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ESSENTIAL ELEMENTS OF A VALID CONTRACT

All agreements are not contracts. Only that agreements which is enforceable at law is a contract. An
agreement which is enforceable at law cannot be contract. Thus, the term agreement is more wider in
scope than contract. All Contracts are agreements but all agreements are not contracts.

An agreement, to be enforceable by law, must posses the essential elements of a valid contract as
contained in section 10 of the Indian Contract Act. According to Section 10, "All agreements are
contract if they are made by the free consent of the parties, competent to contract, for a lawful
consideration and with a lawful object and are not expressly declared to be void." As the details of
these essentials form the subject-matter of our subsequent chapters, it is proposed to dismiss them in
brief here.

The following are the essential elements of a valid contract :

1. Offer and Acceptance. In order to create a valid contract, there must be a 'lawful offer' by one
party and 'lawful acceptance' of the same by the other party.

2. Intention to Create Legal Relationship. In case, there is no such intention on the part of parties,
there is no contract. Agreements of social or domestic nature do not contemplate legal relations.
Case :- Balfour vs. Balfour(1919)

3.Lawful Consideration. Consideration has been defined in various ways. According to

Blackstone,"Consideration is recompense given by the party contracting to another." In other words
of Pollock, "Consideration is the price for which the promise of the another is brought."
consideration is known as quid pro-quo or something in return.

4. Capacity of parties. The parties to an agreement must be competent t contract. If either of the
parties does not have the capacity to contract, the contract is not valid.
According the following persons are incompetent to contract.
(a) Miners, (b) Persons of unsound mind, and
(c) persons disqualified by law to which they are subject.

5. Free Consent. 'Consent' means the parties must have agreed upon the same thing in the same
sense.
According to Section 14, Consent is said to be free when it is not caused by-

(1) Coercion, or (2) Undue influence, or (3) Fraud, or

(4) Mis-representation, or (5) Mistake.
An agreement should be made by the free consent of the parties.

6. Lawful Object. The object of an agreement must be valid. Object has nothing to do with
consideration. It means the purpose or design of the contract. Thus, when one hires a house for use as
a gambling house, the object of the contract is to run a gambling house.

The Object is said to be unlawful if-

(a) it is forbidden by law;

(b) it is of such nature that if permitted it would defeat the provision of any law;
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(c) it is fraudulent;
(d) it involves an injury to the person or property of any other;
(e) the court regards it as immoral or opposed to public policy.

7. Certainity of Meaning. According to Section 29,"Agreement the meaning of which is not Certain
or capable of being made certain are void."

8. Possibility of Performance. If the act is impossible in itself, physically or legally, if cannot be

enforced at law. For example, Mr. A agrees with B to discover treasure by magic. Such Agreements
is not enforceable.

9. Not Declared to be void or Illegal. The agreement though satisfying all the conditions for a valid
contract must not have been expressly declared void by any law in force in the country. Agreements
mentioned in Section 24 to 30 of the Act have been expressly declared to be void for example
agreements in restraint of trade, marriage, legal proceedings etc.

10. Legal Formalities. An oral Contract is a perfectly valid contract, expect in those cases where
writing, registration etc. is required by some statute. In India writing is required in cases of sale,
mortgage, lease and gift of immovable property, negotiable instruments; memorandum and articles of
association of a company, etc. Registration is required in cases of documents coming within the scope
of section 17 of the Registration Act.

All the elements mentioned above must be in order to make a valid contract. If any one of them is
absent the agreement does not become a contract.

QUASI CONTRACT:
Contractual obligations are voluntarily created by free consent through proposal
and acceptance. In some cases, some obligations though not contractual but treated as
contractual by law.
In fast there is no contract but there is one in contemplation of law i.e. quasi
contract law of quasi contract, is also known as the law of restitution.
Sec. 68 to 72 deals with five kind of quasi contractual obligations. They are as
follower:

1. Supply of Necessaries To a Minor or Lunatic :-

Necessaries means goods suitable to the condition in life of minor or lunatic person. If a person is
incapable to enter into a contract. Any one person who is legally bound t support, provides the
"Necessaries" according the life conditions of the minor or lunatic. He is also entitled to recover the
value from the property for such incapable person.

Example :- Mr. Jonny supplies Mr. Honny (a minor) with necessaries suitable to its condition of life.
Mr. Jonny is entitled to reimbursed the value of necessaries from the property of Mr. Honny.

2. Finder of Goods :-
Sometimes a person finds the goods on the roads or on any place which belong to any other person.
He takes them into his own custody. He is also entitled to recover compensation for the trouble in
taking the case of goods and finding the owner of the good.

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3. Liability of One Person But Paid By Other Can Be Recovered :-

Sometimes one person pays the money for the other person but not as a free gift. Any person on
whose behalf money is paid enjoys benefits. So he is also bound to make compensation to his
benefactor.

Example :- Suppose Mr. Akram holds the factory of Mr. Nisar on lease. The tax payable by Mr.
Nisar to the government being in arrears, the factory is advertised for sale by the government. Under
the law it will also effect the benefits of Mr. Nisar's lease. Mr. Nisar to prevent the sale pays tax to the
government, the sum due from Mr. Akram. Mr. Akram is bound to compensate to Mr. Nisar by
paying the such amount.

4. Mistake and Coercion :-

If money or any other thing delivered by mistake or coercion to another person can be recovered. It is
the liability of that person to repay who has taken.

Example :- Suppose Mr. Nawab a salesman leaves a packet of Soap at the shop of Mr. Riaz by
mistake. Now it is the liability of Mr. Riaz that he should repay it.

5. Non Gratuitous Act :-

Contract section is says, " That when one person lawfully does any thing for another or delivers any
thing to him, not intending to give as a free gift, other person also enjoys benefits, the later is bound
to make compensation to the former.

Short notes on Discharge of Contract

Consiquency
Discharge of contract means termination of the contractual relationship between the parties. When the
rights and obligations arising out of a contract are extinguished, the contract is said to be discharged.
A contract may be discharged either by the acts of the parties or the operation of law. Act of parties
may take different forms like performance, agreement, breach, etc. while operation of law includes
death, insolvency, etc.

