UNIT-1

Characteristics of a Company (Short Summary):

1. Separate Legal Entity – A company is legally separate from its owners; it
can own property and be sued in its own name.
2. Perpetual Succession – The company continues to exist even if its
members die or leave.
3. Limited Liability – Members are only liable up to the amount unpaid on
their shares or agreed contribution.
4. Common Seal (Optional) – Acts as the company’s official signature,
though now optional.
5. Transferability of Shares – Shares can be transferred freely, allowing easy
exit for members.
6. Capacity to Sue and Be Sued – A company can take legal action or face it
in its own name.
7. Separate Property – The company owns its assets; members have no
direct claim over them.

I. Based on Incorporation
1. Statutory Companies: Formed by a special act of Parliament or State
Legislature. Examples include RBI, LIC. They usually serve public utility or
national interests.
2. Registered Companies: These are formed and registered under the
Companies Act, 1956 (now 2013). Most companies fall in this category,
like Tata Motors or Reliance.
3. Chartered Companies: Created by a Royal Charter issued by the
monarch. Examples include the East India Company, Bank of England.
These are rare in India now.
 II. Based on Liability
1. Company Limited by Shares: Liability of members is limited to the
unpaid amount on their shares.
2. Company Limited by Guarantee: Members guarantee a specific amount
to be paid at winding up; mainly non-profit organizations.
3. Unlimited Company: Members have unlimited liability and may have to
pay company debts from personal assets—almost non-existent today.

III. Based on Nationality

1. Domestic Company: Incorporated in India under the Companies Act.
2. Foreign Company: Incorporated outside India but has a place of business
in India.

IV. Based on Number of Members

1. Private Company:
o Minimum 2 and maximum 50 members.
o Restricts share transfer.
o Cannot invite public for capital.
2. Public Company:
o Minimum 7 members, no upper limit.
o Shares are freely transferable.
o Can invite the public through a prospectus.
 V. Based on Control/Ownership
1. Holding and Subsidiary Companies:
o A holding company controls another (subsidiary) via majority
voting rights, director control, or shareholding.
2. Government Companies:
o 51% or more capital is held by the government (Central/State).
Example: BHEL, SAIL.
3. One-Man Company:
o Entire control rests with one person who owns most of the shares.

One Person Company (OPC)

Definition: A company with only one member, introduced under the
Companies Act, 2013.
Key Features:
• Treated as a private company.
• Must name a nominee.
• Does not follow the principle of perpetual succession.
• Minimum one director is required.
• No minimum capital requirement.
• Enjoys several legal privileges.
Eligibility:
• Only Indian resident individuals can form OPCs.
• A person cannot be part of more than one OPC.
• Minors are barred from membership.
Conversion Rules:
• Cannot convert into Section 8 (charitable) companies.
 • Voluntary conversion into other types only after 2 years.
Privileges:
• No AGM required.
• Exempt from certain compliance like cash flow statements.
• Directors can sign annual returns.
• Not subject to independent director requirements.
• Can offer higher director remuneration.

UNIT-2

Memorandum of Association (MoA) – Summary:

The MoA is a key legal document required to form a company. It outlines
the company’s name, registered office, objectives, authorized capital,
and details of the initial shareholders. It defines the scope of the
company’s activities, powers, and limitations.
• It acts as the foundation of the company.
• Any changes to the MoA need approval from shareholders and
regulatory bodies.
• As per Section 2(56) of the Companies Act, it refers to the original or
altered MoA of a company.

Main Clauses of MoA:

1. Name Clause:
o Must end with "Limited", "Private Limited", "OPC", or "IFSC"
depending on the company type.
o Sec 8 companies are exempt.
o Name must not be misleading or violate trademark laws.
2. Registered Office (Domicile) Clause:
o Specifies the state where the company's registered office is
located.
3. Objects Clause:
o States the main objectives, ancillary (supporting) objects, and
other permitted activities.
o Helps protect shareholders, creditors, and public interest.
o Activities beyond this clause are ultra vires (beyond legal powers).
4. Liability Clause:
o Defines members’ liability as limited by shares or limited by
guarantee.
5. Capital Clause:
o Specifies the company’s authorized share capital and its division
into shares.

