Tribunal Fraudulent Manner financial year
(b) SEBI Before passing order, (OR) 2) It can be re-opened if there is direction issued
(c) Income Tax Authority it shall give notice 2) Affairs of company were mis- by central government that books shall be
(d) Statutory Authority to for any representation managed & there is doubt on maintained for more than 8 years
(e) Any person concerned reliability of Financial Statements 3) The accounts once revised shall be final

46
 IV. Voluntary Revision of Financial Statements (or) Board Report (Sec 131)

When to do? Maximum How? - It can be re-opened only Limit of revision?

If BOD thinks Duration - Company to apply for Tribunal’s once in a financial year If such previous Financial
a) Financial Statement (OR) Any of 3 preceding approval - Reason for revision to be Statements or report have
b) Board Report do not financial years - Tribunal shall forward it to Central disclosed in Board’s Report been
comply with Sec 129 & 134 Government & Income Tax - Sent to members; (or)
Authority for representation - Delivered to ROC
- File Tribunal’s Order with ROC - Laid in company’s general
meeting

Then revision shall be

confined to

The correction to comply & Making necessary

with section 129 or 134 consequential alteration

V. Constitution of National Financing Reporting Authority (Sec 132) Central Government

1. Composition Constituted NFRA on 01/10/2018

Chair Person Such Part - Time & Full - Time Members not exceeding 15
Who is eminent person having experience in Accounts, Audit, Finance, Law
Note:
1) Chair Person & Members shall declare to Central Government regarding no lack of
Independence / Conflict of Interest in their appointment
2) Chair Person & Members in full – time employment, shall not be associated
a) With any audit firm during their tenure &
b) 2 years after such ceasing to be member & chairperson

2. Functions of NFRA

Make recommendation to central Monitor & enforce Oversee the quality of service of Perform such other
government on formulation of Accounting compliance of Accounting & professionals with respect to such standards functions as may be
& Auditing Policies & Standards Auditing Standards & suggest change to improve quality prescribed

47
 3. Power to Investigate Service of Auditors of Companies & Body Corporates governed by NFRA
(Class of Companies given under Rule – 3 of NFRA Rules, 2018)

1. Listed Companies 2. Unlisted Public Company having 3. Insurance Company 4. Body corporate / Body corporate registered
in (or) outside India -Paid Up Capital of minimum 500 crore - Banking Company Company on a reference outside India, which is
(or) - Company engaged in made by central subsidiary or associate of (1)
-Turn Over of minimum 1,000 crore electricity government in public to (4) & if its income / net
(or) - Company under special interest to NFRA worth exceeds 20% net
-Aggregate (Loan, Debenture, Deposit) act worth of such company /
of minimum 500 crore banking company
Note:
1) NFRA Rules shall continue to apply for 3 years after it ceases to be
- Listed
- Exceed limit mentioned in point (2)
2) Every such body corporate shall inform the particulars of their auditors in Form NFRA – 1, within 30 days of commencement of rules

4. Penalty
On such investigation, if a professional mis-conduct is proved, then NFRA shall

Impose Penalty Debar the member / firm from

If it is Individual In case of Firm Being an Performing any Valuation

- Auditor
Minimum May extend to 5 times Minimum May extend to 10 - Internal Auditor
Rs. 1 lakh of fees received Rs. 5 lakh times of fees received - Undertaking Audit

Aggrieved Person Minimum = 6 months

can appeal to Appellate Tribunal Maximum up to 10 years

5. Audit & Annual Report

Audit of NFRA is conducted by Comptroller and Annual Report specifies activities done during Both reports shall be submitted to Central
Audit-General (CAG) the year Government, which will again be laid in both the
houses of Parliament

48
 VI. Financial Statement, Board’s Report (Sec 134)

Authentication of Financial Statements by Contents of Board Report Director’s Responsibility Statement

- Chairperson, if authorised by BOD, (or) (a) Number of Board Meetings (a) In preparing annual accounts applicable
- 2 Directors (1 shall be MD, if any) (b) Frauds reported by auditors under 143(12) accounting standards are followed
- CEO, CFO & CS if appointed (c) Amount of dividend recommended (b) Directors have selected accounting policies
- OPC – 1 Director (d) Amount proposed to carry to reserves that are reasonable to give true & fair view
(e) CSR initiatives (c) Maintenance of adequate Accounting Records
(f) Particulars of contracts / arrangements with (d) Accounts prepared on going concern basis
related parties (e) Listed companies has adequate internal
(g) Director’s Responsibility Statement financial controls

VII. Corporate Social Responsibility (Sec 135)

Applicability Non Applicability CSR Expenditure Schedule VII Implementation of CSR

- Net Worth = 500 crore (or) more If a company ceases to 2% of average net profits of a) Eradicating Hunger a) Sec 8 / Trust / Society
- Turn Over = 1,000 crore (or) more meet the requirement company made during 3 b) Promoting Education established by company
- Net Profit = 5 crore (or) more for 3 consecutive preceding financial years c) Promoting Gender b) Sec 8 / Trust / Society
financial years, not be Equality established by Central
during previous financial years required to constitute d) Protection of national Government (or) State
shall constitute CSR Committee CSR committee heritage Government
e) Contribution to PM Cares c) Sec 8 / Trust / Society
shall consist 3 (or) more directors Fund shall have established
in which 1 shall be independent. f) Slum area development track record of 3 years
*Private Company can have with
only 2 directors

49
 Chapter-10: Audit and Auditors
I. Appointment of Auditors (Sec 139)
1. Appointment of Auditors of Company

First Auditors [Sec 139(6)] At First Annual General Meeting [Sec 139(1)]
The auditor appointment at 1st Annual General Meeting shall hold office till
Government Company Any other company conclusion of 6th Annual General Meeting

After Incorporation After Incorporation Procedure

within 60 days within 30 days Appointed by Appointed by Audit Committee

Board
CAG shall appoint 1st Auditors BOD shall appoint 1st Auditors (not having Audit committee
audit
If CAG fails, within next 30 days If BOD fails, within 90 days committee) Recommends Auditor for appointment to Board of Directors