A contract may be discharged in any of the following ways:

1. Discharge by Performance:

This is most pleasant end of a contract when a contract is duly performed by both the parties and
nothing more remains to be done. But if only one party performs his promise, he aloes is discharged
and the guilty party may be taken to the task for breach of contract. The performance may be, either
actual or attempted i.e. tender.

Actual performance must be complete, precise and according to the terms of the agreement. Most of
the contracts are performed in this manner.

Where a promisor has made an offer of performance (tender), and the offer has not been accepted, the
promisor is not responsible for non-performance, nor does he thereby lose his rights under the
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contract. If there are several joint promisors, the offer of performance to any one of them shall be
sufficient.

Performance shall be given by the promisor himself, in contracts requiring use of personal skill, e.g.
painting, dancing or promise to marry, etc. In such a case death of the promisor puts an end to the
contract. Unless a contrary intention appears from the contract, a promise can be enforced against and
only by the legal representatives of the parties. Ordinarily, parties must perform their obligations at
the stipulated time. But if the time is of the essence of the contract, then a failure to perform at the
time specified, renders the contract voidable at the option of the opposite parties.

2. Discharge by Death:

Contracts of a personal nature come to an end by the death of the promisor. In other cases the rights
and liabilities pass on to the legal representatives of the deceased. But they are liable to the extent of
the property inherited by them.

3. Lapse of Time:

The limitation act provides that a contract should be performed within a specified period i.e. period of
limitation. If the contract is not performed, and if no legal action is taken by the promisee within the
period of limitation, he is deprived of his remedy at law. In other words, the contract in such a case is
terminated. For example, for the price of goods sold and delivered, where no fixed period of credit is
agreed upon, the payment should be made or a suit instituted to recover it within 3 years from the
date of delivery of the goods. If the payment is not made and the creditor does not file a suit against
the buyer for the recovery of the price within the period of 3 years, the debt becomes time-barred and
irrecoverable.

4. Breach of Contract:

Breach of contract means refusal of performance by a party. Where a party to a contract has refused
to perform, or disabled himself from performing his promise in its entirety, the other party or
aggrieved party may put an end to the contract unless he has waived his right expressly or impliedly.
For instance, X, a singer enters into a contract with Y to sing at his theatre every night during next
month. Y agrees to pay him Rs. 250 for each night. On the 10th night, X willfully absents herself from
the theatre. Y can put at an end to the contract.

Breach of contract may be of two kinds;

(1) Anticipatory breach; and

(2) Actual Breach.

'Actual Breach' occurs when a party fails to perform his obligation upon the date fixed for
performance by the contract, as for example, where on the appointed day, the seller does not deliver
the goods or the buyer refuses to accept the delivery. It is to be noted that actual breach of contract
due to non performance can only arise when the time for performance has arrived. Actual breach
entitled the party not in default to elect to treat the contract as discharged and to sue the party at fault
for damages for breach of contract.

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Anticipatory breach of Contract:

Anticipatory breach of contract takes place before the date of actual performance. The promisor may
either inform the promisee that he will not perform the contract or may do an act which is
inconsistent with the contract or renders the performance impossible. For example, A agrees to
employ B as a clerk, the service to commence from 2nd February, 1989. On 27th January, 1989, he
informs B that his services will not be required.

5. Impossibility of Performance:

A contract must be capable of being performed. Section 56 provides "agreement to do an act

impossible in itself is void". This rule is based on two principles:

1. Lex non cogit ad impossibilia i.e. Law does not recognize the impossible.

2. Impossibilia nulla obligation east i.e. An impossible act does not create any obligation.

Impossibility discharges the parties to a contract. Even if the act becomes impossible after formation
of contract, the contract is rendered void. Impossibility falls in the following two categories:

1. Initial Impossibility:

Initial impossibility means impossibility at the time of formation of the contract. It may be known or
unknown to the parties. If impossibility is known to the parties, the agreement is void ab initio. But
where the impossibility is known to the parties, the contract would become void because of mutual
mistake of fact whenever such impossibility is discovered.

2. Subsequent Impossibility:

Sometimes a contract is capable of being performed when entered into, but some subsequent event
renders the performance impossible. In such a case also, the contract become void. The subsequent
impossibility may arise (i) by some event beyond the control of the parties, or (ii) by some act of the
promisor or promisee.

INDEMNITY AND GUARANTEE

Definition of Indemnity

A form of contingent contract, whereby one party promises to the other party that he will compensate
the loss or damages occurred to him by the conduct of the first party or any other person, it is known
as the contract of indemnity. The number of parties in the contract is two, one who promises to
indemnify the other party is indemnifier while the other one whose loss is compensated is known as
indemnified.

The indemnity holder has the right to reimburse the following sums from the indemnifier:

 Damages caused, for which he was compelled.

 Amount paid for defending the suit.
 Amount paid for compromising the suit.
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Let’s understand this by an example, Mr. Joe is a shareholder of Alpha Ltd. lost his share certificate.
Joe applies for a duplicate one. The company agrees, but on the condition that Joe compensate for the
loss or damage to the company if a third person brings the original certificate.

One more common example of indemnity is the insurance contract where the insurance company
promises to pay for the damages suffered by the policyholder, against the premiums.

Definition of Guarantee

When one person signifies to perform the contract or discharge the liability incurred to the third party,
on behalf of the second party, in case he fails, then there is a contract of guarantee. In this type of
contract, there are three parties, i.e. The person to whom the guarantee is given is Creditor, Principal
Debtor is the person on whose default the guarantee is given and the person who gives guarantee is
Surety.

Three contracts will be there, first between the principal debtor and creditor, second between
principal debtor and surety, third between surety and the creditor. The contract can be oral or written.
There is an implied promise in the contract, that the principal debtor will indemnify the surety for
the sums paid by him as an obligation of the contract provided they are rightfully paid. The surety is
not entitled to recover the amount paid by him wrongfully.