6. Nomination Clause (OPC only):

o Names a nominee who becomes the member upon the
subscriber’s death.
7. Subscription Clause:
o Contains names and shareholding details of the initial subscribers.

Purpose of MoA:
 • Grants legal status to the company.
• Defines business scope and objectives.
• Protects shareholders' interests.
• Aids in raising capital and guiding management decisions.

Articles of Association (AOA) – Summary

Definition:
As per Section 2(5) of the Companies Act, 2013, AOA refers to the rules and
regulations for internal management of a company.

Objectives of AOA:
• Sets internal management rules.
• Supports effective governance and compliance.
• Is legally binding on members and the company.
• Must align with the Memorandum of Association (MoA).
• Acts like the “constitution” or rulebook of the company.

Key Contents of AOA:

1. Share Capital and variation of rights
2. Preference Shares
3. Transfer/Transmission of Shares
4. Calls on Shares, Forfeiture, Buy-Back
5. General Meetings and voting procedures
6. Directors’ Powers and Duties
7. Appointment of Key Officers (CEO, CFO, CS)
8. Borrowing Powers and operation of bank accounts
9. Dividends and Reserves
10.Accounts, Audit & Winding Up
11.Common Seal and secrecy rules

Content Requirements (Section 5, Companies Act 2013):

• Share classes and rights

• Share transfer, forfeiture rules
• Director duties and meeting protocols
• Audit, voting, dividends, and winding-up procedures
• Use of common seal and borrowing powers

Doctrine of Constructive Notice ( )

• Company’s MoA & AoA are public documents and anyone dealing with a
company is assumed to know their contents, even if they don’t actually
read them.
• If a person enters into a contract beyond a company’s powers, they can't
claim rights under it.

Doctrine of Indoor Management ( )

• Exception to Constructive Notice.

• Outsiders can assume internal rules are properly followed if an act is
within the powers of the company as per MoA/AoA.
• Based on the Royal British Bank v. Turquand case (Tashkent Rule).

Exceptions to Indoor Management:

 1. Outsider has knowledge of the irregularity.
2. Outsider is negligent or fails to make proper inquiries.
3. There’s fraudulent misrepresentation by company officials.
4. Suspicious circumstances around the act/contract.
5. Acts beyond the legal capacity of the company.

UNIT-3
LLP as Body Corporate (LLP Act, 2008)
• LLP is a body corporate and a separate legal entity from its partners.
• It has perpetual succession – changes in partners don’t affect its
existence.
• Liability of partners is limited to their contribution unless there's fraud
or intent to defraud.

Key Characteristics of LLP

1. Separate legal entity with perpetual existence.

2. Mutual rights/duties governed by LLP agreement or the Act.
3. Limited liability – partners aren't liable for other partners’ misconduct.
4. Equal footing – all partners have equal say and share profits/losses.
5. Protection from other partners’ actions (unless fraudulent).

Advantages of LLP
• Separate legal identity
• Easy to form & dissolve
 • No minimum capital or partner limit
• Lower compliance & cost
• Partner liability is limited
• No statutory records required (except books of accounts)

Disadvantages of LLP

• Cannot raise public funds

• Acts of a partner may bind the LLP
• Liability may extend in case of fraud
• No management-owner separation

UNIT-4

CONTRACT OF GUARANTEE

Meaning:
A contract where one party (Surety) assures payment or performance to a
creditor if the principal debtor defaults.

Legal Definition [Section 126]:

“A contract to perform the promise, or discharge the liability, of a third person

in case of his default.”

Parties Involved:

1. Creditor – lends the money or extends credit.

2. Principal Debtor – the one who actually owes the money.
3. Surety – the one who gives the guarantee.

Example:
X gives ₹10,000 loan to Y. Z promises to pay if Y defaults.
• X = Creditor
• Y = Principal Debtor
• Z = Surety

Characteristics:

1. Three parties involved.

2. Consensus among all.
3. There must be an existing debt or enforceable obligation.
4. Primary & Secondary liability:
o Debtor: Primarily liable.
o Surety: Secondarily liable (only after default).
5. Valid contract elements must be present.
6. Can be oral or written.
7. Must be free from misrepresentation or concealment.