BOD shall appoint 1st Auditors Members shall appoint BOD shall Agrees Disagrees
consider &
If BOD fails, within next 60 days recommend an It shall forward the same Refer lack for
Auditor to to members approval at reconsideration to citing
Members shall appoint members in Annual General Meeting reasons
Annual General
Note: Proposed Auditor shall submit his consent & certificate that, Meeting Audit Committee
a) He is eligible for appointment & not disqualified
b) Proposed appointment is as per the term specified in Act Does not Re-Consider Does not Re-Consider
c) The appointment is within the maximum limit (20)
BOD shall also disagree BOD Agrees
Such appointment to be filed with ROC in Form ADT – 1 in 15 days
of appointment & BOD shall BOD recommends the
for specified companies inform NFRA in Form NFRA – 1 in 15 days a) Record reason for disagreement same name to
b) Send its own recommendation members
to members in AGM

50
Note: BOD / Audit committee shall consider following details while appointing Auditor
a) Qualification & Experience
b) Any proceedings of pending professional misconduct

2. Tenure / Rotation of Auditor [Sec 139(2) & (4)]

a. Applicability b. Manner of Rotation

Auditor
Listed Unlisted Public Private All Companies
Company Company Company having public Individual Firm
having Paid up having Paid up borrowing from - Maximum tenure shall be 1 term of - Maximum tenure shall be 2 terms of
Share Capital of Share Capital of Financial 5 consecutive years 5 consecutive years (5Y + 2T = 10Y)
Rs. 10 crore (or) Rs. 50 crore (or) Institutions, - Not eligible for re-appointment for a - On completion of 2 terms, cooling
more more Banks, Public period of 5 years from completion period of 5 years
Deposits of Rs. Note:
50 crore (or) 1) A firm with common partners shall not be appointed for 5 years
more 2) The existing company shall comply with these provision, within 3 years of
commencement of Act i.e., (Latest by 16 – 17)

3. Casual Vacancy of Auditors [Sec 139(8)]

In case of company whose Audit is done by CAG Other Company

within 30 days of casual vacancy within 30 days

CAG shall fill such vacancy BOD shall fill casual vacancy
Note: If casual vacancy is due to resignation, then
within 30 days after failure if CAG fails
within 30 days
BOD shall fill casual vacancy
BOD shall fill casual vacancy

within 3 months

To be approved by members
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 4. Re-appointment of Retiring Auditor
A retiring auditor may be re-appointed at an Annual General Meeting if

He is not disqualified Not given notice of unwillingness Special Resolution No auditor is appointed / re-appointed,
the existing auditor shall continue to be the auditor

II. Removal, Resignation of Auditor and Giving of Special Notice (115) (Sec 140)

Removal of Auditor before expiry of his term Resignation by Auditors

Pass Board Resolution within 30 days

within 30 days Auditor to file statement indicating reasons of such resignation in Form ADT – 3
with
Apply to Central Government approval in Form ADT – 2
Company ROC CAG
within 60 days of approval (If Government Company)

Pass Special Resolution

Special Notice Company Forward Retiring Representation To Company Forward the Representation To Members
notice to Auditor
For For not to Any company / Person may
Removal Re-Appoint apply for Tribunal to stop such
forward of representation

If not possible, auditor may

request it to be read out at
meeting

52
 III. Eligibility, Qualification & Disqualification of Auditors (Sec 141)

Qualification Disqualification [Sec141(3)] Vacation of Office

- CA If an auditor incurs any
- Firm (Majority of partners to be CA) (I) (II) A person / his relation / Partner disqualification after his
Only CA’s are authorised - Body Corporate (except LLP) - Security in Cash (He can’t, but Relatives appointment as per Sec
to act & sign - Officer / Employee of Company up to Rs. 1 lakh) 141(3), then he shall
- Partner / Employment of Officer / - Indebted to Cash excess of Rs. 5 lakh vacate the office
Employee of company - Guarantee to Cash excess of Rs. 1 lakh
- Person who renders services under - Person whose relative is Director / KMP
Section 144 - Person / Partner holding more than 20
- Person / Firm has Direct / Indirect companies as auditor
Business Relationship with CASH (Dormant, OPC, Small Company, Private
Does not include Company Paid Up Share Capital less than
Rs. 100 crore) not included in limit
Professional Ordinary Course
Services Rendered of Business at
Arm’s length price

53
 IV. Reporting of Fraud by Auditors [Sec 143(12)]

If fraud involved is Rs. 1 crore (or) more If fraud involved is less than Rs. 1 crore

within 2 days of knowledge of Fraud within 2 days of knowledge of Fraud

The auditor should report the matter to The auditor should report to Audit Company / BOD
Audit Company / BOD (a) Nature of Fraud
(b) Amount Involved
Need to reply within 45 days (c) Parties Involved

To Auditor Company shall disclose details in Board’s Report

(a) to (c) & (d) Remedial Action Taken
within 15 days

Forward to Central Government To,

a) His Report The Secretary,
b) Reply of Audit Committee / BOD Ministry of Corporate Affairs,
c) If no reply received, then to be informed (in sealed cover by post &
e-mail in Form ADT – 4)

This process is same for Cost & Secretarial Auditor

54
 V. Central Government to specify Audit of items of Cost in Certain Companies (Sec 148)

1. Cost Record 2. Cost Audit 3. Appointment of Cost Auditor

Mandatory for company engaged in production / Mandatory only if Central Government If company has audit committee, they shall
supply of goods & services as prescribed makes an order for company with such Turn recommend to Board & Remuneration shall be
E.g.: Telecom, Electricity, etc. Over (or) Net Worth as prescribed approved by members.
If company does not have audit committee, BOD
Maintenance shall appoint & remuneration shall be fixed by
Mandatory only if Central Government makes order Board & approval of members is required.
(Company under special act, central government to
consult regulatory authority)

What is to be maintained?
Particulars relating to
1) Utilisation of material
2) Utilisation of labour
3) Other items of cost