Here we have an example of the contract of guarantee, Mr. Harry takes a loan from the bank for
which Mr. Joesph has given guarantee that if Harry default in the payment of the said amount he will
discharge the liability. Here Joseph plays the role of surety, Harry is principal debtor and Bank is the
creditor.

Key Differences Between Indemnity and Guarantee

The following are the major differences between indemnity and guarantee:

1. In the contract of indemnity one party makes promise to the other that he will compensate for
any loss occurred to the other party because of the act of the promisor or any other person. In
the contract of guarantee, one party makes promise to the other party that he will perform the
obligation or pay for the liability, in case of default by a third party.
2. Indemnity is defined in Section 124 of Indian Contract Act, 1872, while in Section 126,
Guarantee is defined.
3. In indemnity there are two parties, indemnifier and indemnified but in the contract of
guarantee there are three parties i.e. debtor, creditor and surety.
4. The liability of the indemnifier in the contract of indemnity is primary whereas if we talk
about guarantee the liability of surety is secondary because the primary liability is of the
debtor.
5. The purpose of the contract of indemnity is to save the other party from suffering loss.
However, in case of a contract of guarantee, the aim is to assure the creditor that either the
contract will be performed or liability will be discharged.
6. In the contract of indemnity, the liability arises when the contingency occurs while in the
contract of guarantee, the liability already exists.

Conclusion

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After having a deep discussion on the two, now we can say that these two types of contract are
different in many respects. In indemnity, the promisor cannot sue the third party, but in case of
guarantee the promisor can do so because after discharging the creditor’s debts he gets the position of
the creditor

DEFINE PARTNERSHIP. WHAT ARE THE ESSENTIALS OF PARTNERSHIP.

1. Introduction:
A partnership is mean of bringing together the person who can contributes capital skill for expansion of
business. This type of business is very popular in our country.
2. Definition:
According to Sec. 4
Part ership is the relatio et ee perso s ho ha e agreed to share the profits of a usi ess arried o
y all or a y o e of the a ti g for all .
3. Elements of partnership:
Following are the features of partnership.
(i) It is the result of an agreement.
(ii) Agreement is between two or more persons.
(iii) It is organized to carry on some business.
(iv) Persons should be agree to share the profit of business.
(v) Business is to be carried on by all or any of them acting for all.
4. Feature of partnership:
Following are the essentials of partnership.
(I) Agreement:
Partnership is the result of agreement without it partnership can not be formed. It may be written or oral.
(II) Registration:
Registration of partnership is not necessary.
(III) Number of patners:
There must be two member.
(IV) Business:
The object of partnership is to carry on business.
(V) Unlimited liability:
The liability of partner is unlimited to the invested.
(VI) Profit and loss distribution:
Profits is distributed among the partners according to their agreement in case of loss all the partners share in
it.
Case law
P. L. D 1971 Lah. 396
It was held that where a partnership deed instead of fixing the shares of the partners incorporates the
provisions of partnership act in the deed, the shares of the partners will be governed by he partnership act.
(VII) Legal entity:
Partnership has not separate entity from its member.
(VIII) Management:
All the partner can participate activity in the affairs of business.
(IX) Payment of tax:
Each partner pays tax on his share of profit individually.
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(X) Co-operation:
The success of the business depends upon mutual trust and confidence.
(XI) Share in capital:
Capital of the firm is supplied by the all partners according to the agreement.
(XII) No audit:
In the business of partnership no audit is necessary.
(XIII) Mutual agency:
Business may be carried on by all or any of them acting for all. Each is a principal and an agent.
(XIV) Transfer of interest:
A partner cannot transfer his interest with out the consent of other partners.
(XV) Dissolution:
Partnership is dissolved easily. It operates the pleasure of partner.
5. Kinds of partnership:
Following are the kinds of partnership.
(I) Partnership at will:
If no provision is made in the agreement regarding the duration of the partnership it is called partner ship at
will.
(II) Particular partnership:
Such partnership is formed to do a particular business.
(III) Limited partnership:
The liability of limited partner is limited to the extent of his investment in the business.
(IV) Registered partnership:
The registration of partnership is not compulsory when a partnership is registered. It is called registered
partnership.
(V) Un-registered partnership:
Partnership which is not registered. It is called unregistered partnership.
6. Conclusion:
To conclusion it can be said that, A partnership is a form of business. It has at least two member. Who
joined capital or services for prosecuting of some business.

Following are the important kinds or types of partners :

1. Active Partner :-
A person who provides his share in capital and also takes active part in the management. The
development of business depends upon the active partners.

2. Sleeping or Dormant Partners :-

These partners only provide capital and also share the profit and loss of the business. A sleeping
partner does not take part in the management of a firm. These are not know to public as a partner.

3. Silent Partner :-
A silent partner is known to the public as a partner. He does not participate in the affairs of the
management. But be is liable to pay debts of the firm.

4. Secret Partner :-
He takes active part in the business but public does not know him as a partner of the firm. He is liable

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to pay all the debts of the firm.

5. Nominal Partner :-
These partners do not share the profit and loss the firm. These do not participate in the management
of a firm. A firm only uses the name and goods reputation of the partners. So these are called nominal
partners.

6. Minor Partner :-
A minor may become partner with the consent all the partners. A minor is only admitted in the profits
of the business only. He has no liability of loss.

7. Senior Partner :-
A person who is playing important role in the management according to his ability, experience and
capital, is called senior partner.

8. Junior Partner :-
A person who has small investment in the firm and has a limited experience of business is called
junior partner.

9. Limited Partner :-
A partner whose loss responsibility is restricted to his share only is called limited partner. He cannot
take post in the management of a firm.

10. Unlimited Partner :-

When the liability of the partner is unlimited he is called unlimited partner. The debts of firm can be
paid even by the personal property of the partner.