Kinds of Guarantee:

1. Specific – for one transaction.

2. Continuing – covers multiple or future transactions.
3. Retrospective – for a past debt.
4. Prospective – for a future debt.
5. Absolute – unconditional promise to pay.
6. Conditional – promise to pay upon occurrence of a specific event.
7. Fidelity – for employee’s honesty/conduct.
8. Limited or Unlimited – defines limit of surety’s liability.
 Revocation of Continuing Guarantee:
1. By notice [Sec 130] – Surety can revoke future liabilities by giving written
notice.
2. By death [Sec 131] – Automatically ends future liability unless otherwise
agreed.
3. Other ways:
o Novation (new contract)
o Change in contract terms without surety's consent
o Release of principal debtor
o Omission or negligence by creditor

Rights of Surety:

1. Against Principal Debtor

• Right of Subrogation [Sec 140] – After paying, surety can use the same
rights against debtor as creditor.
• Right to Indemnity [Sec 145] – Surety can demand repayment from
principal debtor.
2. Against Creditor
• Right to securities held by creditor.
• Right to set-off (adjust against any amount the debtor is owed by
creditor).
• Right to share in any reduction from insolvency dividends, etc.
3. Against Co-sureties
• Right to contribution [Sec 146] – Co-sureties share burden equally.
• Right to security sharing – Can share securities or benefits obtained.
• Bound for different amounts [Sec 147] – Contribute up to maximum
limits of individual guarantee.
 Surety’s Liability:

Section 128:
“The liability of the surety is coextensive with that of the principal debtor unless
it is otherwise provided.”
• Coextensive: Surety liable for the same amount as the debtor.
• Immediate: Creditor can directly sue the surety without trying to recover
from debtor.
• Can be limited or conditional, depending on contract.
• Surety may still be liable even if the principal contract is void due to the
debtor's incapacity.

Discharge of Surety:

1. By Revocation
• Giving notice [Sec 130]
• Death of surety [Sec 131]
• Novation (new contract)
2. By Creditor’s Conduct
• Altering contract terms [Sec 133]
• Releasing principal debtor [Sec 134]
• Giving time/composing with debtor [Sec 135]
• Impairing surety’s remedy [Sec 139]
• Losing collateral security [Sec 141]
3. By Invalidation
• Guarantee by misrepresentation [Sec 142]
• Concealing material facts [Sec 143]
 • Failure of co-surety to join [Sec 144]
• Failure of consideration
• Contract invalid due to lack of essential elements

Comparison: Contract of Indemnity vs. Contract of Guarantee

Basis Contract of Indemnity Contract of Guarantee

A contract where a party

A contract where one party
promises to perform or discharge
Meaning promises to compensate for
the liability in case of default by a
the loss incurred by another.
third party.

Section 124 of the Indian Section 126 of the Indian

Defined in
Contract Act, 1872 Contract Act, 1872

Parties Two parties – Indemnifier and Three parties – Creditor, Principal

Involved Indemnified Debtor, and Surety

Three – between creditor and

Number of
One debtor, creditor and surety, and
Contracts
debtor and surety

Liability
Primary liability Secondary liability
Type

Purpose To compensate for a loss To give assurance to the creditor

Liability
Arises only when a loss occurs Liability already exists
Maturity

Contract of Bailment
Definition:
As per Section 148, “Bailment is the delivery of goods by one person to another
for some purpose, upon a contract that they shall be returned or otherwise
disposed of according to the instructions of the person delivering them.”
Parties Involved:
• Bailor – Person delivering the goods
• Bailee – Person receiving the goods
Key Features:
• Involves delivery of movable goods (not money)
• Can be actual or constructive
• No transfer of ownership
• Goods are to be returned after the purpose is fulfilled
Types of Bailment:
1. Based on Charges:
o Gratuitous Bailment – Without remuneration
o Non-Gratuitous Bailment – With remuneration
2. Based on Benefit:
o Exclusive benefit of bailor
o Exclusive benefit of bailee
o Mutual benefit