4. Who shall be Cost Auditor? 5. Cost Audit Report (CAR)

a) It shall be done by Cost Accountant Cost Auditor
b) Auditor under Sec 139 shall not be appointed as Cost Auditor
c) Comply with Cost Audit Standard (By ICWA) Submit his report to BOD
d) Qualification, Disqualification, Rights shall apply to Cost Auditor A copy of CAR in XBRL form
(Sec 141 & 143) i.e., Form CRA – 4 within 30 days of receipt

Applicable to company for Forward to Central Government

financial years commencing from Central Government may ask for
01/04/2014 such other information

55
 MODULE – 2
Chapter-1: The Indian Contract Act, 1872
Unit-1: Contract of Indemnity and Guarantee

I. Contract of Indemnity (Sec 124)

Meaning Parties Special Points: Rights of Indemnity Holder when

A contract where one party (a) Indemnifier 1) Modes of Contract – express / implies sued; to recover from Promisor
promises to save other from any (The one who promises) 2) LIC not considered as Indemnity (a) Damages compelled to pay in
loss due to conduct of (b)Indemnity Holder / Indemnified 3) It must fulfil all other essential any suit
- Promisor himself (The person promised to be saved elements of contract (b) Costs in defending the suit
- Any other Person against loss) (c) All sums paid under terms of
(Act of God exempt) compromise of suit

II. Contract of Guarantee

1. In Guarantee

There are 3 Parties involved There are 3 contracts in Contract of Guarantee

1) Surety – Person who gives guarantee 1) Principal Contract = Principal Debtor (+) Creditor
2) Principal Debtor – Against whom guarantee is given 2) Secondary Contract = Creditor (+) Surety
3) Creditor – To whom guarantee is given 3) Implied Contract = Surety (+) Principal Debtor

2. Essential Features of Guarantee

Existence of Consideration Existence of No Misrepresentation Need not be in Guarantee is not

Principal Debtor - Guarantee without consideration is Liability (or) Concealment writing, oral is valid until some
void also valid other person joins
No P.D = No Guarantee - But no need of any direct It must be Any guarantee obtained as co-surety, if such
consideration between surety & enforceable & by creditor by silence (or) condition is
creditor not Time Barred misrepresentation shall imposed by surety
P.D = Incompetent = Guarantee Valid be Invalid
Surety = Incompetent = Guarantee Void

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 3. Types of Guarantee

Specific Guarantee Continuing Guarantee

Guarantee extended to specific transactions / single debt Guarantee which extends to series of transaction

It can be revoked, if liability is not yet accrued It continues till

- Performance
- Discharged
- Revoked (only future)

4. Nature & Extent of Surety’s Liability

Liability of surety is co- Liability of surety is Liability arises immediately Defect in Document Creditor can sue Surety
extensive (surety liable to Secondary Nature on default by principal directly without proceeding
extent P.D is liable) (only on P.D’s default) debtor Debtor & Surety both are against principal debtor
discharged

5. Discharge of Surety

By Revocation By Conduct of Creditor By Invalidation of

Contract of Guarantee
of continuing Death of Surety By Variance By release (or) Creditor Creditor’s - Guarantee obtained by
guarantee by Novation in contract Discharge of - Compounds Act / Misrepresentation
notice - Future Transactions without Principal Debtor - Gives time Omission - Guarantee obtained by
are revoked Old surety - Enters into fresh - Agrees not Impairs Concealment
Only Future - His estate (property) contract consent contract with to sue P.D surety - Contract that creditor not
Transactions shall be liable for past replaced Principal Debtor eventual to act until co-surety joins
transactions by new If such - Does any act / remedy
contract alteration omission
is
beneficial Legal consequence
to surety is discharge of
then not principal debtor
discharged

57
 6. Rights of a Surety

Against Principal Debtor Against the Creditor Against Co-Surety

Right of Subrogation Implied Promise to Right to benefit of Right to Right to share They are liable to Co-Sureties having
indemnify surety Creditor Security set off reduction contribute equally different sums
Stepping into shoes of unless otherwise
creditor to recover If creditor loses, When P.D agreed Liable to pay equally
then surety is becomes insolvent as far as Limits of their
discharged to that respective obligation
extent permit

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 Unit-2: Bailment and Pledge

I. Bailment

Meaning Parties Essential Elements of a Bailment Classification of Bailment based on

Delivery of goods by one Bailor – Person delivering the goods - Contract: Express / Implied, Reward
person to another for some Bailee – Person to whom they are delivered consideration is not mandatory - Gratuitous Bailment (Free)
purpose, when the purpose - Delivery of Goods: Only Movable - Non Gratuitous Bailment
is accomplished the goods a) Actual Delivery (Both parties get benefit)
be returned b) Constructive delivery
- Purpose
- Possession: having just custody is
different from possession
- Return of Goods

II. Rights of Bailor III. Duties of Bailee (Includes Pawnee)

1) To Terminate the Bailment: If Bailee acted inconsistent with terms of 1) Take reasonable care of goods
contract 2) Not to setup adverse title
2) Premature Termination: In gratuitous bailment, Bailor can demand 3) Not to make inconsistent use of goods
goods at anytime, need not to compensate bailee in case of Loss 4) Return an Accretion from goods
3) Suit against Wrong doer: If a 3rd person does any injury to goods in 5) Return the goods: according to Bailor’s direction on (or) before the
possession of bailee, Bailor may file a suit against such person promised date. If not, he shall be liable for any loss.
4) Right to sue the Bailee for: 6) Not to mix the goods: If bailee mixes it with his own goods
(a) Compensation for loss by negligence of bailee
(b) Compensation for unauthorised mixing of goods Possible to Separate Impossible to Separate
(c) Compensation for unauthorised use of goods
(d) To demand back the goods Bailor to bear the cost of separation Bailor is entitled to compensation
(e) Right to accretion to the goods, bailed

59
 IV. Finder of Lost Goods Finder of Lost Goods has Right to Sell Property, when?

He has no right to sue the owner for If owner has offered a Owner cannot Owner refuses to pay the lawful charges
compensation of expenses incurred specific reward be found &
voluntary
Finder of Lost Goods may They are (OR) Lawful charges in finding
But he may retain goods against such sue the owner for such perishable in owner amounts to 2/3rd of
expenses reward nature value of the thing