If there is written partnership deed rights and duties of partners will be in accordance to it. In the
absence of partnership deed, mutual rights and duties of partners are governed by partnership act.
According to partnership act, the rights and duties of partners are as follows:
Rights of Partners
(1) Right to Take Part in Management : Every partner has the right to take active part in the
management and operation of the business of the firm.
(2) Right to Express Opinion : Every partner has right to express his views and give advice to other
partners for the benefits of business. These opinion and advises may be accepted or rejected by the
other partners. However, no major business decisions can be taken without the unanimous will of all
the partners.
(3) Right to Inspect and Take Copies of Accounts ; Every partner has right to inspect the books of
accounts of the firm. They can also obtain copies of account.
(4) Right to Share Profit ; Every partner right to share the profit of business. They can share the profit
equally or in the agreed ratio.
(5) Right to have Interest : Partners cannot demand any interest on their capital investment. But they
have right to get up to 10% interest on loans and advances made by them to the partnership firm.
(6) Right to be Indemnified ; Every partner is entitled to get compensation from the partnership firm
is respect of liabilities incurred and payment made by him. He should also be compensated for the
losses caused by other partners.
(7) Right to Property ; Every partner has right to use the property of the partnership firm for the
benefit of the firm. They should not use the business property for their personal purposes.
(8) Right to Leave the Firm ; Every partner has right to leave the firm with the consent of other
partners.
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(9) Right to Ownership : Every partner has right on the property of the firm. Thus, property of the
firm cannot be sold by one partner without the consent of other partners.
(10) Right to Dissolve : A partner has the right to dissolve the partnership with the consent of all
partners. Even, if other partners refuse then also he can dissolve the partnership by informing other
partners.
Duties of Partners
(1) To share Losses : In case of loss, it is the duty if every partner to bear the loss equally or in the
profit sharing ratio.
(2) To Work Faithfully : Partnership is based on mutual trust and confidence of the partners. It is the
duty of every partner to be honest and loyal to other partners as well as to the firm.
(3) To Compensate : It is the duty of every partner to compensate the losses or damage to the firm or
to others due to his negligence or deliberate misconduct.
(4) To Work Without Remuneration ; Partnership is operated either by all partners or by any of them
acting for all. It is the duty of every partner to work in the firm without charging and expecting
remuneration. However, the partner can demand remuneration if it is mentioned in the agreement.
(5) To Act Within Authority : It is the duty of every partner to act within the scope of the authority
entrusted to him.
(6) To Maintain Current Account : It is the duty of every partner to maintain proper and correct books
of accounts, so that they may give true and fair view of the business.
(7) Not to Run Competitive Business : A partner should not make any secret profit by way of
commission from the partnership business. Similarly, the property of the firm including goodwill
should not be used for personal purposes.

If there is written partnership deed rights and duties of partners will be in accordance to it. In the
absence of partnership deed, mutual rights and duties of partners are governed by partnership act.
According to partnership act, the rights and duties of partners are as follows:

Rights of Partners

 Right to Take Part in Management :

 Right to Express Opinion :
 Right to Inspect and Take Copies of Accounts ;
 Right to Share Profit ;
 Right to have Interest :
 Right to be Indemnified ;
 Right to Property ;
 Right to Leave the Firm ;
 Right to Ownership :
 Right to Dissolve :

Duties of Partners

 To share Losses :
 To Work Faithfully :
 To Compensate :
 To Work Without Remuneration ;
 To Act Within Authority :
 To Maintain Current Account :
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 Not to Run Competitive Business :

Procedure for the Registration and Dissolution of a Partnership Firm!

Registration of Firm:

Under the Indian Partnership Act, 1932, the registration of the firm is not compulsory. Because an
unregistered firm suffers from certain limitations, hence the registration of the firm is desirable.
Registration can be done at any time.

The registration of partnership firm involves the following procedure:

The firm will have to apply to the Registrar of Firms of the respective State Government in a
prescribed application form. The form should be duly signed by all the partners.

The application form should contain the following information:

1. The firm-name.

2. The name of business place.

3. Names of other places, if any, where the firm is carrying on its business.

4. Date of commencement of business.

5. Date when each partner joined the firm.

6. Full names and permanent addresses of all the partners.

7. The duration of the firm, if any.

When the Registrar of Firms is satisfied that all formalities relating to registration have been fully
complied with, he makes an entry in the Register of Firms. Thus, the firm is considered to be
registered. The Registrar issues a certificate called ‘Registration Certificate’ to the firm. The Register
of Firm remains open for inspection on payment of prescribed fee for the purpose.

Dissolution of Firm:

There is a difference between the dissolution of partnership and dissolution of firm. Dissolution of
partnership occurs when a partner ceases to be associated with the business, whereas dissolution of
firm is the winding up the business.

In other words, in case of dissolution of partnership, the business of the firm does not come to an end
but there is a new agreement between the remaining partners. But in case of dissolution of firm, the
business of the firm is closed up. In brief, dissolution of partnership does not imply the dissolution of
firm. But, dissolution of firm implies dissolution of partnership also.

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Following are the various ways in which a firm may be dissolved:

1. Dissolution by Agreement:

The partnership firm may be dissolved in accordance with a contract already made between the
partners.

2. Compulsory Dissolution:

A firm stands compulsorily dissolved under the following circumstances:

(a) By the adjudication of all the partners or of all the partners but one as insolvent, or

(b) By the happening, of any such event that makes the business unlawful.

3. Dissolution due to Contingencies:

A firm stands dissolved on the happening of the any of the following contingencies:

(a) On expiry of partnership period, if constituted for a fixed period.

(b) On completion of the firm’s venture for which the firm was formed.

(c) On the death of a partner.

(d) On the adjudication of a partner as an insolvent.

4. Dissolution by Court:

Under any of the following cases, a court may order the dissolution of a firm:

(a) Any partner has become of unsound mind.

(b) Any partner has become permanently incapable of performing his duties as a partner.

(c) A partner’s misconduct is likely to affect prejudicially the business of the firm.

(d) A partner willfully commits breach of the partnership agreement.

(e) A partner transfers his interest in the firm, but unauthorized, to a third party.