Duties of Bailor
1. Disclose known defects
2. Bear ordinary/extraordinary expenses
3. Indemnify bailee for defective title
4. Accept return of goods
5. Bear risk of loss
Duties of Bailee
1. Reasonable care of goods
2. Not to make unauthorized use
3. Not to mix goods
4. Return goods after purpose is fulfilled
5. Not to set up adverse title
6. Return accretions to goods

Rights of Bailor
• Terminate bailment
• Claim damages
• Demand return of goods
• Sue third party for loss/damage
• Enforce bailee’s duties
• Claim increase/profit from goods
Rights of Bailee
• Enforce bailor’s duties
• Compensation for faulty goods
• Reimbursement of expenses
• Return goods to any joint bailor
• Recover agreed charges
• Indemnity for defective title
• Sue third parties
• Right to lien (Particular and General)
Termination of Bailment
1. Purpose achieved
2. Time expired
3. Inconsistent use of goods
4. Destruction of goods
5. Gratuitous bailment by will
6. Death of bailor or bailee

Finder of Lost Goods (Section 71)

• Becomes bailee by voluntarily taking possession
• Rights:
o Lien
o Sue for reward (if offered)
o Sell goods under specific conditions
•

• Duties:
o Take reasonable care
o Return goods to true owner
o Avoid personal use/mixing
o Return any increase

Contract of Pledge (or Pawn)

Defined in Section 172:
A pledge is a bailment of goods as security for payment of a debt or
performance of a promise.
Parties Involved:
• Pawnor/Pledger – One who pledges goods
• Pawnee/Pledgee – One to whom goods are pledged
Rights of Pawnee:
1. Retain goods until debt is paid
2. Recover extraordinary expenses (not lien)
3. Right to sue or sell goods on default (after notice)
Duties of Pawnee:
• Take reasonable care
• Not to make unauthorized use
• Not to mix goods
• Return goods when obligation fulfilled

Difference Between Bailment and Pledge

Parameter Bailment Pledge

A contract where movable goods

A contract where goods are
are delivered by one person to
delivered as security for
Definition another for a specific purpose
the repayment of a loan or
and to be returned after the
performance of a promise.
purpose is fulfilled.

Defined under Section 172

Provision in Defined under Section 148 of the
of the Indian Contract Act,
Law Indian Contract Act, 1872.
1872.

Always involves
consideration, usually in
Consideration May or may not be required.
the form of a loan or
promise.
Parameter Bailment Pledge

Pawnor – the one who

Bailor – the one who delivers the
pledges the goods.
Parties goods.
Pawnee – the one who
Involved Bailee – the one who receives the
receives the goods as
goods.
security.

To act as a security for

For safekeeping, repair,
Main Purpose repayment of debt or
transportation, cleaning, etc.
performance of a promise.

Bailee can use the goods only

Right to Use Pawnee has no right to use
with the consent of the bailor
Assets the goods pledged.
and for the agreed purpose.

Pawnee has the right to sell

Right to Sell Bailee has no right to sell the the goods after giving
Goods goods. reasonable notice to the
pawnor if default occurs.

Pawnee is liable for

As per Section 152, bailee is not
Liability for negligence, and may lose
liable for loss if reasonable care is
Loss claim to the extent of the
taken.
damage/loss.

Giving your car to a garage for Pledging gold to a bank to

Example
repair. take a loan.

UNIT-5
Contract of Agency – Summary
A Contract of Agency is created when one person (called the agent) is
authorized to act on behalf of another (called the principal) to create legal
relations with third parties. This relationship is governed by Sections 182 to
238 of the Indian Contract Act, 1872.
According to Section 182, an agent is a person employed to do any act for
another or represent them in dealings with third parties. The person
represented is the principal.
General Rules of Agency
1. Delegation of Acts: A person competent to contract can either act
themselves or appoint someone to act on their behalf.
2. Principal Bound by Agent’s Acts: Legally, the acts of an agent are
considered the acts of the principal (Sec. 226).