V. Rights of Bailee VI. Duties of Bailor

1) To deliver the goods to anyone of Joint Bailor 1) To receive back the goods after time & purpose
2) Right to Indemnity: If bailor has no title & bailee delivers them back to Bailor 2) To indemnify any loss suffered
3) Claim Compensation in case of faulty goods. Bailee gets a right if Bailor fails to disclose the 3) Duty to disclose faults in goods bailed
fault known to him (Gratuitous)
Note: If Bailment is for Hire, Bailee is liable even if he is not aware of it. (Non Gratuitous) Same
4) Claim extra ordinary expenses 4) Pay necessary expenses
5) Right to apply to court to decide the Title of Goods 5) Indemnify bailee for Premature Termination
6) Right to Lien

Particular Lien General Lien

Only when service of skill (or) labour is Banker, Factor, Wharfingers, Attorney of High
involved Court, Policy Broker alone are entitled for such lien

Right to retain until remuneration By express agreement others may also have
received general lien

VII. Termination of Bailment

On Expiry of period On Fulfilment of By Notice By Death of Bailee / Bailor On Destruction of

stipulated Purpose in case of gratuitous subject matter
Gratuitous Non Gratuitous bailment

Anytime by Notice Bailee acts inconsistent with contract

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 VIII. Pledge

Parties Meaning Essentials

Pawnor = Borrower Bailment of goods as security for
Pawnee = Creditor repayment of debt Bailment for Subject matter is Goods (movable) in Delivery of goods from Pledger
security existence to Pledgee

IX. Pawnee’s Rights X. Duties of Pawnor

1) Right to retain pledged goods (For Principal, Interest, Expenses) 1) Liable to pay the debt
2) Right to retention of subsequent debt 2) Disclose all the faults
3) Right to extra ordinary expenses – he can’t retain goods for it 3) Pay extra ordinary expenses
4) When Pawnor makes default 4) Indemnify Pawnee if loss occurs
(a) File suit & retain goods 5) Pay deficit if Pawnee sells the goods due to default
(b) Sell goods after giving notice

If proceeds are less If proceeds are more

Recover from Pawnor Surplus to Pawnor

XI. Pledge by Non-Owners

1. Pledge by 2. Person in possession 3. Pawnor has 4. Pledge by co-owner in 5. Pledge by Seller / Buyer in
Mercantile Agent under voidable contract limited interest possession possession

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 Unit-3: Agency

Agent
Agent is a person employed to do any act for another (or) represent another in dealing with 3rd person

I. Parties

Principal Agent
Should be Competent Person (Major + Sound Mind) Any person can become an agent

If Incompetent, then Principal shall be liable even for unauthorised acts

II. How is an Agency created?

Express Authority Implied Authority Estoppel Necessity Ratification

(a) It can be express / implied
By words Based on circumstances Principal make representation For Emergencies (b) Complete knowledge for valid ratification
(oral / written) that agent has authority (c) Rectifying in entirety & not in part
(d) To be done in reasonable time
(e) Should be communicated to other party
(f) Act should not be void / illegal

Principal III. Appointment of Sub – Agent

Agent “Delegatus Non Potest Delegare” i.e., An Agent cannot further delegate
Sub – Agent Sub – Agent

Legal Validity Exceptions

If properly appointed No authority to appoint Terms of appointment Custom of trades Unforeseen

allowed it provides for Emergency
Principal shall be liable to 3rd Agent shall stand in relation of appointment
Parties Principal & Principal is not liable

62
 Substituted Agent
They are appointed by Agents for Principal with knowledge & consent of principal

IV. Rights of an Agent

Right to Right to retain out of sums received on Agent’s lien on Principal’s property Right to Indemnity
Remuneration Principal Account a) Foe lawful acts
Conditions Right is Lost b) Against acts done in good faith
Advances Expenses Remuneration - Lawfully entitled - When possession is lost c) Non liability of employer of
Made Incurred Payable - Property should belong - Agent waives his right agent to do criminal act
to Principal - Contract to contrary d) Compensation for injury
- Agent has particular lien caused by Principal’s neglect

V. Duties of Agent

Duty to Duty of Duty to follow Avoid conflict Communicate Not to make To Not to delegate Pay sum Not to use
execute Reasonable instruction / of Interest with principal secret profits render received confidential
mandate care & skill custom (not to deal in difficulties (need to disclose proper (Sub-Agent not for information
on his own about the accounts valid generally) principal against
Compensate Principal if acted otherwise account) transaction) principal

VI. Principal / Agent’s Liability to 3rd Parties

Principal’s Agent is not Principal’s liability when agent exceeds Any notice given Effect of Misrepresentation (or) Fraud by Agent
liability for acts personally liable by Authority to agent is
of Agent contracts on behalf equivalent to If acted within Course Beyond the scope of
of Principal Separable Non-Separable giving it to of Business Authority
within scope Principal
Principal liable to Agent is Principal to be Agent is personally
Exceptions authorised extent personally liable deemed to be liable liable

Pretended Foreign Agent does not disclose Incompetent

Agent Principal name of principal Principal (Minor)

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 VII. Rights of 3rd Parties

Contract made by Undisclosed Agent Performance of Contract where Agent is Option of 3rd person to sue the Agent (or) Principal
supposed (assumed) to be Principal
If Agent doesn’t disclose that he is an agent, case where Consequence of including Agent /
If Principal is disclosed before contract is Agent is Principal to act on belief that
completed, the 3rd party may refuse to fulfil Personally Principal / Agent will be
the contract Liable exclusively liable

VIII. Termination of Agency

On Completion of On Expiry of Principal’s Revocation by Principal Remuneration by Agent Death (or) Insanity of
Business Time Insolvency Principal / Agent
It can’t be revoked if Agency / Agent Note: If terminated before stipulated
is personally interested in subject period, compensation should be by
matter such (Principal / Agent) defaulting
party

Effect of termination
Agency comes to an end

For Agent For 3rd Party

when gets to know when they come to know

64
 Chapter-2: The Negotiable Instruments Act, 1881
The Act does not define what is a Negotiable Instrument.
However, Section 13 provides for 3 kinds of Negotiable Instruments