(f) The business of the firm can be carried on at loss only.

(g) It is just and equitable, on the basis of any other reasonable ground, that the firm should be
dissolved.

Definition and nature of a company

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A company can be defined as a group of persons associated together for the purpose of carrying on a
business, with a view to earn profits. The word ‘Company’ is an amalgamation of the Latin word
‘Com’ meaning “with or together” and ‘Pains’ meaning “bread”. Thus, a company is nothing but a
group of persons who have come together or who have contributed money for some common person
and who have incorporated themselves into a distinct legal entity in the form of a company for that
purpose.
There is very good definition by Lord Justice Lindey, “A company is an association of many persons
who contribute money or money’s worth to a common stock and employ it in some trade or business
and who share the profit and loss arising there from. The common stock so contributed is denoted in
money and is the capital of the company. The persons who contribute it or to whom it belongs are
members. The proportion of capital to which each member is entitled is his share. The shares are
always transferable although the right to transfer is more or less restricted.”
Characteristics of a Company
A company as an entity has several distinct features, which together make it a unique organization.
The following are the defining characteristics of a company: -
1. Separate Legal Entity
On incorporation under law, a company becomes a separate legal entity as compared to its members.
The company is different and distinct from its members in law. It has its own name and its own seal,
its assets and liabilities are separate and distinct from those of its members. It is capable of owning
property, incurring debt, borrowing money, having a bank account, employing people, entering into
contracts and suing and being sued separately. The importance of the separate entity of the company
was however firmly established in the following case.
Salomon v. Salomon & co. Ltd.(1897) A.C. 22. S sold his boots business to a newly formed
company for £ 30,000. His wife, one daughter and four sons took up one share of £ 1 each. S took
23,000 shares of £1 each and £ 10,000 debentures in the company. The debentures gave S a charge
over the assets of the company as the consideration for the transfer of the business. Subsequently
when the company was wound up, its assets were found to the worth £ 6,000 and its liabilities
amounted to £ 17,000 of which £ 10,000 were due to S (secured by debentures) and £ 7,000 due to
unsecured creditors, the unsecured creditors claimed that S and the company were one and the same
person and that the company was a mere agent for S and was hence they should be paid in priority to
S. Held, the company was, in the eyes of the law, a separate person independent from S and was not
his agent. S, though virtually the holder of all the shares in the company, was also a secured creditor
and was entitled to repayment in priority to the unsecured creditors.
2. Limited Liability
The liability of the members of the company is limited to contribution to the assets of the company up
to the face value of shares held by him. A member is liable to pay only the uncalled money due on
shares held by him when called upon to pay and nothing more, even if liabilities of the company far
exceeds its assets. On the other hand, partners of a partnership firm have unlimited liability i.e. if the
assets of the firm are not adequate to pay the liabilities of the firm, the creditors can force the partners
to make good the deficit from their personal assets. This cannot be done in case of a company once
the members have paid all their dues towards the shares held by them in the company. For example, if
the face value of the share in a company is Rs. 10 and a member has already paid Rs. 5 per share, he
can be called upon to pay not more than Rs. 5 per share during the lifetime of the company.
3. Perpetual Succession
A company does not die or cease to exist unless it is specifically wound up or the task for which it
was formed has been completed. Membership of a company may keep on changing from time to time
but that does not affect life of the company. Death or insolvency of member does not affect the
existence of the company.
4. Separate Property

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A company is a distinct legal entity. The company’s property is its own. A member cannot claim to
be owner of the company’s property during the existence of the company.
5. Transferability of Shares
Shares in a company are freely transferable, subject to certain conditions, such that no shareholder is
permanently or necessarily wedded to a company. When a member transfers his shares to another
person, the transferee steps into the shoes of the transferor and acquires all the rights of the transferor
in respect of those shares.
6. Common Seal
A company is a artificial person and does not have a physical presence. Therefore, it acts through its
Board of Directors for carrying out its activities and entering into various agreements. Such contracts
must be under the seal of the company. The common seal is the official signature of the company.
The name of the company must be engraved on the common seal. Any document not bearing the seal
of the company may not be accepted as authentic and may not have any legal force.
7. Capacity to sue and Being Sued
A company can sue or be sued in its own name as distinct from its members.
8. Separate Management
A company is administered and managed by its managerial personnel i.e. the Board of Directors. The
shareholders are simply the holders of the shares in the company and need not be necessarily the
managers of the company.

COMPANY LAW
The word company is derived from a Latin word `companies`
it means a group of persons who took their need together.
In India law relating to companies are contained in The companies Act 1956.
Meaning and definition
A company is a voluntary association of persons formed for some common purpose with
capital divisible into parts known as shares .
Justice Lindlay defines company “as an association of many persons who contribute money
or money’s worth to a common stock and employ it in some trade or business and who share
the profits arising there from”
According to companies act a company means a company formed and registered under
companies act.
Features of a Registered comapny
1. Voluntary Association
A company is voluntary association of persons who have come together for a common object
which generally is to earn profit.
The activities of this association are governed by the law and are limited by its memorandum
of association
2. Incorporated association
A company comes into existence on incorporation or registration under the companies act.
Minimum number of persons required for the purpose of incorporation is seven in case of a
public company and two in case of a private company.
3. Separate legal entity
On incorporation company gets personality which is separate and distinct from those of its
members. Company is an artificial person created by law.
4. Separate property

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

5. Legal restrictions
The formation, working and winding up of a company are strictly governed by laws, rules and
regulations
6. Perpetual succession
unlike a person a company never dies. Its existence is not affected in any way by the death
or insolvency of any shareholder. Members may come and members may go , but the
company continues its operations until it is wound up.
7. Common seal
As a company is an artificial person it cannot sign its name on a contract. So it function with
the help of seal. All contract entered into by the members will be under the common seal of
the company.
8. Share capital
A company mobilizes its capital by selling its shares. Those persons who buy these shares
become its share holders and thereby become members in it
9. Limited Liability
In case of limited companies liability of members will be limited to the amount unpaid on the
shares.
10. Transferability of shares.
Members can freely transfer and sell their shares .The right to transfer share is a statutory
right of members.
Ownership and management
The owners of a company are its share holders.
The affairs of the company are managed by their representatives known as Directors
Type of companies
Companies can be classified on the basis of ;
A. Incorporation
B. Liability of members
C. Number of members
D. Ownership
A. Incorporation
1. Chartered company
2. Statutory company
3. Registered company