Essentials of a Valid Agency

• Agreement: There must be an agreement (express or implied) between
the principal and agent.
• Principal’s Competency: The principal must be a major and of sound
mind (Sec. 183).
• Agent’s Competency: Any person, even a minor, can be an agent (Sec.
184).
• Consideration Not Required: No consideration is necessary to create an
agency (Sec. 185).

Creation of Agency
Agency may arise in several ways:
1. Express Agreement (Sec. 187) – Formed through written or spoken
words.
 2. Implied Agreement (Sec. 187) – Inferred from conduct or situation (e.g.,
partner, wife, servant).
3. Agency by Estoppel (Sec. 237) – When one leads others to believe
someone is their agent and they act on that belief.
4. Agency by Holding Out – Based on past conduct implying authority.
5. Agency by Necessity – Arises in emergency situations to protect the
principal’s interests, with certain conditions.
6. Husband-Wife Relation – A wife is presumed an agent for household
necessities.
7. Agency by Operation of Law – Arises by law (e.g., partnership).
8. Agency by Ratification – Principal later approves an act done without
authority, thus validating it.

Sub-Agent and Substituted Agent

• A Sub-Agent (Sec. 191) is appointed by the agent to act under their
control. They can be appointed only under specific conditions like trade
custom or emergency.
• A Substituted Agent (Sec. 194) is directly appointed on behalf of the
principal by the agent when the principal authorizes such delegation.
The substituted agent has a direct contractual relationship with the
principal.

Kinds of Agents
1. General Agent – Has authority to act in all matters of a particular
business.
2. Special Agent – Appointed for a specific task or transaction.
3. Universal Agent – Has broad authority to act in all matters the principal
can delegate.
 4. Mercantile Agents – Include brokers, factors, auctioneers, commission
agents, bankers, and del credere agents.
5. Non-Mercantile Agents – Include lawyers, guardians, promoters, etc.

Duties of an Agent
1. Follow Instructions or Trade Custom (Sec. 211).
2. Act with Reasonable Skill and Care (Sec. 212).
3. Render Proper Accounts (Sec. 213).
4. Communicate with Principal in Difficulty (Sec. 214).
5. Avoid Dealing on Own Account Without Consent (Sec. 215 & 216).
6. Pay Amounts Received (Sec. 218).
7. Protect Principal’s Interests After Termination (Sec. 209).
8. Avoid Delegation unless permitted (Sec. 190).
9. Not to Set Up Adverse Title.
10.Pass on Relevant Information.
11.Not to Make Secret Profits.

Rights of an Agent
1. Right of Retainer (Sec. 217) – To retain money received until dues are
cleared.
2. Right to Remuneration (Sec. 219 & 220) – For services rendered as
agreed or customary.
3. Right of Lien (Sec. 221) – To retain principal’s property until payments
are made.
4. Right to Indemnity for Lawful Acts (Sec. 222).
5. Right to Indemnity for Good Faith Acts (Sec. 223).
 6. Right to Compensation (Sec. 225) – For loss due to principal’s neglect or
lack of skill.

Duties and Rights of Principal in a Contract of Agency

Duties of Principal
1. To Remunerate the Agent: The principal must pay the agent for their
services.
2. To Indemnify the Agent: The principal must protect the agent against
any consequences of lawful acts they perform on the principal's behalf.
3. To Indemnify for Acts in Good Faith: If the agent acts in good faith, even
if it causes harm to third parties, the principal must indemnify the agent.
4. To Compensate for Injury: If the agent suffers injury due to the
principal’s negligence or lack of skill, the principal must compensate the
agent.
Rights of Principal
1. Right to Accounts: The principal can demand proper accounts from the
agent at any time.
2. Right to Ensure Business Conduct: The principal can ensure the agency
business is conducted according to their instructions or, in their absence,
according to local trade customs.
3. Right to Compensation for Negligence: If the agent is negligent or lacks
skill, the principal is entitled to compensation for any loss.
4. Right to Give Instructions in Difficulties: The principal can issue
instructions when the agent faces difficulties.
5. Right to Compensation for Deviation from Instructions: If the agent acts
outside the given instructions, the principal is entitled to compensation
for the loss or profit.
 6. Right to Benefit from Agent’s Transactions: If the agent enters into
beneficial transactions on their behalf, the principal is entitled to the
benefit.
7. Right to Repudiate: The principal can reject a transaction if the agent
conceals a material fact or if the agent’s action disadvantages the
principal.
8. Right to Receive All Money: The principal is entitled to all money due to
them, after permissible deductions by the agent.
9. Right to Pay Remuneration After Completion: The principal is obligated
to remunerate the agent only after the work is completed.
10.Right to Refuse Remuneration for Misconduct: If the agent is guilty of
misconduct, the principal may refuse to pay the remuneration.