1. Promissory Note (Sec 4) 2. Bill of Exchange (Sec 5) 3. Cheque (Sec 6)

I. Essential Characteristics of Negotiable Instruments

In writing Signed Freely transferrable up to Unconditional promise(*) To pay money only Instrument must be
satisfaction delivered
(Things which are certain is an
exception)

II. Promissory Note (Sec 4)

Meaning Parties Characteristics

It is an unconditional undertaking signed by the - In writing, signed by the maker
maker to pay a certain sum of money only to (or) Maker Payee - Express promise to pay, mere acknowledgement is not sufficient
to the order of certain person (or) Bearer of - The sum payable should be definite & unconditional
Instrument Debtor Creditor - Pay money only
- It should be stamped
- Maker & Payee to be certain & different person

Note: A promissory note cannot be made payable to Bearer (only RBI / Central Government has the power) → Sec 31 of RBI Act, 1934

65
 III. Bill of Exchange (Sec 5)

Meaning Parties Characteristics

It is an instrument in writing containing an (a) Drawer: Maker of a Bill (Creditor / Seller)
unconditional order signed by drawer, (b) Drawee: A person directed by drawer to pay (he is a person on whom Bill is drawn) Same as
directing a person to pay a certain sum of [Debtor / Buyer] Promissory Note
money to order (or) order of certain (c) Payee: to whom money is to be paid, it can be even drawer himself
person (or) to Bearer of Instrument (d) Acceptor: Drawee who has signed & accepted the bill drawn on him
(e) Acceptor for honor: whom Bill of Exchange is dishonoured by non acceptance &
any person accept it for honor of the drawer (such other person)

IV. Essentials

Holder must consent to Bill must have been noted (or) Can be made by a person who is Must be for whole Must be in writing before
acceptance for honor protested for non - acceptance not already liable on the bill amount the bill is over due

V. Rights & Liabilities of Acceptance for Honour (Sec 111 & Sec 112)

Binds himself liable to all subsequent parties to All prior parties are liable to compensate Acceptor For Honor, is not liable if bill is presented
pay if drawee doesn’t pay Acceptor for honor for all loss sustained later than day after the day of its maturity

Holder (Sec 8) Holder for Value Holder in Due Course (Sec 9)

- Entitled in his name to possession - Entitled in his name to possession - Entitled in his name to possession
- Acquired before maturity - Acquired before maturity - Acquired before maturity
- Example: Gift, Inheritance - Got the instrument for consideration - It must be obtained in Good Faith, without negligence

VI. Privileges of holder in Due Course

In case of Inchoate Instrument In case of Fictitious Bill Holder in Due Course gets title free from all defects

Holder in Due Course can recover money Drawer is not relieved from payment to Lost Instrument Fraud Unlawful Consideration
up to stamp duty covered Holding in Due Course

66
 VII. Classification of Negotiable Instrument
1. Based on Parties

Bearer Instrument Order Instrument

The amount to be payable to person in possession of Bill Payable to person whose name is appearing on bill
Example:
(a) Where payee is left blank
(b) Blank Endorsement
(c) Written as Bearer

2. Based on Validity

Inchoate Instrument Ambiguous Instrument

Person delivers a Blank instrument to complete with appropriate amount (a) Where an instrument can be treated as Bill of Exchange / Promissory
up to stamp values of Instrument Note at the option of holder
(b) When the drawer & drawee are same person it becomes Ambiguous
Holder Holder in Due Course Instrument
He cannot recover the amount in Can recover any amount on such (c) Once bill is treated as Bill of Exchange / Promissory Note cannot later
excess of what was intended instrument up to the stamp duty on be treated other wise
affixed Note: Amount stated different in words & figures follow words

3. Based on Place

Inland Instruments Foreign Instruments

Drawn in India
AND Drawn outside India (OR) Drawn in India
AND AND
Payable in (OR) Drawee resides in
India India Payable in (or) (OR) Drawee resides in Payable & Drawee
outside India India (or) outside outside India outside India
Note:
1) Foreign Instrument is regulated by the law of place where he made the instrument
2) If Bill is endorsed; the law of place where instrument is made is payable

67
 4. Based on Time

Demand Instrument (Sec 19) Time Instrument (Sec 22)

(a) A Negotiable Instrument in which no time is mentioned then it shall be payable on demand A Negotiable Instrument which is payable
(b) Cheques are always payable on demand (a) After fixed period / After date
(c) Bill of Exchange / Promissory Note is payable on demand if it is mentioned as (b) After Sight
- Payable on Demand; (or) (c) On Special day
- At Sight; (or) (d) On happening of certain event
- At Presentment

VIII. Maturity of Negotiable Instrument

Bill At Sight Bill After Date Bill After Sight

This means the negotiable instrument is payable Payable at fixed time after date mentioned on Period of Negotiable Instrument starts from date
on demand Negotiable Instrument of acceptance

No Grace Period is allowed Grace Period is Allowed Grace period is Allowed

IX. Grace Period (Sec 22)

A Bill not payable on demand, at sight, on presentment i.e., a Time Instrument is allowed 3 days of grace period from the date it is due
If 3rd Day is

Public Holiday (or) Sunday as declared by Central Government in Official Gazette Emergency Holiday

Preceding day to be considered (previous) Succeeding Day of 3rd day (next day)

Example: A Bill drawn on 01/06/2021, payable 120 days after date

Solution: Days to be excluded : Date on which Bill was drawn i.e., 01/06/2021
Remaining days in June = 29
July = 31
August = 31 ; 120th day ends on September 29th , 2021 (+) 3 days = 2nd October, 2021
As it is a public holiday consider the preceding Business day; i.e., 1 st October, 2021

68
 X. Negotiation of negotiable Instruments
Mode of Negotiation of Negotiable Instrument

If payable to Bearer If payable to Order

Negotiation can be done just by Delivery Negotiation can be done by Indorsement (+)Delivery

Parties

Person who transfers is called To whom it is transferred is called

Endorser / Indorser Endorsee / Indorsee
By signing on
Back / Face / On Slip of Paper (allonge)