1. Chartered company
The company which have formed and incorporated under a special charter granted by the
king or queen.
Eg East India company.
Bank of England.
2. Statutory company
These are companies which are created by means of a special Act of Parliament or any state
legislature.
Eg RBI, Railway
3. Registered company
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Company formed and registered under companies Act 1956 is called Registered companies.
B. Liability of members

1. Limited company
2. Company limited by guarantee
3. Unlimited company
1. Limited company or company limited by share
Majority of registered companies will be company limited by shares. In case of limited
companies liability of members will be limited to the amount unpaid on the shares.
2. Company limited by guarantee
Here liability of each member is limited by the memorandum to such amount as he may
guarantee by the memorandum to contribute to the assets of the company in the event of its
winding up.
Such companies are formed for the promotion of art science, culture, sports etc.
3. Unlimited company
A company not having any limit on the liability of its members is termed as unlimited
company.
The members are liable for the debts of the company at the time of winding up.
C. Number of members
1. Private company
2. Public company
1. Private company
A private company is a company
-which restricts the right to transfer its shares.
-limits the number of its members to 50.
-prohibits any invitation to public to subscribe its shares.
2. Public company
A public company means a company which is not a private company
E. Ownership

1. Government Company
2. Foreign company
3. Holding and subsidiary company
1. Government company
A company is said to be government company when 51% of the paid up capital is held by the
central government or by any state government or partly by central govt or partly by one or
more state govt.
2. Foreign company
A foreign company is a company incorporated outside India and having a place of business
in India.
3. Holding and subsidiary company
À company which controls another company is known as the holding company and the
so controlled company is known as subsidiary company.
One Man Company

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This is a company in which one man holds practically the whole of the share capital of the
company, and in order to meet the statutory requirement of minimum number of members
some dummy members like his wife and son holds one or two shares each.
Distinction between public company & private company.
No. Private Co. Public Co.
1. Minimum no of members is 2 Minimum no of members is 7

2. Maximum no members is 50 No maximum limit

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

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

5. Can commence business immediately It shall have to wait until it receive

after incorporation the certificate for commencement
of business.

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

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

allotment of shares. for allotment of shares.
9
8. Need not hold statutory meeting of the It has to hold a statutory meeting
members. and file a stat: report.

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

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

11. Not required to issue prospectus. Must issue prospectus.

13. Two directors Three directors

Formation of a company
The procedure or formation of a company may be divided into four stages;
1. Promotion
2. Incorporation
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3. Raising of capital
4. Commencement of business
I. Promotion
It is the first stage in the formation of a company.
In this stage the idea of carrying on a business is conceived by a person or a group of persons
called promoters. They make detailed investigation about the workability of the idea, amt of
capital required, operating expense etc etc..
Before a company an be formed, there must be some persons who have an intention to form a
company and who take the necessary steps to carry that intention into operation. Such persons
are called promoters.
The promoter is the person who brings a company into existence.
II. Incorporation
A company is said to be incorporated when it is registered with the registrar under the
companies act. The certificate of incorporation is the birth certificate of the company. A
company comes into existence from the date mentioned in the certificate.
Procedure for registration
The promoter has to first decide the proposed form of company as whether it is to be a public
company or a private company.
They may form the company with limited liability , unlimited liability or limited by
guarantee.
They have to decide the name of the company agreeable and desirable to all. For eg if the
name proposed is identical with or closely resembles the name of an existing company , it is
undesirable.
For getting registration an application has to be made to the registrar. The application shall be
accompanied by the following documents:
1. Memorandum of association
2. Articles of association
3. A statement of nominal capital
4. A notice of address of the registered office of the company.
5. A list of directors and their consent to a act signed by them
6. A declaration that all the requirements of the act have been complied with. Such declaration
shall be signed by an advocate of high court or supreme court or a chartered accountant who
is engaged in the formation of company
Certificate of incorporation
If the registrar is satisfied that all the requirements of the act have been complied with he
shall register the company and issue a certificate of incorporation.
Conclusive proof
Once a company is registered incorporation cannot be challenged subsequently. The
certificate of incorporation is a conclusive evidence of the fact that-
1. all the requirements of the act have been complied with.
2. company is duly registered.
3. company came into existence on the date of certificate.
Advantages of incorporation
1. Transferability of shares
2. Separate legal entity
3. Perpetual succession
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4. Common seal
5. Separate property
6. Capacity to sue
III. Raising of capital
After incorporation a company can raise capital by issuing shares. A private company cannot
issue shares to public.
In case of public company a copy of prospectus is filed with the registrar and it will be issued
to the public. Those who are intended in purchasing share are required to send their
application money to company's banker.
On the last date fixed for the receipt of application if the company has received application
equal to minimum subscription the directors will start with allotment of shares.
IV. Commencement of business
A private company may commence its business immediately after incorporation.
But a public company cannot commence business immediately after incorporation but it has
to obtain a certificate of commencement from the registrar.
MEMORANDUM OF ASSOCIATION
Memorandum of association for a company is like the constitutional law for a country. It is
the document which contains the rules regarding constitution and activities of the company.
It is a fundamental charter of the company.
It defines the extent of powers of the company, beyond that it cannot go. It is a document
filed at the time of incorporation.
It is a public document ie any interested public can get a copy on payment of prescribed fees.
Contents of memorandum
1. Name clause
2. Registered office clause
3. Object clause
4. Liability clause
5. Capital clause
6. Association clause or subscription clause.
1. Name clause
The first clause of memorandum requires a company to state its name
Rules:-Should not adopt identical with or resembles that of an existing company. Ltd for
public company and Pvt Ltd for private company. Should not use a name prohibited by the
Name and Emblems Act.
2. Registered office clause
The memorandum must specify the state in which the registered office of the company is to
be situated.
3. Object clause
This is the most important clause of the memorandum of association. It defines the object of
the company and the extent of its powers. The object of the company must be state very
clearly and a company cannot do anything beyond object clause. The objects of the company
shall not be illegal or against public policy.
4. Liability clause
This clause state the nature of liability of members.
5. Capital clause