Liability of Agent to Third Parties

An agent is usually not personally liable for contracts made on behalf of the
principal, but there are specific situations when an agent becomes personally
liable:
1. Foreign Principal: An agent acting for a foreign principal may be
personally liable unless stated otherwise.
2. Principal Cannot Be Sued: If the principal cannot be sued (e.g.,
sovereigns or persons of unsound mind), the agent becomes personally
liable.
3. Non-Existent Principal: If the agent acts for a non-existent principal, they
are personally liable.
4. Undisclosed Principal: If the agent does not disclose they are acting on
behalf of a principal, they can be held personally liable.
5. Express Agreement: If the agent explicitly agrees to personal liability,
they are bound by it.
6. Agency with Interest: If the agent has an interest in the subject matter of
the contract, they are personally liable for it.
 7. Exceeding Authority: If the agent exceeds their authority, they may be
personally liable for breaching the warranty of authority.
8. Trade Usage or Custom: In some cases, agents may be personally liable
due to trade customs.
9. Mistaken or Fraudulent Receipt: An agent who receives money or
property by mistake or fraud can be held personally liable for its return.
10.Signing Negotiable Instruments: If an agent signs a negotiable
instrument without disclosing their agency, they are personally liable.
11.Pretended Agent: If a person falsely claims to be an agent, they are
personally liable for damages if the principal does not ratify the act.

Liabilities of Principal to Third Parties

The principal is liable for the acts of the agent under the following
circumstances:
1. Act Within Authority: When the agent acts within their authority, the
principal is bound by the agent’s acts.
2. Separable Acts: If part of the agent’s actions fall within their authority,
while others do not, the principal is only bound by the acts within the
agent’s authority.
3. Misrepresentation or Fraud by Agent: If the agent commits fraud or
misrepresentation within their authority, the principal is liable.
4. Unnamed Principal: If the agent discloses they are acting as an agent but
doesn’t reveal the principal’s name, the principal can still be bound by
the agent’s actions.
5. Liability Despite Agent’s Personal Liability: Even if the agent becomes
personally liable, the principal may still be held liable.
6. Notice to Agent: Any notice received by the agent in the course of
business is considered as a notice to the principal.
Termination of Agency
Agency can be terminated either by the act of the parties or by operation of
law.
Termination by Act of the Parties:
1. Agreement: Agency ends if both the principal and agent agree to
terminate it.
2. Revocation by Principal: The principal can revoke the agent's authority
at any time before the agent acts to bind the principal.
3. Renunciation by Agent: The agent can renounce the agency, but they
must give reasonable notice to the principal.
Termination by Operation of Law:
1. Completion of Purpose: The agency automatically ends once the
purpose for which it was created is completed.
2. Expiry of Time: The agency ends once the period for which the agent
was appointed expires, even if the purpose isn't completed.
3. Death or Insanity: The agency ends automatically if either the principal
or the agent dies or becomes insane.
4. Insolvency of Principal: If the principal becomes insolvent, the agency is
terminated.
5. Destruction of Subject Matter: If the subject matter of the agency is
destroyed, the agency ends.
6. Dissolution of Company: The agency ends if either the principal or the
agent’s company is dissolved.
7. Principal Becomes an Alien Enemy: If there is a war between the
principal’s and agent’s countries, the agency is terminated.
8. Termination of Sub-agent’s Authority: The termination of the agent’s
authority ends the authority of any sub-agent appointed by them.