XI. Various Kinds of Indorsement

Indorsement in Blank Indorsement in Full Partial Indorsement Restrictive Indorsement Conditional Negotiation Back
Indorsement - When negotiable instrument is
Endorser sign the Indorser signs & Transfer of only a Indorsements which circulated back to any prior party
instrument without name of Indorser is part of amount of excludes / restricts the - The intermediate parties are
writing indorsee’s specified Instrument right of indorsee to discharged
name further transfer - If within Sans Recourse, prior /
It is invalid as per Law intermediate parties shall be liable

Sans Recourse Indorsement Facultative Indorsement Sans Frais Indorsement Liability dependent upon a
Contingency
An Indorser excludes his liability Where Indorser abandons a right When indorser excludes himself
from the Bill (or) increases his liability from any expense on his account on Liability which occurs on happening
the Instrument of an event.
E.g.: Death

69
 XII. Modes of Discharge from Liability on Instruments

By Cancellation By Release By Payment When holder Holder accepting Discharge of By Bill coming Discharge by
allows drawee for Qualified Drawer when back to Acceptor Material
Holder cancels Discharging a When the more than 48 Acceptance cheque is not hand after Alteration
name of party party from any money due on hours to accept presented within maturity
on instrument other method Bill is Paid the Bill, all Prior parties reasonable time If no mutual
apart from previous parties whose consent is by holder to consent then
Such person & cancellation not consenting not taken are Bank & if Bank such alteration
all subsequent are discharged discharged fails causing shall be void
parties are The effect is damage to against people
discharged from same as drawer who do not
liability cancellation consent
He is relieved to
extent of
damage caused

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 XIII. Cheque (Sec 6)

Meaning Types of Cheques Parties

It is a Bill of Exchange drawn on a specified (a) Drawer: Person who draws (or) makes cheque
Banker & not expressed to be payable otherwise Open Cheque Crossed Cheque (Debtor)
than on demand & includes (b) Drawee: Specific bank on whom cheque is
A cheque payable at It is an instruction to drawn
Cheques in Electronic Truncated Cheque the counter the drawee not pay (c) Payee: The person named in the instrument /
Form the money at the to whom the cheque is issued
It is at risk if drawer counter but to be
loses an open cheque done through a Bank

Types of Crossing

General Crossing Special Crossing Account Payee (or) Restrictive Crossing Not Negotiable Crossing

An instruction to a Banker not to Payment can be obtained only Banker is to collect the cheque on If not negotiable is written, even a
pay cheque at the counter, through Particular Bank behalf of payee only, appearing on face Holder in Due Course won’t get a
But to credit it to Payee’s Account (Out of all Accounts payee has of it good title if the transferor’s title is
from different Banks) defective
Banker will be liable if accepted
otherwise The instrument is still negotiable

This cannot be indorsed Thus if title of Transferor is

defective, the title of Transferee will
also be defective

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 XIV. Cheque Bounce / Dishonour of a Cheque (Sec 138 to Sec 142)
Issues a cheque for discharge of a legally enforceable debt
Stage – I Drawer Holder / Payee
i.e., Gift / Donation / Security is not covered under this section
Presentation for Payment
Stage – II Bank Holder
within 3 months (or) within validity period, whichever is earlier

Stage – III Bank Holder

Cheque returned, due to insufficiency of funds

Stage – IV Drawer Holder

Notice of Dishonour, within 30 days of Receipt of information from Bank
Payment to be made within 15 days
Stage – V Drawer Holder
If not,
Court (Sec 142) complain in writing
Holder
within next 1 month
Stage – VI Metropolitan (OR) st
1 class Payee Bank A/c
Jurisdiction Crossed Cheque
Judicial Magistrator Ordinary Cheque Drawers Bank A/c
Court may order Appeal to Appeallate Court
Stage – VII
Imprisonment Fine Conditions (Sec 148)
(OR)
Maximum 2 years Up to 2 times of Amount of Cheque

Drawer shall deposit minimum 20% of fine /

(Sec143A) Court may pass an Interim Compensation Order compensation awarded by court in 60 days of order
(+) 30 days extension
Maximum 20% of Amount of Cheque (It shall be 20 + 20%)

- Any new cases against the same drawer, the cases shall be filed / transferred to the court where the initial case is going on (Sec 142)
(Sec 142A)
- After Negotiable Instrument (Amended) Act, 2015; multiple cases against same drawer shall be transferred to court where 1st case was filed

(Sec 147) Every offence punishable under this act is compoundable

Where Drawer is a company, then company (+) person in charge (+) Director / Manager, Secretary shall be punishable if guilty
(Sec 141) This condition shall not apply to director nominated by virtue of his position / employment in
Central Government (or) State Government

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 Chapter-3: The General Clauses Act, 1897
Need? Applicability Objective
It consolidate & extend - Shorten the language of Central Act
the General Clauses To all Central Acts When does it apply? - To provide uniformity of expressions in Central Act
Act of 1868 & 1887 [Sec 3(7)] - Convenient rules for construction & interpretation
when there is conflict between pre - Guard against slips & oversights
means an act of absence of clear & post constitutional - Chief Inspector of Mines vs Karam Chand Thapar
parliament & definition laws
includes

Act of Dominion Legislature Act before Commencement

(or) of Constitution by
(Between Indian Legislature
15/08/1947 to 26/01/1950) Governor (OR) Governor General
General in in Legislative
Constitution of India came Council Capacity
into effect

History: India when governed by British, Governor General / Viceroy were appointed as the representative of monarch of United Kingdom
(came to end on 26/01/1950)

I. Central Government [Sec 3(8)]

Before Commencement of Constitution After Commencement of Constitution

means Governor General in Council & includes means the President & shall include

Functions entrusted to In relation to in relation to function Administration of Part C State Administration of

Government of Province administration of Chief entrusted Government Union Territory
Commissioner’s Province of State Chief Commissioner (or)
Such Principal Lieutenant Governor (or) Administration
Government acting Such Commissioner acting Such State Government Government of neighbouring state (or) acting within the
within the scope within the scope acting within scope Other authority acting within scope scope

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 II. In 1950, Constitution of India distinguished India into 4 Parts