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This clause contains the total amount of capital with which the company is registered. This
capital is known as authorized capital or nominal capital or registered capital.
6. Association clause or subscription clause
The memorandum concludes with subscription clause. The memorandum must be subscribed
by at least 7 persons in case of public company and 2 in case of private company. Each
subscriber must sign the document and write the number of shares taken by him.
ALTERATION OF MEMORANDUM
The alteration of the memorandum is possible only by strictly following the procedure laid
down in the Act
1. Alteration of a name clause
The name of a company can be changed by passing a special resolution and with approval of
central govt. If a company is registered with a name which is in the opinion of central govt is
identical with or too closely resemble to the name of an existing company, it can be changed
by passing an ordinary resolution but with the approval of central govt .
2. Alteration of registered office clause
If the shift of office is within local limits, ie from one place to another place in the same city ,
town or village that can be done by giving a notice of change to registrar.
If the shift is outside local limits, a special resolution has to be passed.
If the shift is from the jurisdiction of one registrar to another's the special resolution should be
confirmed by the regional director of the state. (new sec 17 A Amendment Act 2000)
3. Alteration of object clause
•The alteration of object clause is subject to so many restrictions. A company may change its
objects for the following purposes;
1. To carry business more economically or more efficiently.
2.To attain its main purposes by new or improved means.
3. To enlarge or change local area of operation
4. To restrict or abandon any of its objects specified in the memorandum.
5. To amalgamate the company with any other company.
6. To sell or dispose of the whole or any part of the undertaking of the company.
–A special resolution and approval of company law board is necessary for alteration.
4. Alteration of liability clause
Liability clause cannot be altered so as to make the liability of members unlimited.
5. Alteration of capital clause
Alteration can be made to
1.To increase share capital
2.To convert fully paid share to stock
3.Cancellation of shares etc
Doctrine of ultra vires
Memorandum contains the rules regarding constitution and activities of the company. It is a
fundamental charter of the company. It defines the extent of powers of the company, beyond
that it cannot go.
A co can act and function within the limits of memorandum. Any act which is beyond the
memorandum is ultra vires the company. Such acts are void .
Ultra means beyond and vires means powers. So ultra vires means ‘beyond powers’.

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The purpose of this doctrine is to helps the shareholders , creditors and every third person
dealing with the company to ensure that their investment are not diverted to unauthorized
objects.
ARTICLES OF ASSOCIATION
Articles of association are the internal regulations of the company and are for the benefit of
shareholders. These are the rules and regulation relating to the internal management of a
company. The article define the mode and form on which the business of the company is to be
carried on.

Types Of Companies

There are different types of company, which can be classified on the basis of formation, liability,
ownership, domicile and control.

1. Types Of Companies On The Basis Of Formation Or Incorporation

a. Chartered Companies
Companies which are incorporated under special charter or proclamation issued by the head of state,
are known as chartered companies. The Bank Of England, The East India Company, Chartered Bank
etc. are the examples of chartered companies.

b. Statutory Companies
Companies which are formed or incorporated by a special act of parliament, are known as statutory
companies. The activities of such companies are governed by their respective acts and are not
required to have any Memorandum or Articles Of Association.

c. Registered Companies
Registered companies are those companies which are formed by registration under the Company Act.
Registered companies may be divided into two categories.

* Private Company
A company is said to be a private company which by its Memorandum of Association restricts the
right of its members to transfer shares, limits the number of its members and does not invite the
public to subscribe its shares or debentures.
* Public Company
A company, which is not private, is known as public company. It needs minimum seven persons for
its registration and maximum to the limit of its registered capital. There is no restriction on issue or
transfer of its shares and this type of company can invite the public to purchase its shares and
debentures.

2. Types Of Companies On The Basis Of Liability

Registered companies are divided into two types, namely, companies having limited liability and
companies having unlimited liability.

a. Companies Having Limited Liability

This liability can be limited in two ways:
* Liability Limited By Shares
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These are those companies in which the capital is divided into shares and liability of members (share
holders) is limited to the extent of face value of shares held by them. This is the most popular class of
company.
* Liability Limited By Guarantee
These are such companies where shareholders promise to pay a fixed amount to meet the liabilities of
the company in the case of liquidation.

b. Companies Having Unlimited Liability

A company not having any limit on the liability of its members as in the case of a partnership or sole
trading concern is an unlimited company. If such a company goes into liquidation, the members can
be called upon to pay an unlimited amount even from their private properties to meet the claim of the
creditors of the company.

3. Types Of Companies On The Basis Of Ownership

a. Government Companies
A government company is a company in which at least 51% of the paid up capital has been
subscribed by the government.

b. Non-government Companies
If the government does not subscribe a minimum 51% of the paid up capital, the company will be a
non-government company.

4. Types Of Companies On The Basis Of Domicile

a. National Companies
A company, which is registered in a country by restricting its area of operations within the national
boundary of such country is known as a national company.

b. Foreign Companies
A foreign company is a company having business in a country, but not registered in that country.

c. Multinational Companies
Multinational companies have their presence and business in two or more countries. In other words, a
company, which carries on business activities in more than one country, is known as multinational
company.

5. Types Of Companies On The Basis Of Control

a. Holding Companies
A holding company is a company, which holds all, or majority of the share capital in one or more
companies so as to have a controlling interest in such companies.

b. Subsidiary Company
A company, which operates its business under the control of another company (i.e holding company),
is known as a subsidiary company.