Part – A Part – B Part – C Part – D

(States = 9 States) (States = 8 States) (States = 10 States) (State = 1 State)

These are former governor’s They are former princely states governed by a It includes former chief commissioner Andaman & Nicobar
provinces of British India ‘Raj Pramukh’ who was Ruler of state, provision & some princely states & each
E.g.: Madras, Uttar Pradesh, appointed by President of India was governed by chief commissioner Governed by
Madhya Pradesh, West Bengal, E.g.: Hyderabad, Jammu & Kashmir, Mysore, appointed by President of India Lieutenant Governor
Bombay, Punjab Rajasthan (1947 - 1956) E.g.: Delhi, Bhopal

III. Act coming into operation of enactment (effective date) [Sec 5]

If date is specifically mentioned in the Act If date is not specified

The day specified in the Act The day when act has been assented by

[As the clock strikes 12 a.m. President of India (OR) Governor General
December 31st (12:00 a.m.) → Effective January 1st]
Act of Parliament Before Commencement of Constitution

IV. Effect of Repeal (Sec 6)

Where a Act made after commencement of this Act repeals anu act made,
The repeal shall not

Revive anything not (OR) Affect previous (OR) Affect any Right, Privilege, (OR) Affect any Penalty, Forfeiture, (OR) Affect any Inquiry,
enforced / prevailed operation of any Obligation, Liability acquired Punishment committed under Litigation (or)
during the period enactment under repealed enactment repealed enactment Remedy

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 V. General Clauses Act, 1897

Application of foregoing sections

Applicability on the Act

General Clauses Act, 1868 General Clauses Act, 1887 General Clauses Act, 1897

Passed on Passed on Passed on

02/01/1868 03/January/1868 14/January/1887 11/March/1897

General Clauses Act does not apply to Acts Section 4 & 4A of General Clauses Act General Clauses Act applicable
passed prior to 03/01/1868 shall apply only on few definition on all the Central Acts
E.g.: Indian Penal Code, 1860 E.g.: Negotiable Instruments Act, 1881 E.g.: Companies Act, 2013
Indian Contract Act, 1872

Sections In short Provisions of General Clauses Act

Sec 7 Revival of Repealed Enactments (Partially / Wholly) can be done after providing purpose
In case of Repeal & Re-enactment, references in any other enactment shall be considered as references to the provisions so re-enacted
Sec 8
(unless a different intention is expressed)
Sec 9 Commencement & termination of Time: 1st day to be excluded – when written as from & last date to be included

Sec 10 If the court / office is closed on last day, if closed then day next court opens

Sec 11 Measurement of Distance: To be taken in straight line on horizontal plane

Sec 12 Duty take Pro-Rate on greater (or) lesser quantity

Gender: Masculine shall include females
Sec 13 Unless otherwise provided in the Act
Number: Singular includes plural
Sec 14 Power conferred may be exercised by authority from time to time

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Sec 15 Power to appoint may be made by name (or) by ex-officio

Sec 16 Power to appoint include Power to suspend (or) dismiss

Sec 17 To indicate the application of Law to Person executing function of an office, it shall be sufficient to mention official title
To indicate relation of Law to Successors of functionaries (or) corporation (having perpetual succession) express its relation to such
Sec 18
functionaries (or) corporation
Sec 19 Law relative to chief or superior shall apply to deputies (or)subordinates to same extent

Sec 20 Notification / Order / Scheme / Rules shall have same respective meaning as per the Act

Sec 21 Power to issue include power to add, amend, vary (or) rescind notification / rules / Bye Laws etc.
Establishment of any court / Appointment of Judge / Fees with respect to Act which has not come into force, it shall not be effective until
Sec 22
commencement of Act / Regulation
Making of rules / Bye – laws after Previous Publication
- Publish a draft of proposal rules
- Publication as specified
Sec 23 - Notice specifying date for taking into consideration
- Sanction / approval of another Authority
- Make suitable changes to Draft
- Publication in Official Gazette
Sec 24 Order, Scheme, Rules, Bye – laws of repealed enactment shall continue to Re-enacted law unless otherwise specified

Sec 25 Recovery of fines as per Sec 63 to 70 of Indian Penal Code & Code of Criminal Procedure

Sec 26 One Person shall not be punished for same offence under 2 different laws
Service by Post: deemed to be effected by
(a) Properly Addressing
Sec 27
(b) Pre – Paying
(c) Posting by registered post
Sec 28 Citation of enactments one law can give a reference to another enactment

Sec 29 General Clauses Act shall not apply to laws existing before commencement of General clauses Act

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 Chapter-4: Interpretation of Statutes
Definition

Statute / Act Document Instrument

It is a law enacted by Comprises 4 Elements A legal document which creates
Parliament (or) State (a) Matter: It defines the purpose of the document any Rights (or) Liabilities
Legislature (b) Substance: Element on which mental / intellectual element finds permanent form
E.g.: Stone, Paper, Card
(c) Means: How it is expressed, i.e., letters, figures, marks, symbols
(d) Record: Device used for such interpretation (mechanical devices, writing etc.)

Classification of Interpretation

Legal Doctrinal
(When there is an Actual rule of law which binds the Judge) (When the purpose is to discover ‘Real & True’ meaning of statute)

Authentic Usual Grammatical Logical

When rule of Interpretation is When it comes from some other When court applies ordinary When court goes beyond of the
derived from the Legislator himself source such as ‘custom (or) case law’ Rules of Speech for finding the words & tries to discover the
meaning of statute intention of statute

Why do we need interpretation / Construction?

Enacted laws are not so Intent of legislature should not only be To clear the confusion, several aids are used
perfect as to leave no gathered from language but also from
ambiguities surrounding circumstances Statutory Non Statutory

General Clauses Act, Definitions Covered under Interpretation of

of Individual Acts Statues

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 I. Rules of Interpretation / Construction

Primary Rules Secondary Rules

A. Primary Rules
1) Rule of Literal Construction (Maxim – Absolute Sententia Expositore Non Indigent)

1st & Cardinal Meaning: When language of When a word has 2 interpretations Words are to be Technical words to be used in
rule of Plain words require statute is plain & ‘One Narrower & One Wider’ understood technical sense
construction no explanation unambiguous no If narrower fails to achieve the object under natural & E.g.:
question of follow the wider one popular sense Person in Income Tax Act
construction arises E.g.: Sec 102 of Companies Act, 2013 E.g.: Betel Leaves Practice in Supreme Court Act

2) Rule of Reasonable Construction (Maxim – Ut Res Magis Valeat Quam Pereat)

Meaning: When the plain or If court finds meaning defeats Example:

Statute must be grammatical meaning does the law, it is the duty of the 1) In section 244, who can file case under class action suit, member
interpreted as to not give a sensible meaning court to depart from dictionary includes preference shareholder
lead to a sensible (i.e., literal construction, meaning & adopt construction 2) To become CA, one needs to obtain CA degree
meaning this maxim to be followed) which will suppress the 3) To function as a company the company shall obtain ‘Certificate
mischief & advance remedy of Incorporation’ from ‘Ministry of Corporate Affairs’

3) Rule of Harmonious Construction

When there is a A statute must When it is not In some cases statute has clearly indicated which Example:
conflict between the be read as a possible a provision is subordinate Article 13(2)
provision of a Statute whole & not in specific rule Fundamental Rights cannot be
Rule of Harmonious sections will override a without subject to not mended
Construction shall be General rule prejudice withstanding Article 368
used It is court’s such provision Parliament has power to amend any
duty to give General (+) shall have a overriding part of constitution
effect to all Special subordinate / the effect Harmonious Construction
the parts of a Provision other provision Fundamental Rights can be amended
statute Both to be read shall prevail but basic structure cannot be changed

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 4) Rule of Beneficial Construction / Heydon’s Rule / Purposive Construction / Mischief Rule (1584)

If language in statute is capable 4 matters to be considered Example:

of more than one 1) What was the law before making the Act? 1) Prize Competition Act
Interpretation this can be 2) What was Mischief (defect) law did not provide? 2) For Understanding don’t write this in exam ‘Smith vs Hughes’
referred 3) What is the remedy the Act has provided? - Street Offences Act, 1959
4) What is the reason for remedy? - It shall be an offence if prostitute solicit people in street
(or) public place
- Was held liable

5) Rule of Exceptional Construction / Common Sense Rule

General rule is that effect must be given to Conjunctive (or) Disjunctive Words
every word of statute, however if no MAY MUST / SHALL
sensible meaning can be derived from such AND OR
word, it can be eliminated Directors in nature Mandatory in nature
Conjunctive, both Disjunctive anyone to
Exception words shall be be satisfied optional & not strictly compulsory & strictly
E.g.: Official Secrets Act, 1920 applicable observed observed

can be used vice versa as an exception can be used vice versa as an exception

6) Rule of Ejusdem Generis

Meaning: Understanding When Applicable? Example:

Same Kind (or) Same Species (a) Enumeration of specific words Arms, ammunition, gun powder,
When general words are followed by (b) Enumeration constitutes a category any other goods
specific words, the general words (c) Such class / category is not exhausted
take the color of specific words (d) General Terms follow enumeration
(e) No different legislature intent

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 B. Secondary Rules

Doctrine of Contemporanea Exposito (or) Effect of Usage Doctrine of Noscitur a Sociis

The meaning of a word is known by its associates
Optima Legum Interpees Est Consuetude Contemporanea Exposito Est Optima Et Example:
Fortissinia In Lege 1. ORANGE Red, Blue = Color
The custom is the best interpreter of the (a) Best way to interpret a document is to read it Apple, Grape = Fruit
Law as it would have been read when made
(b) The best interpretation is that made by 2. Fresh Orange Juice
Contemporary Authority Commissioner of Customs & Excise vs Savoy Hotel

This applies for construing ancient statutes but not moderns

E.g.: Documents issued by Government under Securities Contracts (Regulations) Act, 1956

II. Aids to Interpretation / Construction

Internal Aids & External Aid

Help available within the statute Help out of the Statute

A. Internal Aids

1. Title 2. Preamble 3. Heading & Title of a Chapter 4. Marginal Notes

- Express scope, object 7 purpose of act - It may be referred to know - They are summaries & side notes
Short Long - It recites cause of making statute the scope of a section often found at the side of section /
- Preamble does not override the plain - Heading cannot control / group
Name of Purpose of provision of the act override a section - They ae not part of enactment
the Act the Act E.g.: Gullipoli Sowria Raj vs Bandaru E.g.: Companies Act Chapters - Hence they are not an aid to
Pavani (Hindu Marriage Act, 1955) construction
May be referred to ascertain - However marginal notes offended to
the purpose of the act, Articles of Constitution of India forms
however it cannot override the part of constitution
clear meaning of enactment

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 5. Definitional Section 6. Illustrations 7. Proviso

Restrictive & Extensive Ambiguous Examples given Exception Provisio Saving Clause
- Means – Restrictive & Exhaustive in statute
- Include – Extensive (not restricted) Not to be in Isolation The intention is Remove Preserve from
- Means & Include E.g.: Industrial Disputes Act, 1947 to restrain a special cases destruction
(a) Considered (Seasonal Workers) clause being from general certain rights
(b) Exhaustive applied to a enactment already existing
- Apply & Include – Extensive particular case
- Deemed to Include – Extensive

8. Explanation 9. Schedule 10. Read the Statute as a whole

Attached to a section to explain - It must be read together with the Act for all purposes of construction
meaning of the text of section - In case of inconsistency between Act & Schedules, Act shall prevail

B. External Aids

1. Historical Setting 2. Consolidating Statutes & Previous Law 3. Usage

History of external circumstances The previous law can be referred If meaning is unclear, how that word has been interpreted & acted
which led to enactment over a long period may determine its true meaning

4. Earlier & Later Acts & Analogous 5. Dictionary Definition 6. Use of Foreign Decisions
(Pari Materia) - Decision of countries following same system of
- 2 different statutes on same subject matter shall be To be referred if the act does not Jurisprudence can be used
construed (read) together define the word - Indian decisions prevail over foreign decisions
- If there is discrepancy, the later act shall prevail
- Repealed act loses its operative force

81