DUTIES OF A DIRECTOR OR TRUSTEE

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1. Duties on Appointment as a Director or Trustee

A new director or trustee should know the purposes of the charity. These will be found in the
Letters Patent if the charity is a corporation or in the document which creates the trust (the
constitution for an unincorporated association or the trust deed for a trust). New directors or
trustees should be familiar with the general requirements of charities law and if the charity is a
corporation, of the Corporations Act.

The director or trustee should review the past administration of the charity. They have a duty
to investigate any suspicious circumstances which suggest the charity's property has not been
properly used. Action should be taken to correct any problems.

2. Duty to be Reasonable, Prudent and Judicious

Directors and trustees must handle the charity's property with the care, skill and diligence that
a prudent person would use. They must treat the charity's property the way a careful person
would treat their own property. They must always protect the charity's property from undue
risk of loss and must ensure that no excessive administrative expenses are incurred.

3. Duty to Carry Out the Charitable Purposes

The charity's property can only be used for purposes of the charity. It cannot be used for any
other purpose.

Charities may have more than one purpose. If a charity is incorporated the purposes are found
in the corporation's Letters Patent. If the charity is not incorporated, they will be found in the
document which creates the trust. If property is improperly used, directors or trustees may be
required by a court to repay the money.

Some charities have funds or property that are supposed to be used for one specific purpose.
The directors or trustees must make sure that the property is used for that purpose.

4. Duty to Avoid Conflict-of-Interest Situations

Directors and trustees should avoid conflicts of interest. A conflict of interest arises when a
director or trustee has a personal interest in the result of a decision made by the charity.

Directors and trustees must always consider the interests of the charity and not allow their
personal interests or preferences to affect their conduct and decisions.

Directors and trustees must also avoid the appearance of conflict of interest. Certain
investments, such as loans to donors, directors or trustees of the charity, or to companies in
which they have shares can be a breach of the duty of a director or trustee. Even if these
investments are made at market rates, there may be an appearance of conflict of interest.

If the directors or trustees have any discretion in choosing the people who benefit from the
charity, they must use this power with complete fairness. The choices must be fair and must
also appear to be fair.

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To avoid the appearance of conflict of interest, in general, a director or trustee should not
transact business with the charity or accept any personal benefit from the charity. Authority to
transact business with, or to be a client of, the charity can be given by Court Order. It may
also be given in any regulations made under section 5.1 of the Charities Accounting Act.

5. Duty to Act Gratuitously

Generally a charity cannot pay a director to act in the capacity of a director. Also, a director
cannot be paid for services provided in any other capacity unless permitted by a court order.
In appropriate circumstances, payment for services other than as a director may be allowed by
Court Order or by an Order made under section 13 of the Charities Accounting Act where it is
in the charity's best interest to do so.

A trustee also cannot be paid for services in any capacity unless approved in advance either by
the court or by an order made under section 13 of the Charities Accounting Act. A trustee may
also be paid when authorized by the document which creates the trust. The document that
creates the trust can also prohibit or restrict payment to trustees. A charity can reimburse a
director or trustee for reasonable expenses.

6. Duty to Account

Directors and trustees are responsible for the charity's property. They must make sure that
proper accounts are maintained and that invoices supporting the accounts are kept.

The Public Guardian and Trustee may ask a charity to file its financial statements with the
Office of the Public Guardian and Trustee. A charity incorporated under the Ontario
Corporations Act is required to prepare annual audited financial statements unless the annual
income of the charity is less than $100,000 and all of the members consent each year to the
exemption. These financial statements should detail the capital, assets, income, expenditures
or disbursements and investments. Explanatory notes should show any conflicts-of-interest,
non-arm's-length transactions or payments to directors in any capacity whatsoever. If any
property is given to a charity for a special purpose, that should also be recorded in the
financial statements. In certain cases, it may be necessary to include explanatory notes
showing how the charitable activities were carried out.

The Public Guardian and Trustee may also request information about the management of a
charity. Any charity can be compelled by the Public Guardian and Trustee to pass its
accounts. This is a court process where the accounts are reviewed by a judge of the Superior
Court of Justice. A charity will be asked to pass its accounts where there are serious concerns
about the administration of the charity. Charitable trusts often pass their accounts voluntarily
on a periodic basis.

7. Duty to Manage the Charity's Assets

The directors and trustees are responsible for the management of the charity's funds and
assets. They should not delegate this responsibility to employees or financial consultants,
although they may rely on the advice and assistance of such people if it is prudent to do so.
Directors or trustees may use the management services of accountants, stockbrokers, and
other financial consultants if the capital is substantial. They may pay for these services as part

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of the administrative expenses of the charity. Whatever form the financial service
arrangements take the directors must, at all times, retain general control over the funds.

Directors and trustees must act in person and make all major decisions concerning the charity.
They can delegate the day-to-day management of the charity to employees but they remain
responsible and must maintain proper supervision and control over the work of the employees.

8. Duties in Connection with Specific Powers

1. Power to Invest

For trusts and other unincorporated charities the power to invest may be set out in the
documents which create the charity. If no power to invest is stated, the trustees must
follow the requirements set out in the Trustee Act.

The power of a charitable corporation to invest is usually set out in the Letters Patent
of the corporation. If no power to invest is specified in the Letters Patent the charity
must invest as set out in the Trustee Act. Directors of a charity have a duty to invest
funds not immediately needed to carry out the charity's purposes.

2. Factors to Consider when Investing

The Trustee Act provides a useful guide as to the factors a director or trustee should
consider when investing in a charity's property. There are seven criteria that directors
and trustees should consider in addition to any others that are relevant to the
circumstances. The seven criteria are:

1. General economic conditions.

2. The possible effects of inflation or deflation.
3. The tax consequences of the investment decisions or strategies.
4. The role each investment or course of action plays within the charity's overall
portfolio.
5. The expected total return from income and growth of capital.
6. Needs of the charity for liquidity, regularity of income and preservation or
appreciation of capital.
7. An asset's special relationship or special value, if any, to the purposes of the charity.

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